Tag Archives: House Republicans

Why a shutdown threat won’t work

There are many people who think that the Affordable Care Act (ACA) is bad policy. I am among them. There are also many who think that the current trajectory of government spending is unsustainable and economically harmful. I am also among them.

Then there are people who think it would be wise to shut down the federal government if they can’t get language passed that threatens to defund the ACA. (Notice that I didn’t say language that “defunds the ACA”; I said language that “threatens to defund the ACA.” Much of the ACA is actually funded through mandatory spending so Congress would need to pass a full repeal of the bill to defund it. What these folks want is language in the budget resolution saying that the ACA ought to be defunded. The bill might strip out some discretionary funding but most of the ACA would go forward.)

I am not among them.

To help us think through the options, let’s borrow from game theory and employ a decision tree. The House (H) can either choose to pass a continuing resolution (CR) that funds the ACA or a CR that calls for de-funding the ACA. The Senate (S) can choose to pass whatever the House sends them or to reject it. If they reject it, and no CR is passed by October 1, the federal government will shut down. In this case, as the CRS puts it, “substantial ACA implementation might continue during a lapse in annual appropriations that resulted in a temporary government shutdown.” If the Senate passes whatever the House sends them, then it will go to the President (P) who can either sign it or veto it.

At the end you can see the outcomes and the way that each group feels about them.

Options are happy, sad, neutral, and outwardly sad but secretly happy. (click on the images to enlarge):

decision tree

 To figure out the most likely outcome (the “equilibrium”) you do a fancy thing called “backwards induction.” It is actually quite simple: think about how each player would act at each stage, starting at the end of the game, and cross off implausible actions. This will help you eliminate unlikely outcomes. This is what I’ve done below, with dashed lines indicating an action that a particular player is unlikely to take.  

We can with confidence cross off the possibility that the President will veto a CR that keeps the government open and fully funds his signature initiative or that the Senate would reject such a bill.

We can also cross off the possibility that the President would sign or that the Senate would send him something that calls for defunding his signature initiative.

That leaves us with two plausible scenarios: the House doesn’t use the CR as a means to attack the ACA, the CR passes the Senate, and the President signs it. This is the top branch of the game tree. House Republicans will be neutral about this outcome since they will have escaped blame for a shutdown but will have done nothing to stop the ACA. Senate Democrats and the White House will be pleased.

The other somewhat plausible scenario is that the House passes a CR calling to defund the ACA, and the Senate rejects it. The government would shut down and the ACA would mostly be untouched. I’m guessing Republicans would get most of the blame for shutting down the government since they lack a bully pulpit, aren’t as gifted as the president at communicating, and the ideological stereotype is that Republicans would like to see the government shut down any way. The White House and Senate Democrats will be outraged—simply outraged—that Republicans would do this but they will secretly be happy to have one more reason to say Republicans should never be trusted with power.

If Republicans see all of this, they will likely flinch, hold their noses, and pass a CR that doesn’t touch the ACA and hopefully come up with more constructive ways to challenge the policy. But, it is a close call for some House Republicans so for this reason, I’ve only partially crossed off the first bottom fork of the decision tree. decision tree 2

What the tree doesn’t indicate is the long run consequences of a government shutdown. Two and a half years ago, when Washington was staring down a different government shutdown, I drew from the experience of U.S. states to conclude that a shutdown is not in the interest of those who advocate for limited government:

As is often the case, we can look to the American states for some guidance. It turns out that in 23 U.S. states, the government will automatically shut down in the event that the governor and the legislature fail to agree on a budget. In his work on budget rulesDavid Primo examined the theoretical impact of these provisions from a game theoretic perspective. He noted that in states with an automatic shutdown provision, “the legislature will be able to achieve its ideal budget, so long as the governor prefers it to no spending.” (p. 102)

He therefore predicted that states with such a provision will spend more than states without such a rule. He then tested the hypothesis, controlling for a number of other factors known to impact state spending and found that states with an automatic shutdown provision actually spend about $64 more per capita than other states. As he notes, “This effect is remarkably large, given that shutdowns occur rarely.” (p. 103)

This suggests that the federal government’s automatic shutdown provision—by making Congress’s desired spending level a take-it-or-leave-it offer—tends to bias the government toward more spending. By extension, it also suggests that a government shutdown will shift negotiating power toward those who favor more spending. So, paradoxically, fiscally conservative tea partiers stand to lose the most if the federal government shuts down.

Perhaps it is time for them to rethink their support of a shutdown.

 

The farm bill vote gives credence to Democrats’ favorite ‘straw-man’ argument

“Republicans favor tax cuts because they want to give money to rich people.”

I’ve heard this argument, in various forms, for years. And I’ve always considered it one of the worst straw-men arguments in politics (right up there with “Democrats oppose foreign wars because they are anti-American”).

