An Empirical Study of the Effects of Proposition 13

In Calif. our bureaucracy has become a pure self-serving group always claiming "lack of resources" for doing their jobs while paying themselves way above private sector rates and unsustainable pensions. In Huntington Beach, we have enough money for more than one "planner" (not including building inspectors, plan checkers -- just planners) for each architect in the city. Now that business is down, they are being even more silly in their rules.

It's been awhile, but I think the purpose of Prop 13 was ultimately to cut the funding for government, keeping small. At the time, property taxes paid for most of it.

Politics from both sides have worked hard it seems to get around that. Had the citizens insisted on a smaller government, this would not have happened.

The obvious message of proposition 13 was that government should stop spending so much money. Why else would you inact measures to stop them from collecting money? But people in government don't care to hear that, so they simply look for other ways to plunder. And the lesson from this (based on this paper) is supposed to be that trying to stiffle government only leads to unintended consequences.

I think the real lesson is that government needs to be put into a very tiny cage and constantly watched with the hope that you will find an even tinier cage.

Really? I'm not so sure. I think the message has been "we want stuff but we don't want to pay for it".

I agree spending and revenue collection should be commensurate, but I think this piece pretty clearly illustrates that the way you don't want to do it is by constitutionally hamstringing just one side of the ledger - that causes all sorts of distortions and it never brings spending and revenue into proportion with each other. We're not doing that constitutionally at the federal level now, but we are doing it to ourselves with political rhetoric.

The voters enacted the so-called Gann spending limits a year after Prop. 13 that was intended to address the spending side of the ledger. The Gann limits first ran into trouble in the mid-80's when there were legal difficulties returning budget surpluses to taxpayers. A few years later, again by initiative, the Gann limits were essentially eviscerated by mandating that part of any budget surplus had to be spent on public education (for the children, of course).

Interesting - I didn't realize that. Thanks.

One thing the Gann limit or legislation like that doesn't seem capable of accomplishing, though, is allowing for sufficient countercyclicality in budgeting. California has spending problems, granted, but it also suffers major revenue problems in a downturn. State balanced budget amendments force states into pro-cyclical budgeting... for what reason? Keeping long term spending growth in check with something like a Gann limit is something I can get behind (granted, taxpayers who want greater investment in public eduation is somethng I can get behind too). Keeping a lid on that trajectory of spending is understandable. But cutting and raising spending simply because of the ebb and flow of tax revenue over the business cycle seems nuts to me. And that's really what's hurting California right now - not it's long-term trajectory (although that's bad enough!) - but the fact that it's hands are tied in the face of falling revenue during the downturn.

"One thing the Gann limit or legislation like that doesn't seem capable of accomplishing, though, is allowing for sufficient countercyclicality in budgeting."

That's a feature, not a bug.

:) if that's considered a feature than that's just another mark against Gann-type limits.

I don't think feature means what you think it means...

I think you and I just have a different understanding of what constitutes a feature and what constitutes a bug. We part ways on application of the word, not definition.

You are correct - my last post was pure sarcasm (which doesn't always translate well in a blog).

The only group allowed to legally get stuff without paying for it is government. "Hamstringing" one side of the ledger only causes distortions if you're incapable of understanding that both sides of the ledger are connected. There's no such thing as a one sided boundary.

That's a good point about restricting only one part of the ledger. The best way is to restrict the powers of government altogether. If you give politicians power but curtail how they can pay for it, they'll just find other ways to pay for it.

I agree more or less, but I think it's wrong to think about this as "restricting politicians" in this case. They spend a lot because Californians WANT to spend a lot. That's how this failed so miserably in the first place - by thinking of it as a "tax revolt" against "politicians". What Californians - and Americans - need to come to terms with is that it's ultimately them who has to decide what they want from government and how much they're willing to pay for it. Blaming "politicians" is a good rhetorical strategy for limiting tax increases, but it completely absolves the people from thinking soberly about the services they demand.

The machinations and rent-seeking of politicians is certainly a short-run concern. But in the long-run we have to set these spending and tax trajectories based on our values.

I think there's a subtle difference between restricting "politicians" and restricting "political power." Politicians are human. Give them large amounts of tools and they're going to use them. Especially since the types of people who attain political office are usually those who prefer power/status to money (i.e., generally they could earn more in the private sector but they choose politics for its non-monetary compensation).

Change the system instead of blaming the participants.

Interesting. California is disconcerting in this respect because it's a microcosm of what we're seeing at the federal level: visceral opposition to the very idea of revenue raising combined with an inability to bring spending in line with self-imposed revenue raising restrictions.

