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Can Government Change a Region’s Growth Path?. Chapter 11. Government’s role in theory. Economic base model Government spending needed to alleviate recessions Neoclassical model Government spending crowds out private investment, or Boosts one economy at the expense of another

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Government s role in theory
Government’s role in theory

  • Economic base model

    • Government spending needed to alleviate recessions

  • Neoclassical model

    • Government spending crowds out private investment, or

    • Boosts one economy at the expense of another

  • Endogenous growth model

    • Provides necessary public goods to promote growth (education, infrastructure, property rights enforcement)


Why government
Why government?

  • Redistribute income

  • Provide public goods

  • Administer fiscal policy programs


Equity and efficiency
Equity and efficiency

  • Allocative efficiency

  • Technical efficiency

  • Distributional efficiency

    • Pareto Optimality—optimal solution exists when nobody can improve their situation without harming another.


Investments in public capital
Investments in public capital

  • Highways

    • Construction phase (direct, indirect, induced effects)

    • Post-construction phase

      • Facilitates mobility of inputs, output, consumers and labor

    • Problem: roads go both ways.

      • Customers outside workers can drive away more easily

      • Local residents and workers can drive away more easily

    • Good roads do not guarantee rural growth, but bad roads guarantee the area will stagnate.




Investments in public capital1
Investments in public capital agriculture

  • Education

    • Parental migration effect for K-12

    • Good quality labor force in 4-9 years

    • Possible brain drain if more graduates attend college and do not return

    • No guarantee investment will help local area

    • Poor quality schools guaranteed to harm area since adults with low investment in education generally do not migrate.


Investments in public capital2
Investments in public capital agriculture

  • Telecommunications Infrastructure

    • Crucial for rural development

    • Complementary to transportation infrastructure, but can’t substitute for it


Government r d
Government R&D agriculture

  • Infratechnology—standardization

    • Federal or international level

  • Research university

    • Firms can access future employees

    • Potential collaboration with faculty: but confidentiality?

    • Spillovers from academic research


Growth through consumption
Growth through consumption? agriculture

  • Tourism

    • Direct, indirect induced impacts

    • Creates jobs:

      • Low pay, low productivity, possibly seasonal,

      • Secondary labor market

    • Intense competition for repeat visitors

    • Larger city/county budget for police, fire, …

    • Is the provision of a tourist destination nonrival or nonexcludable?


Growth through consumption1
Growth through consumption? agriculture

  • Arts

    • May attract professionals and skilled workers

    • Low employment multiplier (1.3 to 1.5)

    • Merit goods—is this a role for government?

    • Creates jobs:

      • Low pay, low productivity, possibly seasonal,

      • Many from the secondary labor market


Growth through consumption2
Growth through consumption? agriculture

  • Sports teams and Stadiums

    • Often impede economic development

    • Redistributes households’ entertainment budgets

    • Fewer local linkages than other entertainment venues mean a smaller multiplier.

    • Stadiums and teams are subsidized because of politics, not economics

    • Creates jobs:

      • Low pay, low productivity, seasonal,

      • Many from the secondary labor market


Growth through consumption3
Growth through consumption? agriculture

  • Casinos

    • Redistribute entertainment budgets if less than half the gamblers come from outside the region.

    • Best locations

      • Isolated areas near large cities

      • Next to a state that prohibits gaming

    • Creates jobs:

      • Often higher pay than local alternative

    • Few backward linkages so multiplier is small.


Growth through consumption4
Growth through consumption? agriculture

  • Outdoor Recreation Activities

    • Outside expenditures negligible (everyone packs at home for their camping trip)

    • No empirical evidence of associated employment growth

    • Agritourism (Bed & Breakfast, Dude Ranches) bring in extra revenue to farmers.


Growth through consumption5
Growth through consumption? agriculture

  • Retirees

    • Pandora’s box more than panacea

    • Stable source of spending from young, healthy retirees on fixed incomes

    • Countercyclical effect if incomes based on stock market/interest rates

    • Creates jobs

      • Low paying, retail, service jobs

      • High-paying industrial or resource-based jobs eschewed in favor of natural amenities

    • May outlive their assets and depend on community for support.


