Does a government shutdown boost fiscal conservatism?

by on March 24, 2011 at 3:33 am in Economics, Political Science | Permalink

Matt Mitchell says no:

It turns out that in 23 U.S. states, the government will automatically shut down in the event that the governor and the legislature fail to agree on a budget. In his work on budget rules, David Primo examined the theoretical impact of these provisions from a game theoretic perspective. He noted that in states with an automatic shutdown provision, “the legislature will be able to achieve its ideal budget, so long as the governor prefers it to no spending.” (p. 102)

He therefore predicted that states with such a provision will spend more than states without such a rule. He then tested the hypothesis, controlling for a number of other factors known to impact state spending and found that states with an automatic shutdown provision actually spend about $64 more per capita than other states. As he notes, “This effect is remarkably large, given that shutdowns occur rarely.” (p. 103)

This suggests that the federal government’s automatic shutdown provision—by making Congress’s desired spending level a take-it-or-leave-it offer—tends to bias the government toward more spending. By extension, it also suggests that a government shutdown will shift negotiating power toward those who favor more spending. So, paradoxically, fiscally-conservative Tea Partiers stand to lose the most if the federal government shuts down.

Maybe you’re not convinced by that $64 difference.  Maybe you ascribe it to unobserved variables.  Still, it is hard to argue, based on the evidence, that shutdowns help the cause of fiscal conservatism.

TheophileEscargot March 24, 2011 at 5:14 am

Could it be like the old “going to hospital makes you sick” correlation?

That is, states with problematically high spending try to implement automatic government shutdowns as a way to deal with the problem.

Jason (the commenter) March 24, 2011 at 5:15 am

Better to have a government shutdown because people can’t agree on spending than because there isn’t any more money to spend.

Andrew March 24, 2011 at 5:20 am

I’d pay $65 to shut down the government. Who’s with me?

david March 24, 2011 at 6:24 am

You’d pay $65 to shift negotiating power toward those who favor expanding the government? I don’t think you really read this one through…

Andrew March 24, 2011 at 7:00 am

It’s a joke. I laughed my ass off. But now that you asked, I don’t buy it. It’s not about the actual shutdown, it’s about the existence of the shutdown. The actual shutdown is us calling their bluff. The hint is here:

“This effect is remarkably large, given that shutdowns occur rarely.”

andrew's fan club president March 24, 2011 at 7:11 am

I laughed my ass off too.

Andrew March 24, 2011 at 7:42 am

I hope that job has perks. I mean, what good is being president if you can’t even have interns. You know what I’m sayin’?

Anotherphil March 24, 2011 at 9:43 am

This President prefers vacations to interns.

Me too March 24, 2011 at 2:32 pm

Its good to be the President.

andrew's fan club president March 24, 2011 at 8:07 pm

No interns, alas, just an anatomically correct doll uncannily similar to you.

anthony morrison March 24, 2011 at 5:47 am

This suggests that the federal government to provide automatic shutdown, and by making the congressional level for the maintenance required to make information technology, or lack of it, tends to bias towards more government spending. By extension, it also suggests that the closure of the government will shift bargaining power toward those who support more spending. Thus, ironically, financially conservative tea parties will lose more if the federal government shut down.

babar March 24, 2011 at 6:37 am

i think we should shut down the government and THEN decide whether it was a good idea. who’s with me?

E. Barandiaran March 24, 2011 at 7:13 am

Tyler, your post refers to Primo’s 2007 book but your readers will benefit from downloading and reading his 2010 paper
http://mercatus.org/sites/default/files/publication/Making%20Budget%20Rules%20Work.Primo_.9.28.10.pdf
In this paper he analyzes what budget rules for the federal government may work. Any analysis of current budget rules at all levels of government makes clear why they don’t work –ultimately it is the same reason why budget rules don’t work for a modern family. Rules that may be effective for a hierarchy (leave aside the large literature on the soft budget constraint) don’t work for the modern family and democratic governments.
If you need a good example of why they don’t work just read this news posted yesterday
http://www.stltoday.com/news/local/govt-and-politics/political-fix/article_bca2eed2-5570-11e0-9a25-0017a4a78c22.html
Some politicians (and close relatives and friends) think that taxes and other inconveniences are just for little people. As Willie Sutton, they are exempted from the hard budget constraints that ordinary people face because they rely largely on the latter’s money.
Bottom line: it is not a question of rules, it’s a question of learning how to say no.

Craig March 24, 2011 at 7:33 am

First: I wonder what $64 per person amounts to in percentage terms (percentage of total taxes paid). My guess is that it translates to at least $250 or more per person in the federal budget. Second: federal spending doesn’t come close to stopping because the government shuts down. Most subsidies continue to flow. I suspect that a lot more spending happens in a federal government shutdown than a state government shutdown. Given that the Tea Party members are from states that are net recipients of government largess, I suspect that they would find themselves better off with a govenrnent shutdown – so long as the subsidies keep rolling in.

Evan March 24, 2011 at 7:50 am

This evidence suggests that the threat of a government shutdown leads states to spend more. This makes sense politically — any legislator trying to hold up the budget process to cut spending would be personally painted as the author of the shutdown.

But what happens if that shutdown actually does occur? A better study would analyze pre- and post-shut down budget sizes. That would give the Tea Partiers an idea of what they stand to gain by refusing to cave. That same study could also look at electoral swings post-shut downs to give the Partiers an idea of what they stand to lose.

