Biennial Budgeting: Baloney Budget Reform
I don’t recall ever agreeing with the left-liberal Center on Budget and Policy Priorities (CBPP), but their new paper on the drawbacks of the federal government switching to biennial budgeting is a good read. Congressional Republicans, including House Budget Committee chairman Paul Ryan (R-WI) and Senate Budget Committee ranking member Jeff Sessions (R-AL), are the chief proponents of switching to a biennial budget cycle. By providing (qualified) support to the CBPP paper, I’m hoping to demonstrate to would-be GOP naysayers that criticism of biennial budgeting isn’t confined to one area of the ideological spectrum.
I don’t agree with everything in the paper and I don’t share some of the authors’ concerns, but here are three solid points that the paper makes:
- In 1940, 44 states practiced biennial budgeting. Currently, only nineteen do. In addition, larger states typically have an annual budget cycle. The authors correctly ask, “if large state governments find that biennial budgeting is not the best approach given the responsibilities they shoulder, is it likely to prove appropriate for an entity with the far more extensive domestic and international responsibilities of the U.S. government?”
- The authors call the claims made by proponents that biennial budgeting will free up more time for oversight “overstated.” Authorizing committees can conduct oversight anytime they want. The appropriation committees conduct oversight when they review agency budget requests each year. What’s the benefit of having oversight conducted by the appropriations committees every two years? (For the record, I think the value of congressional oversight is overstated for public choice reasons, but I’ll play along for today.)
- The authors explain what I consider to be the fatal flaw with biennial budgeting:
The desire of many lawmakers to rein in such supplemental appropriations and reassert meaningful control over all annually appropriated funds — and the practice the Obama Administration has followed of including war funding within the regular defense appropriations bill, which has improved budget transparency — would become much harder to fulfill if biennial budgeting were implemented. It is not possible for Congress effectively to plan ahead for unexpected needs in the second year of a biennium. Large supplemental appropriations to meet such needs outside of the two-year budget plan would almost certainly become a regular part of the budget process and could further erode budget controls and accountability.
(Note: A recent paper from Cato adjunct scholar Veronique de Rugy explains that supplemental appropriations are already a problem.)
As a former budget official in a state that uses biennial budgeting, I just don’t understand what congressional Republicans think they’re going to accomplish. The cynic in me thinks that at least part of the support stems from the unwillingness of most Republicans to get specific on what they’d eliminate from the federal budget. Like the Balanced Budget Amendment, I think a lot of Republicans are simply using biennial budgeting as political cover.
An Education in Bizarro Constitutional History
Last week, Rep. Mike Honda (D-CA) published a call in The Hill for a much bigger federal role in elementary and secondary education. His plans are loaded with flaws too numerous to dissect here, so I’ll just highlight one, depressing thing about his piece: his bizarro constitutional history. Follow Honda’s narrative and you’d think for most of our history the feds stayed out of education because of the Articles of Confederation, and a jerky little state called Rhode Island:
Inequity in education has historical roots. At its inception, the Federal Government lacked the capacity and the authority to take responsibility for public education. Before the Constitution was drafted, the 13 colonies operated under the Articles of Confederation, created by the Second Continental Congress. The Articles of Confederation could only be amended by unanimous vote of the states. Any state had effective veto power over any proposed change.
In addition, the Articles gave the weak federal government no taxing power. It was entirely dependent on the states for its money and had no power to force delinquent states to pay. In fact, Rhode Island, fearing that the Convention would work to its disadvantage, boycotted the Convention in the hopes of preventing any change to the Articles. When the Constitution was subsequently presented to the Confederation, Rhode Island refused to ratify it. To placate the states, the Tenth Amendment ceded broad authority to the state governments.
Consequently, as regions of the country developed their own public education systems, disparities opened up.
That Rep. Honda published this dreck is as good as any argument for keeping Washington way out of our schools, especially our American history and civics classes.
The Articles, for one thing, were weak on purpose – Americans were extremely concerned about concentrating too much power in the hands of a central government. Mr. Honda, however, sounds almost as if Americans somehow arrived to find the Articles of Confederation already in place and just had to put up with a bad situation.
