Anschel, Kurt R.

English

Research Papers in Economics

SOUTHERN  JOURNAL OF AGRICULTURAL  ECONOMICS  JULY,  1976
DISCUSSION  OF FINANCING  STATE AND LOCAL
GOVERNMENT  SERVICES IN A CYCLICAL ECONOMY*
Kurt R. Anschel
Drs.  White  and  Musser  bring  an  important  new  managed  and  coordinated,  it  is  the  only  viable
insight:  given  recent  and  prospective  variations  in  alternative.  This,  of  course,  does  not  obviate  the
inflation  and  income  growth,  stability  must become  necessity  for  local  and  state  governments  to  under-
an  important  criterion  for  assessing  alternative  local  take  counter-cyclical  expenditures  financed  by  the
and  state  government  fiscal  systems.  The  1960s  was  federal  government.  The  validity  of the  President's
an  expansionary  period  for  U.S.  and  world  econ-  current  proposals  to  spin-off  social  programs  cur-
omies.  Equity,  growth  and efficiency  appeared  to  be  rently funded and  administered  by the federal  govern-
appropriate  and  sufficient  criteria for evaluating local  ment  to  local  and  state  governments  becomes  ques-
and  state  tax and expenditure  systems.  The economic  tionable.  State  and  local  governments  lack  fiscal
turmoil  of  the  70s,  however,  makes  it  obvious  we  flexibility  and  resources  to  operate  these  programs,
were  a  bit  over-optimistic.  Stability must be added to  particularly  during  periods  of  economic  slow-down
our list.  which  may  lead  to  intensification  of  economic
Instability  of  local  and  state  government  rev-  recessions  as  local  and  state  governments  are  forced
enues  and  expenditures does entail social costs. it  can  to reduce expenditures.
result  in  reduced  services  in  such  vital  areas  as  The  authors'  proposal  that  grants-in-aid  be  util-
education,  health,  housing,  welfare,  fire  and  police  ized  to moderate  the  impact  of cyclical  fluctuations
protection,  and  agricultural  research  and  education.  in  the  economy  also  is  valuable,  but justifies  further
Capital  projects  may  have  to  be  aborted,  reducing  refinement.  Their  suggestion  that  grants  should  fluc-
services  and  wasting  already  expanded  funds.  In  the  tuate  with  regional  differences  in  economic  activity
context  of  Tiebout's  hypothesis,  sudden  shifts  in  needs  further  development  into  a  specific  set  of
output  of  public  services  or  tax  rates  may  cause  a  proposals  which  are  politically  viable.  This  may  be
movement  away  from  optimum  household  location.  very  difficult  given  the  federal  bias  towards  treating
This,  of  course,  assumes  that  demand  for  public  each area  of the country equally.
goods  does not  decline  with decreases  in real income.  The  authors point out growing  uncontrollability
To  the  extent  that  recession  results  in  reduced  of local and state  expenditures  resulting from relative
demands,  some  reduction  in  services  may  also  be  decline  in  road  and  highway  expenditures.  These
appropriate.  Nevertheless,  given  current institutional  conclusions  are  drawn from comparisons  of 1970 and
rigidities,  such  a  calibrated  adjustment is not possible  1972  data  with  1960  data.  Does  the  decline  reflect
even  if the  appropriate  reduction  could  be specified.  efforts  of  local  and  state  governments  to postpone
The  White  and  Musser position, funding counter-  road construction  in years  of fiscal  difficulty or  does
cyclical  programs  as  the proper domain  of the  federal  it reflect  a secular  change?  Moreover,  relative  decline
government,  is  to  be  supported.  Because  the  federal  in  "controllable"  expenditures  is not sufficient  basis
government  alone  can  utilize  deficit  financing,  and  for  concluding  that declining  controllability  presents
economic  policy  necessarily  must  be  centrally  serious  problems.  If  the  amount  of  controllable
Professor of Agricultural  Economics,  University  of Kentucky.
*I  wish  to thank A.  F. Bordeaux, Tom Haas, Alan Randall, Eldon Smith and the SJAE's  anonymous reviewers  for their most
helpful criticisms and suggestions.
11expenditures remains greater than likely decline  in rev-  revenues  much  more  variable.  Moreover,  these  type
enue, decline  in controllability  becomes insignificant,  communities  will  require  different  policy,  both  in
The  authors  call  for  deficit  financing,  stabiliza-  kind and quantity.
tion  reserves,  and  grants-in-aid  to dampen  effects  of  Business  cycle  fluctuations  will  also  have  differ-
business  cycles.  The  feasibility  of  estimating,  with  ential  impacts  among  communities  providing  differ-
