February 26, 2015

Politics and Policy: An Overview

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In an era when fiscal irresponsibility in state governments often makes the news, led by big-government, high-income states like California[1] and Illinois,[2] there are ready explanations for fiscal irresponsibility. One cannot say that California and Illinois, as examples, are too poor to afford the governments that other states have. These high-income states have, through a democratic decision-making process, made spending commitments that strain their capacity to finance them. The problem is not too little money, but rather too little government restraint in committing to present and future expenditures. An understanding of the political decision-making process helps illuminate the reasons why governments are prone to promise more than they can afford. The bottom line is that citizens want government to provide them with benefits, but they don’t want government to tax them to pay for those benefits.

Depicting government as a decision maker is an oversimplification because governments do not make decisions; individuals do. To really understand the process of government decision making, one has to understand the incentives of all the individual decision makers within the democratic process. While it is true that elected officials have an incentive to promise more than they can deliver, they can only do this if voters buy into those promises and support those elected officials. Consider the incentives for voters.

Voters have little incentive to become informed when they vote in general elections. They often vote to express support for a general viewpoint on government rather than as a judgment on the merits of particular policies.[3] People who think government should do more to help people, to preserve the environment, or to provide a good educational system will tend to vote for candidates who express similar viewpoints, regardless of whether the specific policies they advocate can accomplish those goals—and typically campaign platforms are not specific policies at all but expressions of aspirations for desirable outcomes, because that is the type of platform that motivates voters.[4] Politicians’ campaign platforms are not backed by warranties, like goods sold in the market. Yet often, when voters cast their expressive votes in favor of people who want good outcomes but whose policies do not produce them, voters will go right back to the polls and vote for them again, hoping for a better outcome next time around.

Casting a vote is not like buying something in a store. When customers buy something, they exchange money for a good. If a customer later decides the good is not worth the money, it is too late because he or she has already paid the price—so a wise customer will learn about a good before purchasing it. Voters, on the other hand, know their votes are unlikely to be decisive. The outcome of an election will be the same regardless of how they cast their one vote, so voters will not be as informed as customers in a market, and they may vote for vague promises and aspirations rather than concrete policies. Indeed, because of this, most political platforms do not consist of concrete policies; rather they are a list of goals the candidate believes voters will support.

One place this dynamic has played a role is in Florida’s constitutional amendment process. Florida’s constitution has seen some questionable amendments, which may be because voters are often uninformed and because they often vote expressively for ideas that sound good rather than for actual policies that can make them better off. When one recognizes the incentives for voters, serious questions arise about the desirability of having voters determine whether particular public policies should be implemented. Throughout this study, several constitutional amendments will be discussed that illustrate this point.

Because voters tend to favor elected officials who promise them benefits but do not like elected officials to tax them to pay for those benefits, government policies are often shortsighted. Unfunded pension liabilities are a good example. Legislators may vote to offer generous pensions to public employees, promising them a benefit now that will be financed by costs that will only come in the future. Politically, it is easier to do this than it is to promise a generous pension now and start setting aside money to pay for it now. Current officials get credit for the benefits they provide to current state workers, but the costs in terms of unfunded liabilities will land in the laps of future officials.[5]

States with the largest unfunded pension liabilities are also states that have the highest levels of state government spending, providing some evidence that unfunded liabilities are growing to finance current expenditures.[6] These states shift the cost of current benefits onto future taxpayers, a practice that has gone on long enough that those future costs are hitting many state governments now. Florida makes an interesting case study here because it has managed to limit its unfunded pension liabilities more than most states. Florida is fourth-lowest among the states in unfunded liabilities and at the very bottom in unfunded pension liabilities.[7] The Pew Center on the States says Florida “consistently has funded its actuarially required contribution and follows conservative policies in managing its obligations.”[8]

