Holcombe 24 ( PUBLIC SECTOR ECONOMICS : The Role of Goverment in the American Economy Randall...

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PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

CHAPTER

24

The Federal System o

!o"ernment




Randall Holcombe 24-2

The Federal System ofThe Federal System of

GovernmentGovernment Federal system o #o"ernmentFederal system o #o"ernment

!o"ernment made $% o many le"els!o"ernment made $% o many le"els

Federal #o"ernmentFederal #o"ernment To% le"el &n ederal systemTo% le"el &n ederal system

Econom&cs o ederal system:Econom&cs o ederal system:

'es&rab&l&ty o a ederal system'es&rab&l&ty o a ederal system Econom&c &nteract&ons amon# #o"ernmentsEconom&c &nteract&ons amon# #o"ernments





The Theoretical FoundationsThe Theoretical Foundations

of Federalismof Federalism Econom&es o ScaleEconom&es o Scale

Coord&nat&on o Lar#e Pro#ramsCoord&nat&on o Lar#e Pro#rams

P$bl&c !oodsP$bl&c !oods E(ternal&t&esE(ternal&t&es

O%t&mal Shar&n# !ro$%O%t&mal Shar&n# !ro$%





Intergovernmental CompetitionIntergovernmental Competition

and Consumer Choiceand Consumer Choice '&erent #o"ernments can s$%%ly o'&erent #o"ernments can s$%%ly o

"ar&ety o %$bl&cly %ro"&ded #oods"ar&ety o %$bl&cly %ro"&ded #oods

Better sat&sy demands o aBetter sat&sy demands o ahetero#eneo$s %o%$lat&onhetero#eneo$s %o%$lat&on

Many local #o"ernments sat&s&es "ar&edMany local #o"ernments sat&s&es "ar&ed

demand or local %$bl&c #oodsdemand or local %$bl&c #oods





Intergovernmental CompetitionIntergovernmental Competition

and Consumer Choiceand Consumer Choice





o!ility and Intergovernmentalo!ility and Intergovernmental

CompetitionCompetition Many #o"ernments allo) c&t&*ens to +"oteMany #o"ernments allo) c&t&*ens to +"ote

)&th the&r eet,)&th the&r eet, In other )ords- ree to mo"e to anotherIn other )ords- ree to mo"e to another

.$r&sd&ct&on that better sat&s&es the&r.$r&sd&ct&on that better sat&s&es the&r

%reerences%reerences

T&ebo$t modelT&ebo$t model

Local #o"ernments com%ete or res&dentsLocal #o"ernments com%ete or res&dents Hel%s re"eal %reerences or %$bl&c sectorHel%s re"eal %reerences or %$bl&c sector

o$t%$to$t%$t





"ther Governments as a #asis"ther Governments as a #asis

for Comparisonfor Comparison !o"ernment o&c&als m$st sat&sy!o"ernment o&c&als m$st sat&sy

const&t$ents to stay &n o&ceconst&t$ents to stay &n o&ce

Many local #o"ernments allo) orMany local #o"ernments allo) orcom%ar&soncom%ar&son

Pro"&des $se$l &normat&on #&"enPro"&des $se$l &normat&on #&"en

&ncent&"es or rat&onal &#norance&ncent&"es or rat&onal &#norance





"ther Governments as a #asis"ther Governments as a #asis

for Comparisonfor Comparison Ca%&tal&*at&on &n real estate %r&cesCa%&tal&*at&on &n real estate %r&ces

creates &ncent&"es to mon&tor #o"ernmentcreates &ncent&"es to mon&tor #o"ernment

o&c&also&c&als

Many local #o"ernments createMany local #o"ernments create

+laborator&es o democracy,+laborator&es o democracy,





The Roles of $ifferent %evelsThe Roles of $ifferent %evels

of Governmentof Government Ed$cat&on &s lar#est %ort&on o state andEd$cat&on &s lar#est %ort&on o state and

local s%end&n#local s%end&n#

P$bl&c )elare &s second h&#hestP$bl&c )elare &s second h&#hest !rad$al /b$t steady0 r&se &n %$bl&c )elare!rad$al /b$t steady0 r&se &n %$bl&c )elare

