Tag Archives: Mark Crain

Institutions matter, state legislative committee edition

Last week, Mercatus published a new working paper that I coauthored with Pavel Yakovlev of Duquesne University. It addresses an understudied institutional difference between states. Some state legislative chambers allow one committee to write both spending and taxing bills while others separate these functions into two separate committees.

This institutional difference first caught my eye a few years ago when Nick Tuszynski and I reviewed the literature on institutions and state spending. Among 16 different institutions that we looked at—from strict balanced budget requirements to term limits to “item reduction vetoes”—one stood out. Previous research by Mark Crain and Timothy Muris had found that states in which separate committees craft taxing and spending bills spend significantly less per capita than states in which a single committee was responsible for both kinds of bills. As you can see from the figure below (click to enlarge), the effect was estimated to be many times larger than that found for almost any other institution:

InstitutionsBut as large as this effect seems to be, the phenomenon has largely been ignored. To our knowledge, Crain and Muris are the only ones to have studied it. Their paper was now two decades old and was based on a relatively small sample of years from the 1980s.

As I wrote in yesterday’s Economics Intelligence column for US News:

To get a fresh look at the phenomenon, my colleagues and I consulted state statutes, legislative rules, committee websites and members’ offices. We created a unique data set that for some states spans 40 years. We took a cautious approach, coding taxing and spending functions as not separate in any chambers in which it was possible for a tax bill to come out of a spending committee and vice versa. We found that in 25 states, these functions are separate in both chambers, in 7 states they are separate in one chamber, and in the rest, these functions are separate in neither chamber.

To control for other confounding factors, we also gathered data on economic, demographic, and institutional differences between the states. Controlling for these factors, we found that separate taxing and spending committees are, indeed, associated with less spending. To be precise:

Other factors being equal, we find that those states with separate taxing and spending committees spend between $300 and $450 less per capita (between $790 and $1,200 less per household) than other states.

Our full paper is here, a summary is here, and my post at US News is here. Comments welcome.

Would a Biennial Federal Budget Save Money?

According to news reports, a number of members of Congress are urging the “Super Committee” to recommend that the Federal Government move to a two-year budget cycle. The advocates of biennial budgeting span the political spectrum and include Democrats Jeanne Shaheen and Kent Conrad as well as Republicans Paul Ryan and Johnny Isakson.

The idea has long been championed by fiscal conservatives who hope that it will reduce spending. But does it? According to Paula Kearns of Michigan State University, the theoretical impact of a biennial budget process is ambiguous. It might decrease spending if it shifts power from the legislature to the executive, but it might increase spending if it makes the spoils of lobbying that much more durable and encourages special interest groups to lobby for largesse. In a 1994 study, Professor Kearns examined the impact of biennial budgeting at the state level. After controlling for other factors, she found that states with a biennial budget process actually spend more per-capita than states with an annual budget process.

This result was confirmed in a 2003 study by Mark Crain (now of Lafayette College, though he was at GMU when he conducted this research). Crain found that, other factors being equal, states with a biennial budget process spend about $120 more than states with an annual budget process (I’ve converted this figure into 2008 dollars).

Of course, per-capita spending isn’t everything. Maybe biennial budgeting leads to more spending, but it is better spending?

For a review of this and other institutions that affect spending, see my new working paper with Mercatus Center Masters Fellow, Nick Tuszynski.

A Better Balanced Budget Amendment

A few weeks ago, I wrote about the state-level evidence on strict balanced budget requirements:

I believe the evidence supports this claim. David Primo (2003) and Mark Crain (2003) find that states with a strict balanced budget requirement tend to spend less than other states. Shanna Rose (2006) finds that states with strict balanced budget requirements tend not to experience a political business cycle in which government spending rises just prior to an election and falls shortly thereafter. Bohn and Inman (1996) find that states with strict balanced budget requirements tend to have larger General Fund surpluses and larger rainy day funds.

Since then, the recently-inked debt deal has obliged Congress to take up and vote on a balanced budget amendment. I think the most-compelling argument against such an amendment is the concern that it would exacerbate the ups and downs of the business cycle by forcing spending cuts when the economy is contracting and permitting increases when the economy is expanding.

This is a concern, but there are ways around it.

One answer is a rainy day fund. Forty-seven states have such funds; states contribute to them during good years and then draw on them when the budget is strained due to a downturn or some other event like a natural disaster. Gary Wagner and Erick Elder find that states whose rainy day finds have strict rules governing the amounts they must deposit and the reasons for which they may withdraw from them tend to experience less spending volatility.

