Part II of Prop 13: Political Markets
In Part II of my take on Proposition 13, I will discuss the market for politics in Sacramento and why the 2/3 vote on new taxes and the majority vote on expenditures leads to problems. The basic issue is simple. When legislators need to move expenditures forward with a majority vote, it only takes one more Democrat than Republicans to move party agenda, or vice versa with one more Republican. With 2/3 vote need to move new taxes, it is easy (due to more incentives) to spend rather than tax. It almost would have been smarter to have a 2/3 vote on new expenditures and a majority vote on new taxes! Of course, such a system gets few people re-elected. Bottom line: incentives were changed to run fiscal deficits in Sacramento by this simple addition to Prop 13 in 1978, and changed the markets for politics in Sacramento.
And I say markets in Sacramento because I take as an assumption that money moves politics. So the budget process, which is skewed because a majority can agree on expenses but a 2/3 agreement is needed for revenues, is problematic. We see this unfold every year. Equilibrium in this market is hard to achieve because the two sides (revenues and expenses) cannot come together due to the same incentives (and thus not create a deficit because they are equal or balanced). Party lines generally dictate expenses, unless there is a surge of third-party seats.
The big questions are:
1. Should reform make expenses and revenues 2/3 vote or both a simple majority?; and
2. Who wins and who loses due to this change?
Consider those and reply or comment. My take is that is should be a simple majority for both so the citizenry decides how budgets evolve more directly and currently overfunded programs will lose while underfunded programs will win. You can decide which are which.
A simple majority would seem to be the best approach. However, no expenditure should be made without a funding source. I believe that Clinton used that approach at he Federal level and it had some degree of success. When I worked for the State it was extremely frustrating to have new laws passed without adequate, if any, funding for implementation. That was the rule, not the exception. The current budget deficit would be much worse if all all laws, rules and regulations were actually implemented.
by Robert Tancreto
Agreed. The system of mortgaging the future will come to an abrupt halt at some point.
by SBE Faculty at SSU
Would we be out of line if we shared with our fellow econ students some recent articles that we found interesting? Krugman’s piece provides some historical perspective on current schools of thought among economists; Cassidy discusses “the real reason that capitalism is so crash-prone;” Creswell takes the example of a single company forced into bankruptcy by its private equity firm owners as they loaded the company up with debt and made a significant profit; and Black condemns as criminal the behavior of the financial sector in abandoning its historical mission of supplying capital efficiently in the service of the real economy in favor, today, of making huge short-term profits as an end unto itself..
Submitted by Richard and Maisie Conrad
1. Paul Krugman, “How Did Economists Get It So Wrong?” N.Y.Times Magazine, September 6, 2009: http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html
2. John Cassidy, “Rational Irrationality,” The New Yorker, Oct. 5, 2009: http://www.newyorker.com/reporting/2009/10/05/091005fa_fact_cassidy
3. Julie Creswell, “Profits for Buyout Firms as Company Debt Soared,” N.Y. Times, October 5, 2009: http://www.nytimes.com/2009/10/05/business/economy/05simmons.html?_r=1
4. William K Black, “How the Servant Became the Predator: Finance’s Five Fatal Flaws,” Huffington Post, October 12, 2009: http://www.huffingtonpost.com/william-k-black/how-the-servant-became-a_b_318010.html
by Richard Conrad