Thursday, March 14, 2013

The Single Best Economic Reform for the Next Time

Glad to see that Matt Yglesias is talking about this one again:
3. We should beef up automatic stabilizers in the budget by creating some kind of national rainy day fund that automatically releases unrestricted funds to state governments in times of recession. Some elected officials will use the money to avoid pro-cyclical service cuts and furloughs, while others will use it to finance tax cuts and we'll just live with disagreement about the best way to proceed.
He also wants to make monetary policy work better, but I think he undervalues the ideological resistance to those suggestions (or at any rate, whether he undervalues it or not, I think that strong ideological resistance makes any legislative effort in that area very unlikely to succeed).

However, I continue to believe that countercyclical "automatic stabilizers" for the states should, in principle, be something both sides should be able to cut a deal on. To get Republican buy-in, what's necessary is for those funds to be transfer-neutral in the long run. But if that's the case, with money flowing out of state budgets during good times, I really don't see why conservatives should oppose it in principle. After all, no one really believes that states should massively build up programs during good times and then slash them during bad times, but the incentives contained in state revenue flows make that a likely result. It's also easy to imagine the interest-group coalition that would support this kind of thing, and harder to see exactly which influential interest groups would have a strong incentive to oppose it.

In general, I'm much more willing than Yglesias is to leave things in the hands of legislatures. But I think this is the big missing piece of the New Deal regime of moderating the effects of business cycles via automatic government action.


  1. I really like this idea too. Especially since so much of successful Fed policy depends on human action in the face of opposing pressure. It will take a lot of great historians and biographers to explain why Bernanke has been such a flop, but at the heart of the matter I'd say that any system that trust too much in one person to do "the right thing" is asking for trouble.

  2. JB,

    I think you underestimate how hard it is to get payments to be "revenue-neutral in the long-run". Here is a formula that works:

    Each year, the state receives 12% * ( A - B ), with
    A = that state's average tax revenue over the past 4 years
    B = that state's tax revenue this past year

    And if B > A then it ends up paying the federal government instead.

    This is equivalent to forcing each state to save 3% of its tax revenues this year for next year, save 3% for two years from now, and save 3% for three years from now.

    You can also change the 12 and 4 while maintaining revenue-neutrality, but not much else. Anything involving economic forecasts has to correct for their errors, which introduces too much noise.

    Would you be happy with the formula above? Or if not, what formula would you propose?

  3. I really like this idea. On a basic level it sounds very similar to the financial advice that is intended for individuals where they are supposed to have one months salary in a savings account in case of an emergency. I feel that this can protect the citizens of a state against extenuating circumstances and it is simple enough where it does not require a degree in political science to understand.

    1. Considering the mass confusion of economic policy since 2008 I think any effective macro-economic policy that can be spun as "financial advice that is intended for individuals" is a good idea.

  4. I think the idea of a "rainy day" fund is great and automatic stabalizers can real solve a great deal of economic issues.

    Ali Olomi, UCLA

  5. First, the Federal Government's role is to act as a (de facto) 'automatic stabilizer'; my fellow Kentuckians will receive more in federal largesse than they contribute, richer states will subsidize that. This is the tradeoff for states not running deficits or having the opportunity to print money.

    Second, many states keep their own rainy day funds to protect against shortfalls; these have been to a large extent tapped post-2009, but that doesn't make them inherently wrong.

    I admit to being agnostic, but I think I prefer the traditional system (feds = de facto automatic stabilizers and states keep their own rainy day funds). Here's what would happen with Yglesias' proposal here in Kentucky: the rest of y'all will scorn us for being terrible takers, and we will feel awful about it for all of maybe ten minutes, and then we'll say ah fuck it, nothing we can do about it, accept our label and the money that comes with it, drown ourselves in bathtub gin and wake up 20 years later, saying what the heck just happened?

    1. No, the Republicans will call you takers. We will understand that we all live in the same country together. And then you (Kentuckians in general) will continue to vote Republican. It's the way of the world.


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