Demagogues and the Fragility of Democracy Dan Bernhardt Stefan Krasa Mehdi Shadmehr* August 15, 2019 Abstract Our paper investigates the long-run susceptibility of Democracy to demagogues, study- ing the tension between far-sighted, magnanimous representatives who guard the long-run interests of voters, and office-seeking demagogues who cater to voters’ short-run desires. We model the political decision process as a capital/social capital investment problem in which parties propose how to allocate existing resources between current consumption and investment. Voters with CRRA preferences base political choices on a comparison of the current period utility derived from policies and a stochastic valence shock. With log utility, we establish that the benevolent party’s investment converges to zero when the depreciation rate goes to one, regardless of the valence advantage, even though, absent political com- petition from the demagogue, the economy would grow forever. When the coefficient of relative risk aversion exceeds one, we establish that, regardless of the current capital stock there is always a positive probability of entering a death spiral in which once capital falls below a critical level, it continues inevitably downward toward zero. *University of Illinois, Department of Economics, Urbana, IL 61801 USA;
[email protected] University of Chicago 1 Introduction “The republican principle,” wrote Hamilton in Federalist No. 71, “does not require an unqual- ified complaisance to every sudden breeze of passion, or to every transient impulse which the people may receive from the arts of men, who flatter their prejudices to betray their interests.” Quite the opposite, Hamilton argued: “When occasions present themselves, in which the interests of the people are at variance with their inclinations, it is the duty of the persons whom they have appointed to be the guardians of those interests, to withstand the temporary delu- sion...