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How austerity leads to more regulation

at 08:56 AM ET, 08/03/2011

A basic rule of politics is that politicians can’t just stand there. They need to do something.

Traditionally, that means fiscal policy. Vow to cut taxes. Promise better services. Rinse and repeat. But what happens when budget choices are seriously constrained — say, because there’s a balanced-budget rule, or spending caps, or sky-high deficits?

According to a new paper out of the libertarian Mercatus Center, when politicians can’t spend or cut taxes, they start to regulate (or deregulate). The authors, Noel Johnson, Matthew Mitchell, and Steven Yamarik, took a look at what happens in the 27 states with the strictest balanced budget rules, and compared them with the states with looser laws.

Broadly speaking, our stereotypes about the two parties are pretty much correct: When Republicans control both the governor’s mansion and the legislature in a given state, they tend to cut taxes and slash services (they lower taxes, on average, by $265 per capita and cut services by about $353 per capita). When Democrats have unified control, by contrast, they tend to boost services and raise income taxes (on average, by about $66 per capita). Granted, the two parties don’t perfectly mirror each other, notes Johnson, an economist at George Mason University. “Democratic control is a lot more similar to what you get with divided government.” But the differences are real.

In the presence of tight balanced-budget rules, however, Republicans have less room to cut taxes and slash spending, and Democrats have less room to boost services and raise taxes. “In states that have these ‘no-carry’ rules,” Johnson notes, “you don’t see nearly as much difference in partisan preferences here.” As the authors observe, the strict balanced-budget rules “completely counteract the effect of unified party government.”

What does happen, however, is that the parties start competing on regulation. Johnson and his co-authors looked at a number of regulatory policies, from worker’s compensation rules to minimum-wage laws to union rules. When balanced-budget laws are in place, the two parties lean much more heavily on these tools to make policy. Republicans focus on dismantling regulatory protections — becoming more likely to cut the minimum wage and impose “right-to-work” laws making it harder to unionize. Democrats focus on the reverse. Overall, the effect is significant: “Democratic no-carry states,” the authors note, have, on average, 1.7 times a standard deviation more regulation than the rest of the country.”

It’s not just economics, either. Fights over social issues like gay-marriage, alcohol regulation, and gun laws also intensify, the authors find. In other words, politicians have to find some way to appeal to voters, and if they can’t do it through the budget, they’ll do it through regulation.

 
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