Wednesday, November 05, 2008

I Propose Free Wine!!!

A few Democratic bloggers have magnanimously pointed out that despite people's current conviction (which may well hold up on reflection, or it may not) that McCain ran an especially slimy campaign, he in fact did engage the public on a lot more substantive issues than Republican presidential candidates generally have in the modern era.

One substantive issue McCain brought up a lot was earmark spending. He often brought it up in the context of the federal budget and the deficit, and in this context Obama rightly pooh-poohed the idea that earmark spending is a significant part of the federal budget picture.

Even so, there is a significant issue there. The earmark system DOES invite corruption, and it almost guarantees that the dollars are not being spent entirely on things that are truly in the national interest. That's not really a controversial point. The problem is, what do we do about it? Answering THAT question is the thorny part, and McCain never made a serious effort during the campaign to provide that answer.

In my view, the main root of the earmark spending system is the difference in financing structure between the federal budget and state budgets - namely that the federal budget can meet its general budget obligations by borrowing money from the private sector, while state governments are usually prohibited from doing so. The inability to borrow money creates a slightly perverse incentive structure in state governments with regard to certain types of expenditures.

Put a bit more simply, imagine you're running the government of, say, Montana, and you learn that there's some rare goat that's going to die out if you don't build a retaining wall along the edge of some canal somewhere. Not being a goat-hater, you'll probably want to do something about it. But if you have a budget shortfall and there is a decision about whether to cut the goat wall or lay off some police officers, well, bye bye Mr. Goat.

So in theory that's why we have earmark spending. In such an instance, the Governor of Montana goes to the senior senator from Montana and he says "dude, you gotta get me a half million dollars for this goat wall." The senator goes through the process needed to insert the goat wall money into a budget bill and eventually the goat wall gets built and the goats are saved.

Of course in this instance I've chosen to spend the imaginary money on something that could reasonably be construed as being in the national interest - saving a rare subspecies of goat. In reality, a lot of earmark spending cannot reasonably be construed that way. The "Bridge to Nowhere" in Alaska is a famous example - it was purely a giveaway to Alaskan construction companies.

The problem is, no matter how much people may hate the idea that their tax money is going to some sweetheart construction deal in the middle of the wilderness, there's not a lot they can do about it. The only people who really have control over the process are getting much more benefit out of it (in terms of financial benefit to their state economy) than they are giving away (in terms of the impact on the federal tax rates of their constituents: essentially none), which means that all the decision-makers are essentially in a room together going

Governor: I propose free wine!
Senator: I second!
Governor: All in favor?
Both: AYE!

One big solution that's often proposed for this is the so-called Line Item Veto. This would allow the president to veto individual spending projects that he or she deemed to be not in the national interest. The problem with that solution is that it just paints another layer of politics over the process. The president is no more likely, in actual practice, to use his power responsibly than a senator or congressperson, especially given our Electoral College system that establishes a handful of states as "battlegrounds" where presidents must curry favor if they hope to be reelected.

Another solution would be some sort of nonpartisan review board to review earmark spending to determine if it serves a legitimate purpose, and ensure that the process of disbursing the money is fair. That sounds reasonable enough to me in the abstract, but one would imagine it would be a nonstarter with the vast majority of congresspeople, since it would reduce their power to please their constituents.

I'd be interested to hear from anybody who has ideas on this topic. I imagine there must be some innovative stuff out there regarding how to see that earmark spending becomes fairer and more effective dollar-for-dollar. I just don't know what it is, or where to find it.

6 comments:

Herr Gokmop said...

I think line-item vetos are a really bad idea. Often, congressional bills are written with several mutually dependent parts. If one of them is struck, suddenly the remainder of the provisions either don't make any sense, or are actually a bad idea. Line-item vetos would allow a president to render a lot of congressional bills impotent. In that sense, it's a huge expansion of presidential power and intrusion into legislative prerogative. If the president feels so strongly about some element of the legislation, he still has oodles of options. Vetos, congressional lobbying, horsetrading, etc. If none of those (considerably powerful) options work and he's not willing to stand up on a veto of the bill, hey maybe we don't want to give him an extra way of working around Congress.

In my view, the main root of the earmark spending system is the difference in financing structure between the federal budget and state budgets - namely that the federal budget can meet its general budget obligations by borrowing money from the private sector, while state governments are usually prohibited from doing so. The inability to borrow money creates a slightly perverse incentive structure in state governments with regard to certain types of expenditures.

This isn't correct. State government regularly borrows from the private sector through the use of bonds. When a state government sells bonds through an investment bank, that's securing funds from the private sector. By the way, distinguishing "the private sector" from other sources of funding isn't particularly useful. When you sell bonds, you're probably being financed by a Saudi oil giant, a private company, Joe Blow in Minnesota, and a Japanese auto firm. In other words anybody whose investment objectives match with your bond offering.

