Over the last few months, all of the most important public policy stories had one thing in common: they were tied to budgets. We’ve talked about topics like the proposed child tax credit, funding for state parks, child care, and even federal budget topics such as Medicaid cuts.
It can feel like the budget season is the only time policymakers make meaningful decisions, and there is a good reason for this. Public policy is somewhat of a blunt instrument. Policymakers have some capacity to change incentives, but changing the way people interact with each other is extremely hard.
The best tool policymakers have at their disposal is their ability to move resources around the economy. Their ability to raise and lower taxes and determine what programs do or do not receive those tax dollars is unbelievably powerful and has a huge impact on the way people live their lives.
As an analyst, this creates a disconnect. In most cases, our policy analyses are based around the concept of an “average” outcome. For example, if you increase taxes on cigarettes, then people will on average smoke less.
When we simplify this in our models to determine how much less people smoke, we usually assume that all smokers will experience a very slight decrease in smoking. What happens in practice is that a few individuals will likely have large changes to their behavior, while most will just face the higher prices. The overall impact is the same, so this isn’t an issue for an analyst.
However, this is a major issue for policymakers. A policymaker doesn’t deal with an “average” constituent. They represent real people who have preferences that differ from the averages.
This means that when policymakers cast their votes, they are not necessarily making a decision based on what is good for the most people, they are making a decision based on what is good for the people they represent.
Ideally, this should still lead to overall positive results for society. This assumes that representatives are a weighted average of the people they represent. However, in a world of increasingly polarized party politics, this is less likely to happen.
Because of the importance the budget has in shaping public policy, policymakers are incentivised to get as much done as possible to advance their agendas. When one party has a majority, they essentially have the power to ignore the preferences of those who did not vote for them.
From an economic perspective, this creates a social inefficiency because decisions are being made not to maximize everyone’s well-being, but only that of a select group of voters. In a mathematical sense, this is equivalent to using an incorrect willingness to pay figure.
One way policymakers could try to avoid this pitfall is by adopting consensus budgeting as the main way budgets are created. Consensus budgeting a way of adopting budgets where the goal is not for policymakers to try and advance their own agendas as much as possible, but rather to submit a budget that attempts to maximize compromise, preferring average outcomes that leave the fewest people dissatisfied over majority opinions that some people strongly prefer and others strongly dislike.
If stakeholders from different corners of society are worked into the budgeting process, then we should expect the final decision to much more closely reflect the desires of the whole society rather than just those who support the party in power.
To better align public spending with the diverse needs of society, policymakers can change the way budgets are negotiated and approved. Policy analysts can sometimes get too wrapped up in the world of averages the fact that real people have preferences different from the averages. Still, we may all be better off if policymakers made more efforts to realize that their constituents only represent a part of a larger community, and that people have other priorities that should be taken into consideration.