Category Archives: Spending

Keynes – The General Theory of Employment, Interest, and Money

Keynes – The General Theory of Employment, Interest, and Money

My undergrad macroeconomics teacher was an avowed Keynesian. Most of what he taught was in this book, except in the forms of Marshallian geometric analysis and Samuelsonian algebra. I could have saved 19-year old me a great deal of time and anguish by simply reading Keynes’ original, mostly verbal explanations of his ideas. In fact, that pedagogical experience was one reason I switched my undergrad major from economics to history, despite my much greater enthusiasm for economics. Depending on who teaches intro classes, economic ideas are sometimes taught more clearly outside of economics departments.

People often forget that Keynes worked from the same quantity theory of money framework his rivals Friedman and Hayek relied on—an insight I was never taught in undergrad, thanks in part to poor standard pedagogical practices.

Nearly all economists, regardless of ideology, agree that tinkering with the money supply can induce temporary booms and busts. Where they differ is that for monetarists and other free-market types, the fact that policymakers can mess with the price system does not imply that they should. There are tradeoffs a boom now comes at the price of a bust later. Picking up one part of the economy comes at the cost of dragging down other parts. Moreover, unintended consequences can be unpredictable, and harder to manage than the original problems.

Keynes and many of the economists he has influenced instead work with idealized models of economics and government. Economists, using increasingly sophisticated techniques, are increasingly able to foresee and adapt to changing circumstances and unintended consequences to maintain economic stability. Fiscal and monetary policies will never be perfect, but with careful management they can outperform unmanaged markets. Also in this model, politicians actually listen to economists. Even more fantastically, politicians use their boom-and-bust power in the public interest. They do not use it to influence their electoral prospects, or give favors to rent-seekers.

On the positive side, Keynes’ remarks about animal spirits remain insightful, though underappreciated. Here Keynes shared important common ground with economists from Adam Smith on down to his rough contemporaries such as Philip Wicksteed, Frank Knight, and F.A. Hayek, who all emphasized human psychology in their works over formal modeling.

Keynes’ followers pursued a different path after Paul Samuelson, preferring instead to confine themselves to quantifiable models, and to study Homo economicus rather than Homo sapiens. The old joke about Keynesians being more Keynesian than Keynes ever was is often true. Fortunately, the behavioral economics movement has done much to revive animal spirits in the wake of MIT-Harvard-Princeton’s sterilizing the profession, though many of them forget that human frailties also apply to policymakers and the policies they make.

This is not Keynes’ fault. But his unintentional legacy has harmed economics as a discipline, which has missed out on important insights and discoveries by largely walling itself off from other, less quantitative disciplines for several decades. Keynesian models have also acted as enablers for policymakers eager to hear justifications for things they want to do anyway, and for excuses to forget that can does not always imply ought.

Alice Rivlin, 1931-2019

Some economists do more than teach classes and write books. Alice Rivlin, who passed away this week, was proof. She was the first director of the Congressional Budget Office (CBO), from 1975 to 1983, serving under Presidents Ford, Carter, and Reagan. She helped develop many of the standards used for estimating how much legislation would cost if enacted. More importantly, she developed a reputation for keeping politicking out of the bill scoring.

Over in the executive branch, Rivlin was deputy director and then director of the Office of Management and Budget (OMB) under President Bill Clinton. Though Rivlin worked mostly on fiscal issues, part of the OMB’s job is providing cost estimates for proposed regulations. Rivlin was in the OMB when Clinton issued the famous Executive Order 12866 on reforming the rulemaking process, and she played a significant role implementing it. Among other things, E.O. 12866 specifies the definition of a “significant” regulation and contains disclosure and cost estimate standards still in use today—at least when agencies bother to obey them.

Major accomplishments in budget and regulatory policy were apparently not enough, so Rivlin next took on monetary policy. She left the OMB in 1996 to become Vice Chair of the Federal Reserve, the number two position under then-chair Alan Greenspan, which she held until 1999.

Rivlin is perhaps best known for her work at the local level in the District of Columbia. The District was in a massive financial mess during the Marion Barry years, and Mayor Barry’s personal problems were not helping matters. Recommendations from a Rivlin-chaired task force resulted in the federal government stripping the mayor of most authority and establishing a committee to tend to the district’s finances. Rivlin eventually chaired that committee as well until it disbanded in 2001.

Milton Friedman observed that economists who go to work in government often suffer a decline in the quality and independence of their work; part of the price of influence is not telling the boss when he’s wrong, or at least not in public. Rivlin was an exception to that rule, successfully irking powerful politicians throughout her time in government. The CBO, for example, was initially created as a counter to President Nixon’s OMB.

Though Rivlin was a Democrat, she scored President Carter’s energy proposals honestly. For obvious reasons, this upset both the President and Democratic House Speaker Tip O’Neill, who needed legislation to campaign on. As a deficit hawk, Rivlin had two parties deserving criticism. When Rivlin was on the other end of Pennsylvania Avenue working at OMB, President Reagan publicly expressed his displeasure when Rivlin called shenanigans on his deficit spending.

