Can the Federal Budget Process Promote Fiscal Sustainability? Evidence from Synthetic Control Using Lasso

Abstract

Can the federal budget be constrained using congressionally self-imposed rules? The Budgetary Enforcement Act of 1990 (BEA90), in effect from 1992 to 2002, is frequently held up as an example of congressional control that largely succeeded in doing so and its expiration is considered a watershed event. This paper finds supportive evidence that BEA90 constrained non-defense discretionary outlays using a synthetic control/Lasso hybrid regression methodology. The estimated effect of BEA90 is around 10 percent. However, the sampling variation suggests the probability that these results arose from chance is around 30 percent. Confronted with a common applied empirical problem of having many potential predictors (over 2,000) and a short time-series (12 years), we propose novel additional checks that successfully cross-validate the synthetic control’s counterfactual model.