One problem I've always had with state balanced budget requirements is that they prevent states from adequately meeting their own needs, which leads the federal government to take on duties and powers that could be done by the states. I'm guessing the fiscal straight-jackets of many states have pushed quite a bit of power away from the states and towards the federal government. I never thought about this effect, though - the devolution of revenue collection and spending. It would be interesting if the Californiazation of federal finances does the same thing, and forces the states to take on revenue and spending functions they've eschewed for so long. It could actually help federalism out.

It's a terrible way to do it - strengthen federalism by making the national government fiscally dysfunctional - but perhaps it's one silver lining.

state balanced budget requirements ... prevent states from adequately meeting their own needs along with their wish lists of wasteful, unneccessary expenditures.

There, fixed it for you.

They prevent the California brand of dysfunction, but they force states to slash programs that could and should be done at the state level every time there's a revenue-threatening recession, because the only solution is to cut spending. That pro-cyclical back-and-forth gives the feds room to step in. I suppose balanced budget requirements aren't quite as bad as California's schizophrenic approach to budgeting - but they don't exactly help either.

Really, it's a very similar problem. Whereas California restricts the revenue side of the ledger and has no control on the spending side, balanced budget requirements (to varying degrees, depending on how binding they are) restricts the debt side of the ledger and puts all the pressure and responsibility on the tax side. This is just budget whack-a-mole style. You smack it down in one place and it will pop up another place. The best solution is not to be afraid of debt, taxes, spending, or cuts - don't tie your hand behind your back, and have informed voters put states on stable trajectories. Not an easy way, but the best.

I couldn't disagree more - we must absolutely tie government's hands behind its back. Avoiding debt and keeping taxes and spending low are extremely desireable features for a state. The utopian "have informed voters put states on stable trajectories" is not the best way - it's a completely unrealistic pipe-dream that's fundamentally incompatible with human nature.

The best situation is a combination of strict government growth limitation (for example not to exceed inflation plus population growth) and a strict balanced budget requirement. The prevents lots of stupid and dangerous shenanigans. If only we could impose such a limit at the federal level - that would be truly excellent.

Keeping taxes and spending low and even avoiding debt to a certain extent is absolutely extremely desirable.

But you don't do that piecemeal or with restrictive caps on one facet of the budget. That does what arbitrary, politically-based caps ALWAYS do to the decision making process: distort it. It distorts our understanding of costs, it distorts it by eliminating potentially more efficient options, and it distorts it by restricting choice. Setting politically motivated caps on how much a government can borrow makes as much sense as setting politically motivated caps on how much families can borrow.

Obviously you and I have very different opinions on the nature and proper role of government (you are a collectivist, I'm and individualist) so our disagreement is not surprising. I know I will not dislodge your entrenched bias, and I have not yet heard an argument from your ilk that is even slightly persuasive, so we are at an impasse until you become enlightened. (:o)

Strict limits on government growth are good - the stricter the better! They force a discipline that is sorely lacking in Washington. The absence of such limits has led to all manner of badness and encroachment on liberty by the federal government. The fact that politicians will try to get around such limits is NOT a reason to avoid them - it is a reason to make them exceptionally clear and powerfully limiting. Tying government's hands behind its back is just a start - it should also be shackled in leg-irons with a very short chain and locked in a very small constantly guarded cell with extreme consequences for attempting to overstep its bounds.

I find government interventions in the economy, markets, individuals personal affairs, social institutions, etc to be dangerous, offensive and at odds with the principals of individual liberty and self-government. On top of that, they almost always make things worse. what you call politically-based caps help to reduce such interventions. That's a feature, not a bug. What you call the distortion of restricted choice I call the blessing of stopping government from doing tons of crap it shouldn't be doing.

There is so much wrong with your last sentence I don't even know where to start.

Great points.

I'd add that, if tax money leaves one jurisdiction for a downstream jurisdiction, and then the downstream jurisdiction lets some of the money return upstream, the downstream jurisdiction has too much power.

For instance: I send tax money to Denver, and then some of it is sent back to Pueblo for schools. Colorado is involved in something that should be of no concern to a state government.

Compound this with the fact that I also send money to Washington, so that Washington can send money back to Denver, so that Denver can send money back to Pueblo for schools, and it becomes apparent to anyone (except Yasafi and friends) that we have a lot more government than we need.

(Note to Yasafi: Pay attention to the usage of then and than in this post.)