Much more egregious — but also, I’m afraid, more common – Honda writes as if the Constitution does not contain Article I, Section 8, which purposely gives the federal government only specific, enumerated powers, and automatically leaves all others to the states and people. The 10th Amendment — which Honda asserts is what long kept DC out of education — does not actually change in any way what power belongs to the feds, states, and people — it just makes it more explicit.
Finally, very few Americans in the 1770s and 1780s would have even recognized something called “public education,” much less tried to give the national government “responsibility” for it. Back then education was almost entirely a family, church, and community affair, and most people wouldn’t have imagined anything different.
Sadly, Honda’s piece is just further confirmation that many of our representatives in Washington care not one whit about what the Constitution says and permits Washington to do. That, or they really don’t know. Either way, it helps explain why the nation is in a world of hurt, and makes very clear that the obstacles to getting Washington out of education are very tall, indeed.
Mismanaged States Blame Messenger
Mismanaged municipal and state governments around the country are finding a new target to blame for their own self-inflicted wounds: the growing market for credit defaults swaps (CDS) on municipal debt.
A municipal credit default swap would be a derivative that pays off in the event of default by a specific state or a default on one of said state’s debt instruments.
As reported in today’s Wall Street Journal, a handful of state treasurers are demanding information from Wall Street firms on who exactly is “betting against” these states.
It should come as no surprise, except to state officials, that the major buyers of these CDS are the very bondholders investing in their state. In fact the availability of municipal CDS will likely increase the demand for municipal debt. Just speaking for myself, there’s no way I’d buy debt issued by California if I couldn’t at least hedge some of that credit risk
Of course states complain that “betting on a default creates a perception of risk,” as if there wasn’t already a widespread perception of risk to investing in municipal debt of certain states. The states also express concern that adverse movements in the price of CDS could impact their credit ratings, and hence their cost of borrowing. Given the slow speed of which credit ratings moved on sub-prime mortgage debt, I am not sure that cities and states have much to worry about rating agencies being “too aggressive”. If these states had even a small understanding of how markets work, they’d understand the rating is just one element that goes into pricing. Witness the large spread in yields of similarly rated debt. No rating, or credit default swap price for that matter, is going to fool investors into believing that many American local and state governments are just anything other than mini versions of Greece.
Unions and State Government Management
State and local governments that have high levels of unionization have a harder time efficiently managing their finances and other aspects of their operations. At least, that’s my argument. The other day, I showed that states with higher levels of debt had higher levels of unionization. The statistical correlation was very strong.
Today, let’s look at the quality of state management, as measured by a major report by the Pew Center on the States. The Pew report gave letter grades to the 50 state governments for management of finances, employees, infrastructure, and information. Pew also provided an overall state score.
I’ve converted the Pew overall state government management scores to numbers from 1 to 10 and plotted them against state unionization rates (“10″ is the best management score). The chart below shows that as the share of a state workforce that is unionized grows, the overall quality of state management falls, as measure by the Pew scores. The chart shows the raw data in blue dots and the statistically fitted line in pink.
The bottom line: public-sector unionization is not a good idea, as it apparently leads to lower-quality government management and to higher debt levels. As such, I’ve argued that collective bargaining in state and local government workforces should be banned.
(Details: R-square at 0.12 indicates that unionization explains only a small share of management quality, but the F statistic at 6.3 and the t-stat on the management variable of -2.5 indicate that the regression is quite strongly statistically significant. Note that the unionization variable is the union share in state and local governments, but the Pew data regards only the states. Thus, I’m assuming that my unionization variable is a reasonable proxy for state-level unionization. Thanks for data help from Amy Mandler )
The States Respond to ObamaCare
Today Politico Arena asks:
Do the 13 state attorneys general have a case against ObamaCare?
My response:
Absolutely. It will be an uphill battle, because modern “constitutional law” is so far removed from the Constitution itself, but a win is not impossible. There are three main arguments. (1) Under the Constitution, as properly interpreted, Congress has no power to enact such a plan. (2) The plan conscripts state governments into carrying out and paying for federal mandates. And (3) the individual mandate amounts to an unlawful capitation or direct tax.
To Kill ACORN, Kill the Programs
Last year, when the issue of defunding ACORN was a hot-button issue, I told countless radio talk show audiences that the focus should be on eliminating the underlying fuel that created the organization—the flow of federal subsidies.
