Making Better Budget Rules

Is it actually possible for Washington to get the federal budget under control? A story from Politico this morning illustrates the difficulty of the situation nicely: Alice Rivlin, the founding director of the Cangressional Budget Office and a former Clinton administration budget director, is expected to release a proposal to put the budget on a bath to sustainability before the end of the year. But the plan is rumored to contain changes to Social Security benefits. And for many Democrats, that makes it unacceptable.

Nor are Republicans making responsible budgeting a priority either. The Politico story comes just a few weeks after John Boehner declared that he wasn't interested in proposing "solutions" to the out-of-control growth of entitlement spending.

As University of Rochester poli-sci professor David Primo argues in a paper for the Mercatus Institute, the incentives for responsible budgeting—and in particular for budget trimming—aren't very strong. Indeed, thanks to the diffuse costs and concentrated benefits of many government programs, elected officials have a fair amount on incentive to vote for proposals that cost more than the total value they provide. Intensifying the problem is that Congress gets to write its own rules. That means that Congress can also ignore the rules it sets. It's like the game of Calvinball from Calvin and Hobbes; the players can both make and change the rules more or less as they go. And as Primo writes, "due to this constitutionally granted freedom, successful enforcement of budget rules from within will be rare."

But that doesn't mean successful budgeting rules aren't possible. Primo suggests three principles for designing effective budget rules. And his final suggestion is arguably the most important: Rather than simply focusing on balancing the budget, legislators should instead craft rules that focus on spending:

One of the most popular budget reforms is a balanced budget rule. It is simple and has intuitive appeal. ("My family has to live within its means, why shouldn't the government?") And, it undoubtedly helps prevent massive deficits (though as the states have learned, not all balanced budget rules are created equal). The problem is, a budget that comprises 40 percent of GDP can be as balanced as a budget that consumes 10 percent of GDP, so long as sufficient revenues are raised. In other words, if a legislator's goal is to bring spending levels down, a balanced budget rule may not be enough. To be sure, tax increases are politically unpopular, so balanced budget rules tend to have a downward effect on spending. My research on state governments has shown that states with effectively enforced balanced budget rules spend about percent less than states with balanced budget rules that are not as effectively enforced.

A balanced budget rule would probably have a larger effect at the federal level because no restrictions are currently in place regarding deficit spending (in the state-level study the comparison was between different types of balanced budget rules). Still, given the size of deficits at the federal level, a balanced budget rule in isolation would probably lead to hefty tax increases alongside spending cuts, and in the long run, spending reductions are more beneficial than tax increases for two reasons.

First, once enacted, a tax increase has a greater potential to produce permanent increases in government spending, compared with a spending cut. To see why, we only need to return to the logic of concentrated benefits and distributed costs. Suppose that a deficit is closed by increasing taxes. Those taxes pay for government programs that typically have narrow constituencies willing to lobby for them. Any attempt to reduce the scope of government will have to overcome this lobbying. Moreover, legislators are unable to use the budget rule to justify the cuts, since the budget was balanced in through tax increases.

Now suppose that a rule is structured to focus on spending. Surely, there will be a fierce lobbying battle over what gets cut, but something will have to be cut.

One can hope.