Michael L. Marlow

Fiscal Decentralization and Government Size

Numerous studies have attempted to model the possible factors contributing to universal growth in public sectors. This paper analyzes one device that appears capable of controlling some of that growth: fiscal decentralization. The results reported here also support the use of monopoly government assumptions in models of public policy

The Causal Relation between Federal Expenditures and Receipts

Federal expenditures have consistently exceeded Federal revenues since 1970. In fact, the Federal government has seen a surplus in only five years since 1950. The symptoms of such fiscal imbalance are, of course, budget deficits. While budget deficits are nothing new in U.S. history, the recent and projected size of the deficit during peacetime nonrecessionary years has been the cause of much concern to academics, the news media, and politicians. This preoccupation with Federal deficits has produced a variety of policy proposals to deal with them.

Expenditures and receipts: Testing for causality in state and local government finances

Concluding remarksThe results of our tests indicate similarities between the expenditure-tax receipt relations of state governments to those previously reported for the Federal government in Manage and Marlow (1986); the results reported here indicate support for the hypothesis that tax receipts cause expenditures at the state level of government. For tests utilizing symmetric lag structures ranging from three to five years, state expenditures appear to follow state tax receipts. For the shortest lag length (2,2), the determination of bidirectional causality does not make us reject the hypothesis that higher spending levels result from higher revenue levels; rather, the causality appears to be in both directions for the shortest lag length.The finding that tax revenues and expenditures are not causally related at the local level for the three longest lag structures is unexpected. However, the result may be a product of an aggregation problem. The fact that all local governments are aggregated on a state-by-state basis may generate observations that are not useful for our empirical work. For example, if the funding constraints of local governments on a state-by-state basis are especially diverse, their aggregation to the state level of observation may produce data that is not economically meaningful. Nonetheless, the one case where significant causality is observed lends some empirical support for the hypothesis that tax receipts determine spending.Two policy implications are mentioned. One, policy proposals at all levels of governments aimed at solving the occurrence of unacceptably large deficits should consider the linkage between expenditures and tax receipts before they recommend discretionary changes in either or both of the components of deficits: expenditures and tax receipts. For example, the results of our tests do not rule out the notion that a tax increase could promote expenditures that ultimately counter the deficit-reducing effect of a given tax hike.Two, the fact that our results at the state level lend support for the view that causality runs one-way from expenditures to tax receipts suggests that the many dissimilarities in legislative and constitutional constraints between the Federal and state levels of government may not matter much in terms of the causal relation between expenditures and tax revenues. A possible reason for similarities in behavior may stem from the circumvention of legislative or constitutional intent at the state level of government which ultimately serve to weaken differences between the effective constraints facing Federal and state governments. Moreover, it would be puzzling if we found widely disparate behaviors between government units in the absence of significantly different constraints.

Controlling Leviathan Through Tax Reduction

ConclusionOur paper seeks the strategy that allows the greatest ability to reduce public sector size within a political environment that does not want us to directly set limits on public sector size. Tax reduction, through its quid pro quo effect, offers high tangibility to taxpayers and may raise political power of groups that seek both tax reduction and greater opposition to lobbies that seek spending increases for their narrowly-defined interests. Moreover, as Manage and Marlow (1986) argues, since the political response to balanced budget rules is likely to raise taxes, this political bias of tax hikes suggests that balanced budget rules are offered as a means of changing the funding mix and not the actual budget constraint of government.Our analysis should not be construed as a statement promoting deficit finance. Preferred policy is one that forces tax reduction, a balanced budget and price stability. However, this is ‘optimal’ only in a world without political constraints and special interests seeking public funds. Hard second-best choices, based on available analytical and empirical evidence, suggest that tax reduction controls the most important element of the budget constraint and that we should not rely solely on balanced budget rules to solve the underlying public sector growth problem.

Expenditures and Receipts in State and Local Government Finances: Reply

ConclusionIt is worth repeating that causality testing is a very complex task. The diversity of views on interpreting the definition of causality and on the methods for testing causality highlight this issue. In our study, we cite an excellent article which provides a detailed critique of various problems associated with causality tests (see Conway, et al., 1984). It would appear that Chowdhurys comment draws very strong conclusions and fails to consider some of the complex theoretical issues regarding causality tests as well as important data problems pertaining to state and local governments. Moreover, we find it somewhat curious that, given the strong similarities in our two studies, Chowdhury prefers to dwell on the mechanics of an alternative technique rather than concentrate on the fact that his alternative technique yields supporting results to our 1987 paper on the tax-spend hypothesis.

Private sector shrinkage and the growth of industrialized economies: Reply*

ConclusionFurther tests and thoughts on the OECD data lead me to conclude that, if anything, my 1986 paper underestimated the magnitude of the inverse relation between economic growth and government size. If one takes the nominal-based measure of government scale, as advised by Saunders, the significance levels, coefficient magnitudes and goodness of fits improve over what I found with my initial investigation. I would suggest that Saunders reconsider his reluctance to believe that the size of the public sector is unrelated to economic growth in OECD countries over this time period.One additional thought appears relevant to the current policy debate concerning budget deficits and economic performance within the major industrialized economies. The empirical work displayed here and in my 1986 paper suggests serious problems associated with the various proposals urging governments to raise taxes and/or ‘ease’ fiscal policy. Elsewhere, I have suggested that available empirical evidence implies that plans to increase taxes as a way out of budget deficits are plans that carry the potential for raising government spending and possibly future deficits as well. Coupled with the evidence presented here, we should also recognize the potential of tax increases to raise the level of government participation in a country and, accordingly, exert inverse influences on its future economic performance as well. As suggested in my 1986 paper, the empirical evidence may suggest the following irony: While political participants may crave larger and larger non-market resource allocations, their future ability to satisfy that craving may very well be severely constrained by the satisfaction of that same appetite.

Measuring market power as competition over time

Abstract This paper suggests that the empirical measurement of market structure, particularly the reliance on concentration indexes as an indicator of noncompetitive market power, does not adequately reflect recent advances in theory. This paper integrates the literature of the interaction between market structure and firm behavior with dynamic measures of structure. Our estimation for the savings and loan industry suggests that continued application of traditional static measures in market structure-performance studies are apt to be misleading. We call for more investigation into measures of dynamic structure.