Tag Archives: Alex Tabarrok

What would a business-cycle balanced budget rule look like in Illinois?

A few years ago, I testified before the U.S. House Judiciary Committee. I’d been invited to talk about the design of a federal balanced budget amendment and much of my testimony drew on the lessons offered from state experience. Since 49 of the 50 states have such requirements, and since these requirements vary from state to state, I noted that federal lawmakers could learn from the state laboratory.

The best requirement, I argued, would have the following characteristics:

  1. Require balance over some period longer than a year. This effectively disarms the strongest argument against a balanced budget amendment: namely, that it would force belt-tightening in the middle of a recession. In contrast, if budgets need to balance over a longer time period, then Congress is free to run deficits in particular years as long as they are countered by surpluses in others.
  2. Allow Congress some time to come into compliance. You don’t have to be a Keynesian to worry that a 45 percent reduction in the deficit overnight might be a shock to the system.
  3. Minimize the gamesmanship associated with revenue estimation: Across the country, states with balanced budget requirements have to estimate revenue throughout the year (I’m a member of Virginia’s Joint Advisory Board of Economists and our responsibility is to pass judgment on the validity of these estimates). But this invites all sorts of questions: what model to use for the economy, should revenue be scored dynamically or statically, etc. One way to sidestep all of these questions is to make the requirement retrospective: require that spending this year not exceed revenue from years past.

Michigan Republican Justin Amash has proposed an amendment along these lines. It would be phased-in over 9 years and from there on out would stipulate that outlays “not exceed the average annual revenue collected in the three prior years, adjusting in proportion to changes in population and inflation.” Because it requires balance over three years rather than one, Amash calls it the “business cycle balanced budget amendment.”

Writing in Time, GMU’s Alex Tabarrok points to Sweden’s positive experience with a similar rule. And economists Glenn Hubbard and Tim Kane also endorse such a rule in their book, Balance.

Now, some Illinois state lawmakers have put together a proposal for a state rule that appears to be largely based on this model. It requires:

Appropriations for a fiscal year shall not exceed the average annual revenue collected for the 3 prior years, adjusting in proportion to changes in population and inflation.

(Unlike the Amash plan, however, the Illinois plan is not phased in over a number of years. Rather, it takes effect immediately upon passage of the bill.)

To see how it might work in a state, I decided to take the Amash Amendment for a test drive, using Illinois data. The solid blue line in the figure below charts Illinois’s actual general revenue from 1990 to 2012 in billions of current dollars. The dashed blue line phases in an Amash-type “business cycle” balanced budget rule. Once fully phased-in, it would limit spending to the average revenue of the three previous years, with an adjustment for inflation and population growth.

BCBBA

Notice three things:

  1. From 1990 to 2002, and from 2004 to 2007, the rule would have kept Illinois spending in line with Illinois revenue, and would have even allowed the state to run surpluses.
  2. In lean years (like 2008) when revenue levels off, the limit actually continues to rise. That’s because it is based on a longer time trend. This means that it wouldn’t require the sort of draconian budget cuts that balanced budget critics often fear. The accumulated surpluses from previous years could also be used to soften the blow.
  3. Lastly, note the (9 percent) revenue uptick from 2011 to 2012. The amendment would prudently make legislators wait a few years before they can go out and spend that money.

James M. Buchanan: Realistic Optimist

This week we mourn the passing and celebrate the achievements of James M. Buchanan. There have already been many moving and informative tributes. Alex Tabarrok offers a nice summary here. I was fortunate to take one of the last classes Buchanan taught. Even though he was well into his eighties, I found him to be sharp, enthusiastic, and more than a little intimidating to this graduate student.

I’m sure people will be debating Buchanan’s contributions and legacy for quite some time. One aspect that seems unsettled is the degree to which Buchanan’s legacy is optimistic or fatalistic. An old exchange I had with Matt Yglesias highlights the optimism I found in Buchanan’s work:

Back in 2011, in a post titled “Against Public Choice, For Public Virtue,” Matt declared: “I don’t really “get” public choice and think I never will.” He argued:

The observation that malgovernment is a major source of human ills is quite correct, but embracing fatalism about it only exacerbates the problem. What’s needed are efforts to push societies in the direction of taking honor and civic obligation more seriously, not less so.

In a post responding to Matt, I made the case that public choice is no more fatalistic about government failure than other branches of econ are fatalistic about market failure:

Consider a problem from normal economics: the tragedy of the commons. Armed with empirical and theoretical reasons to expect that fishermen will over-fish a common pool, we should plan accordingly. We should examine the incentives of fishermen and think of ways to improve or alter these incentives (e.g., assign property rights over the pool, or impose a Pigouvian tax). To my knowledge, few if any economists would council that we ought to spend our time begging fisherman to pretty please stop overfishing. That is likely to be a fool’s errand.

The idea is much the same with public choice. Armed with empirical and theoretical reasons to think that politicians might do bad things, we should plan accordingly by placing some things—such as the establishment of religion—beyond the reach of politicians. I suppose we could ask Congress to pretty please not establish a religion but in my view it is better to make it illegal for them to do so.

