1. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe CHAPTER 24 The Federal System of Government

2. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 24-2 The Federal System of Government  Federal system of government  Government made up of many levels  Federal government  Top level in federal system  Economics of federal system:  Desirability of a federal system  Economic interactions among governments

3. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 24-3 The Theoretical Foundations of Federalism  Economies of Scale  Coordination of Large Programs  Public Goods  Externalities  Optimal Sharing Group

4. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 24-4 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

5. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 24-5 Intergovernmental Competition and Consumer Choice

6. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 24-6 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

7. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 24-7 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

8. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 24-8 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”

9. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 24-9 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

10. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 24-10 The Roles of Different Levels of Government

11. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 24-11 Special Interests and Government Size  Special Interest Influence the activities of government  Federalism can limit special interests  Concentrates costs  Increases incentives to become informed

12. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 24-12 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

13. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 24-13 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

14. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 24-14 The Number of Governments

15. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 24-15 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

16. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 24-16 Regulations and Grants  Grants provide a method for federal government to regulate state and localities  Lessen intergovernmental competition  Creates more homogenous local governments

17. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 24-17 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

18. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 24-18 Intergovernmental Revenue

19. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 24-19 Intergovernmental Revenue  Can lead to cartelization of local governments  Two distinct types of intergovernmental grants:  General grants  Categorical grants

20. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 24-20 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

21. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 24-21 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?

22. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 24-22 Categorical Grants A Categorical Grant That Differs from a General Grant

23. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 24-23 Matching Grants  Categorical grant that requires a local contribution before the government “matches” it  Grant can be fixed or limitless

24. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 24-24 Matching Grants Matching Grants of a Fixed Amount

25. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 24-25 Matching Grants Matching Grants with No Grant Limit

26. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 24-26 The Flypaper Effect  Empirically, grants appear to “stick where they land”  Possible explanations:  Budget maximizing bureaucrats  Creates incentive to pursue additional grants

27. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 24-27 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