While Florida has avoided shortsighted policies in managing its state pension system, this has not been true for all its government policies. The state is exposed to a substantial liability because of its ownership of the state’s largest homeowners insurance company. In 2006, it was easy, but shortsighted, to promise homeowners lower insurance rates by expanding the state’s coverage with a cost that would only come due in a future year with major hurricanes. The state’s taxpayers have been fortunate that no hurricanes have made landfall in Florida since 2006, but history shows that such a long span between hurricanes is anomalous. Florida’s land use policies also have often been driven by feel-good legislation that has been inadequate to accomplish the long-run goals voters had hoped for when the laws were passed. The legislature promised policy outcomes that voters desired, but the legislation they passed did not accomplish those outcomes. These actions raise the question why Florida has managed to avoid shortsighted policies in some areas but adopted them in others.

One answer is that interest group politics plays a substantial role in public policymaking, as evident in a number of areas, including Florida’s insurance market and land use policies. Concentrated interests are often able to steer public policy to favor them over the general public, which is one factor that leads public policies to sometimes work at odds with the public interest.[9]

Another problem with government expenditures more generally is that there is no good way to weigh the cost of a program against the benefits it provides for citizens. With market transactions, every time customers make purchases they are demonstrating their belief that the benefit of what they have purchased exceeds the cost; otherwise they would not make the purchases. If individuals miscalculate and regret a purchase later, they bear the cost, which serves as a lesson to be more careful next time. Most government output is not sold, however, so the beneficiaries of government programs never weigh the benefits against the cost. As long as the benefit is greater than zero, people will use those programs. There is no market test that can assure people that the benefit of any specific government expenditure exceeds the cost.[10]

While governments often undertake benefit-cost analyses to try to estimate whether the benefits of programs are greater than their cost, those estimates are inevitably inaccurate measures of the benefits because there is no way for analysts to know the true value of the benefits. This is the knowledge problem that faces government: without market prices, the value of government output can never be known for sure. Because of the knowledge problem, special interests can overstate the value of the benefits they receive, and their concentrated political power is often sufficient to steer benefits their way at a cost to the general public. Special interests well understand the benefits they get, while the general public is not well-equipped to recognize the costs imposed on them for the benefit of special interests.

Ultimately, public policy decisions are made based on the political power of those who favor them, and frequently the result is policies that are shortsighted, that favor special interests, and that often are inefficient because, without market prices, there is no good measure of their value. These issues are reasons why a reliance on markets and private-sector activity leads to greater prosperity than a reliance on government. But in cases where people perceive problems with a reliance on markets, there is a demand for government activity.

Most Americans say they favor a market economy and a capitalist economic system, but they also say there is a need for government to support and regulate the market and to provide some specific goods and services. There is popular support for government courts and law enforcement, roads and other infrastructure, schools, and more. Recognizing potential problems that can arise in the absence of government, there is strong democratic support for government taxes and expenditures. But, as just noted, there are problems with government programs too. Florida has not avoided these problems entirely, but it appears to have dealt with them better than most states, so in this context it is worth reviewing Florida’s fiscal history to see how.

Florida’s Term-Limited Legislature

One factor that may have played a role is legislative term limits. In 1992 Florida’s voters approved a constitutional amendment limiting state officeholders to eight years in an elected office. After the eight-year limit, the officeholder is prohibited from appearing on the ballot for that office in the next election. This severely limits the ability of state legislators to become career politicians, which can have two effects that point toward fiscal conservatism.[1] First, politicians have less of an incentive to favor legislation that is designed to build political support, because they know their political careers are term-limited in any event. Second, term limits may affect the type of person who runs for statewide office because the elected office cannot turn into a permanent job.

