Informal Norms Trump Formal Constraints: The Evolution of Fiscal Policy Institutions in the United States

The Journal of Institutional Economics, Forthcoming

39 Pages Posted: 10 Oct 2016

See all articles by Peter Calcagno

Peter Calcagno

College of Charleston - Department of Economics and Finance

Edward J. Lopez

Western Carolina University

Date Written: October 7, 2016

Abstract

Two shifts of informal rules occurred in the decades around the turn of the 20th century that continue to shape U.S. fiscal policy outcomes. Spending norms in the electorate shifted to expand the scope of the government budget to promote economic security and macroeconomic stability. Simultaneously, norms for elected office shifted to careerism. Both norms were later codified into formal rules as legislation creating entitlement programs, macroeconomic responsibility, and organizational changes to the fiscal policy process. This institutional evolution increased demand for federal expenditures while creating budgetary commons, thus imparting strong motivations to spend through deficit finance in normal times. Despite the last four decades of legislative attempts to constrain spending relative to taxes, the informal norms have trumped the formal constraints. While the empirical literature on deficits has examined the constraining effects of informal rules, this paper offers a novel treatment of shifting norms as having expansionary effects on deficits.

Keywords: Deficits, Fiscal Norms, Institutions, Informal Institutions

JEL Classification: E6, D7

Suggested Citation

Calcagno, Peter and Lopez, Edward J., Informal Norms Trump Formal Constraints: The Evolution of Fiscal Policy Institutions in the United States (October 7, 2016). The Journal of Institutional Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2849537 or http://dx.doi.org/10.2139/ssrn.2849537

Peter Calcagno

College of Charleston - Department of Economics and Finance ( email )

66 George Street
Charleston, SC 29424
United States

Edward J. Lopez (Contact Author)

Western Carolina University ( email )

College of Business
Forsyth 224C
Cullowhee, NC 28723
United States

HOME PAGE: http://www.edwardjlopez.com

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