Transcript The Federal System of Government

CHAPTER
24
The Federal System of
Government
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
The Federal System of
Government

Federal system of government
 Government

Federal government
 Top

made up of many levels
level in federal system
Economics of federal system:
 Desirability
of a federal system
 Economic interactions among governments
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
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The Theoretical Foundations
of Federalism
Economies of Scale
 Coordination of Large Programs
 Public Goods
 Externalities
 Optimal Sharing Group

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Intergovernmental Competition
and Consumer Choice
Different governments can supply of
variety of publicly provided goods
 Better satisfy demands of a
heterogeneous population
 Many local governments satisfies varied
demand for local public goods

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Intergovernmental Competition
and Consumer Choice
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
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Mobility and Intergovernmental
Competition

Many governments allow citizens to “vote
with their feet”
 In
other words, free to move to another
jurisdiction that better satisfies their
preferences

Tiebout model
 Local
governments compete for residents
 Helps reveal preferences for public sector
output
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
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Other Governments as a Basis
for Comparison
Government officials must satisfy
constituents to stay in office
 Many local governments allow for
comparison
 Provides useful information given
incentives for rational ignorance

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
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Other Governments as a Basis
for Comparison
Capitalization in real estate prices
creates incentives to monitor government
officials
 Many local governments create
“laboratories of democracy”

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The Roles of Different Levels
of Government
Education is largest portion of state and
local spending
 Public welfare is second highest

 Gradual
(but steady) rise in public welfare
spending

Highways have fallen in importance
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
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The Roles of Different Levels of
Government
Table 24.1 The Percentage of State and Local Government
Expenditures in Various Categories for Selected Years
Category
Percentage of Total
Expenditures
1970
1980 1990
2000
40.4% 36.1% 34.5% 34.6%
12.6%
9.0% 7.3% 6.7%
11.3% 12.8% 13.2% 15.4%
Education
Highways
Public welfare
Insurance trust expenditures
5.5%
6.7% 6.5% 8.2%
(retirement and unemployment)
Health and hospitals
7.4%
8.7% 8.9% 8.5%
Utility and liquor stores
7.2%
8.4% 8.0% 7.8%
Natural resources
3.6%
3.3% 1.5% 1.3%
Housing and community
1.6%
1.7% 1.9% 1.8%
development
Interest on debt
3.4%
4.0% 6.0% 5.5%
Other
7.1%
9.4% 12.2% 10.2%
Source: Author's calculations from data in the Statistical Abstract
of the United States , various editions.
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
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Special Interests and
Government Size
Special Interest Influence the activities of
government
 Federalism can limit special interests

 Concentrates
costs
 Increases incentives to become informed
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
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Centralization and the
Cartelization of Government
Government monitors anticompetitive
behavior in private sector
 Anticompetitive behavior in government
is justified as:

 Eliminating
wasteful duplication
 Enforcing uniform standards
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
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Competition in the Public
Sector
Intergovernmental competition important
in public sector but has declined in
recent decades
 Standardization decreases
intergovernmental competition
 Consolidation has reduce number of local
government units

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
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The Number of Governments
Table 24.2 The Number of Governnmental Units in the United States
Type of Government
1942
1952
1962
1972
1982
1992
2002
Federal government
1
1
1
1
1
1
1
State governments
48
48
50
50
50
50
50
155,067 116,694
91,186
78,218
82,290
86,692
87,849
Local governments
County
3,050
3,049
3,043
3,044
3,041
3,043
3,034
Municipal
16,220
16,788
18,000
18,517
19,076
19,296
19,431
Township and town
18,919
17,202
17,142
16,991
16,734
16,666
16,506
School district
108,579
67,346
34,678
15,781
14,851
14,556
13,522
Special district
8,299
12,319
18,323
23,885
28,588
33,131
35,356
155,116 116,743
91,237
78,269
82,341
86,743
87,900
Totals
Source: Statistical Abstract of the United States , various editions.
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
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Regulations and Grants
Method for centralizing government
activity
 State governments free to impose
regulations on local governments
 Federal government limited by
Constitution

 However,
imposes rules as a condition for
receiving grant funding
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Regulations and Grants
Grants provide a method for federal
government to regulate state and
localities
 Lessen intergovernmental competition
 Creates more homogenous local
governments

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Intergovernmental Revenue
Significant source of local government
revenue
 Occur because:

 Local
government does not have incentive to
undertake the project
 Local government does not have funds to
undertake the project
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
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Intergovernmental Revenue
Table 24.3 Intergovernmental Revenue, 1999
Intergovernmental
Revenue as a
Revenue from Own Intergovernmental Percent of Total
Government Level Sources (Billions) Revenue (Billions)
Revenue
Federal
$1,827
$3
0.2%
State
$889
$254
22.0%
Local
$624
$328
34.5%
Source: Author's calculations from data in the Statistical Abstract of the
United States , 2003 ed., 270 and 303.
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Intergovernmental Revenue
Can lead to cartelization of local
governments
 Two distinct types of intergovernmental
grants:

 General
grants
 Categorical grants
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
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General Grants

Tax revenues collected by higher-level
government
 Given
to lower-level government to spend
how they see fit

Two justifications:
 Higher-level
governments have more revenue
generating ability
 Equalization of revenues among governments
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Categorical Grants
Grants made for a specific purpose
 Give granting government some control
over expenditure
 How much depends on the circumstances

 How
much would the local government have
spent without the grant?
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
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Categorical Grants
A Categorical
Grant That Differs
from a General
Grant
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Matching Grants
Categorical grant that requires a local
contribution before the government
“matches” it
 Grant can be fixed or limitless

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
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Matching Grants
Matching Grants of
a Fixed Amount
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
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Matching Grants
Matching Grants
with No Grant Limit
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
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The Flypaper Effect
Empirically, grants appear to “stick where
they land”
 Possible explanations:

 Budget
maximizing bureaucrats
 Creates incentive to pursue additional grants
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
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Tax Issues and Local
Governments
Individual and business mobility has tax
policy implications
 Taxes paid by immobile factors

 Explains
property taxation
Capitalization of debt
 Capitalization of public goods
 Deductibility of state and local taxes

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
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