Tag Archives: research

Are state lotteries good sources of revenue?

By Olivia Gonzalez and Adam A. Millsap

With all the hype about the Powerball jackpot, we decided to look at the benefits and costs of state lotteries from the taxpayer’s perspective. The excitement around yesterday’s drawing is for good reason, with the jackpot reaching $1.5 billion – the largest thus far. But most taxpayers will never benefit from the actual prize money, with odds of winning as low as one in 292.2 million for the jackpot. So if few people will ever hit it big, there must be other benefits for taxpayers to justify the implementation of lotteries, right?

Of the 43 states that implement lotteries, the majority of lottery revenues – about 58% on average – go to awarding prizes. A relatively small proportion (7%) is used to pay for administration costs, such as salaries of government workers and advertising. The remaining category, and the primary purpose of implementing state lotteries, is revenue for government services. On average, about one third of state lottery revenues is directed to state funds for this purpose. The chart below displays the state-level breakdown of lottery revenue for the most recent year that data are available (2013).

lottery sales breakdown

It is surprising that such a small portion of state lottery sales actually make it to state funds, especially considering how much politicians advertise the benefits of state lotteries. A handful of states direct more than 50% of lottery revenues towards state funds: Rhode Island, Delaware, West Virginia, Oregon, and South Dakota. The other 38 states allocate significantly less with Arkansas and Massachusetts contributing the smallest percentage, only 21%.

Many states direct their lottery revenues towards education programs. The largest lottery system, New York’s, usually directs about 30% of their lottery sales to this area. Similarly, Florida’s lottery system transferred about one third of their funds, totaling $1.50 billion, to their Educational Enhancement Trust Fund (EETF) in 2013.

The data presented here are from 2013, so it will be interesting to see how the recent Powerball jackpot revenues will affect lottery revenues more broadly in the future, especially since the Multi-State Lottery Association reduced the odds of winning in October of 2015 in the hope of boosting revenues. State officials argue that reducing the chances of winning allows the prize to grow larger, which increases the demand for tickets and revenue.

The revenue-generating function of state lotteries makes them implicit taxes. The portion of revenue generated from a state lottery that is not used to operate the lottery is just like tax revenue generated from a regular sales or excise tax. So even if lotteries are effective at raising revenue, are they effective tax policy?

Effective tax policy should take into account the tax’s ability to generate revenue as well as its efficiency, equity, transparency, and collectability. Research shows that state lotteries fall short in most of these categories.

The practice of dedicating portions of tax revenue to specific expenditure categories, also known as earmarking, can be detrimental to state budgets. Research that looks specifically at the earmarking of lottery revenues finds that educational expenditures remain unaffected, and sometimes even decline, following the implementation of a state lottery.

This result is due to how earmarking changes the incentives facing politicians. A 1999 study compares the results of lottery revenues directed specifically to fund education with revenues going to a state’s general fund. Patrick Pierce, one of the co-authors, explains that when funds are earmarked for education they go to the intended program but, “instead of adding to the funds for those programs, legislators factor in the lottery revenue and allocate less government money to the program budgets.”

Earmarking also affects total government expenditures, even though from a theoretical perspective it should have little effect since one source of funding is just as good as another. Nevertheless, many empirical studies find the opposite. Mercatus research corroborates this by demonstrating that earmarking tends to result in an increase in total government spending while having little effect on the program expenditures to which the funds are tied. This raises serious transparency concerns because it obscures increases in total government spending that voters may not want.

Last but not least, about four decades of studies have examined lottery tax equity and the majority of them find that lottery sales disproportionately draw from lower-income groups, making them regressive taxes. This only adds to the aforementioned concerns about the transparency, collectability, and revenue raising capabilities of lottery taxes.

Perhaps the effectiveness of lottery taxes can be best summed up by the authors of a 1993 study who wrote that “lotteries as a source of funding are neither efficient nor equitable substitutes for more traditional tax sources.”

Although at least three people walked away with millions of dollars yesterday, many taxpayers are not getting any benefits from their state’s lottery system.

Teenage unemployment in cities

New research that examines New York’s Summer Youth Employment Program (SYEP) finds that participation in the program positively impacts student academic outcomes. As the authors state in the introduction, youth employment has many benefits:

“Prior research suggests that adolescent employment improves net worth and financial well-being as an adult. An emerging body of research indicates that summer employment programs also lead to decreases in violence and crime. Work experience may also benefit youth, and high school students specifically, by fostering various non-cognitive skills, such as positive work habits, time management, perseverance, and self-confidence.” (My bold)

This is hardly surprising news to anyone who had a summer job when they were young. An additional benefit from youth employment not mentioned by the authors is that the low-skill, low-paying jobs held by young people also provide them with information about what they don’t want to do when they grow up. Working in a fast food restaurant or at the counter of a store in the local mall helps a young person appreciate how hard it is to earn a dollar and provides a tangible reason to gain more skills in order to increase one’s productivity and earn a higher wage.