even modest  accuracy  and  timeliness,  expected  dura-  ent  combinations  of  services.  I  would  hypothesize
tion  of expansionary  and  retractive  cycles  suggested  that  the  income  elasticity  of  demand  for  various
for implementing  these programs  is questionable. The  public  services  is  inversely  correlated  with  controlla-
recent  track  record  of  the  economics  profession  bility  of  expenditures  for  these  services.  In  other
suggests  that  such  an  endeavor  will  be subject  to an  words,  as  disposable  income  of a  community  rises,
intolerable  margin  of  error.  If  these  policies  depend  the  relative  importance  of  capital  creating  expendi-
on  feasibility  of  accurate  forecasting  beyond  a  few  tures  declines  and  the  importance  of labor intensive
quarters,  they  must  be  regarded  as  impractical.  In  personal  service  expenditures  increases.  As  a  result,
fact,  by  making  available  combinations  of  these  controllability  of  public  expenditures  in  higher  in-
approaches,  accurate,  long-term  forecasting can likely  come  communities  would  be  less  than  for  poorer
be  omitted  and  high  social  costs  of  variations  in  communities.  If my  hypothesis  is  correct,  wealthier
expenditures  still  be  avoided.  Further  research  and  communities  will  suffer  more  from  business  cycles
policy  evaluation  is  needed  to  design  a  program  and  require  more,  and  possibly  different,  forms  of
package  which provides needed flexibility  over a wide  counter-cyclical  assistance.
range of possible  contengencies.  There  is  some  danger  of over reacting  to instabil-
One  could  become  quite  troubled  by  Table 5  ity  of  the  economy.  It  appears  clear  that  if  local
which  the  authors  use  to  evaluate  controllability  of  governments  attempt  stability  by  limiting  revenue
local  and  state  expenditures.  What  is  their  data  sources  to  those  with low  elasticity  they  will  reduce
source?  To  what extent do  observed  patterns  reflect  their  potential  to respond  to  increasing  demand  for
prior expenditures  rather  than current  budget  limita-  services  and exacerbate  the local impact of recessions.
tions?  Do  they  reflect  isolation  markets  for  inputs  If demand  for  uncontrollable  expenditures  is income
rather  than  fund  limitations?  Surely  the  authors  elastic  and  greater  than  elasticity  of  controllable
would  be  the  first  to  agree  that  further  analysis  is  expenditures,  then  local  government  will  have  to
needed.  But  do  they  have  a  solid basis  for even  the  depend on  elastic revenue  sources to obtain sufficient
rather  limited  conclusions  they draw?  An affirmative  funds  to  provide  these  services,  or  continually  in-
answer is not obvious.  crease  tax  rates.  Moreover,  if  Baumol's  hypothesis
White  and  Musser  note  the  need  to desegregate  that  the  rate  of  technological  change  in  public
state  and  local  governments  when  analyzing  certain  services  is  slower  than  in  other  segments  of  our
budgetary  categories.  This  can  be  taken  one  step  economy  is  correct,  then increasing  revenues  will-be
further.  Local  communities  must  be  desegregated  if  required  just  to maintain  a  constant  level  of service
aggregation  error  is  to  be  avoided.  Cyclical  fluctua-  [1].  Thus,  a  policy  in  which  local  governments
tions  will  impact  differently  on  local  and  regional  continue  to  increase  their  dependence  on  elastic
economies  which  are  dependent  on  very  different  revenue  sources,  and  look  to the  federal  government
mixes  of  industries.  Traditional  rural  communities  with  its  deficit  financing  capability  for  counter-
still  dependent  on  agriculture  and property taxes can  cyclical assistance,  seems most appropriate.
be  anticipated to-suffer only  small revenue reductions  To conclude,  White  and  Musser  have presented a
during  an  economic  downturn.  Rural  communities  stimulating  paper.  They  have  clearly  demonstrated
with  a  diversified  economic  base,  and  drawing  the  importance  of  the  problem  and  the  need  for
revenues  from  sales  or  income  taxes,  may  find  their  additional research.
REFERENCES
[1]  Baumol,  W.  J.  "Macroeconomics  of  Unbalanced  Growth:  The  Anatomy  of  Urban  Crisis,"  American
Economics Review, 57:415-426,  1967.
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DISCUSSION OF FINANCING STATE AND LOCAL GOVERNMENT SERVICES IN A CYCLICAL ECONOMY

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