My Thoughts on Economic Policy

Given the current economic climate, I anticipate that this will be a busy week for discussions. I think that the materials provided for this week - the chapter from Peters, the Planet Money podcast, and the documentary - illustrate how broadly the government can intervene in the economy, how important the economy is to the political prospects of the President, and ultimately how little control the government actually has over what happens in the economy.

Although scholars agree that the government has little actual control over the economy, there is still some debate over the degree to which the government can or should intervene. If you have not already seen this "music video" explaining the difference between the Keynesian and Hayek-ian perspective, I highly recommend it.



Here we see both an Austrian school (laissez-faire) and a Keynesian (interventionist) perspective on what and how much government should do to address economic downturns. During the debt ceiling debate, Senator Dick Durbin stated that the debt ceiling bill "Put [Keynes] to his final rest", signaling a huge turning point in American macroeconomic policy and a return to a more laissez-faire approach to the economy. Of course, we have since seen President Obama present the American Jobs Act, which includes a vast array of Keynesian based proposals (government investment in infrastructure and public service and subsidized employment programs).

The video does not discuss the current prominent understanding of economics, the Chicago School neo-classical perspective associated with Milton Friedman and George Stigler. These economists prefer a laissez-faire form of capitalism similar to Hayek, but arrive at that recommendation through different assumptions and methodologies. Despite Obama's portrayal by some on the right as a "socialist", many of Obama's economic advisers follow the Chicago School approach to the economy, perhaps explaining some of his recent tax and budget compromises. Despite its popularity in conservative political circles, supply-side economics is rarely discussed as a serious theoretical approach to macroeconomic policy. Even when the Laffer curve is invoked, we often ignore  the fact that there are two sides to the curve, one side where government revenue rises concurrent with taxation and another where it falls in response to higher taxation.

Perhaps the biggest disagreement among economists and politicians appears to be the mechanism through which government should act on the economy. As the podcast, How Do You Create a Job? illustrates, government can create conditions that are likely to create jobs either through reducing restrictions and taxation of business or through taxing and providing more services. We see this trade-off when localities attempt to attract business, as well. The key is finding the balance that fosters the creation of good jobs and provides services that government can deliver well. As this statement from the former CEO of Intel illustrates, low-taxes alone are not a good economic development strategy.

At this point in time, the future of the economy and government's role as a regulator and participant remains uncertain. We have seen a Keynesian approach with the stimulus package, a more supply-side approach with the extension of the Bush tax-cuts, and a Corporatist approach with the bailouts. Prior to the summer, the economy appeared to be on an upswing, although it was a comparatively anemic upswing in terms of job creation and unemployment. The manufactured debt ceiling crisis (itself a lesson in agenda-setting) seems to have stalled recovery due to uncertainty and anxiety about the American political process. Suddenly, we find ourselves in the midst of a likely double-dip recession with consumer confidence at a low-point and anger from both the political left and right coming to a head.  The so-called  super-committee is currently in negotiations to prevent another showdown similar to the debt ceiling crisis of the summer, but early reports seem to indicate that compromise will be difficult to achieve. The President has embarked on a "jobs tour" and is making job creation his current policy priority, but as we have seen, Congress appears unwilling to pass the American Jobs Act as it is written. In response, Obama has shifted his focus to the regulatory and implementation process to implement mortgage reform and other programs that his administration believes will stimulate the economy (If you need any further evidence that the policy stages process is not as neat and tidy as theory suggests, just look at how economic policy is currently progressing). Perhaps the biggest issue with our economy at the moment is inequality; with African Americans, Latinos, low-skilled workers, and the young facing extremely high unemployment and the erosion of wealth accumulated prior to the economic collapse. It is impossible to tell what the next few months will bring, but I can almost guarantee that discussion of the economy will dominate the 2012 elections.

Taking and Giving Away Power in a Federalist System

This week's podcast A City Throws in the Towel and documentary Cheney's Law tell us two different tales about power in a federalist system with a separation of powers. On one hand, we have a story about the Bush Administration successfully attempting to consolidate power in the national executive branch. In the other we have the city of Reading, Pennsylvania ceding its power to the state in order to avoid financial ruin. In both of these instances we can see how a policy decision like re-defining torture and selling off government property can have a larger meaning in terms of the distribution of power between branches and levels of government. We can also think beyond the effects on the executive branch (in Cheney's Law) and the city government of Reading (in A City Throws in the Towel) and hypothesize about the long-term consequences of these decisions for other branches and levels of government. Giving up power is a very difficult thing to do, and once power is consolidated or distributed it tends to stay that way until another emergency or shock to the system emerges.