Unfortunately, many young people today are not obtaining these benefits. The chart below depicts the national teenage unemployment rate and labor force participation rate (LFP) from 2005 to 2015 using year-over-year August data from the BLS.

national teen unemp, LFP

During the Great Recession teenage employment fell drastically, as indicated by the simultaneous increase in the unemployment rate and decline in the LFP rate from 2007 to 2009. From its peak in 2010, the unemployment rate for 16 to 19 year olds declined slowly until 2012. This decline in the unemployment rate coincided with a decline in the LFP rate and thus the latter was partly responsible for the former’s decline. More recently, the labor force participation rate has flattened out while the unemployment rate has continued to decline, which means that more teenagers are finding jobs. But the teenagers who are employed are part of a much smaller labor pool than 10 years ago – nationally, only 33.7% of 16 to 19 year olds were in the labor force in August 2015, a sharp decline from 44% in 2005.

Full-time teenage employment is unique in that it has a relatively high opportunity cost – attending school full time. Out of the teenagers who work at least some portion of the year, most only work during the summer when school is not in session. Some teenagers also work during the school year, but this subset of teenage workers is smaller than the set who are employed during the summer months. Thus a decline in the LFP rate for teenagers may be a good thing if the teenagers who are exiting the labor force are doing so to concentrate on developing their human capital.

Unfortunately this does not seem to be the case. From 2005 to 2013 the enrollment rate of 16 and 17 year olds actually declined slightly from 95.1% to 93.7%.  The enrollment rate for 18 and 19 year olds stayed relatively constant – 67.6% in 2005 and 67.1% in 2013, with some mild fluctuations in between. These enrollment numbers coupled with the large decline in the teenage LFP rate do not support the story that a large number of working teenagers are exiting the labor force in order to attend school full time. Of course, they do not undermine the story that an increasing amount of teenagers who are both in the labor force and attending school at the same time are choosing to exit the labor force in order to focus on school. But if that is the primary reason, why is it happening now?

Examining national data is useful for identifying broad trends in teenage unemployment, but it conceals substantial intra-national differences. For this reason I examined teenage employment in 10 large U.S. cities (political cities, not MSAs) using employment status data from the 5-year American Community Survey (ACS Table S2301. 2012 was the latest data available for all ten cities).

The first figure below depicts the age 16 – 19 LFP rate for the period 2010 – 2012. As shown in the diagram there are substantial differences across cities.

City teenage LFP

For example, in New York (dark blue) only 23% of the 16 – 19 population was in the labor force in 2012 – down from 25% in 2010 – while in Denver 43.5% of the 16 – 19 population was in the labor force. Nearly every city experienced a decline over this time period, with only Atlanta (red line) experiencing a slight increase. Five cities were below the August 2012 national rate of 34% – Chicago, Philadelphia, Atlanta, San Francisco, and New York.

Also, in contrast to the improving unemployment rate at the national level from 2010 – 12 shown in figure 1, the unemployment rate in each of these cities increased during that period. Figure 3 below depicts the unemployment rate for each of the 10 cities.

City teenage unemp rate

In August 2012 the national unemployment rate for 16 – 19 year olds was 24.3%, a rate that was exceeded by all 10 cities analyzed here. Atlanta had the highest unemployment rate in 2012 at 48%. Atlanta’s high unemployment rate and relatively low LFP rate reveals how few Atlanta teens were employed during this period and how difficult it was for those who wanted a job to find one.

The unemployment rate may increase because employment declines or more unemployed people enter the labor force, which would increase the labor force participation rate. Figures 2 and 3 together indicate that the unemployment rate increased in each of these cities due to a decline in employment, not increased labor force participation.

The preceding figures are evidence that the teenage employment situation in these major cities is getting worse both over time and relative to other areas in the country. To the extent that teenage employment benefits young people, fewer and fewer of them are receiving these benefits. From the linked article:

“The substantial drop in teen employment prospects has had a devastating effect on the nation’s youngest teens (16-17), males, blacks, low income youth, and inner city, minority males,” wrote Andrew Sum in a report on teen summer employment for the Center for Labor Market Studies at Northeastern University. “Those youth who need work experience the most get it the least, another example of the upside down world of labor markets in the past decade.”