Chris Edwards pointed this out in September. If Congress simply stops subsidizing ACORN, its activists will reincorporate under new names and again become eligible for funds. Alas, that’s precisely what ACORN is currently doing.
From FoxNews.com:
One of the latest groups to adopt a new name is ACORN Housing, long one of the best-funded affiliates. Now, the group is calling itself the Affordable Housing Centers of America.
Others changing their names include what were among the largest affiliates: California ACORN is now Alliance of Californians for Community Empowerment, and New York ACORN has become New York Communities for Change. More are expected to follow suit.
A comment from Frederick Hill, a spokesman for Republicans on the U.S. House oversight and government reform committee, doesn’t indicate that the GOP has quite received the message:
To credibly claim a clean break, argued Hill, the new groups should at least have hired directors from outside ACORN.
It appears that for many Republicans, attacking ACORN represented political opportunism, not a statement about the proper role of the federal government.
Further rendering the GOP’s ACORN agenda moot was last week’s ruling by a U.S. District judge that singling out ACORN for defunding is unconstitutional. It truly boggles the mind what passes for constitutional and unconstitutional in this country.
Tuesday was the birthday of James Madison, the “Father of the Constitution.” Reflecting upon Madison’s wise words, it’s hard to understand how the federal “community development” programs that have funded ACORN could pass constitutional muster:
“The government of the United States is a definite government, confined to specified objects. It is not like state governments, whose powers are more general. Charity is no part of the legislative duty of the government.”
“[T]he powers of the federal government are enumerated; it can only operate in certain cases; it has legislative powers on defined and limited objects, beyond which it cannot extend its jurisdiction.”
“With respect to the two words “general welfare,” I have always regarded them as qualified by the detail of powers connected with them. To take them in a literal and unlimited sense would be a metamorphosis of the Constitution into a character which there is a host of proofs was not contemplated by its creators.”
“If Congress can do whatever in their discretion can be done by money, and will promote the general welfare, the government is no longer a limited one possessing enumerated powers, but an indefinite one subject to particular exceptions.”
See this essay for reasons why these HUD community development programs should be abolished.
Ray LaHood as Santa Claus
U.S. News & World Report’s columnist Paul Bedard reports that Transportation secretary Ray LaHood told him that it’s fun playing Santa Claus to states and cities around the nation.
So let’s take a look at some recent examples of DOT gift-giving with federal taxpayers’ money:
- DOT’s Federal Highway Administration helped restore an old brewery in Petosi, Wisconsin with a $450,000 gift. That should make taxpayers want to drink.
- DOT is sending $116,000 to Calaveras County, California to restore a train that operated in the 1920s.
- Dolgeville, New York intends to use DOT stimulus money to repair sidewalks even though the village acknowledges that the new sidewalks will have to be torn up and replaced again due to impending water and sewage line upgrades. Keynes would be particularly proud of this one. Last year the city received a $1 million gift from DOT for the “installation of period street lights, trees, accent pavers, street furniture and sidewalk improvements” on the city’s Main Street.
- Cascade County, Montana plans on spending $75,000 of DOT money on the Montana Museum of Railroad History.
- The Michigan Department of Transportation plans on spending $5 million in federal DOT money on a bunch of projects that are of unquestionable national importance: cobblestone streets in Grand Rapids; exhibits at the Detroit Science Center; rehabilitating the historic Quincy and Torch Lake Railroad Engine House in the Upper Peninsula; a bridge for bicyclists and pedestrians over the Clinton River in Utica and bike racks at several locations in Wayne, Oakland, and Macomb counties.
- Boone County Regional Airport in Arkansas plans on using $50,000 in DOT money to market SeaPort Airlines. Fly, fly away taxpayer money.
These projects might be worthwhile, but they should be paid for by the local interests who can best judge their worth.
In his 1932 book, Congress as Santa Claus, constitutional scholar Charles Warren offered a prescient warning on the dangers of federal subsidization of state and local affairs:
The continuance of this practice of shifting to the National Government responsibility for payment for matters which formerly were dealt with by individual initiative, by community cooperation, by voluntary organizations, or by local or State governments – the continuance of this practice of making drafts on the National Treasury to carry out purposes not within the enumerated or implied powers of the National Government will inevitably have two results.