Rivlin also left a footprint in the think tank world, working at the Brookings Institution between government appointments. Her book “Systematic Thinking for Social Action” is one of Brookings’ best-selling books, and remains an influential text in public administration courses. She also taught courses at Georgetown, George Mason, and Harvard.

Rivlin’s 1993 book “Reviving the American Dream: The Economy, the States, and the Federal Government” makes the case for increased federalism, which is a rare stance among career Washingtonians. It is also somewhat ironic, given Rivlin’s role in a partial federal takeover of the D.C. local government. But her long experience with federal budget dysfunction gives her plenty of ammunition for arguing for devolving many federal tasks to the state level—and D.C.’s troubles were something of an outlier case. In Rivlin’s system, the federal government would focus more on foreign policy, with the states taking on education, health care, poor relief, transportation, and other tasks that are currently mostly federally administered. The federal government would establish some uniform standards for states to follow, but would be more of a supervisor than an actual policy actor.

Though Rivlin mostly retired from government work after Clinton’s second term ended, she served on the Simpson-Bowles Commission in 2010 that looked for ways to reduce the national debt. She continued to warn about the dangers of perpetual deficit spending for the rest of her life.

Rivlin also worked in a time, place, and occupation that were all far more difficult for women than today. Intentionally or not, she set some major precedents. It says a lot about Rivlin that despite her era’s social norms, strong personalities on both sides of the aisle respected her. She was a stickler for keeping politics out of her budget and cost estimates. This sometimes involved making very powerful people very upset, and she did it anyway. Her reputation for fairness was well-earned, even if some of her praises were sung through clenched teeth.

While CBO and OMB’s modeling techniques are not always very accurate, on Rivlin’s watch such shortcomings usually had more to do with the nature of forecasting than with poll results or an upcoming election.

Few economists can claim as many accomplishments in as many policy areas as Rivlin. She held important roles in the executive branch and the legislative branch, in the federal government and overseeing a local government, plus the Federal Reserve, and still found time to make scholarly and popular contributions to federalism, administrative structure, and debt reduction efforts. She also had the good sense to be a thorn in the side to both parties, even as she was a member of one of them—something that is sadly missing in Washington today.

Republican Study Committee Releases 2020 Budget Proposal

Congress is supposed to pass an annual spending budget, though it rarely gets around to it. Instead, the government is usually funded through a mashup of individual appropriations bills, omnibus appropriations bills, and continuing resolutions. This makes government spending less transparent and less accountable. It also leaves the federal government vulnerable to shutdowns during political fights, which happened in January of this year.

Fortunately, the Republican Study Committee (RSC) has just issued a proposed budget. It is likely the only budget that will be introduced in Congress this year, though unlikely to pass a Democratic House. As with any issue-spanning document, one can quibble with its contents regardless of political persuasion. Still, the RSC deserves a great deal of credit for at least putting something out there.

Other parts of the GOP should also issue their own proposed budgets; unlike The Highlander, there can be more than one. Across the aisle, a Democratic budget(s) would face similar obstacles in a Republican Senate and White House. They still should release their own budgets to make their policy priorities more concrete.

The whole RSC FY 2020 Budget is here. The document cites CEI sources on a variety of issues:

  • Regulatory Reform. The budget gives an entire chapter to regulatory reform, beginning on page 17, and cites Wayne Crews’s Ten Thousand Commandments annual report—the 2019 edition of which will be released soon.
  • Energy and Environment. The budget’s recommendations for increasing North American energy production draw on the energy and environment chapter in CEI’s Agenda for the 116th Congress.
  • Export-Import Bank. On page 25, the budget would abolish the Export-Import Bank, citing my paper “Ten Reasons to Abolish the Export-Import Bank.” Ex-Im’s charter expires this September 30, and will close if Congress declines to reauthorize it.

Kudos to the RSC for putting out a tangible document that should serve as a starting point for debating federal priorities for the next fiscal year—and for attempting to fix a broken budget process. They also have excellent taste in finding sources for many of their ideas; interested readers can find more in CEI’s Free to Prosper: A Pro-Growth Agenda for the 116th Congress.

Unemployment, Taxes, and Spending

Alongside Charles W. Baird, whose writing I have enjoyed since my high school and college days in FEE’s The Freeman magazine (then called Ideas on Liberty), I am quoted in a Heartland Institute piece on unemployment and how to keep it low.

USA Act Increases Accountability, Restores Congress’ Power of the Purse

Separation of powers is one of the United States government’s most basic principles. But for several decades, presidents from both parties have gradually concentrated more and more power in the executive branch, at the expense of Congress and the judiciary. A new bill from Rep. Cathy McMorris Rodgers (R-Wash.), the Unauthorized Spending Accountability (USA) Act of 2016, seeks to rebalance a tilted scale.

Only Congress has the power of the purse, yet a long list of unauthorized executive branch programs continue to operate—256 in all, at a cost of more than $310 billion. The USA Act would automatically cut a program’s budget to 90 percent of its previously authorized level in its first unauthorized year, and to 85 percent in the second year. Programs would sunset altogether after a third unauthorized year.