Unfortunately, in many cities the response to this situation will only exacerbate the problem. Seattle and Los Angeles have already approved local $15 minimum wages, and a similar law in the state of New York that applies only to fast food franchises was recently approved by the state’s wage board. While many people still question the effect of a minimum wage on overall employment, there is substantial empirical evidence that a relatively high minimum wage has a negative effect on employment for the least skilled workers, which includes inner-city teenagers who often attend mediocre schools. Thus it is hard to believe that any of the seemingly well-intentioned increases in the minimum wage that are occurring around the country will have a positive effect on the urban teenage employment situation presented here. A better response would be to eliminate the minimum wage so that in the short run low-skilled workers are able to offer their labor at a price that is commensurate to its value. In the long run worker productivity must be increased which involves K-12 school reform.

Pennsylvania taxpayer’s new “boutique” apartments

Eric Blumenfeld Realty Management (EBRM) recently secured $44 million in financing to restore the Divine Lorraine Hotel in Philadelphia. According to the article:

“EBRM will renovate the 9-story property into a boutique residential community comprised of 109-rental units to sit above 20,000 s/f of restaurant and retail space.”

But Blumenfeld did not receive ordinary financing. Instead EBRM largely circumvented the private sector capital markets and received a substantial portion of its financing courtesy of the Pennsylvania taxpayer:

“The hotel’s revitalization involved coordinating with an array of state and city governmental agencies and programs, including the Philadelphia Redevelopment Authority which provided a $2,500,000 loan and $1,000,000 grant, the Pennsylvania Redevelopment Assistance Capital Program which provided a $3,500,000 RACP grant, the Philadelphia Industrial Development Corp. which provided a bridge loan for the state grant, and the parks department which is anticipated to provide $8,000,000 in historic tax credits financing.”

In total EBRM received over $15 million in government grants, loans, and tax credits, including a RACP grant, which my research shows simply shuffles economic activity around Pennsylvania and puts taxpayers on the hook for paying back the bonds that fund the program – with interest.

I appreciate the renovation of historic landmarks but I don’t think taxpayers should have to help with the financing. Boutique apartments are a private good and as such their provision is best left to the market, without assistance from public funds. Some businesses choose to pursue government grants and subsidies rather than create a business plan that private investors are willing to finance – and who can blame them? It’s often easier to work with local governments that are just waiting to throw money at any business venture that promises jobs than to go through the trouble of creating a profitable business capable of attracting investors.

If you’re a Pennsylvania taxpayer thinking about moving to Philadelphia I recommend a new unit in the remodeled Divine Lorraine. At least that way you might get something for your money.

Institutions matter, state legislative committee edition

Last week, Mercatus published a new working paper that I coauthored with Pavel Yakovlev of Duquesne University. It addresses an understudied institutional difference between states. Some state legislative chambers allow one committee to write both spending and taxing bills while others separate these functions into two separate committees.

This institutional difference first caught my eye a few years ago when Nick Tuszynski and I reviewed the literature on institutions and state spending. Among 16 different institutions that we looked at—from strict balanced budget requirements to term limits to “item reduction vetoes”—one stood out. Previous research by Mark Crain and Timothy Muris had found that states in which separate committees craft taxing and spending bills spend significantly less per capita than states in which a single committee was responsible for both kinds of bills. As you can see from the figure below (click to enlarge), the effect was estimated to be many times larger than that found for almost any other institution:

InstitutionsBut as large as this effect seems to be, the phenomenon has largely been ignored. To our knowledge, Crain and Muris are the only ones to have studied it. Their paper was now two decades old and was based on a relatively small sample of years from the 1980s.

As I wrote in yesterday’s Economics Intelligence column for US News:

To get a fresh look at the phenomenon, my colleagues and I consulted state statutes, legislative rules, committee websites and members’ offices. We created a unique data set that for some states spans 40 years. We took a cautious approach, coding taxing and spending functions as not separate in any chambers in which it was possible for a tax bill to come out of a spending committee and vice versa. We found that in 25 states, these functions are separate in both chambers, in 7 states they are separate in one chamber, and in the rest, these functions are separate in neither chamber.

To control for other confounding factors, we also gathered data on economic, demographic, and institutional differences between the states. Controlling for these factors, we found that separate taxing and spending committees are, indeed, associated with less spending. To be precise:

Other factors being equal, we find that those states with separate taxing and spending committees spend between $300 and $450 less per capita (between $790 and $1,200 less per household) than other states.