Andrew March 24, 2011 at 7:57 am

Whenever the shutdowns get close, we always hear about stuff like school closings and police protection. They use the legitimate (if overly expensive) functions as the axe against the voters. I don’t really see the real drama being between the legislature and the executive.

E. Barandiaran March 24, 2011 at 8:18 am

Andrew, you’re right. There is no real drama. The fight among politicians is not different from a fight among a family’s children about how to spend their parents’ money. They may stop talking to their parents but sooner or later they will talk again. The relevant issue is whether some budget rules can be effective. My point is that no rule will prevent children to fight and to manipulate parents. Parents must learn to say no. So far the Tea Party’s success has been largely the result of standing up to say no to children, sorry, to politicians. Gordon Tullock and other public choice scholars have focused too much on revolutions to gain power but there are revolutions aimed at preventing abuses of power (after any initial success their main problem is how to keep the revolution alive).

8 March 24, 2011 at 8:45 am

Maybe it’s like option pricing. That option is way, way out of the money, but if it ever hits…jackpot.

During the 1995-96 shutdown, one of the networks went out to the Midwest and asked people what they thought of the shutdown. A lot of people didn’t know the government was shutdown and others said they felt no effects. We know that shutdowns are unpopular in the short-term, but what about the long-term? What happens if it’s a year later, and still no effects for Joe Sixpack? Eventually, propaganda gives way to reality, but in this case the propaganda (children starving) will set up a favorable comparison to a prolonged shutdown.

John March 24, 2011 at 9:01 am

While initially counter intuitive I think it makes sense. It’s a MAD strategy for politicians and keeps both sides from braking the spending pact.

Andrew March 24, 2011 at 9:10 am

It could be just that slightly more often the “we’ll shut the government down and you won’t get your services threat” is more effective against the median voter than the “we’ll shut the government down so they don’t get to keep wasting money” threat. But we knew this logic worked better even before Harry Browne devised his great libertarian offer to try to try to add salience to the forgotten man.

Granite26 March 24, 2011 at 9:29 am

So the median voter is willing to pay 64$ extra to avoid a shutdown, meaning that they don’t want the shutdown?

Like Evan and 8 were saying, what effect does an actual shutdown have on governments and people’s perceptions?

Other than blasphemy, is there a reason the budget doesn’t get cut into disc and non-disc parts? Police and schools and medical services get repeat funding, but everything else needs budget part II to get funded. As long as pols salaries and spending increases are in II, seems like a win to me.

chris March 24, 2011 at 9:45 am

He noted that in states with an automatic shutdown provision, “the legislature will be able to achieve its ideal budget, so long as the governor prefers it to no spending.” (p. 102)

He therefore predicted that states with such a provision will spend more than states without such a rule.

Doesn’t this implicitly assume that the legislature wants to spend more money than the governor wants to spend? This seems like an odd assumption given that the governor is the one that actually does the spending. (Although his data allegedly do back it up. I wonder about confounding factors, though.)

Also, the current federal situation is the opposite: the House, at least, wants to spend *less* than the executive (i.e. Obama) wants to spend. They just don’t want to be forced to go on record saying *how* they want to spend less, because the actual cuts they would have to make to reach their spending target would be massively unpopular (while the target itself polls much better — thanks a lot, low-information voters).

Anotherphil March 24, 2011 at 10:18 am

is there a reason the budget doesn’t get cut into disc and non-disc parts?

Yes, because the distinction isn’t clear. Also, a good deal of state spending is driven by “federal financial participation”. Because the feds can’t order states to do something, they use the carrot and stick federal money. You want highway funds? Raise the drinking age to 21. You want to cut welfare spending? No you can’t do that because you must adhere to federal eligibility guidelines.

Andrew March 24, 2011 at 10:40 am

“Because the feds can’t order states to do something,”

But we know that’s a distinction without a difference, right? If they did ‘order’ it, it’s just a compliance versus non-compliance cost in another form. A fine is basically a tax.

Simeon J March 24, 2011 at 12:08 pm

Why assume that shutting down the government is anything less that a political ploy, posturing and throwing red meat to the radicals. It has nothing to do with economic considerations at all.

Rich Berger March 24, 2011 at 3:50 pm

He indicates that shutdowns rarely occur. Doesn’t that give me a reason to suspect that his entire analysis is built on sand, since these budget rules are rarely triggered? For example, let’s suppose that some states had a law prohibiting cohabitation by unmarried adults that was put on the books prior to 1900, but was almost never enforced. So I do a study about the rates of cohabitation in states with and without such laws. I find that there are higher rates of cohabitation in states with such a law and I issue a press release that such laws lead to higher rates of cohabitation. Would you take my findings as proof? Or would you suspect that I had wasted my time, or had an axe to grind?

Anthony March 24, 2011 at 7:08 pm

“the legislature will be able to achieve its ideal budget, so long as the governor prefers it to no spending”

What does this actually mean, in particular the “no spending” part? If the shutdown is partial, with many large programs continuing on autopilot, who has the edge if the governor prefers the partial shutdown to the legislature’s ideal budget?

How is the legislature’s ideal budget determined, and does a 2/3 requirement like California’s make any difference?

scineram March 24, 2011 at 8:29 pm

Of course they overspend! That is why they shut down.

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