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Abstract:
There has been an international trend towards shifting the provision of public services down to lower levels of government. That decentralization has increased the relative importance of local governments. This paper examines the relationship between spending by those local governments and long-run economic growth. Using a comprehensive data set of all U.S. metropolitan areas, the overall level of local government spending was found to have no significant relationship with economic growth. However, local government investment (capital outlay) and the percent of spending devoted to highways both had a statistically significant positive relationship with growth.

economic growth, local government, public investment, metropolitan areas

Abstract:
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.

entrepreneurial activity, economic growth, economic freedom, local government, metropolitan areas

Abstract:
This paper explores the factors that contribute to long-run economic growth in U.S. metropolitan areas, with particular attention given to government finance variables. Unlike previous work that examines only a sub-sample of the largest areas, this paper uses a new comprehensive data set for all U.S. metropolitan areas. We use panel data and metro fixed effects regression. We found a statistically significant negative relationship between increases in two sources of local government revenue (used to fund an equal increase in spending on public welfare) and subsequent growth in real per capita income, supporting previous findings that taxes have a negative impact on income growth. We also found that replacing welfare spending with higher spending on education and "other expenditures" was positively associated with employment growth, and found similar results for the relationship between police and highway spending and per capita income growth.

economic growth, taxes, government spending, metro areas

Abstract:
Oates' (1972) decentralization theorem holds that local governments will do a superior job at providing the efficient quantity of public goods. Brennan and Buchanan (1980) suggest that "the potential for fiscal exploitation varies inversely with the number of competing governmental units in the inclusive territory." (211) Together, these imply that there will be a positive relationship between economic growth and both the degree of decentralization of government and the number of competing government jurisdictions. The previous empirical literature has produced mixed results on those relationships. This paper provides the first examination of that relationship between interjurisdictional competition and local economic growth that utilizes a panel data approach. Unlike most of the previous literature, it examines all U.S. metropolitan areas (nearly 400), not just a subset of the largest ones, so the results are more generalizable to the entire population of U.S. metro areas. Using a fixed effects regression model, the results provide some support for that hypothesis of a positive relationship, yet there are some conflicting findings as well.

interjurisdictional competition, fragmentation, decentralization, Leviathan, fiscal federalism, economic growth, metropolitan areas

Abstract:
During recessions, state governments frequently face substantial midyear budget shortfalls. Numerous states are now experiencing such crises again. These fiscal crises are often blamed on the cyclical decline in revenue growth or reductions in federal aid. Others have suggested that enacting rapid spending increases during expansionary years - rather than using the revenue windfalls for tax cuts or increases in rainy day funds - may be an important contributing factor to those budget shortfalls. Using data from the 2001 recession, we find support for that "overspending" hypothesis. While neither the mere presence nor the size of a rainy day fund were significant predictors of fiscal stress, faster increases in spending are positively and significantly associated with fiscal stress. When rainy day funds work, it is the strength of their withdrawal rules that matter. These results have important implications for fiscal policy choices. States that restrain spending growth during expansionary years and implement strong rainy day fund withdrawal rules are likely to face less severe fiscal crises during recessions.

fiscal stress, government spending, rainy day fund, business cycles