Tag Archives: wall street journal

What Makes for a Good Balanced Budget Amendment?

Today, the U.S. House will begin debating a balanced budget amendment. This morning, the editorial board of the Wall Street Journal chastised Speaker Boehner for offering a “vanilla amendment that merely calls for a balanced budget, with no spending limitations or supermajority tax requirements.” Their worry is that, “Under Mr. Boehner’s amendment, spending could rise to 25% or 30% or more of GDP, so long as the budget is balanced.”

This is a misplaced worry. Right now, Congress is able to vote benefits for current voters while putting about 45 percent of the tab on non-voters (our posterity). It doesn’t take a complicated economic model to see that this arrangement systematically biases spending upward. And any amendment that requires current voters to pay for current spending will diminish that bias. As I told the House Judiciary Committee last month, in states where balanced budget requirements are stricter, spending is lower.

Moreover, the editors’ preferred amendment—one that includes some sort of spending limitation—is actually unlikely to achieve its goal. Last year, I examined the operation of various spending limits, using data from 49 states covering 30 years (I wrote about my research in an OpEd in the Journal). I found that those tax and expenditure limits “that limit budgets to some share of income had no statistically significant impact on either state-only spending or on combined state and local spending.” It may be that when states bind themselves with such limits, they make sure that the limit is set so high that it fails to actually constrain.

As far as supermajority requirements for tax increases are concerned, research does suggest that these can limit spending. I guess it is a political call as to whether such a requirement should be tied to a balanced budget amendment. In my view, a balanced budget amendment requires strong bipartisan support for it to be effective. But I don’t do politics.

I do agree with the editors in one regard. There is no need to settle for a “vanilla amendment.” There are many different varieties of balanced budget amendments and some of these have much stronger features than others. In my view, the most-effective amendments are those that:

  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.

There are amendments that have these characteristics. For example, H.J. Res. 81 (which now has 54 cosponsors), has all three.

In other news, the amazing Cord Blomquist has managed to get my testimony on the YouTubes:

A Nobelist on Fiscal Stimulus

Tyler Cowen and Ira Stoll both link to an interview of new-Nobelist Thomas Sargent by Art Rolnick of the Minneapolis Fed. Here is the Nobel Laureate on fiscal stimulus:

In early 2009, President Obama’s economic advisers seem to have understated the substantial professional uncertainty and disagreement about the wisdom of implementing a large fiscal stimulus. In early 2009, I recall President Obama as having said that while there was ample disagreement among economists about the appropriate monetary policy and regulatory responses to the financial crisis, there was widespread agreement in favor of a big fiscal stimulus among the vast majority of informed economists. His advisers surely knew that was not an accurate description of the full range of professional opinion. President Obama should have been told that there are respectable reasons for doubting that fiscal stimulus packages promote prosperity, and that there are serious economic researchers who remain unconvinced.

In my view, economic journalists have largely dropped the ball on this one. From the Wall Street Journal on left, most journalists seem to take the President for his word when he claims widespread agreement on the merits of fiscal stimulus. I think it is pretty difficult to read a sampling of fiscal stimulus papers from the last 5 to 10 years and find anything that resembles a consensus.

Even in the face of more recent academic critiques, the Administration seems to have dug in its heels. A top Administration official recently told Roll Call that the new stimulus plan “will indisputably add to economic growth and add to job creation.”

Hopefully Mr. Sargent’s recognition by the Royal Swedish Academy will shed some light on the rather significant “disputes” among macroeconomists regarding fiscal stimulus.

By the way, Tyler calls this interview, “the single most readable link” in his post and “the best introduction to Sargent on policy and method for non-economists.” I agree. Sargent has some very interesting and cogent things to say about the moral hazards of government deposit insurance, the link between the generosity of unemployment benefits and Europe’s problem with long-term unemployment, and the relative merits of the formulaic balanced budget rules of the Maastricht Treaty compared with the simple and “unspoken” balanced budget rules that reigned during the gold standard era. Indisputably interesting stuff.

Society Progresses When We Connect and Exchange

The crowd-sourced, wikinomic cloud is the new, new thing that all management consultants are now telling their clients to embrace. Yet the cloud is not a new thing at all. It has been the source of human invention all along. Human technological advancement depends not on individual intelligence but on collective idea sharing, and it has done so for tens of thousands of years. Human progress waxes and wanes according to how much people connect and exchange.

Those are the opening lines of Matt Ridley’s OpEd from this weekend’s Wall Street Journal. It is a nice synopsis of Ridley’s book, The Rational Optimist. It is one of the best books I have read in years and should be required reading for anyone interested in understanding how societies progress (or don’t).

