Abstract
In the tight budgetary conditions following the 2008 financial crisis, governments have proposed saving money by reforming public services. This paper argues that tight budget constraints make reform harder by introducing an information problem. Governments are uncertain about bureaucratic departments’ effectiveness. Normally, effective departments can be identified by increasing their budget, since they can use the increase to produce more than ineffective departments can. When budgets must be cut, however, ineffective departments can mimic effective ones by reducing their output. Budget cuts thus harm both short-run productive efficiency, and long-run allocative efficiency. I confirm these predictions in a US dataset. Low marginal productivity bureaucracies reduce output by more than expected in response to a budget cut, and budget setters respond less to observed short-run marginal productivity after cutback years.
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Notes
Formal theory can be found in an online appendix at http://sites.google.com/site/davidhughjones.
This is a simplification (Dunleavy 1985), but it may not be unrealistic in the context of protecting one’s existing budget from cuts.
A public library system is a single managerial and accounting unit, which may comprise one or more physical branches.
I used every library with at least 12 years of data during which the budget increased, and at least one year during which the budget decreased.
Other specifications were tried, including per-state time trends, and adding lagged budget change directly as a control. Coefficients on output slope and output slope × cutback t−1 remained highly significant in the expected direction. Results are available on request.
The “cutback in t−1” dummy is still defined with reference to total funding, since this is what determines the ability of low-type bureaucracies to pool with high type bureaucracies.
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Acknowledgements
I thank Dennis Leech, Sharun Mukand, Roger Congleton and two anonymous reviewers and audiences at the EPCS, EPSA and ECPR 2011 meetings for their comments.
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The author thanks Sharun Mukand, Dennis Leach, Hugh Ward and participants at the EPCS and EPSA 2011 conferences.
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Hugh-Jones, D. Why do crises go to waste? Fiscal austerity and public service reform. Public Choice 158, 209–220 (2014). https://doi.org/10.1007/s11127-012-0002-5
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DOI: https://doi.org/10.1007/s11127-012-0002-5