Tag Archives: vote

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.

Reforming disability retirement in Montgomery County, MD

On the heels of Atlanta, Georgia’s sweeping pension reforms, and the cooperation of New Jersey Republicans and Democrats to reform pension and health care benefits, comes the news that City Council President (and former private sector labor leader) Valerie Ervin lead the Montgomory County Council to vote to reform disability retirement for public workers. Unions opposed the measure saying it was an issue for collective bargaining. Ervin’s reply: the council has stayed out of disability retirement for 21 and half years waiting for the unions to budge to no avail.

The political shakeup resulting from public union intransigence is noteworthy as  Robert McCartney writes in The Washington Post. Public unions wield political power. Last year a city council member was voted off the board due to union opposition for backing pension reform. In Montgomery County, “unions have played an out-sized role in politics…partly because they’re open-handed with campaign contributions and campaign workers.” Ironically perhaps union support and “boots on the street” were instrumental to Ervin’s election in 2006.

What has changed in a year? State and local budgets haven’t improved. Revenues are tight and the costs associated with benefits, often negotiated with unrealistic and erroneous accounting assumptions, are beginning to eat up larger portions of the funds used to operate services. Unions’ strategy of refusing to face numerical reality has led to budgetary gridlock and the emergence of a newly pragmatic tenor in labor-government negotiations.

 

The Times They Are A Changin’

In which national newspaper did the following appear (not on the opinion pages):

But public workers have a unique relationship with elected officials, because government employees are effectively negotiating with bosses whom they can campaign to vote out of office if they don’t get what they want. Private unions, in contrast, don’t usually have the power to fire their members’ employers.

The answer is here.

In her review of the literature on public sector unions, Eileen reaches much the same conclusion. She writes:

In addition, however, public sector unions are also able to increase demand for their labor through the political, legislative, or regulatory process, thus increasing wages further than private sector unions are able to.

 

Wisconsin police search for 14 missing legislators

To avoid a vote on a proposal to limit collective bargaining rights in the state of Wisconsin, 14 legislators have fled the state, to an undisclosed location. I am not sure if there is a precedent for this. The reason they crossed state lines was to dodge the Wisconsin police

This is one potential end result of the logic of public sector unionism – a logic that allows public unions and their employers to sit on the same side of the bargaining table.

How this episode plays out will say much about the future of representative government.

A Balanced Budget Amendment: Not so Far-Fetched

The Alexandria News reported last week that Virginia Governor McDonnell sent the General Assembly a resolution for their consideration. If passed, it would be one step toward enactment of a federal balanced budget amendment.

Remember, there are two ways to amend the Constitution. One option is for two-thirds of each federal chamber to pass it and then forward it to the states where three-fourths need to ratify it (by convention or by the legislature). This is the way all 27 amendments to the constitution have been passed. The second—so-far unused—option is for the states to get the ball rolling by calling a convention: If two-thirds of them petition Congress for a constitutional convention, then a convention must be called. It will then consider an amedment (or amendments) and if it can agree, forward these back to the states where, again, three-fourths must consent to passage.

The Virginia bill would take a stab at both methods. It calls on Congress to pass a balanced budget amendment. But, “in the event of congressional inaction,” it petitions Congress for a constitutional convention.  

The idea is not so far-fetched. After all, there have been 17 amendments to the Constitution since the Bill of Rights, which comes to around one amendment every 13 years. The most-recent took effect 19 years ago in 1992. Moreover, in 1995, the U.S. Congress came razor-close to passing a balanced-budget amendment, obtaining the requisite two-thirds of House votes and falling just one vote shy of two-thirds of all senators.

What is more, we are actually closer to the second means of amending the Constitution than you may think. David Primo writes (p. 130):

In the 1970s, thirty-one states called for a convention on the subject of a balanced budget, and Missouri did so in 1983. Since then, three states (Alabama, Florida, and Louisiana) have rescinded this request, though it is unclear whether they can do so. Depending on how the counting is done, then, only two to five more states are needed for a convention to be called.

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.

How Can States Limit Spending?

What can states do to arrest the rapid growth in state spending? What tools do state legislators have to limit the growth of their budgets?

