Current template: single.php

By: David Hebert

Abstract

This essay applies insights from the Virginia School of Political Economy to explain systematic factors that contribute to the current U.S. debt crisis. Specifically, this essay explores the trifurcation of the fiscal decision among authorization committees, appropriation commit-tees, and revenue generating committees. While many private firms use a similar organizational structure, the key difference lies in the lack of residual claimancy over the resulting fiscal decision. Free from the concerns of residual claimancy, the incentives that individual members of the various committees in the public setting differ radically from those of the private setting. Recognizing this, the current U.S. debt crisis becomes an easily understood phenomenon.

Preliminary Draft – Do Not Cite


* Assistant Professor of Economics, Aquinas College. email: david.hebert@aquinas.edu

 

1. Introduction

This chapter explores some of the systematic factors that have contributed to the current debt crisis felt in the United States and are continuing to do so. This current fiscal reality of the situation is apparent to even the untrained eye. Further, this problem plagues not only the federal government but all fifty state governments as well. Pointing this out is nothing new. What is new and perhaps noteworthy, however, is the juxtaposition of the public sector’s indebtedness with the private sector’s profitability. In a time where multiple companies are now worth over $1 trillion and setting record levels of profit, the US public sector seems to be hemorrhaging money at a faster rate than ever before. This gap between public indebtedness and private profitability is perplexing and worth exploring further.

This chapter explores this by explaining the differences between the private and public sectors as it relates to the creation and discharge of debt obligations. Specifically, it examines the two sectors from a systems theoretic approach. Traditionally, economists who examine these types of issues will study firms and governments from a choice-theoretic approach, implicitly modeling these organizations as if they were comprised of one mind with a single goal. When describing the behavior of firms, economists will use phrases such as, \ firms set price equal to marginal revenue” or \the rm would increase total revenue if it were to reduce price within the elastic region of the demand curve.” Likewise, when describing the behavior of governments, economists will use phrases like \government sets social marginal benefit equal to social marginal cost” or \[insert other such phrase here].” Of course, we know that these statements are fictitious. Firms and governments do not think or reason, let alone speak or act. The individual people within these organizations do the thinking, reasoning, speaking, and acting. What we typically describe as the behavior of firms and governments is really the result of all of the individual decisions made by individual people aggregated through a series of rules (Brennan and Buchanan, 2000).

This chapter takes a unique approach to describing the creation and discharge of debt obligations by applying the insights of De Viti De Marco (1936), Buchanan (1949, 1967), Brennan and Buchanan (2000), and Wagner (2012); ?. In doing so, it describes Congress as a polycentric order with somewhat catallactic properties (?). This catallaxy emerges as a result of the split-ting of the fiscal decision, as Buchanan (1967) describes. However, rather than viewing the fiscal decision as being split into two, this chapter builds off of ?, which describes a tripartite decision process among appropriations committees, authorization committees, and revenue generating

committees. Where this system (or more accurately, one like it) was initially established in order to act as a constraint on the behavior of government [[avarice checking avarice quote here from FP here], today it results in persistent deficits. Understanding how this system works, how it was originally envisioned to work, and the breakdown of the \old time fiscal religion” (Buchanan and Wagner, 1977) generates understanding of the structural and systematic causes of the persistent debt crisis in the United States.

The rest of this chapter will be organized as follows: section II describe the split decision among the three committees; appropriations, authorization, and revenue generation. Section III provides a systems theory approach to understanding this. Section IV then applies these insights how the system was originally set up to have many opportunities to prevent Congress from acting and how it is set up today to essentially incentivize the creation of debt obligations. Section V provides concluding remarks.

 

2. A Split Decision

Today, members of the U.S. Congress are tasked with making many decisions and casting many votes. de Jouvenel (1961) describes the committee system as a practical means of resolving the problem with allowing an entire legislative assembly to speak on each and every bill. For example, as Hebert (forthcoming) describes, \if we suppose that each of the 535 members of the U.S. Congress were given equal speaking time on each of the 10,637 bills considered during the 113th Congress and that Congress spent 80 hours per week only discussing bills and nothing else, each Congressman would receive about five seconds of speaking time per bill.” A committee system allows Congress to charge a specific subset of its members with the tasks of the initial discussion of bills pertaining to specific topics, of \hammering out the details,” and of presenting the full legislative assembly with a more reasonable bill that can be voted on. In a world where each committee is made up of an unbiased, representative sample of the full legislative assembly, the resulting political decision from the committee should be identical to the decision that would have been made by the full legislative assembly, but with the added benefit of requiring fewer people per bill.1

In addition to the practical reason for having committees, there are also systems reasons for doing so. For example, the U.S. Congress divides spending and revenue generation into three different types of bills; appropriations bills, authorization bills, and revenue generating bills. Brie y, an authorization bill describes how much of something Congress will ultimately purchase. An appropriations bill, by contrast, is what allows the President to actually take the money out of the U.S. Treasury and spend it on what the Congress has been authorized to purchase. The final component of this process is the revenue generation, which is typically carried out through tax legislation.

What this means is that, at least in principle, Congress can authorize the purchase of some-thing and refuse to appropriate the funding for it. In fact, this is partially what happened with the Affordable Care Act in 2010, which was passed into law but then subsequently \defunded” through the Republicans’ successfully blocking the passage of appropriations bills that would have given the President the ability to actually withdraw funds from the Treasury to pay for the Affordable Care Act.


1Though Hebert (forthcoming) describes how this is only true in a limited number of potential situations.

