Therese J. McGuire

The contribution of publicly provided inputs to states' economies

Abstract We specify a regional production function that, in addition to labor and private capital, includes two publicly provided inputs — highways and education. We employ a panel data set consisting of annual observations on the 48 contiguous states from 1969 to 1983 to estimate input elasticity coefficients under a specification that allows for differences over time and across states. We find that both of the publicly provided inputs have a significant and positive effect on output. Our results support the policy conclusion that publicly provided infrastructure is an important element of economic growth.

The effect of public capital in state-level production functions reconsidered

Using a panel data set for the forty-eight contiguous states from 1970 to 1983, several estimates are provided of a Cobb-Douglas production function with three types of public capital as inputs. Various specification tests are systematically applied to test for both random and fixed state effects, nonstationarity, endogeneity of the private inputs, and measurement error. In the preferred specification, which is first differences with fixed state effects, the public capital variables are not significant, while the fixed state effects and private input variables are significant. Copyright 1996 by MIT Press.

The effect of property tax limitation measures on local government fiscal behavior

Abstract Previous evidence on the effects of tax and expenditure limitation measures has not been conclusive. Difficulties arise in characterizing differences in fiscal institutions across states, and estimating behavior in the absence of limitation measures. A recently enacted tax limitation measure limits the growth in local property taxes in some Illinois jurisdictions, but not in others. Such differential treatment of otherwise similar jurisdictions provides a natural experiment for estimating the impact of the tax cap on local government fiscal behavior. We find that the cap has been effective in that the fiscal behavior of capped jurisdictions differs from that of never-capped jurisdictions.

Industrial mix as a factor in the growth and variability of States' economies

Abstract We use annual employment data for the states and the United States from 1969 to 1985 to estimate trend rates of growth and deviations from trend for the state economies. We calculate measures of growth and variability for each state that are net of the effect of the state industrial mix interacting with the national industrial growth rates and variabilities. We find great variety in the macroeconomic behavior of the regional state economies, and we present evidence that the industrial mix of an economy is one factor that helps explain differences in net growth rates and variabilities across the states.

Fiscal Decentralization in Spain: An Asymmetric Transition to Democracy

Asymmetric fiscal decentralization, by which we mean different fiscal arrangements between the central government and different groups of, or individual, lower-level governments, may be justified from an economic efficiency perspective. As argued by Tiebout (1956), Oates (1972) and others, a decentralized system of regional and local governments is better able to accommodate differences in tastes for public goods and services. This efficiency argument calls for decentralization of fiscal authority to regional and local governments, but not necessarily asymmetric decentralization. However, when the differences in tastes for public goods and services arise out of differences in history, culture and language across regions of a country, asymmetric treatment may be justified. History, culture and language may influence how a group of people (a region) views autonomy, independence and fiscal authority. Some regions may have had experience with autonomous government in the past, they may have a culture that is strongly reliant upon (or leery of) the central government, or they may be fearful of losing their separate languages if they do not have special arrangements. To accommodate differences in taste for independence, autonomy, and fiscal authority, it may be necessary to have different fiscal arrangements between the central government and the different regions comprising the country.

Fiscal decentralization policies and sub-national government debt in evolving federations

As part of a process of democratization, many countries spanning Europe, Latin Amertica, Africa, and Asia are reorganizing their governments by devolving fiscal responsibility and authority to newly empowered regional and local governments. Although decentralization in each country proceeds differently, a common element tends to be an initially heavy reliance on central government grants to fund regional spending. We develop a theoretical model of regional borrowing decisions in which the incentives for regional borrowing depend crucially on how the regions expect the federal system of finance to evolve. We examine the implications of the model using data on Spanish regions for the period 1984-1995 and find evidence that regions may be borrowing inefficiently in response to incentives imbedded in the Spanish system of fiscal decentralization.

The Effect of Earmarked Revenues On the Level and Composition of Expenditures

This article provides estimates of the impact of earmarked revenues on the level and composition of state expenditures. Examined are four types of state spending —total, elementary and secondary education, highways, and aid to nonschool local governments -and two measures of earmarking -earmarked revenues per capita and earmarked revenues as a share of the favored expenditure category. An extra dollar of earmarked revenues results in either no change in expenditures or in increases in expenditures that are much smaller than a dollar. A greater reliance on earmarking as a share of expenditures results in either no change in spending or lower expenditures.

A Note on the Shift to a Service‐Based Economy and the Consequences for Regional Growth

Using data for the 50 U.S. states we relate industry-specific employment growth rates over the period 1976-1989 to the industrial compositions of the states in 1976. We explore the idea that services and manufacturing are inextricably linked and that this interdependence may be beneficial to manufacturing (through knowledge spillovers, for example). Specifically, we test whether the manufacturing sector grew faster in service- based economies. Our evidence does not support the idea of cross-fertilization from services to manufacturing.

Intergovernmental Fiscal Relations and Social Welfare Policy

Several decades of experience with income redistribution policies have not eradicated the problem of poverty in the U.S. In fact, in the most recent decade there is evidence that the income distribution has become more disparate and that the number of poor has increased (Bradsher, 1995, Atkinson, 1995 and Atkinson, Rainwater, and Smeeding, 1995). These facts have led to a growing frustration with welfare policy among both conservatives and liberals. One possible (partial) source of the ineffectiveness of welfare policy in the U.S. is that responsibility for this government function has been placed at the wrong levels or units of government. In other words, the responsibility for financing and delivering welfare programs may be in the wrong governmental hands. The conventional wisdom has been that redistribution policies should be centralized because of the public good nature of redistribution and because of the potential for migration to undue any redistribution undertaken at the subnational level. Current political thinking in the U.S. and many other developed countries is that subnational levels of government may be more effective at designing and delivering welfare policy because they are closer to their voters and recipient populations and therefore have a better understanding of the needs and tastes of their residents. The issue explored in this chapter is whether the delivery of welfare policy would be improved by decentralization of governmental responsibility.

Tax Incentives and the City

It is difficult to justify tax incentives within the existing economics literature on tax competition. We develop a model in which communities are interested in attracting firms not only for their own capital but also for the “concentration externalities,” a form of agglomeration economies, their location bestows on existing firms. We find that it is efficient in this case for communities to offer tax incentives, defined as a tax rate below the benefit tax level, to firms. We present the recent relocation of the Boeing Corporations headquarters from Seattle to Chicago as a case study.