California’s shrinking property tax revenues

Proposition 13, the 1978 law that caps property taxes in California at 1 percent of a home’s value and, “forbids major tax increases unless a home is sold or rebuilt,” has left counties with a revenue problem. While falling home values usually lead local governments in other states to increase property tax rates, California counties can only watch as property tax revenues fall with the housing market.

According to the Wall Street Journal, Stanislaus County’s assessed property tax values fell 21 percent over the past four years and 4.7 percent this year. This year’s property tax collection of $447 million is 11.6 percent lower than two years ago. The debate over whether Proposition 13 has worked as intended – protecting the elderly and those on fixed incomes from rapidly rising property tax increases or whether it has led to fiscal distortion and centralization continues.

State and Local Economic Development Programs

Fairfax County’s Economic Development Authority has opened a new office in Los Angeles. Their aim is to lure Californians who are fed up with the Golden State’s web of taxes and regulations. 

It is true, of course, that California’s business climate is abysmal. According to Sorens and Ruger, California is number 44 in terms of fiscal freedom (with 50 being the least-free), and 46 in terms of regulatory freedom. Other indices come to the same conclusion. Kail Padgitt of the Tax Foundation, for example, evaluated states based on their business tax climate and California came in at #49.

Virginia, by contrast, does decently well in both reports. By Sorens and Ruger’s measure, the state is the 13th most-economically-free in the nation and by Padgitt’s, its business tax climate is the 12th-best.

Given the important link between taxes and economic prosperity—see studies by Agostini and Tulayasathien (2003); Mark, McGuire, and Papke (2000); Harden and Hoyt (2003); and Gupta and Hofmann (2003) or reviews by Helen Ladd (1998) or Padgitt (2010)—it might seem only natural for Virginia to highlight its relatively low-tax environment. 

The irony, however, is that taxpayer-funded projects like an economic development office located 2,285 miles away from the county make it more-difficult for Fairfax to maintain its competitive tax rates. More expensive than the office itself are the handful of subsidies and tax expenditures that the state and the county offer to businesses that relocate or that meet special criteria (these subsidies include the option for the state to dole out “discretionary, deal-closing” benefits).

Proponents of economic development programs will no doubt contend that these expenses pay for themselves. But the economic literature is far from conclusive on that score.

Some studies find that targeted incentives lead to employment growth in the industries they target.

But others find evidence to suggest that these results are exaggerated. Examining 366 Ohio firms, for example, Gabe and Kraybill (2002) found that incentives have large effects on announced employment growth but modest or even negative effects on actual employment growth.

According to a recent Wall Street Journal article, some states and localities have begun to notice this discrepancy. John Garcia, the economic development director in my hometown of Albuquerque recently announced that the city was trying to collect nearly half a million dollars in property tax abatements that were given to a call center that relocated and then closed shortly thereafter.

But the real question is not whether these types of incentives are a good deal for the firms that receive them (one would think they would be!), but rather are they a good deal for the state at-large?

In a case study examining Virginia giveaways, Alwang, Peterson, and Mills (2001) draw attention to the fact that “most economic development events involve winners and losers.” For example, other firms may have to pay higher costs for purchased inputs. They found that the benefits doled out to one firm cost others more than $1 million, annually.  

Sweet deals can also crowd-out legitimate government expenditures on true public goods. Burstein and Rolnick (1996), write:

[W]hen competition takes the form of preferential treatment for specific businesses, it misallocates private resources and causes state and local governments to provide too few public goods.

Furthermore, cost-benefit analyses of economic development deals rarely account for the so-called rent-seeking losses that such deals inevitably invite: firms will sink millions of dollars into societally useless activities—lobbying and ingratiating themselves to the politicians—in an effort to win these privileges. The money they spend on smart and expensive lobbyists, lawyers, and accountants would be better spent developing new products and services that actually provide value to customers. These losses are hard to measure but that does not mean that they don’t exist.

In my view, states and localities should aggressively compete with one another over businesses. And part of that competition should involve figuring out ways to provide public goods at the lowest possible tax and regulatory cost. But this cost should be low for everyone, not just for the politically-connect firms.

HT to my colleague, Dan Rothschild, for directing me to the news about Fairfax County.

Saving Playgrounds and Amphitheaters

In the coming years expect more of these kinds of discussions in local government.  Revenues are sluggish to modest. The recovery is weak. Spending growth in entitlements guarantees a future with diminished economic growth. Pension obligations in many state and municipal governments will crowd out other areas of spending. There will be tax hikes proposed and there will be spending cuts proposed and someone is not going to like them.

