Category Archives: Legislative Process

What to expect from a lame duck

Two weeks ago, I sat down with CSPAN’s Greta Wodele Brawner to talk about “lame duck” sessions of Congress. Drawing on my research with colleagues Chris Koopman and Emily Washington, we discussed the ways in which roll call voting patterns differ during lame duck sessions compared with ordinary sessions.

A few times I struck a relatively upbeat tone about what might get accomplished in the next two years. Only two weeks old, I worry that some of these comments already seem wildly optimistic. Let me know what you think.

Is American Federalism conducive to liberty?

In new Mercatus research, Dr. Richard E. Wagner, Harris professor of Economics at George Mason University tackles a fascinating question: Is the American form of federalism supportive of liberty?

His answer is a qualified ‘yes.’ Under certain conditions, American federalism does support liberty, but that very same system can also be modified resulting in the expansion of political power relative to the liberty of citizens. The question of what results from the gradual constitutional transformation of the American federalist system is a salient one for not only students of government but also policymakers.

The important conditions that determine which form of federalism prevails (liberty-supporting or liberty-eroding) are rooted in competition among governments. Today we are experiencing a very different kind of federalism than the one instituted by the Founders. For the better part of a century, the US constitution has often been amended in a way to encourage collusion among the states thus undermining a key feature of a liberty-supporting federalism.

Restoring a liberty-supporting federalism first requires a deeper diagnosis of the American federalist system. Dr. Wagner develops that possibility through a very engaging synthesis of public choice theory, Austrian and new institutional economics.  Student of Dr. Wagner may be familiar with many of these concepts, developed in his public finance books including Deficits, Debt and Democracy (2012, Elgar). Rather than summarize the paper in today’s blog post, for now I encourage you to read the piece in full.

It’s Time to Change the Incentives of Regulators

One of the primary reasons that regulation slows down economic growth is that regulation inhibits innovation.  Another example of that is playing out in real-time.  Julian Hattem at The Hill recently blogged about online educators trying to stop the US Department of Education from preventing the expansion of educational opportunities with regulations.  From Hattem’s post:

Funders and educators trying to spur innovations in online education are complaining that federal regulators are making their jobs more difficult.

John Ebersole, president of the online Excelsior College, said on Monday that Congress and President Obama both were making a point of exploring how the Internet can expand educational opportunities, but that regulators at the Department of Education were making it harder.

“I’m afraid that those folks over at the Departnent of Education see their role as being that of police officers,” he said. “They’re all about creating more and more regulations. No matter how few institutions are involved in particular inappropriate behavior, and there have been some, the solution is to impose regulations on everybody.”

Ebersole has it right – the incentive for people at the Department of Education, and at regulatory agencies in general, is to create more regulations.  Economists sometimes model the government as if it were a machine that benevolently chooses to intervene in markets only when it makes sense. But those models ignore that there are real people inside the machine of government, and people respond to incentives.  Regulations are the product that regulatory agencies create, and employees of those agencies are rewarded with things like plaques (I’ve got three sitting on a shelf in my office, from my days as a regulatory economist at the Department of Transportation), bonuses, and promotions for being on teams that successfully create more regulations.  This is unfortunate, because it inevitably creates pressure to regulate regardless of consequences on things like innovation and economic growth.

A system that rewards people for producing large quantities of some product, regardless of that product’s real value or potential long-term consequences, is a recipe for disaster.  In fact, it sounds reminiscent of the situation of home loan originators in the years leading up to the financial crisis of 2008.  Mortgage origination is the act of making a loan to someone for the purposes of buying a home.  Fannie Mae and Freddie Mac, as well as large commercial and investment banks, would buy mortgages (and the interest that they promised) from home loan originators, the most notorious of which was probably Countrywide Financial (now part of Bank of America).  The originators knew they had a ready buyer for mortgages, including subprime mortgages – that is, mortgages that were relatively riskier and potentially worthless if interest rates rose.  The knowledge that they could quickly turn a profit by originating more loans and selling them to Fannie, Freddie, and some Wall Street firms led many mortgage originators to turn a blind eye to the possibility that many of the loans they made would not be paid back.  That is, the incentives of individuals working in mortgage origination companies led them to produce large quantities of their product, regardless of the product’s real value or potential long-term consequences.  Sound familiar?

New resource: Mercatus Center’s 2013 State and Local Policy Guide

Are you interested in the practical policy applications of the kinds of research the State and Local Policy Project is producing?

For an accessible and very useful review have a look at the inaugural edition of the Mercatus Center’s 2013 State and Local Policy Guide produced by our Outreach Team.

