LIMITING STATE SPENDING….South Knox Bubba reports today on the Tennessee Taxpayer’s Bill of Rights (TABOR), a proposal that would limit spending growth to a combination of inflation and population growth. We’ve had a similar proposal in California, although it hasn’t really gotten anywhere yet.

Oddly enough, I support this kind of thing, but with a different twist:

  • The basic idea of TABOR is flawed because it essentially means that state employee salaries are frozen forever in real terms. If we had adopted this kind of rule in 1970, teachers would still be getting paid about $15,000 a year today.

  • A better idea, I think, is to limit state spending to a percentage of gross state product (GSP, the state equivalent of national GDP), with perhaps a small amount of wiggle room allowed by a super-majority vote. This allows everyone to benefit from economic growth, while still keeping a clear cap on spending.

In another post, SKB compares state government to a business:

Every place I’ve ever worked, when we had financial troubles the CEO came around to every department and said “Hey, you gotta cut back x%. Don’t care where, don’t care how, just do it. No excuses, no exceptions.”

Anyone who’s done corporate budgeting knows that it’s usually done as a percentage of sales: marketing gets 10%, sales gets 15%, R&D gets 12%, etc. The percentages differ from company to company, and the total percentage (in a well run company) is based on historical knowledge of what it takes to hit your earnings target. I think state governments could run the same way, and their job is actually even easier because the earnings target is always the same: zero.

And aside from capping spending, budgeting as a percentage of GDP has another advantage too: it makes your priorities a lot more obvious. If the constitutional budget cap is, say, 10% of GSP, and you think of education spending as 3% of GDP and law enforcement as .6%, it makes it pretty obvious what the tradeoffs are. You’re not thinking in dollar amounts as much as percentages, and the percentages have to add up to 10.

For a variety of reasons I’m not sure something like this would be a good idea at the federal level, where you want to have the flexibility to run a large deficit during a recession (although the Europeans are giving it a try with their budget and stability pact, which allegedly prohibits governments from ever running a deficit bigger than 3% of GDP). Done correctly, however, it might work, and it’s worth a look.

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