For one thing, there are plenty of good reasons for cutting taxes that do not rest on a desire to give money to rich people. Moreover, it’s a rather Orwellian twist of the English language to say that refraining from taking as much from high-earners is equivalent to handing them money taken from others. More fundamentally, though, I’ve always found it hard to believe that any serious person—Democrat or Republican—actually wants to transfer resources from middle and low-income taxpayers to upper-income taxpayers. This wouldn’t be justified on either efficiency grounds or on any standard theory of social justice.

Then came the July 11 House vote on the Farm Bill.

As I noted in my last post, U.S. Farm Policies—namely subsidies, price floors, and barriers to trade—are roundly opposed by economists of almost all stripes. The reason is that subsidies, price floors, and barriers to trade do exactly what the straw-man argument claims Republicans want to do: they transfer resources from middle-income consumers and taxpayers to upper-income farmers and landowners.

For years the issue has been clouded by the strange combination of food stamps and farm subsidies in a single “farm bill.” As Veronique explained a few weeks ago, this facilitated a logroll:

In their famous book published in 1962, “The Calculus of Consent: Logical Foundations of Constitutional Democracy,” Noble Prize Winner James Buchanan and his co-author Gordon Tullock identified this behavior as logrolling — an agreement between two or more lawmakers to support each other’s bill.

Normally, they wouldn’t support the other’s bill if it weren’t for the support of their own bill. The main consequence of this quid pro quo is more government spending across the board and in this particular case; more farms subsidies and more food stamps spending.

Then, on July 11, a funny thing happened. The Republican leadership split up the two portions of the farm bill and—shockingly, to me at least—put the farm subsidy portion of the bill up for a vote without any amendments.

Then, without the support of a single Democrat, 216 House Republicans voted to use government subsidies, price floors, and barriers to trade to transfer resources from middle income consumers and taxpayers to upper-income farmers and landowners.

I’m not sure what their motivations were, but the vote certainly makes it seem as though the Republicans in Congress who voted for it want to give money to rich people.

The Wrong Line in the Sand

There are many in policy circles these days who believe that newly-empowered House Republicans – especially those that were elected with Tea Party backing – ought to draw a line in the sand on raising the debt ceiling. This is the wrong line in the sand. Excessive debt is indeed bad. But it is a symptom of the disease, not the disease itself. To treat the real disease, I believe we need to get serious about addressing the spending problem.  

What is Wrong With Debt?

It used to be that Republicans focused almost-exclusively on taxes instead of on their root cause: spending. This, of course, biased policy in favor of huge deficits. When deficits are large but manageable, they drive up interest rates and crowd-out private investment. And when deficits are large and unmanageable, they can up-end a country’s entire economy.

Economists Carmen Reinhart and Kenneth Rogoff examined the implications of debt in 44 countries over a 200 year period. They found that in economically-advanced countries, when debt-to-GDP ratios moved from around 30 percent of GDP to 90 percent or more, economic growth rates tended to halve. Now the US isn’t a typical country and investors may be willing to let our government get away with debt-to-GDP ratios that are higher than 90 percent.

But certainly they are not going to let us get away with debt-to-GDP ratios of 200+ percent (which is what the CBO projects for 2035), let alone 300+ percent (2047) or 800 percent (2078).

At some point, the federal government will have accumulated too much debt for investors to feel comfortable lending at current rates. At that point, they will demand higher interest rates which will undermine economic growth.

In a best-case scenario, we will join the list of countries that have seen excessive debt severely hamper their economic growth rates. In a worst-case-scenario, the increased interest-cost will further add to the government tab, consuming the whole budget and causing the whole edifice to collapse under its own weight.   

What is Wrong with Taxes?

Now you might think we ought to draw a line in the sand and not borrow anymore. The problem is that if we refuse to raise the debt limit, it might cause the government to default on its existing debt, hastening the day when investors will lose confidence in the full faith and credit of the government.

An even more-likely scenario is that a refusal to raise the debt limit will trigger a massive tax increase. Some critics, of course, have blithely suggested that a tax increase is just what we need. The problem here is that taxes can also inflict great economic harm. Economists Christina and David Romer examined over 60 years of U.S. data to understand the impact of taxes on GDP. They carefully disentangled the tax-effect from other effects, and concluded that a tax increase of 1 percent of GDP lowers real GDP by almost 3 percent.

The CBO projects that if we were to meet our current long-term spending promises without more borrowing, all taxes would need to roughly double. If the Romers’ estimate is anywhere near accurate, a doubling of all tax rates would trigger one of the worst economic contractions in US history.  

So what should we do? I’d say the first thing we need to do is focus on spending. Its two symptoms — excessive debt and excessive taxation — are both economically damaging. Only by focusing on the disease can we avoid both symptoms.

Spending is where the line should be drawn.