3. Systems Theory

A system in this context describes the relationship of the individual parts and how they interact to form the whole. For example, a car can be thought of as a system { there are four tires, an engine (which is itself a system), seats, and various pieces of glass designed to shield the passengers from the outside while providing visibility. And we can say with a fair amount of confidence that each of these individual parts contributes toward the overall goal of the system, which is to help convey people from point A to point B in a comfortable way. If any one of these parts were to fail, the ability of the system as a whole would be greatly reduced or even brought to a halt. If an individual tire were to fail, the car would not be 75% capable of conveying people between points: the part would need to be repaired or replaced such that the car could be restored to working order again.

The same can be said of a legislative assembly. Congress and the resulting decisions that Congress makes can be thought of as \the whole” and the individual members, committees, and subcommittees can be thought of as \the parts.” While there are many differences between cars and Congress, the one that is of importance in this context lies in the recognition that the individual parts of a car are designed to work well together to reduce friction and enable productive behavior whereas the individual parts of Congress are designed to increase friction and prevent \productive” behavior. In other words, the system in place that governs the fiscal

decision is designed to prevent spending from happening, not to enable it. As Calvin Coolidge is reported to have once said, \it is more important to kill bad bills than to pass good ones.” The fiscal decision is designed, from a systems theory approach, to block as many bills as possible through the systems of checks, balances, and the splitting of the fiscal decision along these lines. The intended result is that the few bills that make it through this gamut are can be viewed as \good” in the sense that many different minority coalitions (including a minority of one at the presidential level) has the ability to stop a bill from having the effect of spending money and thus, affecting change.

4. A Brief History of the Fiscal Decision

In a very real sense, the frustrations that presidents, members of Congress, and even the general public feel with the ability of Washington, DC to accomplish or achieve anything was intentional. At its very creation, the Constitution was designed to stymie and frustrate would-be rulers. As James Madison wrote in Federalist 51, \Ambition must be made to counteract ambition.” Here, as in the rest of Federalist 51, Madison was referring to the tremendous power that they were entrusting to a small group of people in creating a federal government. This power must be somehow constrained. One way of doing this, which the Founders ultimately chose, was to divide that power into many hands and require many independent groups of people to assent to a decision in order for it to actually be \made.”

For example, if Congress wanted to finance something like an interstate highway system, the original process would have been to first raise the funds to do so through applicable tax policy. This policy, per the Constitution, must originate in the House Ways and Means Committee. Next, Congress would have to pass an authorization bill which would determine how much money Congress and the President were allowed to spend on an interstate highway system. Finally, Congress would have to pass an appropriation bill to allow the President to physically withdraw the money from the Treasury to pay for the creation of the interstate highway system.

At each step of the way, the relevant committees could, in principle, prevent the bill from happening and in doing so, prevent Congress or the President from actually spending the money. If the authorizing committee were to block the passage of an authorizing bill, the appropriations committee could, in principle, pass a bill allowing the President to withdraw the money from the Treasury but the President would be unable to spend that money on an interstate highway system. Likewise, if the appropriations committee were to block the passage of an appropriations bill but the authorizing committee were to pass a bill, Congress and the President would find themselves in a position where they were allowed to spend money but were unable to withdraw the money.

This system worked remarkably well for many years and even generations. As a result of this, and what Buchanan and Wagner (1977) refer to as \that old time fiscal religion,” the United States had a long history of running balanced budgets and even ran surpluses in some years. This all began to change around the 1930s as a result of two forces: the rise of factions and the rise of Keynesianism in the economics profession.

Download this Post

References


Brennan, G. and J. Buchanan (2000): The Reason of Rules: Constitutional Political Economy, vol. 10 of The Collected Works of James M. Buchanan, Liberty Fund.

Buchanan, J. (1949): \The Pure Theory of Government Finance: A Suggested Approach,” Journal of Political Economy, 57, 495{505.

III (1967): Public Finance in Democratic Process: Fiscal Institutions and Individual Choice, vol. 4 of The Collected Works of James M. Buchanan, Liberty Fund.

Buchanan, J. M. and R. E. Wagner (1977): Democracy in Deficit: The Political Legacy of Lord Keynes, vol. 8 of The Collected Works of James M. Buchanan, Indianapolis, IN: Liberty Fund.

de Jouvenel, B. (1961): \Seminar Exercise: The Chairman’s Problem,” The American Political Science Review, 55, 367{372.

De Viti De Marco, A. (1936): First Principles of Public Finance, New York, NY: Harcourt Brace & Co. Inc.

Hebert, D. (forthcoming): \The Chairman’s Solution,” The Journal of Public Finance and Public Choice.

Wagner, R. E. (2012): Deficits, Debt, and Democracy: Wrestling With Tragedy on the Fiscal

Commons, Cheltenham, UK: Edward Elgar Publishing.

Why Deficits?

One thought on “Why Deficits?

  • Avatar
    December 20, 2018 at 10:08 AM
    Permalink

    This chapter-to-be has many good insights on the congressional budget process or fiscal system using the systems theoretic approach. It is important to note, however, that the fiscal system is more Balkanized than described here. Some of this Balkanization is designed to circumvent the Founders’ intent to limit the federal government’s propensity to spend. For example, certain accounts — Social Security, in particular — are put off budget. Also, large portions of the budget are exempted from the annual appropriations process. These portions are described as “mandatory spending” accounts. This lets the authorizers put the applicable accounts on autopilot. Finally, there are a significant number of accounts are funded by appropriations every year that are not authorized. This permits the appropriators to eclipse the authorization process.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.