SSU Business and Economics Blog

Incentives Matter: California Government

Economics is a social science, which means economics is concerned with understanding human behavior. The textbook definition of economics is “the study of choice under conditions of scarcity” which is just an obtuse way of saying that we can’t always have everything, so we have to choose from among the things we can have: incentives matter.
This is a fairly simple notion, but we often forget about it when addressing big problems, such as the failure of our financial markets to function properly, California’s perpetual governance problems, the inability of the California State University to anticipate and respond effectively to a changing economic environment, etc.
It turns out that a root cause, or at least major contributing factor, of most of these problems are cases where incentives of individual decision makers lead them to make choices that the rest of us do not particularly like.
As an example, let’s examine some of California’s governance problems. Here, I am going to focus on the structure of legislative decision-making, rather than the politics of policy-making. It is somewhat difficult to disentangle those things, so I will probably have to allow politics to creep in here and there.
The state constitution requires that every ten years the state legislature draws new voting district boundaries (redistricting). This is to make sure there is a “reasonably equal” population within each type of district (US House of Representatives, CA Assembly, CA Senate, and Board of Equalization). This is a pretty clear conflict of interest. State legislators decide who gets to vote for the various legislative seats. So, not surprisingly, they draw boundaries in ways that will advance their agendas. This results in a process that encourages the election of candidates from both parties who tend to be ideologues rather than pragmatists. That is, we do not elect very many moderate candidates, making compromise on real issues of state business very difficult.
California’s citizens have also decided that professional politicians are bad, because they tend to become corrupt. As a result, and because it is easy to get voter initiatives placed on the ballot, Proposition 140, passed in 1990, placed term limits on legislators. This had the effect of increasing the number of women and minorities elected, but also made it difficult for legislatures to be effective leaders. Just as they figure out how to be effective in Sacramento, they are termed out. This results in inexperienced people being put into leadership positions. Case in point: Assemblywoman Karen Bass was majority whip (whips are basically responsible for organizing party caucus decision making, an incredibly important job) in her first term in office, and selected to be Assembly Speaker during her second term. Because we have inexperienced politicians in positions of responsibility, they tend to be much easier to influence. This gives lobbyists a distinct advantage in Sacramento, and provides interest groups, including private and public unions, to step-up their lobbying efforts.
California’s constitution (as amended by Proposition 13 in 1978) requires that two-thirds of the legislature (CA Assembly and CA Senate) approve in order to pass a budget bill. Unless the majority party captures at least two thirds of the seats in both houses, the minority party has the ability to hold hostage the budget process, and this has happened in more years than not over the past couple of decades.
The Democrats have almost always been the majority party in both houses of the legislature, so this governance structure seems to play well in to the hands of the traditional Republican agenda of reducing government, especially during periods of falling tax revenue. When revenues are on the rise, as they were throughout most of the first half of this decade, there is less resistance to spending from Republicans because instead they have an incentive to use their de facto filibuster to direct spending to their own districts in order to help themselves get reelected. (Of course, Democrats get their districts lots of benefits as well.) Legislators from neither party have incentives to save for the future because that doesn’t often help them get votes. When revenues are falling, Republicans can simply refuse to vote for anything other than spending and tax reductions, and then they get to claim that they are serving the interests of their constituents.
The legislature’s Republicans, who are usually in the minority, have little or no incentive to compromise in doing the state’s business because inaction will eventually get them what they want. Combine this with the effect that redistricting has on the kinds of candidates who are typically elected, and you have a fantastic recipe for pork-barrel spending in times of plenty, draconian spending cuts when times are bad, and perpetual budget stalemate. Also, because it is easy to get voter initiatives on the ballot, desperate voters have approved many noble but ill-conceived restrictions on the legislature that provide even less room for compromise and flexibility.
I’m not sure I could imagine a worse structure for democratic-republic governance. These are just issues of California’s structural government requirements; I haven’t even covered actual policy yet. Maybe I’ll save that for another post.
What we need to do now is put politics aside for the time being – bipartisanship isn’t good enough – and institute real and significant changes to the structure of government in California. Compromise and consensus can only be a part of doing the state’s business if we give legislators a chance to do their jobs. We can ignore incentives – on redistricting, lobbying, spending, cutting, saving, levying taxes – but we shouldn’t expect to like the results if we do.

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