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Budgetary choices and institutional rules: veto rules and budget volatility

Abstract

Studies of the line item veto have traditionally focused on whether it leads to less spending than an all-or-nothing veto and have only produced modest results. However, other impacts that differences in rule choice might effectuate have not been investigated in detail. We examine the role of veto rules for budgetary volatility, the extent to which expenditures vary. Theoretically, we model budget choices given all-or-nothing, line item, and item-reduction vetoes and demonstrate that more encompassing veto authority does not necessarily decrease spending but should result in more political gridlock, implying less volatility. We then analyze the model’s prediction by examining American state budget expenditures from 1978 to 2007. Whether one looks at budget categories or total spending, volatility is greater with the all-or-nothing veto relative to more stringent alternatives. Hence, delegating greater authority to executives such as governors, perhaps unexpectedly, likely strengthens expectations about future budgets while reducing the responsiveness of spending to changing preferences or circumstances.

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Notes

  1. 1.

    For example, in November 2011 the U.S. House budget leaders rolled out their own line item veto plan, which the lower chamber actually approved in February of the next year. However, the lack of Senate Democratic support doomed the proposal, which was never brought to a vote.

  2. 2.

    The same logic would appear to apply to the U.S. Congress’ 1996 item veto, which required a legislative supermajority to override deleted items and was deemed unconstitutional (on this veto authority, see Berry 2016).

  3. 3.

    Obviously, much of this empirical work has theoretical underpinnings as well. For example, Kousser and Phillips (2012) are concerned with whether an item veto either provides the governor with negative power, preventing unwanted spending, or is a source of positive power, advancing the chief executive’s initiatives, but find evidence for neither. Along similar lines, while Krause and Melusky (2012) posit and find evidence that executives with unfettered spending authority spend more due to short-term electoral interests, they provide no evidence that veto authority matters.

  4. 4.

    With respect to the states, most work on the impact of volatility focuses on public performance. For example, Crain (2003) emphasizes how volatility causes public inefficiencies while, more recently, Flink (2018) suggests that public agencies are able to at least compensate somewhat for volatility. While the link between volatility and private investment in the states is not a well-plowed area, there is evidence that uncertainties associated with features such as government budgets are generally problematic (e.g., Azzimonti 2018).

  5. 5.

    Theoretically, the reversion budget may be any prespecified level (including zero), although it is typically conceptualized as the previous year’s budgetary figure (e.g., Kiewiet and McCubbins 1991). While some theoretical work has specified a zero reversion point (Kiewiet and Krehbiel 2002), this assumption is not empirically justified. Typically, in light of failure to agree on a new budget, a continuing resolution is used with previous funding levels as the focal point or, even in the rare instance of a shutdown, essential services are continued which, for states, are typically a large portion of the budget (e.g., in 2011 it was estimated that approximately 80% of spending continued during Minnesota’s erstwhile shutdown).

  6. 6.

    We follow Carter and Schap (1990) in modeling the legislature as a unitary actor. Given the majoritarian decision-making process, it can be understood as the chamber median, or the median of the budget committee. Alternatively, it could be the opposition party leader if assuming strong party influence, or the chair of the budget committee if considering the legislative norm of deference (Maltzman 1998). Even if we model the legislature with more players, the main result of our model on the relationship between budgetary volatility and veto authority does not change.

  7. 7.

    See Crombez et al. (2006) for a graphical presentation of policy outcomes under the all-or-nothing veto in a two-dimensional bargaining situation.

  8. 8.

    Schap (1988) presents examples demonstrating that a policy outcome under an item veto or an item-reduction veto need not be in the Pareto-efficient set.

  9. 9.

    For this to be a meaningful result there should be some random factor associated with the status quo. For example, we can think of the status quo as being the prior year’s budget with a random component produced by factors such as macroeconomic shocks or political scandals, etc.