Term limits do not necessarily end an officeholder’s political career, of course, because the officeholder can run for another office once the term limit is reached. But term limits will end most political careers because the opportunities for advancement are limited. Florida’s House of Representatives has 120 members; its Senate has only 40. Most representatives, therefore, cannot move to the Senate. Opportunities to move to the US Congress are even more limited, partly because there are fewer seats (Florida has 25 representatives in the US House of Representatives) and partly because those federal offices are not term-limited and incumbents are almost always reelected. One effect of term limits might be that people who run for elected office are less interested in their own careers and more interested in furthering public policy that conforms to their vision of the public interest.[2] Most members of the legislature will be out of office in a few years because of term limits, and will be subject to the laws they have passed when in office. Looking at the fiscal responsibility that characterizes Florida—compared to many other states, at least—the conjecture that term limits has had an effect has an intuitive appeal. The legislature and governor’s office have been dominated by self-proclaimed fiscal conservatives in recent decades, and they have been fiscally responsible in their budgetary decisions.

Readers should be reluctant to uncritically accept the hypothesis that Florida’s fiscal conservatism is a by-product of term limits, but some evidence does point in that direction. It does appear that the term limits that have been in place for more than a decade have coincided with a leveling out in state expenditure growth, as figures shown in the tables below illustrate. It is plausible that term limits have had the effect of keeping the state from pursuing the fiscally irresponsible policies that characterize many other states, but the topic needs further research.[3]

Amending Florida’s Constitution

Differences in the institutional structures of governments can make a difference in the types of policies and programs they implement. One institution that has influenced public policy in Florida is the constitutional amendment process. Florida’s constitution allows several methods of proposing an amendment, including by the legislature, through a citizen initiative, and by a commission. There is little restriction on the content of amendments that can be added to the constitution. For example, amendments have specified the minimum size of pens for pregnant pigs in Florida and the types of nets that can be used for fishing in Florida’s waters, and have mandated that Florida build a high-speed rail network linking its largest cities (this mandate was later repealed by another amendment). All appropriately proposed amendments, regardless of their origin, must be presented to the voters and require 60 percent approval to be added to the constitution.[4] 

Often, the legislature’s motivation for putting amendments on the ballot is popular demand. One reason the legislature may respond to popular demand and put an amendment on the ballot is that the legislation can preempt a citizen initiative attempt, with provisions that are more favorable to those in the legislature. One example is Florida’s constitutionally mandated revenue limitation, which was put on the ballot by the legislature and approved by the voters in 1994. A citizen group had announced its intention to collect signatures to put a revenue limitation on the ballot. This action prompted the legislature to design its own revenue-limitation amendment, which led the citizen group to drop its attempt. The legislature’s constitutional revenue limitation was much weaker than the one discussed by the citizen group, so although the state does have a constitutional cap on state revenues, the cap has grown faster than the actual budget and the cap has never been binding.[5] The weaker legislative amendment preempted the citizen initiative, but it is likely that the legislature would not have acted at all were it not for the threat of the citizen initiative.

The citizen initiative was implemented with the new Florida constitution adopted in 1968. To put a citizen initiative amendment on the ballot, it must receive voter signatures equal to 8 percent of the votes cast in half of the state’s congressional districts in the preceding presidential election and also 8 percent of the total votes cast statewide. The bar is fairly high, but several citizen initiative amendments do appear every two years. That high bar explains why amendments proposed by the legislature can sometimes preempt attempts to move forward with a citizen initiative.

Florida’s constitution also specifies that every 20 years a Constitutional Revision Commission will be formed with members appointed by the governor, the Speaker of the House, and the President of the Senate. That commission can also place amendments on the ballot. In addition, a Taxation and Budget Reform Commission is formed every 20 years, appointed by the same elected officials and empowered to place amendments related to tax and budget items on the ballot. The two commissions are staggered so that one or the other meets every ten years. The Constitutional Revision Commission was established in Florida’s new 1968 constitution, and the Taxation and Budget Reform Commission was created by a constitutional amendment placed on the ballot by the legislature in 1988.

