Monthly Archives: January 2009

State budgets and the stimulus

As the American Recovery and Reinvestment Act (aka the Stimulus Bill) moved out of the House of Representatives yesterday, Eileen Norcross and Frederic Sautet released a new paper questioning the long-term ramifications of this package on states’ budgets.

While federal grants may provide temporary relief for state budgets, the size and scope of the proposed spending will worsen already-distorted state and local fiscal practices while creating perverse incentives inducing greater public spending with scarce state funds. By fracturing the link between those who benefit (local constituencies) and those who pay (federal taxpayers), ARRA reduces government accountability on all levels and ultimately erodes local control over policy by imposing federal solutions on local problems.

Instead of attempting a short-term fix of amplifying the grant system through an emergency stimulus package, the federal government should work to make state and local governments accountable for their own spending decisions. This means reducing states’ and localities’ reliance on federal funding for local priorities and allowing local activities to be addressed by the appropriate mechanisms: state and local governments and the private and philanthropic sectors.

Also of interest, the Wall Street Journal has a breakdown by state on each of four proposed spending categories: aid to states, school and college modernization, job training, and transportation and infrastructure.

Finally, Nicole Gelinas has some analysis of last-minute changes to the House-approved package as they relate to state and local infrastructure investment.

Grants, Earmarks, and the Stimulus

Yesterday President Obama unveiled more details about the stimulus.

It’s certainly big: 3,000 miles of electric transmission lines, 380 drinking water projects, 1,000 rural water and sewer system projects. A new website, recovery.gov, will enable people and experts to make sure money is spent where it is intended.

But accountability after money is committed does not stop a poor allocation of resources. The question isn’t, “Did the money hit the federal target?” It’s, “How does government choose the target?” I think this bill is going to set off a very large and much debate as we watch the money weaving its way through our states and communities: is there really much difference between an earmark, and a vetted, approved, and monitored government grant?

New Paper on Infrastructure and Flood Protection

Today the Mercatus Center released a new paper by Peter Gordon and Richard Little, both of the University of Southern California. The paper, “Building Walls Against Bad Infrastructure
Policy in New Orleans,” is the latest policy primer in the Mercatus Policy Series.

Written as part of the Mercatus Center’s Gulf Coast Recovery Project, Gordon and Little focus on how Louisiana can think more holistically about risk management and disaster mitigation. But the research is germane far beyond the Pelican State and should be a useful tool for any state or local government that relies on levees, floodworks, and other protections against natural disasters. Structural controls are never foolproof, they argue, and along with insurance, risk transfer mechanisms, and redundant defenses, are only part of a larger system to mitigate against natural disasters.

In the paper, Gordon and Little suggest how the private sector can be better involved in mitigation against disaster and how this should inform state and local governments:

As New Orleans rebuilds from the damage of Hurricane Katrina, local and national policy makers are attempting to ensure the levees are rebuilt better and stronger. While such efforts to ensure more reliable flood protection are certainly understandable given the region’s history, they should not preclude serious consideration of the implications of excessive reliance on structural controls. More comprehensive approaches will provide decision makers at all levels—from elected officials to individual homeowners—with incentives to manage flood risk effectively.

Read the whole thing here.

The Edifice Complex and the Stimulus

The Wall Street Journal had a great column over the weekend one of urban development’s many fads: stadiums, convention centers, and aquariums (casinos and waterfront promenades fall into this category).

The theory goes that weak urban economies can be reinvented into  entertainment destinations. Like most public investments of this sort, the demand is supposed (though not proven) and the effects  overstated. Stadiums don’t deliver their promised benefits. The underlying problems in these cities persists. Mayors should look to the institutional issues – the tax and regulatory environment, fighting crime, and pursuing policies to improve education – for solutions to urban decline.

The proposed stimulus may build things, but it’s unlikely to fix much.

Stimulate the economy or local and state spending?

One  nearly invisible issue in the stimulus debate is this:  How will this affect state and local budgets and behavior? Given the magnitude of the proposed infusion,  it’s gotten very little attention.

The theory of grants isn’t esoteric, it’s an entire subject in public finance.

Consider the flypaper effect.  Intergovernmental transfers may stimulate more local public spending, than an equivalent dollar of citizen funds.  That is, federal money “sticks where it hits.”  There are many competing explanations.

Here is a good survey by Thaler and Hines (1996).

New Paper on Stimulus and the States

Let me begin with one caveat: this blog is not going to feature excessive self-promotion. A string of press releases do not a blog make.

With that out of the way, I want to bring your attention to a new policy brief by Eileen Norcross and Frederic Sautet entitled “The Main Street Economic Recovery Proposal: Will It Bring Us Out of Recession?” Clearly, stimulus package focusing on “shovel-ready” projects will invariably be played out on the state and local level.

In the paper, Norcross and Sautet recommend:

Instead of engaging in activist fiscal policy, the government should announce a policy of fiscal prudence promoting lower public spending and thereby creating a good context for entrepreneurial activity.

1) Let the price mechanism run its course. Prices in some economic sectors have been artificially inflated for too long. Downward adjustment of prices will release resources from unprofitable sectors to more profitable ones where they are most useful.

2) Restore a climate favorable to entrepreneurial discovery and innovation. In order to discover new business opportunities, entrepreneurs must have the confidence that they can invest and be rewarded for it. But while the institutional environment must reward entrepreneurial activity, it should not socialize losses by subsidizing failure.

Fred and Eileen also wrote about the states and stimulus in November in Forbes.

Welcome to Neighborhood Effects

Welcome to Neighborhood Effects, a new blog about American state and local economic policy and political economy issues. It is run by the Mercatus Center at George Mason University.

Our goal of this blog is to offer timely news, insight, and analysis on state and local economic public policy issues in a broad sense of the phrase.  We hope it will be a useful resource to policy makers, journalists, citizen advocates, policy analysts, social scientists, and others with an interest or stake in state and local political economy. Moreover, we believe that it can play a role in a larger conversation about the relationship between the federal, state, and local governments; what’s working in state and local economic development; and the future of state and local governments in America.

In order to accomplish this, we plan to leave comments open. We do have a moderation policy but anticipate employing a very light touch. Your participation is not just welcomed, it’s encouraged.

And if there’s something you’d rather discuss offline, please feel free to get in touch with me at drothsch //at-sign// gmu \\dot\\ edu.