James Buchanan, Gordon Tullock, and the other founders of Public Choice and its close-cousin Constitutional Political Economy didn’t stop their analysis after they found that politicians sometimes behave badly. Like James Madison before them, they thought of constructive ways to make political actors behave better, sometimes by placing certain decisions beyond their reach.

There is nothing fatalistic about that.

 

Great Myths of the Great Depression

The New Deal deficit spending helped boost the economy and bring the unemployment rate down to single-digit levels, but fear of deficits limited the scale of New Deal programs and caused Roosevelt to reverse course and cut back on spending in 1937, just as the economy was gaining momentum.

So writes Dean Baker in the New Republic. This is marginally better than the myth I learned in high school: FDR saved capitalism from itself by embracing the wisdom of Keynesian economics. He “primed the pump” with massive deficit spending and lifted the economy out of the Great Depression.

My high school story was a tad inconvenient for those who are fans of both Keynes and FDR: In 1940—7 years after the New Deal had begun—the unemployment rate still hovered at an astounding 14.6 percent.

But the high school myth turned out to be wrong: Keynesian economics didn’t end the Great Depression because Keynesian economics was never tried. Keynes, remember, called for deficit-financed spending during downturns (and surpluses during times of plenty to pay off the debt). The data show that FDR (and Congress) implemented half of the Keynesian stratagem: real spending dramatically increased throughout the Great Depression. 

The problem—from a Keynesian perspective—is that they also massively increased (already-high) taxes so that, even as the economy collapsed, revenue soared.  

 

 

A seminal piece in the American Economic Review by Cary Brown exploded the myth that Roosevelt was a Keynesian:

The primary failure of fiscal policy to be expansive in this period is attributable to the sharp increases in tax structures enacted at all levels of government.  Total government purchases of goods and services expanded virtually every year, with federal expansion especially marked in 1933 and 1934.  [But] the federal Revenue Act of 1932 virtually doubled full employment tax yields.

But notice, Brown doesn’t say that FDR failed to be Keynesian because he stopped spending; he failed to be Keynesian because he also raised taxes. But that doesn’t stop many in the punditry from claiming that, in his later years, FDR was converted into some sort of proto-Paul Ryan.

See this excellent post by Alex Tabarrok on the subject. See, also, these posts by Tyler Cowen.

Institutionalizing Failure

From the New York Times:

As advocates of charter schools, including the Bloomberg administration, try to persuade legislators to lift the limit on the number of such schools in the state, no one is as likely to stand in their way as Mr. Perkins, whose district encompasses nearly 20 charter schools. Several more are planned next year.

Over the last decade, as charter schools have multiplied, Mr. Perkins has undergone a dramatic shift and emerged as their most outspoken critic in the Legislature, writing guest columns in newspapers and delivering impassioned speeches criticizing the “privatization” of public schools.

First, calling charter schools “privatization” is a lie. They’re publicly approved, publicly financed, and publicly supervised. The only way they’re “private” is they are free of the education bureaucracy and the grasp of teachers unions.

There are two main arguments against charter schools, which are logically inconsistent. First, there are those who say that charter schools don’t improve educational outcomes, while conversely arguing that charters ‘”eave some students behind.” If there’s no benefit to charter schools, what are the students who stay in public schools being left behind from? In Mr. Perkins’ words:

“If there are people fleeing from something, it is cause for alarm,” he said in an interview in his office. Using an analogy he favors when talking about charter schools, he said: “That should tell you there is a fire, and those who are responsible should find out what is causing that fire, not just create a new place for those who flee and leave the rest inside to burn there.”

The analogy is apt; public schools are failing students at catastrophic rates. Students and parents are fleeing, with good reason. Mr. Perkins, however, is firmly blocking the door. I’ll never understand people that refuse to accept choice and freedom because of some unpredictable future. Is the devil you know really better than the chance at something better?

Interestingly, Alex Tabarrok points to the NBER Digest‘s summary of recent research on the schools in Harlem:

Will Dobbie and Roland Fryer find that in the fourth and fifth grade, the math test scores of charter school lottery winners and losers are virtually identical to those of a typical black student in the New York City schools. After attending the Promise Academy middle school for three years, black students score as well as comparable white students. They are 11.6 percent more likely to be scoring at grade level in sixth grade, 17.9 percent more likely to be scoring at grade level in seventh grade, and 27.5 percent more likely to be scoring at grade level by eighth grade. Overall, Promise Academy middle school enrollment appears to increase math scores by 1.2 standard deviations in eighth grade, more than the estimated benefits from reductions in class size, Teach for America, or Head Start.

Those numbers indicate that the failures of monopolistic public education are so institutionalized and ingrained in students, it takes years of instruction and adaptation to the new institutional arrangements of charter schools to rehabilitate students, and then they can begin to blossom.

However, the article notes that Mr. Perkins decided charter schools were unsatisfactory after… a few months.