As the executive branch becomes more overbearing with each successive administration, Congress becomes more and more of a wallflower. Congress has not seen fit to authorize entire cabinet-level departments, such as the State Department, since 2003. The Justice Department was last authorized by Congress in 2009. Other departments, such as the Bureau of Land Management, have now operated for twenty years without congressional authorization. The USA Act would require Congress to own up to its budgeting responsibilities, while simultaneously making the executive branch more accountable.

There is more. The USA Act’s automatic budget cuts and sunsets apply only to programs classified as discretionary spending. But two thirds of federal spending is classified as mandatory, including major programs such as Social Security and Medicare. While Congress has the power to change these programs at any time, they do not require congressional reauthorization, and can continue indefinitely on autopilot.

The USA Act would create a Spending Accountability Commission to examine mandatory spending programs and make them more accountable to Congress, which apparently prefers to avoid making them more efficient or fairer—a clear abdication of responsibility, given the coming entitlement crunch. The Commission would also assist Congress in creating a schedule for sun-setting unauthorized discretionary programs.

Restoring a proper separation of powers is a tall order. The USA Act is no panacea for all of government’s ills, but it would mark an important step in a crucial area of reform.

What Hollowed Out Military?

Politico ran a story earlier this week with the headline “How Congress Is Hollowing Out the Military.” Congress is forcing the Pentagon to pay for many expensive weapons programs it neither wants nor needs. This leaves less funding available for defense-related defense spending. Sequestration is putting further pressure on military finances. In fact, the winding down of Iraq and, one hopes, Afghanistan, have led to actual cuts in the DOD’s budget. The authors worry about how this could affect military readiness if an actual defense-related conflict were to arise.

To put this hollowness in context, I looked up a historical table (Excel format) of agency spending. It turns out the military has more than doubled its spending since 2000, from $290 billion to $586 billion in 2014. This is down from a 2010 peak of $695 billion, when Iraq and Afghanistan (and everywhere else the last two adminstrations have ventured) were more fiercely contested than today. The current defense budget is hardly austere.

I would be delighted to see Congress scrap unneeded weapons programs, though public choice problems probably preclude it. Regardless of political developments going forward, defense hawks need not worry about the Pentagon’s budget. Its long-run growth is practically assured, regardless of who is in power.

Unfunded Mandate Reform in the House

This week, the House is considering a dozen reform bills as part of Stop Government Abuse Week. The centerpiece bill, sponsored by Rep. Virginia Foxx, would add transparency to a shady practice called the unfunded mandate. The bill’s full title is the Unfunded Mandates Information and Transparency Act, or UMITA for short, and it will receive a floor vote today. It is expected to pass.

The goal of UMITA is to add teeth to the dentally-challenged Unfunded Mandate Reform Act of 1995 (UMRA), passed in the excitement of the Republican Revolution during the Clinton years.

Unfunded mandates were a problem back then, and they are an even bigger problem today, due in part to Presidents Bush and Obama’s record-setting deficit spending. Why do large deficits drive unfunded mandates? Suppose the federal government wants to enact a new job-training program. If it runs the program itself, it adds to the deficit, and runs the risk of making voters angry. But if it instead requires state governments or private companies administer and pay for the program, the federal balance sheet is unaffected. Unfunded mandates are a sneaky way to grow government.

The old 1995 UMRA bill made for great press conference fodder, but little else. One reason is that an unfunded mandate has to be very expensive before it triggers any UMRA actions. It would have to cost more than $100 million to state and local governments, so a $99 million unfunded mandate could slip through the cracks. Private sector burdens have to reach $146 million before drawing scrutiny.

If a mandate does reach the thresholds, the Congressional Budget Office (CBO) investigates and discloses its findings to Congress, which then has the option of striking down the mandate.

The trouble is that few unfunded mandates cost that much; their strength is in numbers rather than in size. And Congress rarely strikes down mandates that do meet the threshold for review. UMRA also exempts disaster aid and national security-related spending.

It gets worse. There are more than 60 federal agencies that issue regulations, but UMRA only covers the 17 cabinet-level agencies. The remaining three quarters of the regulatory state, called independent agencies, are exempt from this basic transparency measure.

Enter the new UMITA bill. It would expand UMRA’s disclosure requirements to cover independent agencies. It would also move mandate review from CBO to the Office of Management and Budget’s Office of Information and Regulatory Affairs (OIRA), which specializes in regulatory review, and is better suited to the task.

UMITA also closes another UMRA loophole. UMRA only applies to rules that enter the rulemaking pipeline via a Notice of Proposed Rulemaking (NPRM) in the Federal Register. If an agency wants to avoid review of an unfunded mandate, all it has to do is avoid that step of the regulatory process. In that sense, UMRA actually reduces transparency. UMITA would fix that by making all rules subject to review, regardless of whether agencies skip the NPRM.

UMITA is not an earth-shaking reform, but it would improve transparency in both government spending and the regulatory process. Wayne Crews and I wrote about UMITA in 2012 here, and The Hill wrote about the bill here.