The guide is divided into six sections outlining how to control spending, fix broken pensions systems, control healthcare cost, streamline government, evaluate regulations, and develop competitive tax policies. Each section gives an overview of our research and makes brief, specific, and practical policy proposals.

If you have any questions, please contact Michael Leland, Associate Director of State Outreach, mleland@mercatus.gmu.edu

Why Regulations Fail

Last week, David Fahrenthold wrote a great article in the Washington Post, in which he described the sheer absurdity of a USDA regulation mandating a small town magician to develop a disaster evacuation plan for his rabbit (the rabbit was an indispensible part of trick that also involved a hat). The article provides a good example of the federal regulatory process’ flaws that can derail even the best-intentioned regulations. I list a few of these flaws below.

  1. Bad regulations often start with bad congressional statutes. The Animal Welfare Act of 1966, the statute authorizing the regulation, was meant to prevent medical labs from using lost pets for experiments. Over time, the statute expanded to include all warm-blooded animals (pet lizards apparently did not merit congressional protection) and to apply to zoos and circuses in addition to labs (pet stores, dog and cat shows, and several other venues for exhibiting animals were exempt).The statute’s spotty coverage resulted from political bargaining rather than the general public interest in animal welfare. The USDA rule makes the statute’s arbitrariness immediately apparent. Why would a disaster plan benefit circus animals but not the animals in pet stores or farms? (A colleague of mine jokingly suggested eating the rabbit as part of an evacuation plan, since rabbits raised for meat are exempt from the regulation’s requirements).
  2. Regulations face little oversight. When media reported on the regulation’s absurdity, the USDA Secretary Tom Vilsack ordered the regulation to be reviewed. It seems that even the agency’s head was caught off guard by the actions of his agency’s regulators. Beyond internal supervision, only a fraction of regulations face external oversight. Of over 2600 regulations issued in 2012, less than 200 were subject to the OMB review (data from GAO and OMB). Interestingly, the OMB did review the USDA rule but offered only minor revisions.
  3. Agencies often fail to examine the need for regulation. In typical Washington fashion, the agency decided to regulate in response to a crisis – Hurricane Katrina in this case. In fact, the USDA offered little more than Katrina’s example to justify the regulation. It offered little evidence that the lack of disaster evacuation plans was a widespread problem that required the federal government to step in. In this, the USDA is not alone. According to the Mercatus Center’s Regulatory Report Card, which evaluates agencies’ economic analysis, few agencies offer substantial evidence justifying the need for promulgated regulations.
  4. Agencies often fail to examine the regulation’s effectiveness. The USDA’s plan to save animals in case of a disaster was to require owners to draw up an evacuation plan. It offered little evidence that having a plan would in fact save the animals. For example, the magician’s evacuation plan called for shoving the rabbit into a plastic bag and getting out. In the USDA’s view, the magician would not have thought of doing the same had he not drawn up the evacuation plan beforehand.
  5. The public has little influence in the process. By law, agencies are required to ask the public for input on proposed regulations. Yet, small businesses and individual consumers rarely have time or resources to keep an eye on federal agencies. In general, organized interests dominate the commenting process. The article describes the magician’s surprise to learn that he was required to have a license and a disaster evacuation plan his rabbit, even though the regulation was in the works for a few years and was open for public comments for several months. Most small businesses, much like this magician, learn about regulations only after they have passed.
  6. Public comments are generally ignored. Most public comments that the USDA received argued against the rule. They pointed out that it would impose substantial costs on smaller businesses. The agency dismissed the comments with little justification. This case is not unique. Research indicates that agencies rarely make substantial changes to regulations in response to public comments.

Strategy and politics in the of phrasing of bond referendum

How detailed should bond referendum be? The Arlington County Board heard comments from the public on the FY 2013 capital spending plan a few weeks ago. At issue was $153 million in local GO bond referendum that will be on the ballot on November 6th. The Arlington Sun Gazette reports there are four major “bundles.”

  • $31.946 million for Metro, neighborhood traffic calming, paving and other transportation projects
  • $50.533 million for parks, including the Long Bridge Park aquatics and fitness center and parkland acquisition
  • $28.306 million for Neighborhood Conservation and other “community infrastructure” projects
  • $42.62 million for design and construction of various school projects.

At issue was the language accompanying the bond packages. The Arlington County Civic Federation contends the $45 million dedicated to the acquatics center be listed as a separate item rather than bundled under the general category of park improvements.

Scott McCaffrey writes that the County Board has been bundling bonds under thematic groupings for many years as a strategy to lessen voter opposition, an interesting claim.

How explicit does language have to be in municipal General Obligation bond offerings? States typically require GO bond debt be subject to voter approval before issuance, but how does ballot language matter to the outcome?

