State Spending With Limits, and Without

AEI’s Ben Zycher is a wonderfully funny guy, and a damn good economist. Humor is his way of coping with the dismal science and with his depressing subjects and shoot-yourself conclusions. His latest study examines whether tax and expenditures limits (“TEL”), adopted by most states over the course of four decades, actually work. (TELs seek to limit state taxes and spending growth to some formula—typically, inflation plus population growth.) Unequivocal answer, based on a comprehensive data set and a sophisticated econometric analysis: Nah. Nope. Forget it.

In coming months, I’ll shamelessly exploit this mother lode. (As a law prof, I don’t actually have to know what I’m talking about; I just have to know someone who does.) For today, three broad observations that are suggested—though not compelled—by the study: a Madisonian point; a federalism point; and a political strategy point.

  • The U.S. Constitution allows Congress to tax, spend and borrow without any limit—no balanced budget requirement; no TEL; no nothing. Why? Answer, the Founders didn’t believe in such “parchment barriers.” Consistent with their position, Ben Zycher’s study shows that the (small) positive effects of TELs found in the literature disappear once one accounts for endogeneity effects. In plaintext: TELs will tend to be enacted and to “work” in political environments that are conducive to fiscal discipline anyhow. In the few cases where a TEL actually threatens to constrain the political process, the powers-that-be will soon chew it up. The paper provides case studies to that effect.
  • You’d expect the study to start with an overview of TELs—but no. Instead, there’s a bracing account of the federal-to-state transfer system and, in particular, Medicaid. That, if I understand Ben correctly, is what has driven the adoption of TELs, and what explains their ineffectiveness. More modestly and precisely perhaps, you can’t understand this stuff except in the context of our pathological federalism.
  • TELs have been a conservative grassroots-and-astroturf demand for decades. A great deal of energy and money has gone into a campaign that, by all indications, has produced nothing but symbolic sign-this-pledge victories. The TEL campaign shares that futility with other conservative-libertarian crusades: term limits, balanced budget amendments, block grants.

To anyone who has looked at the issue for five minutes, it’s obvious that federal transfers drive state and local spending. To anyone who has spent five minutes with Jemme Madison, it’s obvious that TELs are bound to be a joke.  Fixing the system, however, is very hard—indeed, impossible for any advocacy group or think tank that doesn’t specialize in howling at the moon. In contrast, collecting pledges from state politicians to resist the inexorable incentives of the intergovernmental transfer system and even the demands of their own voters is comparatively easy. Non-profits might keep doing that even if they knew better, which often they don’t. After this study, though, there’s no excuse for not knowing better.

Conservative orthodoxy has it that the private, entrepreneurial sector will respond promptly to evidence of failure; only government will double down on failed investments. After all the econometric pyrotechnics, the question Ben Zycher screams at you is whether conservative groups in this venue will behave more like the entrepreneurial culture they champion or like the government they purport to fight.