    Alternatively, we can assume that a failure to agree produces a zero reversion budget, i.e., s = 0, and, concomitantly, a true government shutdown. In this instance, pinpointing which veto rule causes higher budget volatility is difficult, as the answer depends upon the distribution of the potential ideal points of players—the relative distances of zero and the proposer’s ideal point from the confirmer’s ideal point matter. However, as discussed, a zero reversion point is not plausible.

  10. 10.

    We should note, however, that such aggregate spending restrictions do not impact our predictions regarding the impact of the gridlock set’s relative size. However, on the grounds that such restrictions might influence the adoption of the item veto, in our empirical analysis we include a control for whether states have adopted them.

  11. 11.

    Until 1996, the governor of North Carolina had no approval or veto authority (note that no veto authority also will produce greater volatility, and this is reflected in our coding this state as not having item veto authority).

  12. 12.

    The results are unchanged using nominal dollars. We employ real dollars because it is more natural to define players’ preferences on dimensions expressed in real dollars.

  13. 13.

    An alternative specification would be to examine the budget’s unconditional variance. That is, one would regress (growth)2 on Z, and examine whether item veto significantly decreases the unconditional variance. If we use this alternative specification, we get essentially the same result for budgetary category spending but not for total spending: item veto significantly reduces volatility of budgetary category spending, but it does not have a significant effect on volatility of the total spending. As noted above, these results are not inconsistent with our theory. We present the results with this alternative model in the “Appendix”.

  14. 14.

    Fatas and Mihov (2006) also exploited the variances of the residuals to measure the volatility of fiscal policy. However, while they utilized a two-step procedure, our method is more efficient because we estimate all parameters simultaneously via Maximum Likelihood.

  15. 15.

    While our panel is not balanced, for notational simplicity we denote the number of periods by T for all units as if the dataset were balanced.

  16. 16.

    TEL data come from Budget Processes in the States 2008, which is produced by the National Association of State Budget Officers. As of 2007, there are 28 states having some form of limits, usually tied to growth in personal income and population. Among the seven states with no item veto, Nevada accepted TEL in 1979, while Indiana and Rhode Island accepted them in 2006 and 2007, respectively. As for the rest, 18 states have never accepted them. Two sample t test shows that states with the item veto are more likely to have TEL (p value = 0.000).

  17. 17.

    Since spending data are for state fiscal years (e.g., 2005 spending is for the fiscal year starting in 2004 and ending in 2005), we use lagged versions of the four political variables in our regression analysis. For example, for education spending in state s in year t, we use governor party switch—Democrat in year t − 1.

  18. 18.

    In light of the possibility that preferences of past players were not captured by the previous budget, we also tried alternative political variables of change, such as upper house to D (whether the party that has majorities in the upper house changed to Democrat), lower house to D (measured analogously), and changes in the % of seats occupied by the opposition party, but these variables did not have significant effects.

  19. 19.

    While we model growth in spending to analyze its variance, there are studies on spending level that find no differences between Republican and Democratic governors (e.g., Leigh 2008; Beland and Oloomi 2017). However, if Democratic governors pursue more radical changes relative to Republican governors when regaining power from the other party, findings from these studies are not necessarily inconsistent with our result.

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Correspondence to Lawrence S. Rothenberg.

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Appendix

Appendix

Tables 6 and 7 present the results from the alternative specification discussed in footnote 13. The effect of item veto significantly reduces (unconditional) volatility of budgetary category spending, but it does not significantly affect the volatility of the total spending. Also, significant variables have the same sign as before.

Table 6 The effect of item veto on the unconditional volatility of budgetary category spending
Table 7 The effect of item veto on the unconditional volatility of total spending

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Jo, J., Rothenberg, L.S. Budgetary choices and institutional rules: veto rules and budget volatility. Econ Gov 21, 1–25 (2020). https://doi.org/10.1007/s10101-020-00234-7

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Keywords

  • Separation of powers
  • Veto bargaining
  • Budgetary politics