Balanced Budget Requirements Don’t Work as Well as Spending Limits

When I first came to Washington back in the 1980s, there was near-universal support and enthusiasm for a balanced budget amendment among advocates of limited government.

The support is still there, I’m guessing, but the enthusiasm is not nearly as intense.

There are three reasons for this drop.

  1. Political reality - There is zero chance that a balanced budget amendment would get the necessary two-thirds vote in both the House and Senate. And if that happened, by some miracle, it’s highly unlikely that it would get the necessary support for ratification in three-fourths of state legislatures.
  2. Unfavorable evidence from the states - According to the National Conference of State Legislatures, every state other than Vermont has some sort of balanced budget requirement. Yet those rules don’t prevent states like California, Illinois, Connecticut, and New York from adopting bad fiscal policy.
  3. Favorable evidence for the alternative approach of spending restraint - While balanced budget rules don’t seem to work very well, policies that explicitly restrain spending work very well. The data from Switzerland, Hong Kong, and Colorado is particularly persuasive.

Advocates of a balanced budget amendment have some good responses to these points. They explain that it’s right to push good policy, regardless of the political situation. Since I’m a strong advocate for a flat tax even though it isn’t likely to happen, I can’t argue with this logic.

Regarding the last two points, advocates explain that older versions of a balanced budget requirement simply required a supermajority for more debt, but newer versions also include a supermajority requirement to raise taxes. This means - at least indirectly - that the amendment actually is a vehicle for spending restraint.

The Spin Cycle: Accelerating Sea Level Rise

The Spin Cycle is a reoccurring feature based upon just how much the latest weather or climate story, policy pronouncement, or simply poo-bah blather spins the truth. Statements are given a rating between 1-5 spin cycles, with less cycles meaning less spin. For a more in-depth description, visit the inaugural edition.

A popular media story of the week was that sea level rise was accelerating and that this was worse than we thought. The stories were based on a new paper published in the journal Nature Climate Change by an author team led by the University of Tasmania’s Christopher Watson.

Watson and colleagues re-examined the satellite-based observations of sea level rise (available since the early 1990s) using a new methodology that supposedly better accounts for changes in the orbital altitude of the satellites—obviously a key factor when assessing sea levels by determining the height difference between the ocean’s surface and the satellites, the basic idea behind altimetry-based sea level measurements.

So far so good.

Their research produced two major findings, 1) their new adjusted measurements produced a lower rate of sea level rise than the old measurements (for the period 1993 to mid-2014), but 2) the rate of sea level rise was accelerating.

It was the latter that got all of the press.

But, it turns out, that in neither case, were the findings statistically significant at even the most basic levels used in scientific studies. Generally speaking, scientists report a findings as being “significant” if there is a less than 1-in-20 chance that the same result could have been produced by random (i.e., unexplained) processes. In some fields, the bar is set even higher (like 1 in 3.5 million). We can’t think of any scientific field that accepts a lower than a 1-in-20 threshold (although occasional individual papers do try to get away with applying a slightly lower standard).

Venezuela: World’s Highest Inflation Rate

Venezuela’s bolivar is collapsing. And as night follows day, Venezuela’s annual implied inflation rate is soaring. Last week, the annual inflation rate broke through the 500% level. It now stands at 510%.

When inflation rates are elevated, standard economic theory and reliable empirical techniques allow us to produce accurate inflation estimates. With free market exchange-rate data (usually black-market data), the inflation rate can be calculated. The principle of purchasing power parity (PPP), which links changes in exchange rates and changes in prices, allows for a reliable inflation estimate.

To calculate the inflation rate in Venezuela, all that is required is a rather straightforward application of a standard, time-tested economic theory (read: PPP). Using black-market exchange rate data that The Johns Hopkins-Cato Institute Troubled Currencies Project has collected over the past year, I estimate Venezuela’s current annual implied inflation rate to be 510%. This is the highest rate in the world. It’s well above the second-highest rate: Syria’s, which stands at 84%.

Venezuela has not always experienced punishing inflation rates. From 1950 through 1979, Venezuela’s average annual inflation rate remained in the single digits. It was not until the 1980s that Venezuela witnessed a double-digit average. And it was not until the 1990s that Venezuela’s average inflation rate exceeded that of the Latin American region. Today, Venezuela’s inflation rate is over the top (see the accompanying table).

