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Do Politicians Regulate When They Can’t Spend?

That is the question Noel Johnson [1], Steven Yamarik [2], and I examine in our latest Mercatus Working Paper: Pick Your Poison [3].

Relying on data from 48 states covering the years 1970 through 2009, we look at the relationship between fiscal rules, fiscal outcomes, and regulatory outcomes.  The specific fiscal rule that we examine is a so-called “no-carry” rule, present in about half of the states.  It forbids legislatures from carrying a deficit over from one year to the next.  A number of previous studies have examined the impact of these rules (some of which I have blogged [4] on in the past) and generally find that they restrain spending and taxation. We ask whether politicians constrained by these rules attempt to attract votes by engaging in active regulatory policy instead.  We tackle this question in three stages:

1.      First, we quantify the different spending and taxing outcomes that obtain when one or the other party gains control of both the executive and the legislative branches of state government.  After controlling for a number of other factors that have been shown to impact fiscal outcomes, we find that Democrats tend to raise individual income taxes by about $66 per capita when they are in control, while Republicans tend to lower overall taxes by $265 per capita and income taxes by $99 per capita.  Republicans also reduce total spending by about $353 per capita, education spending by about $135 per capita, and welfare spending by about $113 per capita (all figures are in 2009 dollars).

2.      Next, we show that when states have rules that restrict the legislature’s ability to carry a deficit into the next year, most of these partisan differences in fiscal policy disappear.  (There are exceptions, however; Democrats continue to increase individual income taxes and Republicans continue to reduce total taxation).

3.      Lastly, we look at the impact of these fiscal rules on regulatory behavior and find that they actually seem to be associated with more partisan regulatory outcomes.  In particular, Democrats appear to be more-likely to raise the minimum wage when no-carry rules restrict their ability to spend and tax more.  They are also less-likely to adopt right-to-work statutes (i.e., they are more-likely to favor a closed union shop than they otherwise would be).  Among Republicans, fiscal no-carry provisions tend to enhance their likelihood of adopting right-to-work statutes outlawing closed union shops.  We corroborate these results using Jason Sorens’s and William Ruger’s measure of paternalistic regulations [5].  These are regulations that are not easily justified on economic grounds.  They include things such as home schooling regulations, alcohol regulations, marriage and civil union laws, gun laws, and marijuana laws.  We find that, here too, the no-carry provisions seem to make Democrats more-likely to regulate and Republicans less-likely to regulate.

As we write in the paper:

Our results suggest political actors will use whatever policy instruments are available to them to achieve their ends.  If they are constrained along one dimension, they will substitute into more-partisan activities along the other dimension.

The implication for those who are trying to restrain spending is this: Institutions such as strict balanced budget requirements can be useful tools to restrain the fiscal size of government, but they may lead to an expansion in the regulatory state.

Thanks to my excellent coauthors, I learned a lot in researching and writing this piece.  It is still a working paper, so we would be grateful for any comments readers might have.