So far as these Government donations consist of direct appropriations for private or local interests, they will deaden and finally destroy the eagerness or willingness of State Governments and local communities to pay for their own needs. So far as they take the shape of the so-called Federal Aid laws for local projects to be matched by local appropriations, they will have ‘a tendency to induce excessive expenditures by State and municipal governments, with top-heavy bond issues and oppressive local taxation.’
I doubt in Warren’s worst nightmares could he have envisioned the examples of DOT spending above, let alone the existence of a $90 billion federal Department of Transportation.
Six Reasons to Downsize the Federal Government
1. Additional federal spending transfers resources from the more productive private sector to the less productive public sector of the economy. The bulk of federal spending goes toward subsidies and benefit payments, which generally do not enhance economic productivity. With lower productivity, average American incomes will fall.
2. As federal spending rises, it creates pressure to raise taxes now and in the future. Higher taxes reduce incentives for productive activities such as working, saving, investing, and starting businesses. Higher taxes also increase incentives to engage in unproductive activities such as tax avoidance.
3. Much federal spending is wasteful and many federal programs are mismanaged. Cost overruns, fraud and abuse, and other bureaucratic failures are endemic in many agencies. It’s true that failures also occur in the private sector, but they are weeded out by competition, bankruptcy, and other market forces. We need to similarly weed out government failures.
4. Federal programs often benefit special interest groups while harming the broader interests of the general public. How is that possible in a democracy? The answer is that logrolling or horse-trading in Congress allows programs to be enacted even though they are only favored by minorities of legislators and voters. One solution is to impose a legal or constitutional cap on the overall federal budget to force politicians to make spending trade-offs.
5. Many federal programs cause active damage to society, in addition to the damage caused by the higher taxes needed to fund them. Programs usually distort markets and they sometimes cause social and environmental damage. Some examples are housing subsidies that helped to cause the financial crises, welfare programs that have created dependency, and farm subsidies that have harmed the environment.
6. The expansion of the federal government in recent decades runs counter to the American tradition of federalism. Federal functions should be “few and defined” in James Madison’s words, with most government activities left to the states. The explosion in federal aid to the states since the 1960s has strangled diversity and innovation in state governments because aid has been accompanied by a mass of one-size-fits-all regulations.
For more, see DownsizingGovernment.org.
Federal Subsidy Programs Top 2,000!
January 22, 2010 is a day that should live in infamy, at least among believers in limited government. On that day, the federal government added its 2,000th subsidy program for individuals, businesses, or state and local governments.
The number of federal subsidy programs soared 21 percent during the 1990s and 40 percent during the 2000s. The entire nation is jumping aboard Washington’s gravy train. My assistant, Amy Mandler, noticed the recent addition of two new Department of Justice programs, and that pushed us over the threshold to reach 2,001.
There is a federal subsidy program for every year that has passed since Emperor Augustus held sway in Rome. We’ve gone from bread and circuses to food stamps, the National Endowment for the Arts, and 1,999 other hand-out programs from the imperial city on the Potomac.
Figure 1 shows that the number of federal subsidy programs has almost doubled since the mid-1980s after some modest cutbacks under President Ronald Reagan.
Most people are aware that federal spending is soaring, but the federal government is also increasing the scope of its activities, intervening in many areas that used to be left to state governments, businesses, charities, and individuals. To measure the widening scope, Figure 1 uses the program count from current and past editions of the Catalog of Federal Domestic Assistance. The CFDA is an official compilation of all federal aid programs, including grants, loans, insurance, scholarships, and other types of benefits.
Figure 2 shows the number of subsidy programs listed in the CFDA by federal department. It is a rough guide to the areas in society in which the government is most in violation of federalism—the constitutional principle that the federal government ought not to encroach on activities that are properly state, local, and private.
As the federal octopus extends its tentacles ever further, state governments are becoming no more than regional subdivisions of the national government, businesses and nonprofit groups are becoming tools of the state, and individualism is giving way to a more European desire for cradle-to-grave dependency.
Yet recent election results indicate that Americans may be starting to wake up and fight back. Whether we are more successful than Cicero and Cato the Younger in battling to retain our limited-government republic remains to be seen.
Can Scott Brown’s Election Stop the Federal Takeover…of Education?