Average Annual Inflation Rates

Meditations on Memorial Day

Benjamin Franklin said, “There never was a good war or a bad peace.” Given Franklin’s leadership in the struggle for American independence, we can infer that he did not think that there never was a war that was necessary, or a war that was worth its cost. But he reminds us that even necessary wars have terrible costs.

I thought about Franklin when I read an eloquent column on the meaning of Memorial Day by the novelist Mark Helprin, who is also a senior fellow at the Claremont Institute. He lamented:

Though if by and large we ignore the debt we owe to those who fell at Saratoga, Antietam, the Marne, the Pointe du Hoc, and a thousand other places and more, our lives and everything we value are the ledger in which it is indelibly recorded.

It’s a worthy sentiment, one heard frequently in Memorial Day addresses, and we do indeed owe our lives and our pursuit of happiness to the freedom that America’s soldiers have sometimes had to defend.

But I can’t help wondering: Have all of America’s wars have been necessary to American freedom? Helprin mentioned the Second Battle of the Marne, the great turning point of World War I and the first battle in which Americans started experiencing the enormous casualties that Europeans had been facing for nearly four years. The problem is that World War I was a catastrophe, a foolish and unnecessary war, a war of European potentates that both England and the United States could have stayed out of but that became indeed a World War, the Great War. In our own country, the war gave us economic planning, conscription, nationalization of the railroads, a sedition act, confiscatory income tax rates, and prohibition. Internationally, World War I and its conclusion led directly to the Bolshevik revolution, the rise of National Socialism, World War II, and the Cold War. World War I was the worst mistake of the 20th century, the mistake that set in motion all the tragedies of the century. The deaths of those who fell at the Marne are all the more tragic when we reflect that they did not in fact serve to protect our lives and all that we value.

Did the wars in Vietnam and Iraq protect American lives and liberties? Two weeks ago, Republican presidential contender Jeb Bush said that discussing whether the Iraq war was a mistake “does a disservice to a lot of people who sacrificed a lot.” It’s understandable that an aspiring commander-in-chief would want to spare the feelings of those who lost a loved one in Iraq. But surely it’s more important that a commander-in-chief ask tough questions about when it’s advisable to go to war.

In my book The Libertarian Mind, I wrote about the effects of war: not just death on a large scale but the destruction of families, businesses, and civil society. And thus:

War cannot be avoided at all costs, but it should be avoided wherever possible. Proposals to involve the United States—or any government—in foreign conflict should be treated with great skepticism….We should understand the consequences of war for our entire social order and thus go to war only when absolutely necessary.

On this weekend we should mourn those who went to war, such as my father, who planned and participated in the liberation of Europe, and his brother who was lost off the coast of Normandy, and we should resolve not to risk American lives in the future except when our vital national interests are at stake.

Four Lessons to Ponder Before Going to War

In about 30 seconds this morning on Fox News Sunday, George Will laid out the prudential case for proceeding very cautiously when contemplating a war:

WALLACE: So George, with that as trailer, what’s the lesson that we should take from Iraq, and particularly as it comes to future U.S. policy?

WILL: Four lessons, I think.

First, the government has to choose always on the basis of imperfect information. I agree with Bob [Woodward]. There were no lies here [in the Bush administration’s incorrect claims about WMD]. It was a colossal failure to know what we didn’t know.

Second, the failure to ask Admiral Yamamoto’s question. When he was asked by the government of Japan could he take a fleet stealthily across the Pacific and strike Pearl Harbor, he said yeah, but then what? He knew they would have on their hands an enormous problem in the United States.

Third, Colin Powell’s Pottery Barn rule: if you break it, you own it. Just as when the Kennedy administration in November 1963 was complicit in the coup against Diem, in South Vietnam, we owned South Vietnam ever after.

But fourth and most important, the phrase nation-building is as absurd as the phrase orchid building. Orchids are complex, organic things. So are nations. And we do not know how to build nations any more than we know how to fix English-speaking home grown Detroit. 

Is the Fed on Track?

That’s more-or-less the question that Bankrate.com asked Dean Baker, co-founder of the Center for Economic and Policy Research, and me after last month’s FOMC press release. Dean said yep. I said…uh, not really. Our full answers appeared recently in the online publication’s “Wealth of Opinions” column. There’s even a little poll at the end, allowing you to pick your favorite answer. Of course you don’t have to vote. It’s really entirely up to you. I mean, I’m not trying to pressure you or anything like that.

