Working Paper: NBER ID: w2283
Authors: Robert P. Inman
Abstract: The federalist fiscal structure of the United States has been evolving steadily towards the centralization of the financing of government services and transfers. Revenues are raised centrally and then transferred, via grants-in-aid, to state and local governments. This paper seeks to explain this movement towards centralized financing. Two alternative hypotheses are examined. The first--that aid is allocated to correct market or political failures in the local public economy or to equalize the provision of meritorious local public goods--generally fails to account for the distribution of federal aid over the past thirty years. The second hypothesis--that aid is allocated to ease the fiscal pressure in the state- local sector when, and only when, it is in the political interests of Congressional representatives to do so--is supported by the recent data. Our current system of federal grants to state and local governments is a logical outcome of a Congressional budget process that rewards the centralized financing and the localized provision of public good and services.
Keywords: Federal assistance; Local services; Fiscal order; Political economy; Public goods
JEL Codes: H77; H71; H72
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Federal aid allocation is influenced by political interests (H77) | Federal aid is primarily allocated based on political interests (H84) |
| Federal aid is allocated when it serves the political interests of congressional representatives (H84) | Federal aid is primarily allocated based on political interests (H84) |
| Federal assistance has grown significantly since the 1960s (H84) | Federal aid is allocated when it serves the political interests of congressional representatives (H84) |
| Decentralized congressional decision-making process favors redistributive financing (D72) | Federal aid is allocated when it serves the political interests of congressional representatives (H84) |
| Federal aid distribution has become more equitable across states (H77) | Federal aid is allocated when it serves the political interests of congressional representatives (H84) |
| Federal aid does not fully neutralize inequities in local service provision (H79) | Federal aid is not primarily allocated to correct market failures or promote equitable public goods provision (H84) |