Yesterday, I wrote about President Obama’s proposal to extend the Race to the Top program, this time letting school districts completely bypass state governments and apply directly to the feds for funding. I pointed out that the proposal was one among several troubling signs that Obama intends to put Washington fully — and, of course, unconstitutionally — in charge of American education. At the time, I didn’t realize how right I was.
When I was writing yesterday I was basing my comments on documents from the White House’s website and hadn’t yet read the details of what went on at the President’s photo-op announcing the proposed extension. I sure wish I had: At the dog-and-pony show, the President just came right out and said that he wants to push aside states — mentioned by name was famous holdout Texas — that dared to invoke the Constitution and not participate in a program that was, Constitution or no Constitution, supposed to be voluntary.
“Innovative districts like the one in Texas whose reform efforts are being stymied by state decision-makers will soon have the chance to earn funding to help them pursue those reforms,” intoned the President.
Fortunately, Texas Governor Rick Perry wasn’t about to be cowed: “I will say this very slow so they will understand it in Washington, D.C.: Texas will fight any attempt by the federal government to take over our school system.”
So it’s pretty certain now, more so even than just 24 hours ago: President Obama wants to federalize American education.
Thankfully, a lot can clearly happen in 24 hours. Yesterday’s election of Scott Brown in Massachusetts could very well send shockwaves of fear through the ranks of Democratic (and maybe even Republican) legislators in DC, who might finally get the message that Americans just don’t like federal takovers. Heck, perhaps even the President will get the message. If so, then maybe even something as relatively small as a $1.35-billion scalpel designed to cut through states and get right at districts could be seen as too dangerous to handle.
That’s speculation, of course, but we should know a lot more in just, oh, the next 24 hours.
Is Keynesian Stimulus Working?
In his Brookings Institution speech yesterday, President Obama called for more Keynesian-style spending stimulus for the economy, including increased investment on government projects and expanded subsidy payments to the unemployed and state governments. The package might cost $150 billion or more.
The president said that we’ve had to “spend our way out of this recession.” We’ve certainly had massive spending, but it doesn’t seem to have helped the economy, as the 10 percent unemployment rate attests to.
It’s not just that the Obama “stimulus” package from February has apparently failed. The total Keynesian stimulus is not measured by the spending in that bill only, but by the total size of federal government deficits.
The chart shows that while the federal deficit (the total ”stimulus” amount) has skyrocketed over the last three years, the unemployment rate has more than doubled. (The unemployment rate is the fiscal year average. Two months are included for FY2010.)
The total Keynesian stimulus of recent years has included the Bush stimulus bill in early 2008, TARP, large increases in regular appropriations, soaring entitlement spending, the Obama stimulus package from February, rising unemployment benefits, and falling revenues, which are “automatic stabilizers” according to Keynesian theory.
The deficit-fueled Keynesian approach to recovery is not working. The time is long overdue for the Democrats in Congress and advisers in the White House to reconsider their Keynesian beliefs and to start entertaining some market-oriented policies to get the economy moving again.
Debt Aggravates Spending Disease
USA Today’s Dennis Cauchon reports that ”state governments are rushing to borrow money to take advantage of cheap and plentiful credit at a time when tax collections are tumbling.” That will allow them to “avoid some painful spending cuts,” Cauchon notes, but it will sadly impose more pain on taxpayers down the road.
When politicians have the chance to act irresponsibly, they will act irresponsibly. Give them low interest rates and they go on a borrowing binge. The result is that they are in over their heads with massive piles of bond debt on top of the huge unfunded obligations they have built up for state pension and health care plans.
The chart shows that total state and local government debt soared 93 percent this decade. It jumped from $1.2 trillion in 2000 to $2.3 trillion by the second quarter of 2009, according to Federal Reserve data (Table D.3).
Government debt has soared during good times and bad. During recessions, politicians say that they need to borrow to avoid spending cuts. But during boomtimes, such as from 2003 to 2008, they say that borrowing makes sense because an expanding economy can handle a higher debt load. I’ve argued that there is little reason for allowing state and local government politicians to issue bond debt at all.
Unfortunately, the political urge to spend has resulted in the states shoving a massive pile of debt onto future taxpayers at the same time that they have built up huge unfunded obligations for worker retirement plans.
We’ve seen how uncontrolled debt issuance has encouraged spending sprees at the federal level. Sadly, it appears that the same debt-fueled spending disease has spread to the states and the cities.
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