Last night, I talked to a friend and mentor who reminded me of something very important: fiscal discipline leads to organizational discipline. As you know, I make a strenuous effort to be fair towards those with whom I disagree, and to that end I referenced CBPP’s sterling reputation in D.C. policy circles. But on reflection, I think I may have been too generous. Consider the following observation from the Oliff and Lav report on property tax limits in Massachusetts:

Changes in school enrollment can have a big impact. The adoption of Proposition 2 ½ coincided with a decline in Massachusetts’ K-12 enrollment, allowing schools to operate with less revenue. If another state adopted a property tax cap during a period of steady or rising enrollment, it would be forced to impose much more extensive cutbacks in teachers, classes, and programs than those seen in Massachusetts.

As Josh Barro explains in his MI report, however, spending per pupil tells a different story. Massachusetts and New Jersey spent the same amount per pupil in 1980, and New Jersey was spending over 26 percent more in 2007. And across different demographic groups, from poor students eligible for free or subsidized school lunches to the middle class students Oliff and Lav suggest are the main victims of the property tax cap, Massachusetts students has outperformed New Jersey students. So is it fair to say that changes in school enrollment can have a big impact? Perhaps the argument is that per pupil spending would be even lower if school enrollment were higher. But school enrollments would presumably be higher because there were more taxpaying households in the state. Given severe land use restrictions, this would mean even higher home values, etc. New Jersey, without Proposition 2.5, is spending far more for inferior educational outcomes. It’s not clear what school enrollment has to do with this phenomenon.

This leads us back to the point about efficiencies. Oliff and Lav are right to say that fiscal constraints don’t automatically generate efficiencies. But in state and local government, payroll — not transfer payments, a la Social Security, etc. — are the biggest cost center. When we’re talking about achieving “efficiencies,” we’re talking about firing workers, ideally workers who are ineffective performers. As a general rule, organizations don’t shed workers in flush times. This is true of governments as well as for-profit enterprises. It should go without saying that governments, including state and local governments, have a number of tools at their disposal to secure a steady stream of revenues that private firms do not. During the last decade, state budgets grew at a rate of 6 percent, far in excess of overall economic growth. Fiscal constraints were relatively weak. It is hardly surprising that the incentives to shed workers were also weak. The entire point of something like a property tax cap is to strengthen organizational discipline by imposing fiscal discipline.

Last night, I had the great pleasure of reading Tony Hsieh’s forthcoming book Delivering Happiness. Hsieh is the CEO of Zappos.com, an online retailer known for its zealous focus on customer service. Much of the book concerns the rocky period when Zappos was on the verge of going out of business, and Hsieh liquidated almost all of his assets to buy inventory and keep the company afloat. This is when the company was forced to make layoffs, and Hsieh describes how the remaining employees rallied to maintain and actually increase sales.

To be sure, local governments are very different from online shoe retailers. For one thing, local governments can’t always fire weak performers. Rather, they are contractually obligated to fire the most recently hired personnel, regardless of productivity or talent. And compensation schemes are often fairly flat, so that weak performers are often paid as generously as strong performers. That this approach would generate inefficiencies should go without saying. Fiscal discipline would presumably create internal pressure for aggressive reform.

It’s worth underlining that the federal landscape is different. Federal spending is increasingly dominated by entitlements. Social Security might be poorly structured and more generous than is fully consonant with a sustainable tax burden. But waste, fraud, abuse won’t prove a rich mine of savings. Moreover, benefit decreases can be understood as an increase in lifetime net tax rates, so the argument for fiscal discipline isn’t quite as straightforward as it is at the state and local level.

(This is one reason why Charlie Crist is a deeply foolish man: he suggests that we can achieve entitlement savings by eliminating waste, fraud, and abuse rather than changing the eligibility requirements for the program, adjusting the number of years used to calculate benefits, reforming the spousal benefit, etc. Yet he also vetoed legislation that would change Florida’s wasteful teacher compensation system.)