While not addressing the matter specifically a few related questions have been pursued in the literature. Damore, Bowler and Nicholson in their paper, “Agenda Setting by Direct Democracy: Comparing the Initiative and the Referendum” (State Politics and Policy Quaterly, forthcoming) considers if agenda setters use the referendum process to extract greater spending than the median voter desires. Some of this research indicates that voters are less likely to support state referendum for tax increases but that between 1990 and 2008, 80 percent of bond referendum received voter approval.

As to the need for particular language, there are strategies. The Government Finance Officers Association (GFOA) lists six steps governments can take to improve their chances of getting a bond approved. This includes, “measure design” or “developing ballot language that appeals to voters and clearly explains how this measure addresses the particular issue targeted by the bonds meets the needs of the community.”

I did find anecdotal evidence that politicians struggle with language on ballot questions, in an effort to strike a balance between clarity and increased likelihood of passage. The Rockford Illinois School Board appears to be hemmed-in by how it phrases bond questions. The more detailed the questions the more legally-bound the board is to spend the money as specifically approved by voters.

Speaking of language, in writing this post I was unsure if I should be using”referenda” as the plural of “referendum”. “Referenda” sounds more natural to me but “referendum” appears to be used more often.

Given the difficulty of the original Latin grammar (referendum is a “gerund” and has no plural), it turns out there is an unsettled debate over this. Either is correct according to the Irish paper The Daily Edge. I felt better knowing that even The British Parliament debated over which plural form to use back in 1998. It turns out whether one uses the Latin “referenda” or the Anglicized “referendum” is purely a matter of taste.

NJ Legislators Eye Changes for State Wine Industry

Although New Jersey is not typically on the short list of states that produce quality American wine, several of its vineyards have won critical acclaim in a variety of categories. However, the state’s wine industry is facing legal setbacks and policy uncertainty that could prevent it from expanding.

Last year, lawmakers threatened to shut down New Jersey wine production after a federal law made it illegal for the state to prevent out-of-state wineries from operating tasting rooms. Instead, lawmakers opted to stop issuing licenses for new wineries to begin operation and banned some existing ones from distributing their product. Now, the Wall Street Journal reports that proposed legislation could allow wineries to begin selling again and benefit wine consumers:

Powerful state Senate President Stephen Sweeney has introduced legislation that would, for the first time, allow both New Jersey and out-of-state producers to operate tasting rooms that sell directly to customers. It would also, for the first time, let New Jersey vineyards ship directly to consumers and let Garden State wine lovers buy from vineyards in the 38 states that allow it, including New York and Connecticut.

Vineyards would pay up to $1,000 for the shipping license and could produce up to 250,000 gallons of wine a year.

The bill would also help at least 16 new producers who have been issued temporary licenses allowing the harvesting of grapes and bottling of wine. But those producers can’t sell their products.

In addition to permitting tasting rooms, the bill would allow New Jersey winemakers to begin selling their product through direct shipping, increasing their potential customer base. It would also allow limited direct shipping from out-of-state producers. Direct ordering wine is crucial for the success of small vintners. Wineries that produce a limited number of cases per year might not be attractive to distributors, but direct shipping allows them to profit and provides greater variety for consumers.

Unsurprisingly, though, the state’s liquor stores oppose the bill, as the change would subject them to increased competition. While vintners favor the proposed legislation, the liquor store lobby suggests that it would hurt local wine makers by allowing the sale of California wines in tasting rooms. In this case, the liquor retailers’ lobby is playing both the bootlegger and the baptist, protecting their own interests while pretending to be looking out for the interest of New Jersey winemakers at the same time.

State Senator Sweeney’s bill has passed the senate already, but it must pass in the assembly by January 10th to be adopted. The  bill would be a gain for consumers and small businesses in New Jersey, but stands a chance of falling victim to special interests.

Tightening Municipal Bankruptcy Laws

There have been 629 municipal bankruptcies in the US since 1937. Some of the most recent include: Vallejo California, Central Falls Rhode Island, Boise County Idaho, and as of last week, Harrisburg Pennsylvania.

As a result of these recent filings, municipal bankruptcy, or Chapter 9 of the U.S. Bankruptcy Code, has become an increasingly important topic in the policy community and a few states have taken action towards tightening up and/or clarifying their municipal bankruptcy laws.