Alex Taborrok makes the case for essentially the same scheme at the federal level.  He calls it an “unbalanced Budget Amendment.”

Glenn Hubbard and Tim Kane weigh in with a similar proposal, arguing that “the annual constraint on expenditure should be defined by the median federal revenues of the last five years, not the current year.”  They have a number of other proposals worth considering as well:

  • The “balance” should count accrued liabilities in entitlements.
  • It should use “escalating supermajorities for exemptions,” meaning that “a 3/5 vote in both houses is required the first year of exemption, 4/6 the second year, 5/7 next, and so on.”
  • It should provide a glide path to a lower debt-to-GDP ratio.

David Primo highlights a current proposal in Congress that incorporates many of these features.

Balanced Budget Rules and Unintended Consequences

In my view this is one reason of many why a balanced budget amendment is not a workable path toward fiscal conservatism.

That is Tyler Cowen’s take on my paper with Noel Johnson and Steven Yamarik. I can certainly see why he might come to this conclusion.  We find that when Democratically-controlled states face a binding constraint on their ability to carry a deficit over from one year to the next, they may regulate more instead. A friend of mine calls this the “muffin-top” problem: belt-tightening can sometimes lead to unsightly bulging…elsewhere.  In spite of the muffin-top problem, I am actually still an advocate of a balanced budget amendment at the federal level.

Though I often marvel at the fiscal irresponsibility of state governments, I can’t help but feel that if the states and the federal government were in some sort of fiscal beauty contest, the states would easily come in 1st through 50th while the federal government would come in 51st.  Consider:

  • Collectively, state and local governments are in debt to the tune of about 2.6 trillion dollars, while the federal government has racked up nearly 4 times that amount.
  • The states have accumulated $9.9 trillion in unfunded obligations that will come due over the next several decades.  The Feds, meanwhile have accumulated 5 to 10 times this amount (depending on whether you agree with Medicare’s chief actuary that the current political path is highly unlikely).
  • Most states manage to balance their operating expenses (some gimmickry aside) on an annual or biannual basis. In contrast,
    for the last 80 years, the federal government’s norm has been to run an annual operating deficit (with deficits about 85 percent of the time).
  • When states do borrow, it is typically for long-term capital projects (again, some gimmickry aside).  So future generations are on the hook for bridges and buildings that they, too, will use. In contrast, the Feds don’t even pretend to borrow for future projects; much of what my daughter’s generation will pay for is my generation’s consumption.
  • When states encounter budgetary problems, they tend to deal with them by cutting spending rather than raising taxes.

All of this is somewhat surprising given the fact that, constitutionally, the states were given a blank check whereas the feds were not. As Madison put it in Federalist 45:

The powers delegated by the proposed Constitution to the federal government, are few and defined. Those which are to remain in the State governments are numerous and indefinite.

So why, given so much more (constitutional) power than the feds, do the states seem to manage their affairs more-responsibly? Tiebout competition and the lack of a central bank likely play a role. But I believe the fact that every state but Vermont has to balance its books each year must account for a large share of this relative fiscal probity.  As James Buchanan and Richard Wagner argued over 30 years ago, the ability to buy items for today’s generation while putting the tab on tomorrow’s generation creates a systematic bias in favor of irresponsible spending. In contrast, they argue:

The restoration of the balanced-budget rule will serve only to allow for a somewhat more conscious and careful weighting of benefits and costs. The rule will have the effect of bringing the real costs of public outlays to the awareness of decision makers; it will tend to dispel the illusory “something for nothing” aspects of fiscal choice.

I believe the evidence supports this claim.  David Primo (2003) and Mark Crain (2003) find that states with a strict balanced budget requirement tend to spend less than other states.  Shanna Rose (2006) finds that states with strict balanced budget requirements tend not to experience a political business cycle in which government spending rises just prior to an election and falls shortly thereafter. Bohn and Inman (1996) find that states with strict balanced budget requirements tend to have larger General Fund surpluses and larger rainy day funds.

In our paper we find that stricter balanced budget rules tend to constrain partisan fiscal outcomes.  The fact that they may lead to bulges in the regulatory state is, indeed, unfortunate.  But in my view, that suggests that we should also examine biases in the political economy of regulation and consider institutional reform to address those as well.  Perhaps there is need for a more-conscious weighing of the benefits and costs of regulation?  If belt-tightening leads to muffin-tops, maybe we need more than a balanced budget amendment?  Perhaps spanxs?