Friday, June 21, 2024

The economic case for expanding the scope of reconciliation

By Josh Bivens
Economic Policy Institute

The Republicans having a razor-thin majority in the House and Democrats with a slim majority in the Senate, it should, in theory, be possible to pass broadly popular legislation.
In practice, however, the senate filibuster requirement for a sixty-vote supermajority, has made it radically more difficult for even significant Senate majorities to move legislation.
The budget reconciliation senate procedure, does, however, provide a limited end run around the filibuster to allow a certain subset of legislation to pass with a simple majority.

One feature of the reconciliation process—the so-called Byrd Rule—limits its scope to budget-related measures. However, the criteria for what types of bills should or should not be allowed to proceed under the Byrd Rule is highly subjective.

While the most direct way to restore majority rule and break gridlock in the U.S. Senate is to abolish the filibuster, short of that, one could still allow a simple majority to pass a broader range of legislation by expanding the scope of what is allowed to proceed under the expedited rules of reconciliation. While this is a suboptimal path, it would be far better than the status quo.


Josh Bivens (Economic Policy Institute)

In this report, we argue that the criteria currently interpreted as dictating what legislation can proceed under the auspices of reconciliation are arbitrary, incoherent, and outright damaging. Given this, the carve-out from the filibuster’s reach offered to (some) fiscal measures in the Senate under the current rules of reconciliation has no particular logic and protects far too few potentially popular legislative proposals from Senate gridlock.
To resolve these problems, the Senate should either abolish the filibuster for the vast majority of legislation, or, second best, greatly expand the scope of reconciliation to allow more pieces of legislation to pass than in earlier periods.

Our argument rests on the following points: the perception that the federal budget changes have bigger impacts on the economy than other legislation. The history of the budget reconciliation process and the Byrd Rule strongly suggests that they were instituted in response to this perception. However, many legislative changes that older conventional wisdom would have put outside the bounds of budget reconciliation have profound effects in shaping the trajectory and distribution of economic growth. Given this, there is no reason, even on narrow economic grounds, to privilege budget-related rules over other rules that affect economic outcomes.

The Byrd Rule’s explicit bias toward deficit reduction has not proved useful even for the narrow goal of reducing deficits. Narrow Republican majorities have been able to game the rule to allow large, sustained regressive tax cuts to pass in the past 20 years and have, in turn, increased budget deficits substantially.

The goal of always biasing policy toward deficit reduction is itself misguided. Sometimes deficits should be made smaller to foster economic growth, while sometimes, they should be made larger. For most of the past three decades, the U.S. economy has faced chronic shortfalls of aggregate demand relative to productive capacity. These shortfalls are sometimes labeled “secular stagnation,” meaning larger deficits would have been useful over that time. The past two years have seen evidence of a demand shortfall fade away, but it is possible that the longer-run trend of secular stagnation will reassert itself before too long.

To achieve smaller deficits while also providing a counter to chronic shortfalls in demand, it makes sense to allow a broader range of measures—including nonbudgetary measures that would boost aggregate demand—to pass under the Byrd Rule.

The most obvious drawback to expanding the scope of reconciliation is that it compacts much of an entire year’s legislative agenda into a single vehicle. This potentially short-circuits a thoughtful policymaking process around each individual plank of a reconciliation bill and could lead to poorly crafted bills. Crucially, however, the drawbacks of the reconciliation process have minimal impact on policies that are straightforward, like increases in the federal minimum wage or labor law reform.

Today’s budget reconciliation process came about with the Congressional Budget Act (CBA) of 1974 and the “Byrd Rule” in 1985. Before 1974, the filibuster could be applied to budget bills in the U.S. Senate. The act changed the federal budgeting process, shifting power for budgetary decision making away from the executive branch and toward Congress. One key impediment to Congress asserting more influence in the budget-making and enforcement process was a minority’s ability to filibuster budget-related bills and hence cause legislative gridlock.

Between 1974 and 1985, the new fast-track procedure to pass bills that could not be filibustered eroded the super majoritarian norms of the Senate. In response, a prominent defender of these norms—Sen. Robert Byrd (D-W.Va.)—introduced the “Byrd Rule,” putting limits on what could be included in budget reconciliation bills. Most important was the provision that disallowed “extraneous” legislation from being included in budget reconciliation bills, where extraneous relates to a change in outlays or revenues incidental to the non-budgetary components of the provision.

Defenders of the current conventional wisdom point to this provision regarding its reach in disallowing a federal minimum wage increase or labor law reform to pass. This interpretation often leads to incoherent outcomes, ruling out some bills with larger fiscal effects than previous bills passed under reconciliation. Zipperer, Cooper, and Bivens (2021), for instance, surveyed evidence showing that raising the federal minimum wage to $15 by 2025 would likely reduce public expenditures by roughly $10 billion annually. This is several times the size of the fiscal effect of opening up the Arctic National Wildlife Refuge (ANWR), a provision allowed under reconciliation in 2006 and forecast to boost federal revenues by about $2.5 billion over three years. Even on its own terms of privileging legislation with significant fiscal effects, the Byrd Rule is inconsistently applied. This shows that measures with only “extraneous” effects on fiscal policy can strongly shape the economy.