Economic development policy
Economic Development Policy agriculture

  • Resembles Cargo Cults of Pacific (WWII)

  • Waves of Economic Development

    • 1930s: Smoke stack chasing, beggar thy neighbor strategies for relocating firms

    • 1980s: Target start-ups, offer business services, business incubators, fragmented, unorganized

    • 1990s: Government as catalyst, uses holistic approach


Controversial legacy
Controversial legacy agriculture

  • Create regions reliant on government transfers

  • Interstate analysis tricky because tax law and fiscal policies vary among states

  • Policies from subsequent waves added to economic development tools, economic development data hard to access

  • Surveys used to see if firm would have located without government subsidy: Are these reliable?


Controversial legacy concl
Controversial legacy (concl) agriculture

  • Subsidies for capital expenditure—but capital and labor are often substitute goods. How does this “create” jobs?

  • Subsidies of inefficient firms merely prolong their death.

  • Subsidizing the financing or interest rates of the firm not necessary unless business is extremely risky.

    • Financial markets work.

    • Should tax money create jobs in a risky industry?


Economic development incentive tools
Economic development agriculture incentive tools

  • Tax abatement policies

    • Empirically little evidence that taxes or subsidies influence location of high-tech or service firms

    • Supposedly counteracts high crime rates or high tax rates (but the land market does that)

    • Inefficient tax price of public goods for residential taxpayers

    • Spatial equity concerns: rural or low-income areas subsidize urban areas

    • Cost-benefit analysis seldom includes opportunity cost of funds

    • Awarded arbitrary, often upon request


Tax increment financing tif
Tax Increment Financing (TIF) agriculture

  • Urban revitalization tool, but urban areas don’t always need to show unemployment problems

  • Small firms and residents may have to relocate to make room for TIF district

  • City uses tax revenues paid by a firm to directly assist that firm

  • Allows cities to avoid red tape required to get intergovernmental aid

    • No need for voter approval


Tax increment financing tif1
Tax Increment Financing (TIF) agriculture

  • Spatial equity concerns: rural or low-income areas subsidize urban areas

  • Overlapping jurisdictions (school districts) lose tax base within the district

  • Offers nothing to existing businesses and residents

  • Blighted areas may grow at the expense of the rest of the state

  • Geographic substitution


Enterprise zones
Enterprise Zones agriculture

  • Zones within which firms face fewer restrictions and lower taxes

  • Firms have lower production costs and more freedom to innovate

  • Main beneficiaries: landowners, building contractors


Enterprise zones1
Enterprise Zones agriculture

  • Firms may just relocate short distances to participate in the EZs

    • Backward linkages diverted from initially viable region

    • Lower tax revenues mean higher taxes elsewhere or less government spending

    • On average local governments in US lose $59,000 for every job created with an EZ.


Arms race between the states
Arms race between the states agriculture

  • Officials feel a need to do something to help the poor

  • Beneficiaries easily identified

  • Cost per taxpayer relatively small

  • Negative effect on lowest 20% of income distribution when such programs are often funded with reduced social programs or increased income taxes.


In favor of local competition
In favor of local competition agriculture

  • If it enhances efficiency

    • Can create agglomeration economies

    • Can increase use of local public goods and decrease the average cost of using them

    • New jobs help retain young adult population


Against local competition
Against local competition agriculture

  • Specifically contentious if competition is aimed at specific firms

    • Leads to inadequate levels of public goods and services or higher taxes for same services

    • Firms often do not generate the advertised number of jobs (winner’s curse)

    • Prisoner’s dilemma game among states

    • Net benefits spiral downward

  • Federal Tax of 100% on all benefits? (Rolnick, 2000)



Measuring an area s economic welfare
Measuring an Area’s agriculture Economic Welfare


Sazama s index of inequality
Sazama’s index of inequality agriculture

where t is the specific year,

i is the category (gender, race, etc., if any),

q is the income quintile and Piqt is the percentage of people in each category of the income quintile q

during year t.

The smaller the index, the less is the inequality


Net migration
Net Migration agriculture


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