Dean Stansel

Interjurisdictional Competition and Local Government Spending in U.S. Metropolitan Areas

Using a new comprehensive data set of 314 U.S. metropolitan areas (or all metro areas for which comparable historical data were available), this article provides a newtest of the Leviathan hypothesis that there is an inverse relationship between fiscal exploitation and the amount of interjurisdictional competition. Unlike much previous work, this article focuses on the local level, where the residential mobility that drives that interjurisdictional competition is at its highest. Consistent with the Leviathan hypothesis, the results indicate that there is a negative relationship between interjurisdictional competition and spending growth, and this result holds for two different measures of spending and three different time periods. However, the results for spending levels are less supportive.

Local Government Finance and Entrepreneurial Activity in U.S. Metropolitan Areas

Recent empirical literature finds that greater economic freedom at the state level tends to have a positive effect on entrepreneurial activity and economic growth generally. However, state boundaries are relatively arbitrary, and the level of economic freedom in local economies can vary widely within individual states. While there is currently no economic freedom index for metropolitan areas, this paper uses data for government revenue and expenditure as a proxy. It provides the first examination of that relationship at the local level, using data on net new business formation for 288 U.S. metropolitan areas over the period 1990-2003. We found a statistically significant negative relationship between increases in all seven selected sources of revenue (used to fund an equal increase in spending on public welfare) and net new business formation. We also found that replacing welfare spending with higher spending for seven of eight selected spending categories was positively and significantly associated with net new business formation.

The Determinants of the Severity of State Fiscal Crises

During the most recent recession, many state governments faced substantial budget shortfalls. Those shortfalls are often blamed on external factors like the declining economy or reductions in federal aid. What politicians themselves do, especially during expansionary years—whether they enact spending increases, implement tax cuts, increase the size of their rainy day funds, or some combination thereof—is typically given less attention. We examine those factors and find that fiscal stress tends to be positively associated with spending growth, negatively associated with the size of rainy day funds, and not statistically significantly associated with the unemployment rate or federal aid.