Can Understanding Cognitive Bias Improve the Federal Budget Process?

Forthcoming in Public Budgeting & Finance is an interesting essay by Marvin Phaup (Trachtenberg School – George Washington University) on “Budgeting for Mandatory Spending: Prologue to Reform.” Phaup points out that many features of the federal budget process currently plays into well known human biases:

Specifically, use of cash‐basis accounting, on‐budget payment accounts, and a narrow definition of debt defers recognition of the cost of mandatory spending until benefits are payable and politically unavoidable. Acting to control “future” costs is cognitively more difficult for decision‐makers than addressing cost now as obligated.

and:

From an accounting perspective, the current process fails to support budgeting for mandatory spending because of the failure to recognize cost when it is controllable at the decision to incur it. Instead current accounting recognizes cost only when payments are made to or on behalf of beneficiaries, that is, when non‐payment would be a grievous breach of acceptable norms of behavior. Simply, current accounting gives prominence in the budget process to a politically sunk, unavoidable measure of cost.

Phaup works through several examples in detail from several mandatory programs, then  in my favorite section reassesses the defense of the current practice with several sharply worded observations. E.g.:

Current budgetary accounting for mandatory spending is often defended on grounds of consistency with the absence of a constitutionally protected right to benefits, if current law were to be changed. That is, elected policymakers could change the law at any time and terminate benefits, including for those already receiving payments. A Supreme Court decision upholding a legislative revocation of benefits is frequently cited to support this position. According to this view, the budget properly delays recognition of current law mandatory obligations until government forgoes exercise of its option to terminate and makes payment.

However, for most budget purposes, for example, baselines, cost estimates, the maintained assumption is the precise opposite: that current law spending continues indefinitely. Only when the law is changed is this assumption extended to the new statute.

Phaup argues that the long term costs of these program should be made more salient by substituting existing arbitrary assumptions (e.g. that the government will pay no future benefits) to arbitrary-but-more-politically-realistic assumptions (e.g. benefits accumulated prior to a change in current law will still be paid). He proposes a few of these plausible assumptions and depicts how they would be scored or provided to policy makers under the three programs examined. Generally the fiscal sustainability of these programs is more alarming than under current policy [see Table 3].

The essay concludes with some anticipated critiques and how they might be accommodated. For instance, if the goal is to eliminate on previously promised benefits (contra previous norms and practices), then this accounting change would make that more difficult. But of course there is no obvious neutral way to do this, a default must be chosen, and we consequently can’t avoid some implicit policy setting with our accounting rules.

I think another reaction one might have is that the budget process is in some sense purposefully myopic because that is what the political equilibrium selects on. But that is probably an overattribution of human will to something of human design. The current approach probably has arbitrary features that continue to survive because there is nothing in the political competition to attack the bias. In the private sector, poor accounting methods can lead to business exit via poor prices and misallocated inputs; I’ve never seen a candidate try to win voters with changes to accounting practices in the federal budget. While our budget deficit inclinations are probably mostly determined by politics, if simple reforms like these improved our long-term standing by even a small percentage then they’d probably be worth trying out.

One thought on “Can Understanding Cognitive Bias Improve the Federal Budget Process?

  1. I have to bring up Rudy Penner’s great observation about budget deficits here: “The process is not the problem. The problem is the problem.” Marvin is technically right, but it probably doesn’t matter.

    Like

Leave a Reply to John Mikesell Cancel reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s