To fiscal hawks, and some political centrists, “mandatory’’ entitlement programs such as Medicare and Social Security are at the heart of unsustainable, out-of-control federal spending.

Mandatory programs, unlike “discretionary” programs, continue year after year and essentially run on autopilot unless Congress passes legislation to change them. The big three mandatory programs alone — Social Security, Medicare, and Medicaid — consume more than 40% of the federal budget and are growing rapidly.

But T. Renee Bowen, an economist at Stanford Graduate School of Business and the Hoover Institution at Stanford, sees another side to the story. From the standpoint of political bargaining, she argues, mandatory programs may be the best way to encourage deal-making that benefits the public as a whole, rather than private interests.

It’s a startling argument, drawing in part on esoteric game theory, but it’s based on common-sense principles about how even polarized political parties can be enticed to look beyond their individual interests.

And though federal entitlements attract the most attention, the idea can also apply to state and local governments that have their own blends of mandatory and discretionary programs.

Bowen fleshed out the insight in a new paper with Hülya Eraslan of Johns Hopkins University and Ying Chen at the University of Southampton. They show that mandatory spending programs set up a more constructive bargaining situation than the one associated with annually renewable programs.

Republicans and Democrats bitterly disagree about the value of Social Security, for example, and many Republicans contend that it should be curtailed. But unless one party has overwhelming control over the House, Senate, and White House, the only way to enact any change is through negotiations that provide something for each side. If Republicans want to trim the program back, they have to come up with changes that satisfy Democratic goals as well. That, the researchers argue, leads to policies that are more likely to benefit the public as a whole.

That's very different from the bargaining over discretionary programs. Because Congress has to enact a new law every year to spend any money at all, supporters will push for as much as they can get, and opponents can hunker down and insist on zero funding — the status quo. The upshot is likely to be no agreement on anything, or a narrow preoccupation with each side’s private interests.

People can disagree about how big a role the government should play, but no one disagrees that the government has some role to play. There are certain “public goods” that the private sector simply doesn’t provide. The question, then, is how to provide those public goods as efficiently as possible.

“The goal isn’t just to grow the pie, but to grow the pie in a way that doesn’t hurt anyone,’’ Bowen says. “You want to improve the allocations, making one person better off without making another person worse off.”

To be sure, there is no scientific way to determine the optimal size or structure of a public spending program. But Bowen argues that an optimal level does exist, and the best way to approach it is to maximize spending on broad public interests rather than private interests.

If that sounds abstract and theoretical, Bowen offers an analogy from everyday life.

Imagine two young brothers named Tom and Jake, she suggests. Both have birthdays coming, and their mother has money for only two birthday presents. Tom desperately wants both a big toy helicopter and new crayons. Jake loves crayons too, but he’s even more eager for a toy train. Since their mother has already promised them each a present — the equivalent of a guaranteed, mandatory benefit such as Social Security — the trick for the boys is to figure out how they can get what they both want most.

Tom’s initial idea is to persuade Jake to sign up for the helicopter and a small box of crayons. But Jake already knows he can get a toy train, so he turns Tom’s offer down flat. This forces Tom to think more carefully about what Jake wants, and he comes up with a new idea: a small helicopter and a big box of 64 crayons. Jake likes this idea, and everybody ends up happier at no extra cost.

Going back to Republicans and Democrats, the key is to have an incentive to search for “common goods” that benefit everybody. “The cheapest way to buy off other parties is to spend money on common goods,” Bowen says bluntly.

If the starting point for negotiations is zero spending, as it is for a discretionary program, Republicans and Democrats are more likely to agree on nothing at all — or nothing that either side wants. If that happens for every program, including defense, the result will be very little spending on the common good. Even small-government conservatives would probably be queasy about that.

By contrast, says Bowen, a mandatory program creates incentives for both sides to make the program work better. That, says Bowen, is a good deal for the public.

View the Research Paper

Mandatory versus Discretionary Spending: The Status Quo Effect
Forthcoming in the American Economic Review

T. Renee Bowen is an assistant professor of economics at Stanford Graduate School of Business and 2013-14 W. Glenn Campbell and Rita Ricardo-Campbell National Fellow and Arch W. Shaw National Fellow at the Hoover Institution.