s%end&n#s%end&n#

H&#h)ays ha"e allen &n &m%ortanceH&#h)ays ha"e allen &n &m%ortance





The Roles of $ifferent %evels ofThe Roles of $ifferent %evels of

GovernmentGovernment

1970 1980 1990 2000

Education 40.4% 36.1% 34.5% 34.6%

Highways 12.6% 9.0% 7.3% 6.7%Public wl!a" 11.3% 12.8% 13.2% 15.4%

#nsu"anc t"ust $nditu"s

&"ti"'nt and un'loy'nt(5.5% 6.7% 6.5% 8.2%

Halth and hositals 7.4% 8.7% 8.9% 8.5%

)tility and li*uo" sto"s 7.2% 8.4% 8.0% 7.8%

+atu"al "sou"cs 3.6% 3.3% 1.5% 1.3% 1.6% 1.7% 1.9% 1.8%

#nt"st on dbt 3.4% 4.0% 6.0% 5.5%

-th" 7.1% 9.4% 12.2% 10.2%

atgo"y

P"cntag o! /otal

E$nditu"s

ou"c utho"s calculations !"o' data in th Statistical Abstract

of the United States ,a"ious ditions.

/abl 24.1 /h P"cntag o! tat and ocal o,"n'nt

E$nditu"s in a"ious atgo"is !o" lctd a"s





Special Interests andSpecial Interests and

Government Si&eGovernment Si&e S%ec&al Interest Inl$ence the act&"&t&es oS%ec&al Interest Inl$ence the act&"&t&es o

#o"ernment#o"ernment

Federal&sm can l&m&t s%ec&al &nterestsFederal&sm can l&m&t s%ec&al &nterests Concentrates costsConcentrates costs

Increases &ncent&"es to become &normedIncreases &ncent&"es to become &normed





Centrali&ation and theCentrali&ation and the

Carteli&ation of GovernmentCarteli&ation of Government !o"ernment mon&tors ant&com%et&t&"e!o"ernment mon&tors ant&com%et&t&"e

beha"&or &n %r&"ate sectorbeha"&or &n %r&"ate sector

1nt&com%et&t&"e beha"&or &n #o"ernment1nt&com%et&t&"e beha"&or &n #o"ernment

&s .$st&&ed as:&s .$st&&ed as: El&m&nat&n# )aste$l d$%l&cat&onEl&m&nat&n# )aste$l d$%l&cat&on

Enorc&n# $n&orm standardsEnorc&n# $n&orm standards





Competition in the Pu!licCompetition in the Pu!lic

SectorSector Inter#o"ernmental com%et&t&on &m%ortantInter#o"ernmental com%et&t&on &m%ortant

&n %$bl&c sector b$t has decl&ned &n&n %$bl&c sector b$t has decl&ned &n

recent decadesrecent decades

Standard&*at&on decreasesStandard&*at&on decreases

&nter#o"ernmental com%et&t&on&nter#o"ernmental com%et&t&on

Consol&dat&on has red$ce n$mber o localConsol&dat&on has red$ce n$mber o local

#o"ernment $n&ts#o"ernment $n&ts





The 'um!er of GovernmentsThe 'um!er of Governments





Regulations and GrantsRegulations and Grants

Method or central&*&n# #o"ernmentMethod or central&*&n# #o"ernment

act&"&tyact&"&ty

State #o"ernments ree to &m%oseState #o"ernments ree to &m%ose

re#$lat&ons on local #o"ernmentsre#$lat&ons on local #o"ernments

Federal #o"ernment l&m&ted byFederal #o"ernment l&m&ted by

Const&t$t&onConst&t$t&on Ho)e"er- &m%oses r$les as a cond&t&on orHo)e"er- &m%oses r$les as a cond&t&on or

rece&"&n# #rant $nd&n#rece&"&n# #rant $nd&n#





Regulations and GrantsRegulations and Grants

!rants %ro"&de a method or ederal!rants %ro"&de a method or ederal

#o"ernment to re#$late state and#o"ernment to re#$late state and

local&t&eslocal&t&es

Lessen &nter#o"ernmental com%et&t&onLessen &nter#o"ernmental com%et&t&on

Creates more homo#eno$s localCreates more homo#eno$s local

#o"ernments#o"ernments





Intergovernmental RevenueIntergovernmental Revenue

S&#n&&cant so$rce o local #o"ernmentS&#n&&cant so$rce o local #o"ernment

re"en$ere"en$e

Occ$r beca$se:Occ$r beca$se: Local #o"ernment does not ha"e &ncent&"e toLocal #o"ernment does not ha"e &ncent&"e to

