Fiscal stimulus through state and local governments

Abstract

State and local governments in the United States make up more than half of total government consumption and investment and almost 90 percent of total government employment. Despite these facts, the debates surrounding fiscal policy during business cycles have usually been limited to the actions of the federal government. This is in large part due to two reasons. First, there are 50 state governments and more than 60,000 local governments, making coordinated responses very difficult. Second, because state and local governments are bound by balanced budget rules, their hands are tied, to some degree, in their ability to enact countercyclical spending policies. However, their dramatic expenditure and employment cuts in the recent recession have made it increasingly clear how much their actions affect the economy as a whole and have motivated new research surrounding their budget mechanisms and the broader impacts of their fiscal policy. This dissertation consists of three chapters, each seeking to illuminate a specific issue within this area of research. In the first chapter, I examine how the impact of federal intergovernmental grants on local economies may be mediated by public sector unions. In the second chapter, I explore the impact of revenue structure on city government revenue and expenditure fluctuations. Finally, the third chapter (co-authored with Gabriel Chodorow- Reich, Zachary Liscow, and William Woolston) estimates the fiscal multiplier associated with federal transfers to state governments in the recent recession.