In addition, the explicit target of the Byrd Rule’s “extraneous” tests was deficit reduction, but imparting a bias toward deficit reduction in the congressional budget process is unwise. Finally, despite the bias toward deficit reduction embedded in the Byrd Rule, Republican majorities have managed to sidestep the rule multiple times to enact large tax cuts.
There is no convincing economic rationale for privileging budgetary bills in the legislative process. By most accounts, a precipitating event leading to the CBA of 1974 was the Nixon administration’s refusal to spend money that had been appropriated by Congress. One example, the Nixon administration refused to disburse funds from the Environmental Protection Agency (EPA) appropriated for clean water efforts. This impoundment of funds in defiance of Congress was indeed an abuse of executive power and one that was properly rectified by congressional action.

Congress noticed and reacted to this impoundment only because revenue and spending flows are more visible to them than other economic influences under the joint control of Congress and the executive branch. However, more visible does not mean more important. The Nixon impoundment of funds that attracted the ire of Congress was related to legislation aimed at boosting environmental quality. Yet there are other ways besides outright impoundment of appropriated funds that the executive branch can frustrate the intent of Congress to improve environmental quality. Most historians say the Reagan administration’s EPA gutted the effectiveness of environmental protections through lax enforcement and the redistribution of resources to activities that slowed enforcement of regulations. This begs the question: Why should a fast-track legislative remedy be available for executive branch fiscal actions that impede the improvement of environmental quality but not for regulatory actions?

In short, Congress has shaped many crucial policies that have driven economic outcomes in recent years even outside the area of tax and budget policy. In fact, changes in market incomes over recent decades have driven income trends far more than changes in taxes and transfers. Given this reality, the idea that Congress needs a privileged way to fast-track tax and budget policies while other policies languish makes very little sense. The modern U.S. economy needs a Congress able to legislate across all relevant policy areas.
The intended Byrd Rule bias toward fiscal contraction is misguided but could be partially alleviated by allowing more policies to pass through the reconciliation process.

The Byrd Rule disallows any legislation that adds to long-run (10 years) increases in federal budget deficits. This intended bias toward deficit reduction reflected a conventional wisdom that public debt restraint was nearly always and everywhere an economic good except in outright recessions.

The recovery from the COVID-19 recession has seen a reversal of many of the data signatures of secular stagnation—interest rates have risen as the Fed has sought to contain the largest outbreak of inflation in nearly 40 years. However, it does not follow automatically from this episode of high inflation and higher interest rates that secular stagnation is decisively over, for a couple of reasons. For one, secular stagnation was always a background condition of the economy that could be overcome with enough policy force. The problem was insufficient spending, and any policy that boosted spending (like deficit-financed federal spending) could overcome this problem.

For another, the COVID-19 recovery saw a sharp decline in the economy’s productive capacity as labor force participation declined and rolling supply chain disruptions snarled the ability to manufacture and produce goods. This decline in supply helped “solve” the gap between aggregate demand and the economy’s productive capacity. However, these supply declines are highly likely to be temporary. In the U.S., labor force participation has steadily climbed back to near pre-COVID trends, and supply chains (at least before the recent COVID-19 outbreak in China) have been healing rapidly.

Whether one thinks that the reprieve from the condition of secular stagnation in 2021 and 2022 was the result of extraordinarily rapid demand growth (spurred by large fiscal policy interventions) or the result of shocks from the COVID-19 pandemic and the Russia-Ukraine war, the reprieve seems likely to be temporary. Nothing fundamental occurred to change the underlying condition (for example, a rollback of the post-1979 rise in inequality was not achieved). Secular stagnation is likely to persist as the economy returns to more normal conditions going forward. In a few years, the Byrd Rule bias toward fiscal contraction is likely to be as un-useful as it was in the two decades before the COVID-19 shock.
The Byrd Rule in practice has restrained spending increases, not tax cuts. It stands to reason that policy changes that boosted the bargaining power of the bottom 90% of the labor market and led to faster broad-based wage growth would likely raise aggregate demand greatly. This would make the Byrd Rule’s bias toward fiscal contraction less damaging.

Even under narrow budgeting-based views of the Byrd Rule, higher minimum wages and fundamental labor law reform have significant fiscal effects. Both changes to the federal minimum wage and measures to boost the unionization rate in the U.S. economy are straightforward policies that should be allowed to move forward through an expansion of the reconciliation process. These policies would have profoundly progressive impacts on the U.S. economy and are at least as relevant to working peoples’ lives as the vast majority of bills that have been ushered through reconciliation in recent decades.

Abolishing the filibuster would be the simplest and most effective way to allow popular legislation to have a chance of actually moving through the U.S. Senate. However, given the limited time window for this Congress and the Biden administration to make progress on an effective economic policy agenda, and given the political resistance of some senators to abolishing the filibuster on principle, policymakers should consider all other options realistically available to them.

As they finalize the rules and procedures for the 118th Congress, Senate Democratic leadership should expand the scope of reconciliation. The economic assumptions used in the past for adopting the Byrd Rule are not borne out in reality. The status quo limitations on the types of policies considered under reconciliation need not continue to artificially constrain the Senate. The Senate should be enabled to pass much needed economic legislation with the support of a simple majority.


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