Members of both these commissions are appointed by elected officials, but members of the Taxation and Budget Reform Commission may not be elected officials themselves. This commission was constituted this way to insulate it from direct pressure from voters. While politicians do not announce their strategies explicitly, one reasonable conclusion is that the Taxation and Budget Reform Commission was established to try to amend Florida’s constitution to allow personal income taxation. Personal income taxation is prohibited by Florida’s constitution, and it would be enough of a political lightning rod that elected officials would avoid proposing it. The legislature would not place such an amendment on the ballot, for example, and the Constitutional Revision Commission might shy away from it too, if its membership included elected officials. The thought was that a commission composed of people who were not elected officials could ignore the preferences of the voters and place an amendment on the ballot to allow personal income taxation. So the Taxation and Budget Reform Commission was created even though the similar Constitutional Revision Commission was already a part of the constitution.

In practice, the income tax has not been proposed, and ironically, those who support personal income taxation have worked to keep it off the ballot while those who are opposed have not objected to having an amendment on the ballot. Why? Voters would certainly vote against it, and the proponents of a personal income tax do not want to see an income tax amendment soundly defeated while the opponents of it do.

Because Florida’s constitution has so many avenues for amendment, and because there is little restriction on the contents of the amendments, many items end up in Florida’s constitution that are really policy issues rather than constitutional issues. This can have the effect of constraining the legislature: if a powerful interest with sufficient financial backing to collect enough signatures wants to implement a policy and the legislature resists, the group can try to amend the constitution. That is how pig pens, fishing nets, and high-speed rail got into the constitution, along with property tax limitations (which are actually a constitutional constraint on government’s ability to tax). A citizen initiative amendment to legalize medical marijuana was narrowly defeated in November 2014, pushing the legislature to consider the issue in the 2015 session.

The Division of Political Power

Another institutional factor that may come into play in Florida is that political power in the legislature is heavily concentrated in the Speaker of the House and the President of the Senate. Compared to the US Congress, for example, the Florida leaders have much more power relative to the other members of the legislature. The President and Speaker have complete control of the legislative agendas in their chambers, so members can only get their proposed legislation heard if the President or Speaker agrees. Technically, all employees in the House are employees of the Speaker and all employees in the Senate are employees of the President. It has happened in the past that a chamber leader has fired members of a legislator’s staff in retribution for a vote that the chamber leader did not approve.

The result of this concentration of power is that individual members have less of an ability to promote legislation on their own compared with legislators in the US Congress. This institutional difference may limit passage of special-interest legislation in Florida (although there is still plenty of special-interest legislation introduced). At a minimum, it steers legislation toward the preferences of the Speaker and President.

As mentioned earlier, both chambers of the Florida legislature have term limits. Since the creation of term limits, the chambers have chosen a President and Speaker to serve for two years from among members who are beginning their final two years before their term limits. This means that the leaders of each chamber have already served for six years in their chambers before rising to lead, and know they will not be eligible for reelection to the same office. This arrangement removes incentives to promote legislation in order to gain support for reelection and it may be a factor in the fiscally responsible decisions made in the legislature for the past few decades.

[1] Evidence on this point is mixed. Dale Bails and Margie Tieslau find that legislative term limits reduce expenditures in “The Impact of Fiscal Constitutions on State and Local Expenditures,” Cato Journal 20, no. 2 (2000): 255–77; while Abbie Erler finds that term limits increase expenditures in “Legislative Term Limits and State Spending,” Public Choice 133, nos. 3/4 (December 2007): 479–94. Jeff Cummins finds mixed results in “The Effects of Legislative Term Limits on State Fiscal Conditions,” American Politics Research 41, no. 3 (May 2013): 417–42. For an overview of institutional effects on state expenditures, see Matthew Mitchell and Nick Tuszynski, “Institutions and State Spending: An Overview” (Working Paper No. 11-39, Mercatus Center at George Mason University, Arlington, VA, October 2011), https://www.mercatus.org/publication/institutions-and-state-spending.

[2] See John M. Carey, Richard G. Niemi, and Lynda W. Powell, Term Limits in the State Legislatures (Ann Arbor: University of Michigan Press, 2000); and Michael Smart and Daniel M. Sturm, Term Limits and Electoral Accountability (London: Center for Economic Performance, London School of Economics, 2006).

