Pawns or Rooks? Local Government Responses to Economic Shocks, 1977-2011
30 Pages Posted: 25 Aug 2014 Last revised: 27 Aug 2014
Date Written: 2014
Economic shocks such as the Great Recession subject local governments to contradictory pressures on expenditures: declining revenues with increasing demand for services. How do local governments respond to these competing pressures? One possibility is that local government response is reactive: falling revenues force lower expenditures in spite of increased pressure for local governments to “do something” to help. Another possibility is that local governments are proactive, responding to falling revenues with increased demand by seeking new revenue sources, particularly intergovernmental assistance. In this sense, local governments are “rooks” rather than “pawns”, able to adapt innovatively to the new economic conditions. To answer this question, I develop a vector autoregression model of aggregate local government expenditures from 1977-2011. I find evidence that local government expenditures tend to be a function of own-source and state intergovernmental revenues, which in turn are functions of GDP. But at the same time, I find evidence that local expenditures may Granger cause state intergovernmental revenues at least in some states, consistent with the “rooks” hypothesis.
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