An Econometric Examination of the New Federalism

Abstract

An Econometric Examination of t he New Federalism PRESIDENT REAGAN unveiled a set of proposals in February 1982 for fundamentally altering U.S. federal-state fiscal relations. He first proposed a massive program "swap" whereby the federal government would take over sole responsibility for the large and rapidly growing medicaid program and the states would assume sole responsibility for the main U. S. income support programs-food stamps and aid to families with dependent children (AFDC). He also proposed various ways to loosen strings heretofore accompanying categorical grants-many grants would be converted from categorical to block-grant form (continuing a trend begun a decade earlier in the Nixon administration), and many categorical and block grants would then be placed in a trust fund, the financial responsibility for which would eventually revert to state governments. Finally, he proposed rather sharp cutbacks in all forms of intergovernmental aid, cutbacks that would normally be front page news but in fact were upstaged by the more fundamental structural proposals. In this paper I try to construct an analytical framework for evaluating I owe a special debt of gratitude to Deborah S. Laren for working out some rather complex data processing schemes and to Judith Jackson for typing the paper on a stillevolving text-edit routine, both with a great deal of skill under the pressure of a time constraint. Patrick Driessen, Sharon Gennis, and Marieka Klawitter also provided able assistance gathering and processing data. Richard A. Kasten generously supplied some of the data. Many ideas surfaced when I presented an early version of this paper at the University of Michigan's public finance workshop, and many more when I circulated a draft to the editors and discussants of the Brookings Panel. Harvey Galper, Helen F.

Government size and growth: Accounting for economic freedom and globalization

“…According to the race to the bottom hypothesis, increased labor and capital mobility will cause problems for big welfare states as countries compete with each other for high-quality labor and capital by lowering taxes and welfare benefits-as described by, for example, Martin and Schumann (1997), Sinn (1997), and Gramlich (1982). Contrary to the hypothesis, recent empirical evidence suggests that globalization and big government are indeed compatible; see Dreher et al (2008), Dreher (2006b, Castles (2004), and Mendoza et al (1997).…”

The political economy of state level welfare benefits

“…The price varies because federal cost-sharing arrangements bear upon the marginal price of state benefit levels. Gramlich (1982) and Gramlich and Laren (1984) have provided support for a negative relationship between the price (the state's share of costs) and benefit levels.…”

“…In addition, increases in AFDC benefits increase the income base used to determine the food stamp entitlements and thus reduce food stamp benefits. It has been difficult, however, to measure precisely the effect of food stamps on AFDC levels (Gramlich, 1982;Gramlich and Laren, 1984). Because of the difficulty of isolating the independent effect of food stamps on AFDC levels, two forms of the dependent variable are employed: (1) average monthly AFDC benefits and (2) AFDC benefits plus food stamps.…”

The Temporary Assistance for Needy Families Program

“…Chernick (1998) also reviews the evidence and argues that the price elasticities of changing the matching rate are somewhat greater than this. Baicker (2001) See Orr (1979) and Gramlich (1982) for two early contributions, and Moffitt et al (1998b) for a recent one. See Chernick (1998) for some discussions of the issues and a review of the literature and Moffitt (1999b) for a discussion of the implications of this literature for explaining the 1996 welfare legislation.…”