Thanks - and I agree completely about the jurisdictional idiocy you describe. The money should stay local and more distant government agencies should stay out.

Probably more accurate to say that we're two different brands of individualist, but then again - it's inherent in your brand of individualist to not recognize any other sort of individualist but your own, and to brand everyone else a collectivist... so while it may be more accurate, I'm not holding out hope.

You should avoid presuming to know things you do not - your imagined version of what I think is wrong. I am well aware of the rich diversity of thought among both individualists and collectivists, and that the boundry is sometimes fuzzy.

I was simplifying - I realize some of your views are individualistic, and we largely agree in some areas. However, you devote column-miles to defending and justifying the encroachment of the state. Those views are collectivist in a big way. That's what makes your claim to be a different brand of individualist implausible to me.

Did you seriously just lecture me on presuming to know things about what people think in the same comment that you call me a collectivist? You're too much, yetanotherdave :)

Chill dude, I didn't lecture you at all. Your statement "it's inherent in your brand of individualist to not recognize any other sort of individualist but your own, and to brand everyone else a collectivist" looks like a presumption to me. Am I wrong?

Also, I described why I consider you a collectivist and it is definitely not based on presumption - it's based on what you've written here at the cafe. Did you not read my post?

Again, are you seriously telling me to chill after writing a hyper-defensive response like that? I did read your post, and I also never said I didn't make a presumption. I did make one. A reasonable one, I thought. A presumption that I didn't just pull out of thin air. But a presumption - I never denied it. I just find the lecture ironic given your own presumptions. Your statement looked like a presumption to me, because I don't know of anything I've written that could form the basis of me being a collectivist - hence my reception of yours as a presumption.

Ultimately I said you were something - a certain brand of individualist which I described. And you said I was something - a collectivist. Both of us think both things have at least some basis in what we've said in the past. Both of us to some extent are obviously making a presumption because we can't read each other's minds. All I'm saying is (1.) recognize we're in the same boat and don't get all high and mighty telling other commenters to chill or not to presume things, and (2.) if you don't think I have reasonable enough evidence to say what I said remember that a lot of people think the same of you.

Wow - is the parody intentional? The funniest part is this: "I don't know of anything I've written that could form the basis of me being a collectivist"

It's also funny that you think me saying "chill dude" is being high and mighty.

At the risk of offending your tender sensibilities I'll offer 2 pieces of advice:
1) You really need to get some thicker skin.
2) You seriously need to work on your reading comprehension. (Misreading me to have been "hyper-defensive" or "high and mighty" or lecturing is not an isolated case of completely missing what was said. It is a pattern of yours I've observed frequently with numerous other commenters here.)

I should say four times now, not twice. Since now apparently I should presume less, I should chill out, I should work on my reading comprehension, and I need to get thicker skin. Yes, I can tell that I'm the one that's too sensitive here! As I said - you're too much sometimes yetanotherdave.

Thicker skin? I'm not the one telling you not to do certain things or to chill out - that's you :) I'm just pointing out how ironic it is that you're saying those things in the first place. I'm not the one that's lost it twice now over a difference of opinion.

Oh, and now I've "lost it" as well.

Oh, the irony...

Virtually every time DK has agreed with a post that criticizes government, his agreement has been a yabbut.

Can you please explain your obsession with "yabbut" to me? What exactly is wrong with caveats for you? Never in my life have I come across someone that thinks there's something inherently wrong wiht agreeing with some things and disagreeing with other things... but on here for some reason there's a bunch of you that have serious issues with that. I don't understand why - could you explain? Think of it this way - if I agree with some of what you say in your comments, and then add a "but" and list some things I disagree with, then it stands to reason that you also agree with some of the things that I say but disagree with others. There's a symmetry to this, brotio. If I'm a yabbut than you're a closeted yabbut.

States can borrow, but they cannot print money or monetize their debt like the feds. That is the main difference. Further the whole state balanced budget thing is a bit of a canard, and much state spending is mandated by the feds and not the other way around.

We raised taxes last year in Maryland on the rich, and 20% sales tax increase - total complete flop - revenues continue to decline. State and local budgets are screwed becuase of the reliance on property related taxes, based on a real estate bubble. So, many states increased spending at unsustainable rates, based on an unsustainable revenue source.

Also California can raise the income tax on the rich to solve all their ills right?

More on state balanced budget rules:
http://www.ncsl.org/issuesresearch/budgettax/st...