$nderta2e the %ro.ect$nderta2e the %ro.ect

Local #o"ernment does not ha"e $nds toLocal #o"ernment does not ha"e $nds to

$nderta2e the %ro.ect$nderta2e the %ro.ect






Can lead to cartel&*at&on o localCan lead to cartel&*at&on o local

#o"ernments#o"ernments

T)o d&st&nct ty%es o &nter#o"ernmentalT)o d&st&nct ty%es o &nter#o"ernmental

#rants:#rants: !eneral #rants!eneral #rants

Cate#or&cal #rantsCate#or&cal #rants





General GrantsGeneral Grants

Ta( re"en$es collected by h&#her3le"elTa( re"en$es collected by h&#her3le"el

#o"ernment#o"ernment !&"en to lo)er3le"el #o"ernment to s%end!&"en to lo)er3le"el #o"ernment to s%end

ho) they see &tho) they see &t

T)o .$st&&cat&ons:T)o .$st&&cat&ons: H&#her3le"el #o"ernments ha"e more re"en$eH&#her3le"el #o"ernments ha"e more re"en$e

#enerat&n# ab&l&ty#enerat&n# ab&l&ty E4$al&*at&on o re"en$es amon# #o"ernmentsE4$al&*at&on o re"en$es amon# #o"ernments





Categorical GrantsCategorical Grants

!rants made or a s%ec&&c %$r%ose!rants made or a s%ec&&c %$r%ose

!&"e #rant&n# #o"ernment some control!&"e #rant&n# #o"ernment some control

o"er e(%end&t$reo"er e(%end&t$re

Ho) m$ch de%ends on the c&rc$mstancesHo) m$ch de%ends on the c&rc$mstances Ho) m$ch )o$ld the local #o"ernment ha"eHo) m$ch )o$ld the local #o"ernment ha"e

s%ent )&tho$t the #rant5s%ent )&tho$t the #rant5





Categorical GrantsCategorical Grants

A Categorical

Grant That $iffers

from a General

Grant





atching Grantsatching Grants

Cate#or&cal #rant that re4$&res a localCate#or&cal #rant that re4$&res a local

contr&b$t&on beore the #o"ernmentcontr&b$t&on beore the #o"ernment

+matches, &t+matches, &t

!rant can be &(ed or l&m&tless!rant can be &(ed or l&m&tless






atching Grants of

a Fi(ed Amount






atching Grants)ith 'o Grant %imit





The Flypaper EffectThe Flypaper Effect

Em%&r&cally- #rants a%%ear to +st&c2 )hereEm%&r&cally- #rants a%%ear to +st&c2 )here

they land,they land,

Poss&ble e(%lanat&ons:Poss&ble e(%lanat&ons: B$d#et ma(&m&*&n# b$rea$cratsB$d#et ma(&m&*&n# b$rea$crats

Creates &ncent&"e to %$rs$e add&t&onal #rantsCreates &ncent&"e to %$rs$e add&t&onal #rants





Ta( Issues and %ocalTa( Issues and %ocal

GovernmentsGovernments Ind&"&d$al and b$s&ness mob&l&ty has ta(Ind&"&d$al and b$s&ness mob&l&ty has ta(

%ol&cy &m%l&cat&ons%ol&cy &m%l&cat&ons

Ta(es %a&d by &mmob&le actorsTa(es %a&d by &mmob&le actors E(%la&ns %ro%erty ta(at&onE(%la&ns %ro%erty ta(at&on

Ca%&tal&*at&on o debtCa%&tal&*at&on o debt

Ca%&tal&*at&on o %$bl&c #oodsCa%&tal&*at&on o %$bl&c #oods 'ed$ct&b&l&ty o state and local ta(es'ed$ct&b&l&ty o state and local ta(es

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