[3] Florida is one of 15 states that have term limits for their legislatures. The others are Maine, California, Colorado, Arkansas, Michigan, Ohio, South Dakota, Montana, Arizona, Missouri, Oklahoma, Nebraska, Louisiana, and Nevada.

[4] The requirement of 60 percent approval of the voters is itself a result of an amendment that increased the threshold for approval from 50 percent.

[5] I have analyzed this issue in Randall G. Holcombe, “Tax and Expenditure Limitations: Issues for Florida” (Policy Report No. 32, James Madison Institute, April 2001). Florida is not unique in having a tax or expenditure limit that has no effect. Ronald J. Shadbegian argues that, in general, these limits are ineffective in “Do Tax and Expenditure Limitations Affect the Size and Growth of State Government?,” Contemporary Economic Policy 14, no. 1 (January 1996): 22–35.

[6] Jessica Calefati, “California’s ‘Wall of Debt’ Is Only a Slice of the Problem,” San Jose Mercury News, January 26, 2014, www.mercurynews.com/california/ci_24998205/californias-wall-debt-is-only-slice-its-liability.

[7] “Illinois’ Unfunded Pension Liability Rose in FY 2013–14 Report,” Reuters, December 4, 2013.

[8] The idea that voters have little incentive to become informed, and so are often rationally ignorant regarding candidates and policies, is discussed by Anthony Downs in An Economic Theory of Democracy (New York: Harper & Row, 1957). Geoffrey Brennan and Loren Lomasky discuss expressive voting in Democracy and Decision: The Pure Theory of Electoral Preference (Cambridge: Cambridge University Press, 1993).

[9] See Downs, Economic Theory of Democracy. Brennan and Lomasky explain that voters often cast ballots to express preferences for general ideas and preferences for desirable outcomes rather than specific policies that can actually accomplish those outcomes in Democracy and Decision. Bryan Caplan takes that argument a step further to explain why voters often make their voting decisions based on irrational beliefs in The Myth of the Rational Voter (Princeton: Princeton University Press, 2007).

[10] For a discussion of the potential problems associated with states’ unfunded liabilities, see H. P. Brixi, “Government Contingent Liabilities: A Hidden Risk to Fiscal Stability,” Journal of Public Budgeting, Accounting & Financial Management 13, no. 4 (2001): 582–623.

[11] See Cynthia A. Sneed and John E. Sneed, “Unfunded Pension Obligations as a Source of Fiscal Illusion for State Governments,” Journal of Public Budgeting, Accounting & Financial Management 9, no. 1 (Spring 1997): 5–20. States with the highest levels of expenditures are also the states that have tended to run into the more substantial fiscal difficulties. Sharon N. Kioko, “Reporting on the Financial Condition of the States: 2002–2010,” Journal of Public Budgeting, Accounting & Financial Management 25, no. 1 (Spring 2013): 165–98.

[12] John Hood, “The States in Crisis,” National Affairs 6 (Winter 2011): 58–59.

[13] The Trillion Dollar Gap: Underfunded State Retirement Systems and the Roads to Reform (Washington, DC: Pew Center on the States, 2010), 40, http://www.pewtrusts.org/en/research-and-analysis/reports/2010/02/10/the-trillion-dollar-gap.

[14] This idea was explained well by Mancur Olson, The Logic of Collective Action: Public Goods and the Theory of Groups (Cambridge: Harvard University Press, 1965).

[15] A theoretical foundation for these ideas can be found in Ludwig von Mises, Economic Calculation in the Socialist Commonwealth (Auburn, AL: Mises Institute, 1990); Friedrich A. Hayek, “The Use of Knowledge in Society,” American Economic Review 35, no. 4 (September 1945): 519–30; and Israel M. Kirzner, Discovery and the Capitalist Process (Chicago: University of Chicago Press, 1985).