Budget Rules and State Business Cycles

Abstract

Levinson (1998) finds that large states with lenient balanced budget rules experience less cyclical variability. He concludes that state fiscal policy works. However, Levinson's finding is not robust to alternative methods of detrending the data. In addition, the 1984 Advisory Commission on Intergovernmental Relations (ACIR) analysis of state budget rules used by Levinson (and other researchers) is of questionable merit. Reestimation of Levinson's regressions using budget rule classifications in a U.S. General Accounting Office (GAO) study reverses his result. The results from this study suggest that existing empirical work using the ACIR index should be revisited.

Fiscal Policy Multipliers on Subnational Government Spending

“…22 In addition to the ACIR and NASBO classifications of budget rules, a classification can also be found in a 1993 report by GAO. Differences between these classification systems are the subject of an exchange between Levinson (1998Levinson ( , 2007, and Krol and Svorny (2007). An alternative classification scheme, based on direct readings of statutes and constitutions across states, has also been recently produced by Hou and Smith (2006).…”

Do Balanced‐budget Rules Increase Growth?

“…Reuben and Poterba () find that balanced‐budget and debt‐restriction rules lead to lower taxes and lower debt, and Alt and Lowry () find that more stringent BBRs are associated with lower borrowing costs. Despite concern that BBRs limit fiscal flexibility needed for counter‐cyclical policies, Levinson (), Alesina and Bayoumi (), and Krol and Svorny () provide mixed evidence to resolve the issue. Carlino and Inman () find significant power for countercyclical deficits but do not focus on the role of BBRs; both they and Eberts and Stone () offer evidence that suggests an explanation for the conflicting results on whether or not BBRs increase the volatility of state and local economies: countercyclical deficits are less effective in the long run because they induce a subsequent reversal, offsetting earlier effects.…”

“…Krol and Svorny () identify anomalies in the two measures, but they are not directly comparable: the KS index is dichotomous (strict or lenient), the ACIR index is semi‐continuous. Thus far, only KS have preferred the GAO measure.…”

State Government Organization of Health Services, 1990-2009

“…We also compiled state sociodemographic, economic, and political data from multiple sources to create annual measures of state characteristicsincluding age distribution, race/ethnicity, and density of population 12 -unemployment, 13 average per capita real personal income, 14 poverty rate, 14 partisan composition of the state legislature and governor, 15,16 an indicator of states with stringent of balanced budget requirements, 16,17 indices of the governor's power to set budget policy or veto budgets, 18,19 complete budget data (including federal and local transfers, operational expenses, and capital budgets) for state spending on education, welfare, police, natural resources, and transportation, and detailed revenue data. 15 Budget data did not take into account the influx of money related to bioterrorism preparedness in the early 2000s as this was federal rather than state funding.…”