Our full paper is here, a summary is here, and my post at US News is here. Comments welcome.

What to expect from a lame duck

Two weeks ago, I sat down with CSPAN’s Greta Wodele Brawner to talk about “lame duck” sessions of Congress. Drawing on my research with colleagues Chris Koopman and Emily Washington, we discussed the ways in which roll call voting patterns differ during lame duck sessions compared with ordinary sessions.

A few times I struck a relatively upbeat tone about what might get accomplished in the next two years. Only two weeks old, I worry that some of these comments already seem wildly optimistic. Let me know what you think.

An interesting development in state regulation of wine shipment

Can one state enforce another state’s laws that prohibit direct-to-consumer wine shipment from out-of-state retailers while allowing it by in-state retailers?  That’s the question posed in a recent New York case.

The New York State Liquor Authority has a rule that prohibits licensees from engaging in “improper conduct.”  The liquor regulator argues that direct shipments by retailers that violate other states’ laws constitute improper conduct.  It has fined, revoked licenses, and filed charges against New York retailers that it believes have shipped wine illegally to customers in other states. One retailer, Empire Wine, refused to settle and has sued the liquor authority in state court, claiming that the “improper conduct” rule is unconstitutionally vague and that the liquor authority cannot enforce other states’ laws that discriminate against interstate commerce.

Many states continue to prohibit direct shipment from out-of-state retailers. For example, 40 states do not allow New York retailers to ship directly to consumers.  This harms consumers, because it is usually out-of state-retailers, rather than wineries, that offer significant savings compared to in-state retailers. In a 2013 article published in the Journal of Empirical Legal Studies, Alan Wiseman and I identified two different anti-consumer effects of laws that allow out-of-state wineries to ship direct to consumer but prohibit out-of-state retailers from doing so. First, these laws deprive consumers of price savings from buying many bottles online: “Online retailers consistently offered price savings on much higher percentages of the bottles in each year—between 57 and 81 percent of the bottles when shipped via ground and between 32 and 48 percent when shipped via air. Excluding retailers from direct shipment thus substantially reduces—but does not completely eliminate—the price savings available from purchasing wine online.” Second, these laws reduce competitive pressure on bricks-and-mortar wine stores, since they exclude lower-priced out-of-state retailers from the local market. Thus, the laws likely harm consumers who buy from their local wine shops, not just consumers who want to buy online. (The published version of the paper is behind a paywall, but you can read the working paper version at SSRN.)

(Photo credit: http://srxawordonhealth.com/2011/07/11/exercise-in-a-bottle/)

 

Municipalities in fiscal distress: state-based laws and remedies

The Great Recession of 2008 “stress tested” many policies and institutions including the effectiveness of laws meant to handle municipal fiscal crises. In new Mercatus research professor Eric Scorsone of Michigan State University assess the range and type of legal remedies offered by states to help local governments in financial trouble.

“Municipal Fiscal Emergency Laws: Background and Guide to State-Based Approaches,” begins with some brief context. Most municipal fiscal laws trace their lineage through the 1975 New York City fiscal crisis, the Great Depression and the 19th century railroad bankruptcies. Writing in 1935, attorney Edward Dimock articulated three pieces to addressing municipal insolvency:  1) oversight of the municipality’s financial management 2) stop individual creditors from undermining the distressed entity and 3) put together a plan of adjustment for meeting the creditor’s needs.

These general parameters are at work in state laws today. The details vary. Some states are passive and others much more “hands-on” in dealing with local financial troubles. Scorsone documents these approach with a focus on the “triggers” states use to identify a crisis, the remedies permitted (e.g. can a municipality amend a collective bargaining agreement?), and the exit strategies offered. Maine has the most “Spartan” of fiscal triggers. A Maine municipality that fails to redistribute state taxes, or misses a bond payment triggers the state government’s attention. Michigan also has very strong municipal distress laws which create, “almost a form of quasi-bankruptcy” allowing the state emergency manager to break existing contracts. Texas and Tennessee, by contrast, are relatively hands-off.

How well these laws work is a live issue in many places, including Pennsylvania. In 1987 the state passed Act 47 to identify distressed municipalities. While Act 47 appears to have diagnosed dozens of faltering local governments, the law has proven ineffective in helping municipalities right course. Many cities have remained on the distressed list for 20 years. Recent legislation proposes to allow a municipality that can’t “exit Act 47” the option of disincorporating. Is there a middle ground? As the PA State Association of Town Supervisors put it, “If we can’t address the labor issues, if we can’t address the mandates, if we can’t address the tax exempt properties, we go nowhere.”