One popular tool is a “tax and expenditure limitation” (TEL). This is a formal rule—written into a state’s statutes or its constitution—that limits the growth of its budget via a fixed formula. Twenty seven states currently operate under TELs, but their design varies considerably from state to state. In my latest working paper, I examine the various ways TELs might be structured to see which varieties work best and under what circumstances.

I examined data from 49 states over 30 years (sorry Alaska, most researchers ignore your budget data since it is so strange). The analysis also included a standard set of control variables to account for the impact that other factors might have on state budgets.

Perhaps the most-surprising thing I found was that TELs have a different impact in high and low-income states (others have found this too). As the Figure below shows, in low-income states, TELs seem to reduce spending as a share of total personal income by about 4/10 of one percentage point (or about 3 percent relative to the average state spending share). But in high-income states, TELs increase spending as a share of total person income by about 2/10 of one percentage point.

What accounts for this? It appears that the driving factor is the fact that TELs often include income in their formula (by limiting budget growth to some multiple of personal income growth or by limiting budget size to some share of total personal income). So in high-income states, these types of formulas fail to restrain and may actually act as an excuse for the state to spend up to the limit.  

Not all TELs have this strange characteristic. As indicated by the figure below, TELs that limit budget growth to the sum of inflation and population growth seem to limit spending as a share of total personal income in both high and low-income states.

What other characteristics make for more-effective TELs? I found that four others seem to stand out:

  • The TEL should automatically and immediately refunds revenue in excess of the limit to taxpayers. This means policy makers won’t have a chance to spend the surplus and it means that taxpayers will come to appreciate the merit of the limit first-hand.
  • The TEL should target spending rather than revenue. This makes it harder to get around the limit through borrowing.
  • The TEL should be codified in the state constitution rather than in statute. This makes it more-binding.
  • The TEL should require a supermajority or a public vote to be overridden. All TELs can be overridden in case of emergencies. But to have any teeth at all, the TEL should require a supermajority vote to do this. Without, it is more like a suggested limit on spending, rather than an actual limit.

There are a lot more details in the paper, which can be found here.

Nobel Laureates on Local Governance and the Importance of the Constitution

Last night, the Mercatus Center, among other organizations, hosted a panel discussion on James Buchanan’s contributions to social philosophy and political economy. In addition to Buchanan (the 1986 Nobel laureate in economics), there were two other economic Nobelists on the panel: Elinor Ostrom (2009 Laureate) and Amartya Sen (1998 Laureate).

Professor Ostrom’s closing remarks (at around 32:00 in the video) are particularly germane to this blog. She quoted James Buchanan and Gordon Tullock in their seminal work, The Calculus of Consent:

“Both the decentralization and size factors suggest that, when possible, collective activity should be organized in small rather than large political units. Organization in large units may be justified only by the overwhelming importance of the externality that remains after localized and decentralized collectivization.” (pp. 114-15).

Ostrom then declared:

Boy, if I could get that up on the wall of every university I visit and get it into the textbooks on public policy and urban governance, I would be thrilled. 

Then, she addressed the importance of a constitution:

But somehow, we have forgotten this core idea…A lot of people and students come in and, when asked “what is democracy,” they say, “It is voting; democracy is defined by voting for officials, not by people being engaged in constitutional decision making.” And people have lost the idea of a constitution. Some of my students come in and think “well that’s just a piece of paper written by dead, old white men at a national level.” The idea that citizens would craft their own rules and really struggle with how to get things organized at a local community as well as all the way up, has been lost.

I think that Professor Ostrom’s diagnosis is spot-on. Many—students, journalists, and especially policymakers—almost worship the notion of voting (see professor Holcomb’s From Liberty to Democracy for a nice treatment of the evolution of this idea). To them, if 50 percent + 1 favor X, then X is by definition correct.

And note that this cuts across the political spectrum. On the left, you have a lot of people who are willing to say that if a majority thinks that smoking ought to be banned—even on private property—then it ought to be banned. The right is no stranger to this notion either. A lot of conservatives are willing to say that if the majority favors banning certain bedroom activities, then those activities should be banned. And if a court steps in to overturn the ban, then it is automatically a case of judicial activism (irrespective of what the law does or does not actually say). 

