Tag Archives: fiscal responsibility

CAP Act: Baby Steps Towards Fiscal Responsibility – Tentative and Toothless

This afternoon Senators Bob Corker (R-Tenn.) and Claire McCaskill (D-Mo) will introduce legislation to “force Congress to dramatically cut spending over 10 years”. From the Senator’s website:

At a time when many families have been forced to tighten their pocketbooks, Congress must also learn to do the same. This bill isn’t just about cutting back this year or next year; it’s about instilling permanent discipline to keep spending at a responsible level,” McCaskill said.

The Commitment to American Prosperity Act, the “CAP Act,” would:

(1) Put in place a 10-year glide path to cap all spending – discretionary and mandatory – to a declining percentage of the country’s gross domestic product, eventually bringing spending down from the current level, 24.7 percent of GDP, to the 40-year historical level of 20.6 percent, and

(2) If Congress fails to meet the annual cap, authorize the Office of Management and Budget to make evenly distributed, simultaneous cuts throughout the federal budget to bring spending down to the pre-determined level. Only a two-thirds vote in both houses of Congress could override the binding cap …

I’m very pessimistic about this, for many reasons. Procedurally, the Act only institutes a new budgetary point of order, which can be overridden with super-majority votes in both houses. That is, the Act doesn’t compel anyone to act fiscally responsibly unless they’re inclined to do so. If we had such restrained legislators, a cap wouldn’t be necessary to begin with. Currently the House can override budgetary points of order with a simple majority vote, so this is an improvement, but not one I expect to have serious results.

The technical aspects of the Cap Act are similarly merit-less. First, the baselines are all skewed; why should we accept 20.6% of GDP spending as the new ‘normal’? Historically, Federal receipts average right around 18% of GDP, so locking in 20% would still put us on a trajectory towards systemic deficits. Given that we’re starting from a baseline where Federal debt rapidly approaches 100% of GDP, this isn’t a responsible plan to reign in spending. Similarly, the “lookback GDP” guidelines will count 2009, 2010, and 2011 spending, which has already exploded far beyond what is fiscally sustainable, or historically precedented. The “glide path” isn’t a serious measure of fiscal sustainability; it places us, in just five years, at the same debt-to-gdp ratio that trigged an economic meltdown in Greece last year. So the bill doesn’t set reasonable baselines, it doesn’t do anything to address the deficit, and if Matt’s work with similar TELs in the states holds, high-income economies like ours tend to use spending caps as excuses to grow spending beyond the levels they otherwise would.

There are some technical merits, but they’re merely cosmetic. Bringing Social Security back ‘on-budget’ is a good start, but this bill still leaves massive loopholes for ’emergency spending’, which the New York Times called a new way of political life six years ago. That trend hasn’t changed one iota since; if anything it’s gotten worse. A unified Democratic Congress couldn’t pass any budget last year. It’s one of the few constitutional powers actually entrusted to the Congress, and they failed. Which leads to my separation-of-powers concerns with this legislation. It’s unclear from a first reading, but where is the authority for Congress to entrust sequestration power with OMB, an executive branch agency?

Finally, there are massive political concerns with the legislation. It seems poised as a cover for fiscally irresponsible co-sponsors like McCaskill and John McCain (who both supported TARP and the GM Bailout; McCaskill also voted for Obamacare while McCain has his own big government medical plan to push) to claim the mantle of fiscal responsibility. We’ve already seen that movie, and it was terrible the first time.

In sum, I don’t see any reason the bill would restrain spending to a responsible or sustainable level. The bill has some good ideas, but they’re wandering in a wilderness of bad ones. The impulse is good, the execution is terrible.

Note: Sorry a rough draft went up on the RSS feed earlier, WordPress is a cruel mistress sometimes.

Budget Gimmicks Exposed

Megan McArdle writes:

There’s a saying I’ve heard from accountants:  recessions uncover what auditors can’t…. I supect that this is also the case with the emerging epidemic of governments who cooked the books.  Hungary is the latest culprit, and its official pronouncements are starting to sound, well, worryingly Greek.

Stay tuned. Veronique de Rugy and Eileen Norcross have taken on the brave task of trying to codify the respective ways in which federal and state legislators play tricks with their budgets and evade fiscal responsibility. Look for their papers soon.

State Budget Crisis, New York Edition

According to the New York Times, Governor Paterson is looking to layoff about 10,000 state government workers in order to balance the budget. This comes just days after a federal judge blocked the governor from furloughing half of the state workforce for one day a week. Last year, the governor made a pledge to the public employee unions that there would be no layoffs until January 1, 2011. So, under the governor’s new plan, the layoffs would not take effect until that date. It is probably not a coincidence that that is also the day the governor hands the keys over to his successor.