In terms of the executive branch, it remains relatively powerful since Bush and Cheney have left office. The Obama administration continues the practice of issuing signing statements to laws, but I think the debt ceiling negotiations revealed that Obama is more hesitant about exercising executive power. Here's a NYTimes article about executive power under Obama.

In A City Throws in the Towel we heard about Reading, PA as an example of a city that was taken over by the state as a financial disaster area. The podcast hints at the fact that many cities throughout the nation are facing the same issues, as population decreases and poor economic conditions decimate their tax bases. In Reading's case they chose a state takeover, but this is not always the case. The city of Detroit, Michigan is currently at risk of being involuntarily taken over by the state if they cannot cut $200 million in spending.  Local governments are not protected by the Constitution, unlike state governments, so this may be a coming threat for many cities and counties. State governments are feeling similar financial crunches, particularly because so many have balanced budget provisions in their constitutions or state laws. The question remains, what will happen to our federal system if states can no longer meet their financial obligations to residents?

My Thoughts on Peters Ch. 7: Budgeting

Although budgeting is rarely included in policy stages theory (and you will see on p. 47 that Peters himself does not include budgeting as a policy stage), it is an important part of the policy process. Sometimes it is considered to be part of implementation and sometimes it is considered part of policy formulation. Either way, the budget is just as important, if not more so, in determining the effectiveness and efficiency of a policy as the authorizing legislation or agency rules. An underfunded program will likely be seen as ineffective and an over-funded program will likely be seen as inefficient.

Peters goes into a lot of detail about types of budgets and approaches to budgeting. A lot of this goes beyond what you really need to know for a public policy class and delves into the management and administration literature. My hope is that you have learned three major lessons from this chapter:

1) The budget process is complex and takes a long time to complete. Planning for budgets begins almost a year and a half prior to when the budget is enacted. It starts with the president's economic advisers, it moves to the agencies, comes back to OMB and the president for review. In early February, the president releases his budget publicly and the action moves to the legislative branch. The appropriations committees in both houses of Congress take the President's release into account and then after hearings and negotiations send their own versions to the floor of their respective houses. Often the president's, Senate's, and House's bills are all very different reflecting the different political ideologies of their leadership. Once the appropriations bills pass both houses, they go to conference where leaders from both houses attempt to eliminate the differences between the two bills. The resulting reconciliation bill is voted on by both houses and goes to the President once it passes. The president can veto, sign, or let pass the bill as a whole. All of this has to be finished by mid-September for a new budget to take effect. It should be no surprise that the deadline is rarely met, particularly when both houses are divided politically, so Congress is often forced to pass continuing resolutions, which fund programs at the same level as the previous fiscal year (remember, fiscal years are October-September).

2) Congress has very little control over a large portion of the budget. Annually, only about 30% of the budget is discretionary spending, the rest can't be changed without substantial, politically unpopular policy change. The remaining 70% includes entitlement programs like Medicare and Social Security and interest on the debt. For more information see the Center on Budget and Policy Priorities' fact sheets on the budget. This means that during all of the negotiations and hearings about the budgets, most of the disagreements and advocacy effort concerns a small piece of the budget pie. Organizations that may be allies during other parts of the year sometimes end up as adversaries during budget debates.

3) The budget, deficit, and debt all suffer from definitional problems. How they are counted and what is included is often strategic, and rarely represents "the truth" of federal spending and debt

4) The system is full of perverse incentives, or incentives that make the process less efficient. The short-term focus, out of date projections, lack of line-item veto, pork barrel spending, overhang, supplemental appropriations, and incrementalism may all lead to budgets that are larger than necessary and an inefficient use of funds.

Of course, this isn't to say that government spending is bad (although there are certainly economists and politicians who would argue that point). There are, however, places where funding could be more efficiently allocated. I want you to keep this is mind when you read the program evaluation chapter. Funding and implementation both have as much of an effect on program performance as the legislation itself.