Ya, there are a lot of tricks to get around balanced budget requirements. But it's still a constraint, just a somewhat softer constraint than it's often billed as. Same with borrowing - they can borrow but there are still restrictions on what they can borrow for.

Explain the debt monetization issue to me a little more. State debts are denominated in dollars the same as federal debts. They would seem to benefit from a monetary recourse every bit as much as the feds would. They can't make monetization a policy, but then again - neither can Congress (thank God). The end result is often a lot of state "rainy day funds", which seem to me like they would be as much a drag on growth as old-school "sinking funds" (although I'm no public finance expert - maybe they aren't).

I don't know - it just frustrates me personally right not to be in a state that (1.) wasn't especially hard hit by the housing bust... at least not like other states out there, and (2.) with a AAA bond rating that is up against a self-imposed cap on borrowing, and all they're talking about to bridge our budget gap is cutting spending. It's a good thing raising taxes is off the table - that would make things even worse. But what the hell is the point of a AAA bond rating if you're not going to borrow at a time of temporarily depressed revenue and record low interest rates? It doesn't make sense.

Monetizing the debt - the Federal Reserve is buying massive amounts of debt issued by the federal government keeping rates down and soaking up supply. States do not have such a buyer. If a state with shaky finances issues debt, then they pay market rates (and hope they find buyers), which may further strain their budgets. States should balance their budgets, otherwise we would have a slew of bankrupt, irresponsible states. States have fat to cut. What kills me is most state budget's biggest expenditure is health care (e.g. Medicaid). Maryland increased health expenditures by 5.1%. I thought the government had magical powers to cut medical spending. Funny how we never see that claim actually in action.

I see what you mean - I suppose I think of debt monetization as the actual creation of new money, rather than simply the fed's having a purchaser of bonds that the states don't have. And insofar as we're talking about monetization as an inflation issue, the states should benefit as much as the federal government.

RE: "States should balance their budgets, otherwise we would have a slew of bankrupt, irresponsible states. States have fat to cut."

There's definitely fat to cut - there always is - but why do you think states would be bankrupt if they didn't balance their budgets?

Ya - the mandates bug me too.

Look at state finances specifically CA. They have racked up massive debts approaching 100% of their budget - it continually anowballs. That is not sustainable; tax increases or not. Most states spends ever increasing amounts, and the only thing that keeps most in check are the balanced budget limitations. Look at every mature industrialized country in the world taking more steps toward budget disasters. Greece, the UK, the US, Japan. They are at the point where they have 1 choice - cutting spending.

Our newest bubble developing, but one that will play out over 5-10 years, is the government debt issuance bubble. It is not sustainable, unless some hidden burst of economic growth emerges. I just do not see how the world absorbs the debts being issued.

There's a difference between saying that not balancing a budget leads to bankruptcy and saying that irresponsible levels of borrowing lead to bankruptcy. The second is certainly true - the first is not. If debts are snowballing, rather than growing at the pace of GDP than of course it's unsustainable. That's practically a tautology, mcwop.

I'm surprised you're putting UK and the US in the same camp as Greece. I don't think that's justified (granted, I don't know the details of the UK situation). I don't know what's going on with Japan - they seem to defy the laws of gravity and I don't feel qualified to comment on that case.

I also couldn't disagree more with their one choice. The U.S., at least, certainly has latitude to raise taxes and even though it can't maintain these deficits for the long hall, it can certainly run deficits in the low single digits from here until eternity.

I don't know if I'm as worried about a government debt bubble bursting as I am about a dollar bubble bursting. Obviously they're not unrelated and one would inevitably lead to the other.

I've lived in California for most of my life, and the Prop. 13 story is by far the worst canard I've ever heard. Progressives love to claim that it killed social spending in the state due to lack of revenue.

Anyone in California who has ever a) registered a car b) received a paycheck c) had a financial transaction with the government d) bought something from a business likely realizes that other taxes were increased to make up for any lost property tax revenue.

In other words, Prop 13 + Politics = fiscal shenanigans

Sounds more like, if you're gonna poke a stick in a wasp nest, you should kill all the wasps first.

Long time back, i found a hive of white faced hornets in a bush beside the back patio.

When dusk fell, I sprayed 91% alcohol around the hive followed by several sprays over a lighter. I kept adding fuel to the flames til I saw no further movement.

Too bad we can't do that to the bandits in the capital.

Unfortunately, Politics = fiscal shenanigans without Prop 13 as well, so you just can't win.

Then Politics + X = shenanigans^X

I think that's called the "Keynesian multiplier."

LOL!!