Municipalities end up in distress for a complex set of reasons: self-inflicted policy and governance failures, uncontrollable social and economic shifts, and external shocks. Unwinding the effects of decades of interlocking problems isn’t a neat and easy undertaking. The purpose of the paper isn’t to evaluate the effectiveness various approaches to helping municipalities out of distress, it is instead a much-needed guide to help navigate and compare the states’ legal frameworks in which municipal leaders make decisions.

 

 

 

Is American Federalism conducive to liberty?

In new Mercatus research, Dr. Richard E. Wagner, Harris professor of Economics at George Mason University tackles a fascinating question: Is the American form of federalism supportive of liberty?

His answer is a qualified ‘yes.’ Under certain conditions, American federalism does support liberty, but that very same system can also be modified resulting in the expansion of political power relative to the liberty of citizens. The question of what results from the gradual constitutional transformation of the American federalist system is a salient one for not only students of government but also policymakers.

The important conditions that determine which form of federalism prevails (liberty-supporting or liberty-eroding) are rooted in competition among governments. Today we are experiencing a very different kind of federalism than the one instituted by the Founders. For the better part of a century, the US constitution has often been amended in a way to encourage collusion among the states thus undermining a key feature of a liberty-supporting federalism.

Restoring a liberty-supporting federalism first requires a deeper diagnosis of the American federalist system. Dr. Wagner develops that possibility through a very engaging synthesis of public choice theory, Austrian and new institutional economics.  Student of Dr. Wagner may be familiar with many of these concepts, developed in his public finance books including Deficits, Debt and Democracy (2012, Elgar). Rather than summarize the paper in today’s blog post, for now I encourage you to read the piece in full.

Hercules, California’s Herculean debts

What lead the city of Hercules, California to default on its debts? Guest poster Marc Joffe, Principal Consultant at Public Sector Credit, finds a case of mission-creep in the “dynamic city on the Bay’s”  decision to issue debt to finance power plants and affordable housing.

(For more of Marc Joffe’s research on modeling credit risk, read his 2013 Mercatus Working paper comparing Illinois and Indiana)

Hercules, California Public Power Failure Leads to Default

by Marc Joffe

Cities can default on obligations to their creditors without filing for Chapter IX bankruptcy protection.  This is the lesson of Hercules, California – a 25,000-resident San Francisco suburb whose finances are not quite as mighty as its name implies. Hercules experience is also illustrative of the risks that cities take when they expand beyond their core functions of public safety and public works.

The city is threatening to default on $12.8 million of municipal bonds as early as this August.  In a tender offer issued earlier this month, Hercules offered holders of these bonds 90% of their securities’ face value. According to the bondholder notice, “If an insufficient number of bonds are not tendered, the City anticipates it will soon default on the bonds.” Offering bondholders 90 cents on the dollar in order to avoid facing the risk of non-payment is, for all intents and purposes, a default.

In fact, it is the city’s third default in recent years. In 2011, Hercules failed to repay a $3.75 million loan from the California Housing Financing Agency (CHFA). The state loan was intended to support a mixed use development Hercules planned to build. The development, which included a large affordable housing component, was stymied by neighborhood opposition to low income housing and the City’s inability to acquire a portion of the intended construction site from a nearby homeowner’s association. Earlier this year, Hercules sold the site to a developer who plans to build market rate housing. It has also agreed to repay the CHFA loan in installments through 2026 at a reduced interest rate.

Hercules’ second default occurred on February 1, 2012, when it failed to make a $2.4 million interest payments on Redevelopment Agency (RDA) bonds. The default was absorbed by Ambac, the agency’s municipal bond insurer. Ambac filed suit against the city claiming it had failed to remit RDA related property tax collections to the bond trustee as required. In March 2012, Ambac and the City settled the litigation with the City pledging two parcels of land to the insurer. The City further agreed to place these two properties on the market, apparently to offset the $4.05 million property tax remittance the city had failed to make earlier.

The most recent default (or, more euphemistically, the current tender offer) involves bonds issued to finance a failed public power scheme. In 2001, the City established a public power company – the Hercules Municipal Utility (HMU) – on the assumption that it could replace the area’s for-profit utility, Pacific Gas & Electric (PG&E). The expectation was that HMU would generate a similar rate of profit to PG&E, but under public ownership, those profits could fund other city spending priorities. Unfortunately for Hercules creditors and taxpayers, things did not work out as planned.

