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Education, Welfare and the “New” Federalism: State Budgeting in a Federalist Public Economy

In: Studies in State and Local Public Finance

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  • Steven Craig
  • Robert P. Inman

Abstract

President Reagan's proposal for a "New Federalism" raises a fundamental challenge to our current structure of Federal-state-local fiscal relations.This research examInes the lIkely consequences of the New Federalism for fiscal allocations by state governments, and attempts to model the impact on both the size of state budgets and on the sectors on which that budget is spent. A political economy model of state budgeting is specified and estimated for a sample of forty-four states for the years 1966-1980.The analysis focuses on the two most visible sectors of state government expenditure, welfare and education, while accounting for the remaining end uses of state funds, other expenditure and taxes. Two general conclusions emerge from the analysis. First, current fiscal allocations by states are significantly influenced by the structure of Federal aid; without Federal matching rules and spending requirements states would choose to spend less on education and welfare services and more on tax relief and the numerous other state activities. Second, the New Federalism, as it relaxes the spending rules and reduces the level of Federal aid, both reduces state education and welfare spending and decreases the aggregate level of state expenditure. We conclude the New Federalism will succeed in reaching its objectives; the government sector will be more decentralized, with the additional consequence of reduced government budgets.

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This chapter was published in:

  • Harvey S. Rosen, 1986. "Studies in State and Local Public Finance," NBER Books, National Bureau of Economic Research, Inc, number rose86-1.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 8901.

    Handle: RePEc:nbr:nberch:8901

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    1. Niskanen, William A, 1975. "Bureaucrats and Politicians," Journal of Law and Economics, University of Chicago Press, vol. 18(3), pages 617-43, December.
    2. Edward M. Gramlich & Henry J. Aaron & Michael C. Lovell, 1982. "An Econometric Examination of the New Federalism," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 13(2), pages 327-370.
    3. Craig, Steven G & Inman, Robert P, 1982. "Federal Aid and Public Education: An Empirical Look at the New Fiscal Federalism," The Review of Economics and Statistics, MIT Press, vol. 64(4), pages 541-52, November.
    4. Courant, Paul N & Gramlich, Edward M & Rubinfeld, Daniel L, 1979. "Public Employee Market Power and the Level of Government Spending," American Economic Review, American Economic Association, vol. 69(5), pages 806-17, December.
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    6. Bergstrom, Theodore C & Goodman, Robert P, 1973. "Private Demands for Public Goods," American Economic Review, American Economic Association, vol. 63(3), pages 280-96, June.
    7. Hamilton, Bruce W., 1983. "The flypaper effect and other anomalies," Journal of Public Economics, Elsevier, vol. 22(3), pages 347-361, December.
    8. Olsen, Randall J, 1980. "A Least Squares Correction for Selectivity Bias," Econometrica, Econometric Society, vol. 48(7), pages 1815-20, November.
    9. Kramer, Gerald H, 1973. "On a Class of Equilibrium Conditions for Majority Rule," Econometrica, Econometric Society, vol. 41(2), pages 285-97, March.
    10. Hausman, Jerry A, 1978. "Specification Tests in Econometrics," Econometrica, Econometric Society, vol. 46(6), pages 1251-71, November.
    11. Moffitt, Robert A., 1984. "The effects of grants-in-aid on state and local expenditures : The case of AFDC," Journal of Public Economics, Elsevier, vol. 23(3), pages 279-305, April.
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    Cited by:
    1. Lars-Erik Borge & Jørn Rattsø, 2008. "Young and Old Competing for Public Welfare Services," CESifo Working Paper Series 2223, CESifo Group Munich.
    2. Michael J. Stutzer, 1987. "Improving intergovernmental finance: a message from the northland," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 2-13.
    3. Anne C. Case & James R. Hines, Jr. & Harvey S. Rosen, 1989. "Copycatting: Fiscal Policies of States and Their Neighbors," NBER Working Papers 3032, National Bureau of Economic Research, Inc.
    4. Yonghong Wu, 2009. "NSF's Experimental Program to Stimulate Competitive Research (EPSCoR): Subsidizing academic research or state budgets?," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 28(3), pages 479-495.
    5. Daniel E. Ingberman & Robert P. Inman, 1987. "The Political Economy of Fiscal Policy," NBER Working Papers 2405, National Bureau of Economic Research, Inc.
    6. Fosu, Augustin Kwasi, 2007. "Fiscal Allocation for Education in Sub-Saharan Africa: Implications of the External Debt Service Constraint," World Development, Elsevier, vol. 35(4), pages 702-713, April.
    7. Besley, Timothy J. & Rosen, Harvey S., 1998. "Vertical externalities in tax setting: evidence from gasoline and cigarettes," Journal of Public Economics, Elsevier, vol. 70(3), pages 383-398, December.
    8. Audun Langørgen & Dag Rønningen, 2004. "Local government preferences, individual needs, and the allocation of social assistance," Discussion Papers 380, Research Department of Statistics Norway.
    9. Werck, Kristien & Heyndels, Bruno & Geys, Benny, 2007. "The impact of central places on spatial spending patterns: evidence from Flemish local government cultural expenditures," Discussion Papers, Research Unit: Market Processes and Governance SP II 2007-10, Social Science Research Center Berlin (WZB).
    10. Jeffrey S. Zax, 1986. "Trends and Deviations in Federal, State and Local Finance," NBER Working Papers 2063, National Bureau of Economic Research, Inc.
    11. Augustin Fosu, 2010. "The External Debt-Servicing Constraint and Public-Expenditure Composition in Sub-Saharan Africa," African Development Review, African Development Bank, vol. 22(3), pages 378-393.
    12. Silva, Fabio & Sonstelie, Jon, 1995. "Did Serrano Cause a Decline in School Spending," National Tax Journal, National Tax Association, vol. 48(2), pages 199-215, June.
    13. Lawrence B. Lindsey & Richard Steinberg, 1990. "Joint Crowdout: An Empirical Study of the Impact of Federal Grants on State Government Expenditures and Charitable Donations," NBER Working Papers 3226, National Bureau of Economic Research, Inc.
    14. Marcel Thum & Thomas Fester & Andreas Kappler & Helmut Seitz, 2005. "Öffentliche Infrastruktur und kommunale Finanzen : Gutachten im Auftrag des Bundesministeriums für Verkehr, Bau- und Wohnungswesen und des Bundesamtes für Bauwesen und Raumordnung," ifo Dresden Studien, Ifo Institute for Economic Research at the University of Munich, number 37.
    15. Paula S. Kearns, 1994. "State budget periodicity: An analysis of the determinants and the effect on state spending," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 13(2), pages 331-362.
    16. Douglas Holtz-Eakin, 1988. "The Line Item Veto and Public Sector Budgets: Evidence from the States," NBER Working Papers 2531, National Bureau of Economic Research, Inc.
    17. Sanz, Ismael & Velazquez, Francisco J, 2003. "What do OECD countries cut first at a time of fiscal adjustments? A dynamic panel data approach," University of California at Santa Barbara, Economics Working Paper Series qt4j744960, Department of Economics, UC Santa Barbara.
    18. Gundersen, Craig & LeBlanc, Michael & Kuhn, Betsey A., 1999. "The Changing Food Assistance Landscape: The Food Stamp Program in a Post-Welfare Reform Environment," Agricultural Economics Reports 33993, United States Department of Agriculture, Economic Research Service.

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