In contrast, Buchanan emphasized the “external costs imposed by collective action.” These are all the burdens that can be imposed on an individual as a result of collective action. Mundane examples are regulation or taxation. But, sadly, horrific examples abound: slavery, subjugation, and racial or sexual discrimination have all been imposed by majority vote at one time or another. In other words, Buchanan took seriously the possibility that democracy might impose costs on individuals.

The founding fathers took this notion seriously too. As Madison put it, “I believe there are more instances of the abridgement of freedom of the people by gradual and silent encroachments by those in power than by violent and sudden usurpations.” And as Franklin is purported to have said (though I understand that he may not have actually said this): “Democracy is two wolves and a lamb voting on what to have for lunch.” 

If democracy can lead to bad outcomes, the solution is not monarchy or despotism. According to Buchanan and Madison, the solution is a Constitution: a document that carefully circumscribes the powers granted to the majority. Yes, the majority rules, but under a constitution, they only possess those enumerated powers that are granted to them (ideally, according to Buchanan, these powers would be granted by unanimous consent). Moreover, powers are distributed across different political units (branches) and levels (federal and state). By organizing collective action in small, dispersed political units, Buchanan argued, we can diminish the expected costs that individuals might bear.

Our particular constitution may, indeed, have been written by a bunch of old, dead white guys. But that hardly diminishes the value of a written constitution. Nor does it mean that it should become a “living, breathing, document,” as some would have it. After all, if its meaning changes with whatever gloss the majority chooses to put on it in any particular time, then what is the purpose of a written constitution anyway?

Would a Ward-System Mean More Government in Arlington?

Eileen writes about the fascinating debate in Arlington, Virginia, over how the County should be structured. Under the current “at-large” system, each of the five County Board members is elected by the entire County. But a petition is underway to change that. Under the new proposal, the County would be divided into separate districts or “wards,” each with a council member representing it.

That got me thinking: what are the likely consequences of such a change? At least theoretically, one would expect a ward-organized government to be a bigger government. The reason is that ward representatives can vote to concentrate benefits on their particular districts, and diffuse the costs over the entire County. Public choice economists usually consider such schemes to be inefficient because they permit marginal costs to exceed marginal benefits.

As one might guess, someone has studied this. A 1997 study by Lawrence Southwick of the State University of New York at Buffalo found that, indeed, ward governments were bigger governments. He gathered data from 1,254 cities and controlled for other factors that might affect government size such as the demographic characteristics of the residents and the size of the population. He found that, compared to ward-cities, at-large cities average 11.1 percent lower total expenditures, 14.8 percent lower per-capita taxes, and 53.3 percent lower per-capita debt levels.

The current system, it seems, tends to favor a limited government. This is somewhat ironic because the party whose platform explicitly endorses limited government is apparently one of the groups backing the change.

New York to Shut Down?

The budget crisis in New York is getting worse. The state has remained in operation thanks to a series of emergency bills that have included dramatic reductions in some areas of spending. But Republicans, worried that the cuts do not go far enough, have opposed the last three emergency bills.

In the latest development, the New York Times reports that two Democratic Senators have said they will not vote for any more emergency bills if they entail further cuts. That’s a problem because Democrats enjoy a razor-thin 2-vote majority. This prompted Governor Paterson to state that he will not give into “thug-activity,” presumably referring to his fellow Democrats. At least one Democrat in question, Senator Díaz, took it that way: “The Governor called me a thug. When I pick a fight, I don’t go back. Let’s see what a thug can do.”

If the politicians fail to play nice, the Times reports that the state government may shut down. This crisis was brought on by out-of-control-government spending. But a government shutdown is not likely to be a win for those who wish to reign in that spending. In his recent analysis of budget rules, University of Rochester Professor David Primo finds that states with automatic shutdown provisions spend $64 more per-capita compared to states that do not have automatic shutdown provisions.

Primo explains:

This finding relies on a result, first shown by Romer and Rosenthal (1978), that the more extreme a status quo or reversion point, the more advantaged is the proposer in bargaining settings with take-it-or-leave-it offers. By making the reversion point, in effect, zero, states that do not allow for some reasonable level of spending in the absence of budgetary agreement advantage the proposer in the process (in this case, the legislature). This result demonstrates the sometimes surprising effects of budget rules.