Budget

Making Better Budget Rules

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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.

New rule! New rule!

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.

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  1. The whole “their both just as bad” thing is not cute anymore. The Republicans are not the angels from on high that you cream for, but they are not leading us straight down the path to socialism.

    This is a time to take a side, not wallow in pathetic platitudes.

    1. but they are not leading us straight down the path to socialism

      Just because they are doing it slower — and you can probably find evidence to the contrary if you look for it — doesn’t mean they are not.

  2. The federal government needs more than just budgeting reform.

    It needs to start producing it’s financial statements on an accrual acounting basis the same as it requires for publicly traded companies. And it should be subject to independent audits of those financials the same as publicly traded companies.

    Start carrying the net present value of all those unfunded liabilities for Social Security and Medicare on the balance sheet so the public can see the REAL magnitude of the national debt.

  3. “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.

    1. ?????, wow, that’s a lot. (Gobbler beat me to it, dagnabbit.)

  4. I figure we all need a laugh on Monday, so here’s Paul Krugman’s latest editorial: The big government expansion everyone talks about never happened.

    1. Krugman does know that an entire cottage industry that does nothing but debunk his nonsense has developed….I wonder if these count as new jobs in Gov employment models?

      1. Jobs created and saved.

    2. Ask yourself: What major new federal programs have started up since Mr. Obama took office? Health care reform, for the most part, hasn’t kicked in yet, so that can’t be it. So are there giant infrastructure projects under way? No. Are there huge new benefits for low-income workers or the poor? No. Where’s all that spending we keep hearing about? It never happened.

      In case we didn’t already have it, this is confirmation that he is not receiving information from our universe.

      1. “Health care reform, for the most part, hasn’t kicked in yet, so that can’t be it.”

        Uh huh.

        I guess McDonalds didn’t really get that healthcare administrative cost percentantage rule waiver the other day either.

    3. To quote Samuel Johnson, he is not only dull himself, but he is the cause of dullness in others.

  5. The whole “their both just as bad” thing is not cute anymore. The Republicans are not the angels from on high that you cream for, but they are not leading us straight down the path to socialism.

    This is a time to take a side, not wallow in pathetic platitudes.

    Crap. The republicans are too taking us “down the path to socialism”….medicare drug benefit ring any bells?

    No matter, there is no fixing these problems only letting them play out and picking up the pieces afterwards.

    Plan accordingly.

    1. Exactly. The Republicans are just your first girlfriend, screaming “I want it too, just not so fast!”

      Fuck them.

    2. Fish, you’re probably right. But to support Mick for a second, the rhetoric of the two parties is decidely different. Especially in this election. I hold out little hope they will live up to the rhetoric, but in either case, we can plan for the crash, and “plan accordingly”, as you say (and believe me, I have). Until then, I will vote under the Buckley rule, vote for the most “electable” “conservative/libertarian” I can.

      1. I hate to fall back on the tired trope; the lesser of two evils is still evil but I don’t see any way around it. Evict every democrat under the Buckley rule and you get useless Republicans who do stupid things like pass unsustainable medicare drug benefits and take the country to war under false pretenses.

        Either way there’s really no way to win.

        1. We could try not letting them burrow in for 30-50 years.

          1. Point taken.

  6. “on a bath to sustainability”

    Well, we’re definitely taking a bath on the federal budget.

  7. Seems like a good thread to re-iterate the efficacy of the Balanced Budget Veto.

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