The “Ten Percent” Rule

Over the last decade or so, I have increasingly begun to rely on a “10 percent” rule for public policy. The nut of this rule of thumb is that it takes at least a 10 percent change in something to motivate a meaningful change in behavior or direction. By “meaningful,” I mean a change in direction or behavior that is strategic and involves a realignment of priorities and/or resources.

I first saw this pop up in organizational change, both as a trustee and senior manager of numerous nonprofit organizations. Specifically, most organizations can dance around a 10 percent change in their budgets. If it’s a budget reduction, programs can be tweaked around the edges through attrition, cuts in discretionary spending categories, etc. Once the threshold hits 10 percent, I saw a realignment of priorities–programs were cut or redefined, expectations were re-calibrated. On the flip side, increases in revenues of less than 10 percent tended to reinforce existing programs. Revenues greater than 10 percent tended to result in new programs with new priorities (and sometimes realignments of existing programs).

Applied to government budgets, states or municipalities would rarely change priorities or re-align priorities if they were focused on revenue changes of 10 percent or less. Decisionmaking tended to be incremental and focused on short-term fiscal management, not whether the programs were (or should) exist or improve.

The rule applies much more broadly. For example,

  • Last year’s decline of VMT of about 3 percent, probably won’t result in a major re-aligment of real-estate preferences or long-term changes in travel behavior;
  • Inclusionary housing rules that require builders to dedicate more than 10 percent of the new housing to low-income households are likely to reduce the overall supply of housing;
  • Land-use regulations that impose relatively small costs (e.g., aesthetic enhancements) are likely to have small, often insignificant impacts on development patterns, but large costs such as increased uncertainty in the development approval process are likely to result in major impacts.

Several caveats are in order.

First, this is a rule of thumb, and I have not subjected it to quantitative empirical testing.

Second, the impacts of small incremental costs can have cumulative long-run impacts. The 10 percent rule applies to an immediate decision in a relatively short time horizon.

Third, the rule applies to individual decisions (and projects) and is probably not reflective of costs that add up systemwide, across a municipality or state, or nationally. So, small costs can add up to big impacts if they are imposed on a systemwide basis.

Nevertheless, I’ve found the 10 Percent Rule a pretty useful device for predicting whether public policy will impact changes in behavior.

Thus, if you really want your state or municipal government to re-align its priorities, look for programs or recommend budgetary changes that amount to more than 10 percent. That’s why it makes sense to focus on K-12 education, high education, medicaid, and sometimes corrections as key components of fiscal policy reform although the proposed changes can’t be small.

Also, tax cuts needs to be 10 percent or more if they are going to have meaningful impacts on investment decisions, migration or job creation.

But the rule says you have to propose big changes to big programs to get anything meaningful to happen.

Food for thought on a long weekend.