The really meaningful difference in financing between state and federal is the federal ability to print money, adjust interest rates, and inflate the currency. State governments don't get to dictate what interest they will pay on bonds, it's a function of credit rating agencies. The federal government gets to dictate and even manipulate rates. But both can sell bonds, both can vote to run a monster deficit. If the federals run out of money, they can print more, and save money on interest payments by lowering their interest. There's also a crucial difference of market perception that federal bonds constitute "risk free" investment. (Which is why their interest is so low). It's not that federal bonds are a risk-free investment, it's just that if the federals ever default on their bonds, you're going to have much bigger problems to worry about than your bonds. So they may as well be risk free.

So in theory that's why we have earmark spending. In such an instance, the Governor of Montana goes to the senior senator from Montana and he says "dude, you gotta get me a half million dollars for this goat wall."

Has anyone actually ever created a theoretical defense of the ability to do earmark spending? Where can I find that?

It's like you're saying Congress should be allowed to do this because state governments funding isn't unlimited like the federal government's.

There doesn't need to be any special justification for earmarks. Congress holds the purse strings. Period. Congress makes the laws about how money gets spent. Period. No special defense for a certain type of spending is needed. There is no higher authority on spending in the land. The Supreme Court doesn't need special justification for pulling a case up for review, it's a core element of their essential function. Ditto Congress and spending.

Earmarks are never going away. There may be some reasonable way of limiting them, but they'll never stop, for 2 key reasons. First, you've correctly identified that there are legit reasons why they would be necessary. (Maybe those goats really do need saving). Second, "bringing home the bacon" in the form of earmarks is a key reason incumbents keep getting re-elected. For congress to vote to limit their ability to bring home the bacon would fundamentally run counter to their individual interests.

Uncle Kevin said...

I tend to agree with Mr. Gokmop in the sense that there is a presumption in the discussion of earmarks that somehow they are inherently "bad". Earmarks are one form of spending direction that congress uses. The reason that they have a bad reputation is because of the process by which they tend to get enacted. I won't defend the process, but having been around procurement for military items, there are only superficial differences.

And earmarks basically merely transfer the power for this kind of spending from the executive branch over to the congress. Either place encourages lobbying and political favoritism.

The larger problem is Congresses ability to spend. As you both suggest, for different reasons, there are not the functional constraints upon congress in deciding what to spend. Various proposals have been floated my whole life on how to create functional contraints. Line item vetos, debt/deficit limits, pay-go, etc. None of them seem to work for long. The GOP tried operating on the presumption that if you cut the income, ultimately the spending would be affected. That's been tried a couple of times and it doesn't particularly pan out. Pay-go worked during an agressively expanding economy. It isn't clear how long it could have lasted in a recession, or even a moderate economy.

I've always felt that one glaring hole in our constitution was that it didn't really address the question of governments role in the economy. Regulate commerce, print money, issue patents, and lay taxes. That's about the extent. A couple of related comments about emminent domain, the quartering of troops, and slaves was as close as we came. For all the checks and balances we supposedly have, congresses ability to spend has but really only one "check" and that's the President's veto pen. You can't go to the courts and sue because congress borrows to much, spends too much, taxes too much, etc. The only other "check" on congress is the economy itself and as we see, that can be quite painful when it is exercised.

Herr Gokmop said...

Uncle Kevin:

Don't forget voting as the major check on the congressional ability to spend. If voters these days tend towards the apathetic, and don't hold Congress to account for what they really spend, it's not necessarily a failing of the system, only those who are shepherding it at any given point.

The population is complicit though. The rest of the nation might think that a goat wall is an awful boondoggle, but Sen. Mucketymuck goes home and brags about it at election time. Voters only seem in favor of fiscal restraint outside of their districts.

The government's relationship to the economy maybe shouldn't be in the constitution. Maybe it should be a function of the prevailing culture at the time, or in other words, its relationship should change over time to adapt to the needs of the day.

Uncle Kevin said...

Voting doesn't really compare with the kinds of specific checks and balances the constitution provided for other powers. And to influence congress, voting needs to be in effect "coordinated" across alot of states. Furthemore, congress was specifically design to be isolated from momentary movements in popular support. As such, the coordination needs to be sustained over long periods of time.

Raul Groom said...

A couple things.

State government regularly borrows from the private sector through the use of bonds.

What I was driving at by saying
"general budget obligations" is that state governments cannot sell bonds simply to make their budget whole after an overrun, the way that FedGov can. State bond issues, in almost all cases, are set aside for specific projects. In the statehouse, you can't just bust the budget and then cut a bond issue - if you run out of money you have to start cutting. At the federal level, it's not that way.

In any case, you ask about theoretical defenses of earmarks. I'm not sure there's anything online. Most of what exists is OLD - Congress first started dabbling in this sort of thing in the 1800's if I remember correctly, and there was a significant debate about it. Back then the powers of FedGov were of course considered to be much more limited than we think of nowadays.

Unfortunately if anything DOES exist online I would be suspicious as to the way it was presented, given the fact that earmarks were a partisan issue in the campaign. There's probably some good books about it in print, though.

Raul Groom said...

One thing I've been meaning to ask you, gokmop: I've always sort of had an assumption about what you mean when you use the phrase "print money." But I realize that if my assumption is wrong, it may be leading to some confusion between us.

What specifically do you mean when you say "print money?"