State Budget Process Reform: New Rules Can’t Help What Also Troubles Minnesota

The idea is compelling and – based on recent history – sorely needed: “a series of reforms that will allow us to uphold our constitutional responsibility to end a Minnesota legislative session on time with a balanced budget.”  That’s the stated goal of the House Subcommittee on Legislative Process Reform as communicated by Chair Gene Pelowski.  The first of several interim meetings was held recently in order to identify potential changes to House rules, Senate rules, and joint rules; legislation; and even the possibility of a constitutional amendment to address the end-of-session process issues that have plagued recent legislative sessions.

The initial table-setting testimony by House Research staff on the state’s budgeting process focused on four public budgeting objectives – accuracy, transparency, efficiency and acceptability.  Their presentation brought into sharp relief not only how these objectives are often in tension with each other, but also how they present different demands and challenges in different areas of the general fund budget.  Assembling an acceptable package of process and rules reform to deliver this outcome is clearly not a simple task.  However, Minnesota’s recent budget history also shows that process problems are symptomatic of more fundamental challenges that will be even more difficult to address – especially during a period of divided government.

“The Law of Increased Government Spending”

Perhaps the biggest challenge facing this effort is the simple fact that state government budgets continue to get bigger and more complicated.  In the 19^th century German economist Adolph Wagner observed that the development and growth of industrial economies was accompanied by an increased share of public expenditure in gross national product.  “Wagner’s Law” (otherwise known as “the law of increased government spending”) is based on the idea that as incomes grow so will government budgets; for three primary reasons.

• Economic growth and technological advancement introduce societal complexity requiring the introduction and modification of laws and the development of legal, regulatory, and administrative structures to accommodate the increasing complexity.
• Industrialization and urbanization increase negative externalities such as pollution, congestion and crime, which require a wide variety of public spending and investments.
• Demand for state involvement in social welfare functions rises as income rises. 

Given the size and sophistication of the modern Minnesota economy, it shouldn’t be surprising that legislators introduced a record number of bills in 2019, taxing the legislature’s resources and bandwidth.  And as House Research staffers noted, as individual bills attempt to address the growing complexity of government, they themselves become more complex.  Omnibus budget bills have become highly detailed and lengthy -- now addressing policy matters as well as funding -- and are frequently full of interactive effects between government programs.  It’s not clear to what extent budget process reforms can effectively remedy these and other stresses modern society has injected into government budgeting.  For example, limiting the number of bills a legislator may introduce, a strategy referenced in the hearing, might reduce the volume of proposed legislation to a more manageable level but the inherent complexity of what that legislation addresses would remain unchanged.

Ironically, since 2017 there has been a push in the opposite direction – to add to process demands to better understand the interactive effects and consequences of state budget decisions.  In both the 2017 and 2019 sessions, legislators proposed to establish “disparity impact analyses.”  Among other things, this idea would require each change item in the governor's budget proposal requesting new or increased funding to include, “a succinct analysis of whether the new or increased funding is likely to increase or decrease disparities.”  The measure goes on to define “disparities” as “differences in economic, employment, health, education, or public safety outcomes between the state population as a whole and subgroups of the population defined by race, gender, and geography.”  The word “succinct” might be the most incongruous and incompatible adjective imaginable to describe such an undertaking.  As well-meaning as this proposal may be, as we have noted in Legislative Spotlight, it would potentially be “one of the most effective ways ever invented to throw sand into the gears of the legislative process.”

The Result of Unhealthy Competition

Given ever-increasing complexity, a timely, transparent, and efficient budgeting process is difficult even if everyone is on the same political page.  Throw in divided government and you have the recipe for special sessions and all the transparency and accountability complaints marking recent state budgeting efforts.  However, an academic analysis we have run across may shed some light on the more fundamental issues lurking behind the scenes.  Whether one agrees with this analysis and its conclusions or not, the material deserves to be part of the debate.

In “Why Competition in the Politics Industry is Failing America” Michael Porter, Director of the Harvard Institute for Strategy and Competitiveness, argues it doesn’t have to be this way.  Budget and policy decisions reconciling diverse belief systems about government will always be difficult, but Porter argues it’s the unhealthy competitive structure of the “political industry” that turns challenges into unproductive impasses and exclusionary, unaccountable decision-making that is often unresponsive to the public interest.  Competition normally results in better ways to meet the needs and interests of customers.  In politics, the nature of competition in the “industry” keeps that from happening.

Porter takes his approach to analyzing competitive structure, used by business school students everywhere in studying industries ranging from steel manufacturing to software development, and applies it to the world of politics.  He argues we should understand politics as an “industry” in which most of the key players are private gain-seeking organizations instead of unique public institutions governed by impartial laws.  Like any other industry, participants in the political industry compete to grow and accumulate resources and influence.  (It’s worth noting that the benefits of competition and the recognition that various stakeholders in government routinely work to advance self-interest -- and not necessarily the public interest -- were central ideas to the Brandl-Weber “Agenda for Reform” report delivered to Governor Carlson 25 years ago.)  But unlike any other industry, the political industry self regulates and controls the rules of competition.