Meanwhile, the Wall Street Journal reports “the state has paid out millions of dollars to local nonprofit groups—including $28,500 for a tennis league, $11,000 for a lighthouse museum and $2,700 for a curling club.”

Most states have been on a long-term spending binge (according to data from the BEA, real aggregate state and local government spending is 230% its 1980 level while real aggregate state GDP is just 197% its 1980 level). Of course, public employees and other special interests (such as tennis leagues) benefited mightily from that spending binge.

However New York ends up balancing its budget, it is interesting to note that, as a general rule, states tend to deal with unforeseen shortfalls by cutting spending rather than by raising taxes. This, at least, was the finding of a 1996 study by Bohn and Inman.

Which leads us to an often-underemphasized point: When states over-extend and over-spend, it isn’t just the taxpayer who ends up feeling the hurt. In the end, it is often those who have been made unrealistic promises–the public employees with the giant pensions or the special interests with the sweet deals–who end up paying when those promises are unexpectedly snagged away.

Over the course of the next several months, New York and other states will provide a test of this hypothesis.

Experiments in Democracy

A Wall Street Journal editorial discusses the severity of the budget crises in three states: California, New Jersey, and New York.  While all states are suffering decreased revenues this fiscal year, the problems in these states have been especially severe, resulting in possible downgrades for California’s bonds which are already the lowest-rated in the country.

The Journal states:

A decade ago all three states were among America’s most prosperous. California was the unrivaled technology center of the globe. New York was its financial capital. New Jersey is the third wealthiest state in the nation after Connecticut and Massachusetts. All three are now suffering from devastating budget deficits as the bills for years of tax-and-spend governance come due.

During booms in the business cycle, high tax rates accompanied by an increased level of government services are palatable to taxpayers, but as these three cases exhibit, high-tax policies can quickly become unsustainable as incomes fall.

Eileen’s last post explains that state and municipal policy makers including Rudolph Giuliani are currently discussing reforms toward greater fiscal responsibility in order to promote prosperity in their localities, but these reforms are going to be difficult to enact for states that are already deeply indebted.

A great asset of the American federal system is that policy variation across the states allows citizens and law makers to observe how various fiscal policies function in the real world.  As described by the authors of the newly published 2009 edition of Rich States, Poor States, constituents do in fact “vote with their feet” by moving to states with policies that fit their desires.  This year’s index demonstrates that states in the South and West are generally gaining domestic population from the Northeast where taxes and government involvement in the economy are generally higher.

Unfortunately, the same experimentation at the federal level carries much greater costs.  Until now, federal aid has allowed for irresponsible fiscal policies to continue at the state level, but this policy may be coming to an end.  If the federal debt and deficit approach the unsustainable levels that states such as California, New Jersey, and New York have reached, no entity will be able to bail it out.  Additionally, economic policies at the federal level do not provide the same sort of natural experiment within the country and carry a higher risk of severe negative consequences.

The article continues:

At least Americans have the ability to flee these ill-governed states for places that still welcome wealth creators. The debate in Washington now is whether to spread this antigrowth model across the entire country.

While government systems can never incorporate the feedback mechanisms of the market, the federalist system allows for a sort of competition between states and localities in which competition allows successful programs to thrive and spread. However, this system only works when unsuccessful local policies are not subsidized by the federal government and when authority is sufficiently devolved to allow states to differentiate their policies from one another’s.

More on New Orleans Housing

This morning’s brief on blight from the Greater New Orleans Community Data Center is followed up by a report this afternoon from the city’s Bureau of Governmental Research entitled “The House that Uncle Sam Built: The Continued Expansion of Subsidized Housing in New Orleans.” From the findings:

Since the Katrina disaster in 2005, an influx of federal aid has propelled a radical transformation of the city’s subsidized rental housing market. From accelerated public housing redevelopments to new mixed-income complexes to increased housing vouchers, federal aid has reshaped and expanded the supply. The number of subsidized units in New Orleans is approximately 21% higher than pre-Katrina and growing.

Emily Schaeffer discussed the problems associated with both direct provision of public housing as well as planned mixed-income developments in a 2007 issue of the Mercatus Policy Series. Based on fieldwork in New Orleans and a synthesis of existing literature, she found that portable housing vouchers were preferable both to recipients and to taxpayers:

Mixed-income developments are more expensive than comparable housing assistance policies. Moving housing assistance entirely to a voucher choice program would yield better outcomes at a lower cost than the status quo. The financing from the sale of government land should be taken advantage of as an opportunity to improve fiscal responsibility within the housing assistance program. The MID approach is unable to accommodate all of the families receiving assistance prior to the storm and has no means of ensuring ongoing financing without increasing costs imposed on the taxpayers.