Honest.

No, really!

You Ought to Have a Look: The Case Against Modern Science

You Ought to Have a Look is a feature from the Center for the Study of Science posted by Patrick J. Michaels and Paul C. (“Chip”) Knappenberger. While this section will feature all of the areas of interest that we are emphasizing, the prominence of the climate issue is driving a tremendous amount of web traffic. Here we post a few of the best in recent days, along with our color commentary.

In this issue of You Ought to Have a Look, we focus on what we think is an extremely important article, written by Richard Horton, long-time editor of The Lancet—a British medical journal considered to be one of the world’s most prestigious.

Horton addresses what is increasingly becoming recognized as the biggest problem in modern science: an incentive system that promotes style (i.e., “attention grabbing”) over substance. The headlong pursuit of headlines is leading not only to sloppy science, but selective science. The result is that the course of human knowledge is being perturbed, and not for the better.

Horton’s comments are particularly salient as this week witnessed the retraction of another headline-grabbing paper in a prestigious journal.

Here, we reproduce the bulk of Horton’s essay in which he addresses “the idea that something has gone fundamentally wrong with one of our greatest human creations”:

The case against science is straightforward: much of the scientific literature, perhaps half, may simply be untrue. Afflicted by studies with small sample sizes, tiny effects, invalid exploratory analyses, and flagrant conflicts of interest, together with an obsession for pursuing fashionable trends of dubious importance, science has taken a turn towards darkness. As one participant put it, “poor methods get results”.The Academy of Medical Sciences, Medical Research Council, and Biotechnology and Biological Sciences Research Council have now put their reputational weight behind an investigation into these questionable research practices.The apparent endemicity of bad research behaviour is alarming. In their quest for telling a compelling story, scientists too often sculpt data to fit their preferred theory of the world. Or they retrofit hypotheses to fit their data.Journal editors deserve their fair share of criticism too. We aid and abet the worst behaviours. Our acquiescence to the impact factor fuels an unhealthy competition to win a place in a select few journals. Our love of “significance” pollutes the literature with many a statistical fairy-tale. We reject important confirmations. Journals are not the only miscreants. Universities are in a perpetual struggle for money and talent, endpoints that foster reductive metrics, such as high-impact publication. National assessment procedures, such as the Research Excellence Framework, incentivize bad practices. And individual scientists, including their most senior leaders, do little to alter a research culture that occasionally veers close to misconduct.

Can bad scientific practices be fixed? Part of the problem is that no-one is incentivised to be right. Instead, scientists are incentivised to be productive and innovative. Would a Hippocratic Oath for science help? Certainly don’t add more layers of research redtape. Instead of changing incentives, perhaps one could remove incentives altogether. Or insist on replicability statements in grant applications and research papers. Or emphasise collaboration, not competition. Or insist on preregistration of protocols. Or reward better pre- and post-publication peer review. Or improve research training and mentorship. Or implement the recommendations from our Series on increasing research value, published last year.One of the most convincing proposals came from outside the biomedical community. Tony Weidberg is a Professor of Particle Physics at Oxford. Following several high-profile errors, the particle physics community now invests great effort into intensive checking and rechecking of data prior to publication. By filtering results through independent working groups, physicists are encouraged to criticise. Good criticism is rewarded. The goal is a reliable result, and the incentives for scientists are aligned around this goal. Weidberg worried we set the bar for results in biomedicine far too low. In particle physics, significance is set at 5 sigma—a p value of 3 × 10–7 or 1 in 3.5 million (if the result is not true, this is the probability that the data would have been as extreme as they are). The conclusion of the symposium was that something must be done. Indeed, all seemed to agree that it was within our power to do that something. But as to precisely what to do or how to do it, there were no firm answers. Those who have the power to act seem to think somebody else should act first. And every positive action (eg, funding well-powered replications) has a counterargument (science will become less creative). The good news is that science is beginning to take some of its worst failings very seriously. The bad news is that nobody is ready to take the first step to clean up the system.

This issue is especially near and dear to our hearts at the Center for the Study of Science. For those interested in more on this topic (and we hope that is most of you), please see our recent Working Paper and various other writings and presentations.

This is an extremely important issue that is far from receiving the level of attention that it deserves.