In a 2011 expose, the Huffington Post reported that HMU was serving only 840 customers, charging rates 17% higher than PG&E and had lost money in every year since its 2003 inception. In 2010, the City issued $13.5 million in new bonds to finance HMU, but the proceeds were never invested. Now the City has agreed to sell its power plant to the local utility – Pacific Gas & Electric. Unfortunately, PG&E’s bid was insufficient to retire the $12.8 million in 2010 bonds still outstanding and (for reasons discussed below) the city lacks reserves that could be used to fully redeem these remaining bonds. Thus the need for a 90% tender offer.

Municipal bond analysts often assess a city’s fiscal well-being by reviewing its audited financial statements. Unfortunately, Hercules routinely files its audited financials on a delayed basis. Currently, the latest available statements for Hercules are for the fiscal year ended June 30, 2011. Many California cities have already filed their 2013 audits. The failure to file audited financials on a timely basis is part of a larger financial management issue in Hercules. In May and November 2012, the State Controller’s Office issued three audits highly critical of the city’s fiscal controls. One report “found the City of Hercules’ administrative and internal accounting control deficiencies to be serious and pervasive.” These insufficient controls may explain why RDA tax revenues could be directed away from debt service, thereby subjecting the city to costly litigation.

As shown in the accompanying table, Hercules has persistently run large General Fund deficits since 2008.  The city’s inability to balance its books has resulted in the depletion of its financial reserves. According to Hercules most recent budget, the city had a negative unassigned General Fund balance at the end of FY 2012 and FY 2013, meaning it had no reserves that had not already been earmarked for one purpose or another. Despite having borrowed over $150 million, the city thus lacked liquid assets to cover contingencies.

Hercules General Fund Performance (FY 2008-FY2013)

Year

Revenues

Expenditures

Surplus/(Deficit)

2008

13,927,154

15,238,000

(1,310,846)

2009

14,738,289

17,274,960

(2,536,671)

2010

16,422,677

20,683,147

(4,260,470)

2011

11,823,076

16,232,313

(4,409,237)

2012

10,754,530

12,893,983

(2,139,453)

2013

11,151,014

12,288,943

(1,137,929)

Sources: Hercules Audited Financial Statements (FY 2008-2011), FY 2014 Budget.
FY 2012 and FY 2013 are unaudited estimates.

 

Hercules fiscal straitjacket appears to be the result of government overreach. Instead of focusing on efficient delivery of basic services and providing effective financial oversight, City leaders ventured into enterprises attractive to many of their Progressive constituents: publicly owned power and publicly-financed affordable housing. Lacking the skills to properly manage these undertakings, city leadership squandered large sums of borrowed money and ran down their financial reserves. The result for Hercules will be years of higher taxes, subpar real estate performance and reduced access to the municipal bond market.

 

Does statehood trigger Leviathan? A case study of New Mexico and Arizona

I was recently asked to review, “The Fiscal Case Against Statehood: Accounting for Statehood in New Mexico and Arizona, by Dr. Stephanie Moussalli for EH.net (the Economic History Association).

I highly recommend the book for scholars of public choice, economic history and accounting/public finance.

As one who spends lots of time reading  state and local financial reports in the context of public choice, I was very impressed with Moussalli’s insights and tenacity. In her research she dives into the historical accounts of territorial New Mexico and Arizona to answer two questions.  Firstly, did statehood (which arrived in 1912) lead to a “Leviathan effect” causing government spending to grow. And secondly, as a result of statehood, did accounting improve?

The answer to these questions is yes. Statehood did trigger a Leviathan effect for these Southwestern states –  findings that have implications for current policy – in particular the sovereignty debates surrounding Puerto Rico and Quebec. And the accounts did improve as a result of statehood, an outcome that controls for the fact that this occurred during the height of the Progressive era and its drive for public accountability.

A provocative implication of her findings that cuts against the received wisdom:  Are the improved accounting techniques that come with statehood a necessary tool for more ambitious spending programs? Does accounting transparency come with a price?

What makes this an engaging study is Moussalli’s persistence and creativity in bringing light to a literature void. She stakes out new research territory, and brings a public choice-infused approach to what might otherwise be bland accounting records. She rightly sees in the historical ledgers the traces of the political and social choices of individuals; and the inescapable record of their decisions. In her words, “people say one thing and do another.” The accounts speak in a way that historical narrative does not.

For more read the review.