Rhode Island passed legislation earlier this year that:

takes the decision to file for receivership out of the hands of the community and gives it to the state Department of Revenue. It also replaces the existing state budget review commission system, set up in the 1990s, with a new three-step process of increasing oversight

Just last week, California Governor Jerry Brown signed legislation that changes how cities file for bankruptcy:

After the law takes effect in 90 days, municipalities in the most-populous state will have to submit to a neutral review of their finances, or demonstrate a fiscal emergency, before seeking Chapter 9 bankruptcy protection in federal court.

Given that future municipal bankruptcies are imminent, legislative actions aimed at tightening up and clarifying the current bankruptcy laws may be beneficial. However, Chapter 9 should not be seen as the solution or as an easy way out of a tough situation. As Michael Viscount and Josh Klein rightly argue:

Chapter 9 is a tool for a municipality to restructure its finances in an orderly fashion — but it is not a substitute for political will, which is required to tackle the difficult fiscal problems surrounding us…. Municipal bankruptcy will not eliminate any of the hard choices that must be made to restructure governmental obligations successfully.

Waiting until a municipality is on the brink of bankruptcy is fiscally irresponsible. Politicians and policy makers need to stop waiting until it is too late and begin taking the necessary steps towards creating policy environments that promote fiscal stability.

 

 

 

Assorted Links

Jeff Dircksen at the National Taxpayers Union writes about a new ranking of state governments:

There’s a new ranking that looks at how well states are run, or in some cases not so well run.  According to its web site, “24/7 Wall St. has completed one of the most comprehensive studies of state financial management ever performed by the mainstream media. It is based on evaluation principles used in the award-winning Best Run States In America ratings published by the Financial World Magazine during the 1990s. These studies were used by state governments to evaluate the efficiency of their own operations. The new 24/7 Wall St. study is meant to help businesses and individuals examine state operation with an unbiased eye.”

Take a look and see how your state does.  Spoiler alert:  Wyoming is the best and Kentucky is the worst.

On an unrelated note, Joe Henchman at the Tax Foundation cautions against the use of the Center on Budget and Policy Priorities’ state budget gap data (note: I used this data in my paper on budget gaps—in part because it was timely and because it is so commonly cited). Joe writes:

The number is probably accurate from their methodology, but is ultimately meaningless. Here’s why:

  • A state “budget deficit” is the revenue projected (usually by the Governor’s office) minus hoped-for spending according to some formula, in the initial budget plan. For instance, say a state raised and spent $10 billion this year, but wants to spend $20 billion next year, projecting $11 billion in revenues. Ultimately they settle on spending $11 billion. That state has “closed a $9 billion budget deficit” even though revenues and spending are up from the previous year.
  • The exact method of estimating next year’s spending varies by state, with some starting with last year’s budget while others throw in additional wish list programs. Adding up all the states’ numbers is adding apples and oranges.
  • States must balance their budgets so there really is no cumulative state budget deficit in the end, at least on paper.
  • It’s routine for states to want to spend more than they actually can, at least at first, and having a deficit in the initial plan happens even in flush times. Thus, CBPP’s numbers overestimate the scope of actual state budget deficits.
  • CBPP also presents the deficits as a percent of each state’s general fund. While the general fund is usually the largest and most important part of a state’s budget, in many states it can represent less than half of the total budget. This number thus exaggerates the seriousness of a budget deficit.
  • A budget deficit could exist because of overly ambitious spending plans that are whittled down to reality, overly optimistic revenue projections, fiscal irresponsibility, or structural imbalance. CBPP’s tale of the recession causing everything and federal aid being the only salvation doesn’t fit the facts. For instance, California’s deficit this year includes unpaid bills kicked over from last year, so it’s the same money being double-counted. This irresponsibility is glossed over in CBPP’s report.

The Road Home?

Our own Daniel Rothschild testified last week before the House Judiciary Subcommittee on the Constitution, Civil Rights, and Civil Liberties, about the role of state and federal governments in obstructing home building in devastated New Orleans neighborhoods. From Louisiana’s Daily World:

Daniel Rothschild, director of the Gulf Coast Recovery Project at George Mason University, said the problem isn’t necessarily that government officials are discriminating, but that they’re becoming overly involved in recovery efforts.

“Federal and state policies designed to rebuild homes sowed confusion and uncertainty, making it difficult for people to make informed choices about how, when and where to rebuild,” Rothschild said.

He said the government should set clear, simple rules, then get out of the way to allow rebuilding to take place from the ground up.

“Community leaders, clergy, social entrepreneurs have leveraged social capital and local knowledge to spur rebuilding, and over 1 million Americans have volunteered their time, some for weeks and some for years,” he said. “They got it fixed and built houses one at a time.”

For more Mercatus work on the problems created by post-disaster government uncertainty, and how we could encourage rebuilding efforts, see some of our extensive publications on the subject.