Politics in America, he argues, “is a textbook example of a duopoly” – an industry dominated by two entrenched players.  Duopolies tend to “compete” based on differentiation and enhancing the loyalty of their core and most valuable customers, since the limited choices for their less-valuable customers significantly lessens their competitive vulnerability.  Applying his “five factors analysis,” he observes the political industry suffers from unhealthy competition making legislative stalemates and deadline decisions by a tiny handful of people an expected and logical outcome:

• Buyers – In serving the public interest, the political system’s customers should be all citizens.  But customer power – the ability to affect outcomes – differs among segments.  In the political industry, customer power resides primarily with three of the five customer segments – primary partisan voters, donors, and special interests – and the duopoly prioritizes these segments.  Competition for the fourth segment – average voters – centers on being less disliked than, or slightly preferred to, the alternative.  The fifth segment, non-voters, have already ceded their customer power to the duopoly.

• Channels – The mechanisms an industry uses to reach customers should help them better understand different products and services.  Independent channels can play a powerful role in influencing and informing consumer choices and improving the quality of competition.  However, in the political industry, the duopoly co-opts the primary distribution channels -- paid advertising, social media, and direct voter contact.  The fourth – independent media – increasingly sees a financial benefit from the partisan competition the duopoly’s conflict creates.

• Suppliers – By providing inputs, suppliers improve products and efficiency.  In the political industry suppliers, which include specialized talent, voter data suppliers, and idea suppliers, are controlled by the duopoly. The primary political industry input, candidates themselves, must rely heavily on this duopoly-controlled supplier infrastructure.

• Threat of New Entrants – Huge barriers to entry exist in the political industry in the form of economies of scale, brand recognition, supplier and channel access, access to funding, and the positioning of third-party competitors as “spoilers” or “wasted votes.”  Moreover, in the winner take all nature of election competition, a non-plurality share of votes creates no influence or position on which to build.

• Substitutes – Industries often must respond to entirely new forms of competition creating greater service or value for customers.  Disrupting or reshaping the political industry is constrained by the fact that there is only one government structure.

It is important to realize, Porter argues, that when competitors in any industry have market power, the nature of competition can and will diverge from customers’ interests.  In a duopoly rivals understand that while they compete, they both benefit from an attractive industry as defined from their perspective – one that strengthens and reinforces their way of competing (differentiation), while limiting the power of suppliers and customers and preserving high barriers to entry.  And according to Porter, avoiding compromise is an important competitive strategy employed to enhance differentiation.  In other words, compromise isn’t in the duopoly’s competitive interest.

Imagine There’s No Parties (It’s Not Easy if You Try)

"Let me now...warn you in the most solemn manner against the baneful effects of the spirit of party generally."  George Washington

All this is a very academic and wonky way of trying to explain recent trends in politics – increasing polarization, greater control of respective parties by their ideological wings, influence of money and special interests, stalemates, etc.  One logical conclusion of Porter’s argument is that process reform, such as that being pursued by the Minnesota House’s reform subcommittee, will have an inherently limited impact without a broader restructuring of the nature of competition itself in the political industry.  Rewriting legislative rules and restructuring the governing process is a necessary and essential component of any action plan but needs to be complemented by other reforms.  Some of Porter’s recommendations in this area are predictable (strategies for reforming money in politics), and some have been tried here and failed (strategies for creating a political centrist infrastructure).

His most provocative recommendation involves restructuring the election process itself by instituting “top four” non-partisan primaries followed by ranked choice general election voting with instant runoffs.  Calling the partisan primary system “the single most powerful obstacle to achieving outcomes for the common good,” Porter advocates for a single primary ballot for all candidates open to all voters.  The top four would advance to the general election employing ranked choice voting, ensuring the winning candidate receives a majority of voter support.  He argues this accomplishes several important objectives toward improving the quality of political competition and the beneficial results that flow from it:

• Incentivizes all candidates to present themselves to a general electorate, not just partisan voters from one party
• Lowers barriers to access for both independents and candidates not adhering in full to a party’s orthodoxy
• Encourages legislators to build records of “getting things done”
• Eliminates “spoiler” concerns
• Encourages a focus on issues and reduces incentives for negative campaigning

Perhaps nothing so radical like this is necessary.  Perhaps Minnesota’s good government ethic, combined with a package of thoughtful process reforms, will prove sufficient to address the increasing complexity state government throws at lawmakers each year, while addressing the problematic features of recent session endings. 

Regardless, the latter is probably what we should be banking on because competitive reforms represent an earthquake and would be very unpopular for the current political industry.  For example, last year bills were introduced in both the House and Senate to prohibit using ranked choice voting anywhere in the state – notably with bipartisan sponsorship.

With regards to this particular process reform, agreement across party lines appears to be much less of a problem.