Is there a rational way to make cuts that satisfy all voters? Unfortunately, no.  Budgets do not reflect individual market exchanges. Without the profit motive, or market prices, making choices on the grounds of economic efficiency is difficult to impossible. V.O. Key’s 1940 discussion of The Lack of a Budgetary Theory gets at this core problem in government budgeting. Budgets are not technical documents. Budgets reflect subjective and political choices.

One criterion to use in determining what belongs in a budget is to limit government spending to only providing public goods.

Arthur Brooks mentions the other criteria for government intervention: in the case of monopolies, information problems and market failure.

Amusement parks and amphitheaters do not qualify as public goods. They are club goods. It is possible to exclude free-riders by charging admission. But parks are also non-rival. One person’s use of the facility doesn’t preclude someone else’s. What is telling is how interested parties – those who consider “club goods” valuable to society and worthy of subsidy- respond to the cut.

First consider Playland in Rye, New York. Operated by Westchester County, Playland is one of the few government-operated amusement parks in the United States. It has been so since 1928 after residents decided the expanding hotel-resort-amusement business that had sprung up along Long Island Sound was attracting “bawdy hotels and unsavory crowds.” They asked the county to take it over and reinvent it as a family-friendly park. (An interesting question is how might the community have achieved this outcome without a county takeover?)

With attendance cut in half, a series of recent accidents, and the latest addition of a $30 admittance fee, according to the Wall Street Journal, Westchester County Executive Rob Astorino is seeking to “reinvent the park,” since operating an amusement park, “isn’t an essential service for government to operate…”

There are several bidders offering to take it over, mainly private amusement park owners. One group is non-profit, Sustainable Playland, started by a resident who wants to ensure the park doesn’t become an “over-the-top casino”.  She and her husband have raised $150,o00 for their proposal to revive Playland as a public-private partnership.Their proposal involves a combination of park profits, government grants, and debt.

Now consider the Lubber Run Amphitheater in Arlington, Virginia. Built by the county in 1968, the Amphitheater was found in 2010 to be in violation of  federal and local regulations including the Americans with Disabilities Act, floodplain requirements, Chesapeake Bay Preservation Act requirements, and building codes. The county cut of funds last year due to budget constraints and allocated $10,000 for summer events in 2010.

Residents have launched a petition to save the Amphitheater. Their proposal is pretty basic. “Make room in the budget for the Amphitheater.”

Their discussion board sheds some light on the subjective nature of budgets. Most posters insist the Amphitheater is a priority because they have used and enjoyed it. Posters wonder why the Newseum in Rosslyn got $15 million or why the county is subsidizing low-income housing. In their eyes these are lower or equal priority items.

But there is the crux of the matter. What is a priority of government when the government is choosing to spend funds among a whole list of  non-public goods?  The priority is determined by the most successful special interest.






Entitlement, Entitlements, Entitlements

There is a cancer eating away at the budget from within, one that steadily drains American wealth, sends much of it overseas and only gets worse over time. It is the interest America pays on its national debt.

That is Gerald Seib, writing in today’s Wall Street Journal. My colleague, Veronique de Rugy has been making this point in charts, papers and talks for quite a while now. To help illustrate the problem, I have made a short video graphic using two of her charts:

The first chart illustrates the course of all non-interest spending over the next several decades.  Note, first, that that the biggest drivers of spending growth are Medicare and Medicaid. Without growth in these two programs, our long-term budget problem actually looks quite manageable. Note, also, that spending on these programs actually crowds-out or displaces “other spending” (a category which includes everything from national defense and administration of justice to agricultural subsidies and education funding). In other words, not only do Medicare and Medicaid take over an increasingly large share of the economy, they also take over an increasingly large share of the federal budget. (As Mr. Seib notes, liberals ought to be just as concerned about this as conservatives since their most-cherished programs are likely to get squeezed).

But the story gets worse. Because we are borrowing so much to pay for these programs, our interest payments begin to climb…and climb…and climb. The second chart rescales the first to make room for these interest payments. They eventually take over most of the budget. On this path, the federal government’s spending will eat up four-fifths of our entire economy by the time my daughter reaches retirement.

So what is the moral? We must rein in the cost of debt. To do that we must rein in those programs that are the chief drivers of that debt: Medicare and Medicaid. Unless and until we get serious about entitlement reform—which, so far, has not been a feature of any of the budget negotiations in Washington—the economic cancer will continue to grow.

Me on CNBC

I was on CNBC yesterday morning debating Professor Harley Shaiken on the Wisconsin situation. Here is the video:

Here is a link to Professor Shaiken’s website.

