IOU: Does Democracy Always Deliver for Taxpayers?

From obstinate paper pushers to out of touch pointy-heads, bureaucrats can be stereotyped as everything that’s wrong with government. Sometimes, though, a bureaucrat is the best person for the job.

In “Elected versus Appointed Policymakers: Evidence from City Treasurers,” a 2013 Journal of Law and Economics paper, Alexander Whalley argues that entrusting finances to an appointed versus elected treasurer saves a municipality money. Specifically, Whalley estimates that an appointed treasurer cuts a city’s costs of borrowing by 19 to 31 percent.

In his analysis, Whalley looks at 352 California cities. The borrowing costs of cities that elect their treasurers are 25 percent greater than the costs of cities that have a bureaucrat at the helm. That said, cities that elect their treasurers have, on average, more debt as well as lower levels of income and education in the population—factors that could increase the costs of borrowing, regardless of how a treasurer is selected.

The task of the paper, then, is to isolate the impact of the treasurer. Whalley begins by seeing whether any association exists between how a city chooses its treasurer and its borrowing costs once other variables like income, education, and age are controlled for. In his estimation, an appointed versus elected treasurer is associated with reductions ranging from 19 to 27 percent.

Ultimately, though, we want to know whether the type of treasurer in and of itself causes the costs of borrowing to rise or fall. To do that, the author exploits a natural experiment already underway on the West Coast.

By default, almost all California cities elect their treasurers. Localities are allowed, though, to switch to appointed treasurers by ballot referendum. The author argues that there are unlikely to be substantial differences between cities that barely ratify or barely reject such a referendum. The performance of their economies, their fiscal policies, and their institutions are all likely to be similar. The only difference is one city ended up with an elected treasurer and another with an appointed treasurer.

Essentially, Whalley constructs a natural randomized control trial using the California cities that voted on such a measure since 1992. He finds that an appointed treasurer is associated with a 20 to 22 percent reduction in the cost of borrowing. These results are not just statistically significant. If all California cities with elected treasurers were to transition to bureaucrats, the author estimates that they would save in the order of $40 million annually.

The paper traces these outcomes to the fact that elected officials face different pressures and incentives from bureaucrats. Often elected treasurers are only required to be a resident of their city with no criminal convictions. On the other hand, appointed treasurers are competing for the position based on educational and professional attainment. Moreover, policy performance is likely to play a different role in reelection versus promotion. Technical matters like debt issuance and refinancing do not factor into decision-making in most ballot boxes, Whalley conjectures.

Whalley acknowledges that there are limitations to the research. In particular, he cautions against generalizing the results from treasury to less technical areas of policymaking.

While Whalley’s work focuses on the local level, it has implications for states too. This spring, Illinoisans will head to the polls to vote in primaries for state treasurer and comptroller. Illinois has over $100 billion in debt, and its interest payments topped $1.5 billion in 2013. Can democracy deliver for taxpayers in Illinois? Or, does Whalley’s work suggest a new way forward for the Land of Lincoln and other states burdened with debt?

Feature Photo: cc/(miuenski miuenski)