Here is a link to the GAO report I referenced. If you think the budget gaps of the last few years have been bad, you ain’t seen nothing yet: States face a $9.9 trillion shortfall over the next several decades.

In order to close these long-term gaps, the GAO estimates that states need to immediately cut 12.3 percent (or increase taxes by the same amount) and maintain these changes each and every year for the next 50 years. To put that in perspective, last year states cut 5.9 percent out of their General Funds (total spending, which includes borrowed funds, other state funds and federal funds actually increased!). So, as painful as the last few years have been, states are nowhere close to doing what they need to do in order to address their long-term problems. 

Professor Shaiken mentioned studies that find public-sector employee pay is comparable to private sector pay. Here is one such study. And here is another.

Here is Andrew Biggs and Jason Richwine from yesterday’s Wall Street Journal on why these studies are flawed. To wit: a) they typically don’t account for health benefits, b) they fail to accurately compare the value of guaranteed 8 percent returns in public pensions with 4 percent guaranteed returns in private 401(k)s, and c) they do not take account of greater job security among public sector workers. Here is a link to Biggs and Richwine’s analysis. Here is Veronique de Rugy on the matter. Here is Megan McArdle. Here is a New York Times graphic that focuses just on Wisconsin employees (counting only cash compensation, the median Wisconsin public employee–who is typically more-educated–earns 22 percent more than the median Wisconsin private employee).

Here is a paper that assesses the empirical link between public sector unionism and government spending.

The Failed State of Illinois

The Wall Street Journal has an interesting graph showing the divergent yield paths of debt issued by the states of Illinois and Pennsylvania (I’d reproduce it here but for fear of IP infringement).

The entire $2.8 trillion municipal bond market has been in decline for the last month and a half. As investors have grown increasingly skeptical of governments’ abilities to pay back their debts, they have been demanding higher yields (or, to think of it another way, they are only willing to buy bonds if they are priced at lower levels).

But as the Journal reports, investors seem to be increasingly differentiating between those states that are in bad fiscal shape and those that are in really bad fiscal shape.

Consider, for example, Pennsylvania. Thought to be in middling fiscal condition, that state pays 0.2 percentage points above what the broader market pays when it borrows. But compare this with Illinois. That famously fiscally-irresponsible state must now pay 1.9 percentage points more than what the broader market pays (a year ago, they paid less than 1 percentage point above the market). Of course, this is exactly the sort of dynamic that has done-in so many other governments: irresponsible spending makes lenders charge higher yields, adding to the cost of borrowing and further bloating the budget.

According to Northwestern University Professor Josh Rauh, Illinois’s pension system will be among one of the first to run dry.

This helps explain why, last June, Illinois’s debt surpassed that of California to become the most expensive in the nation to insure. It is now more expensive to insure Illinois’s debt than it is to insure Iraq’s debt!

At an event last week, AEI’s Michael Greve quipped:

Illinois is not a failing state. Iraq is a failing state; Illinois is a failed state.

Would a Permanent Extension of Tax Rates Really Create Certainty?

In the late 1990s, there were typically fewer than a dozen tax provisions that had just a limited lease on life and needed to be renewed every year or so.

Today there are 141.

That is from today’s Wall Street Journal. If speculation is accurate, today’s Congressional vote will only exacerbate this trend. By my count, it creates temporary provisions for:

  • All income tax rates
  • Capital gains tax rates
  • Dividend tax rates
  • The Social Security payroll tax rate
  • The estate tax rate
  • Student loan tax credits
  • Per-child tax credits
  • The Earned Income Tax Credit
  • The tax credit for blending ethanol into gasoline
  • The $1.00 per gallon biodiesel tax credit
  • A tax credit to incentivize alternative fuel
  • A tax credit for maintaining railroad tracks (really?)
  • Expensing of business investments
  • And others (the WSJ refers to “dozens of corporate-tax provisions that already were subject to annual renewal”; some of these may or may not be in my list above). 

As my colleague, Jason Fichtner and his coauthor, Katelyn Christ, have recently written, uncertainty and tax policy are a fatal policy mix.

Previous research suggests that policy uncertainty can be very harmful to economic growth.

But all of this talk about temporary tax provisions obscures an important fact: Even if the Congress were to make current tax provisions permanent, there would still be an enormous amount of uncertainty in current tax policy. This is because, over the long run, government expenditures are on an unsustainable path and by the simple arithmetic of budgeting, taxes will eventually have to go (way) up or spending will have to go down.

If policy makers truly want to generate certainty and create an environment conducive for economic growth, they will need to reform the tax code, make the reforms permanent, and bring spending in line with taxes.