U.S. State and Local Fiscal Policy and Economic Activity: Do We Know More Now?

Abstract

Early reviews of the academic literature on the economic effects of state and local taxes and expenditures suggested that not enough was known upon which to base policy. The reviews called for better data and improvements in empirical methodology. This paper reviews studies conducted since the early literature reviews to assess our current state of knowledge. The conclusion of the study is that we know more now. But our knowledge is unlikely to ever be sufficient to provide universal policy guidance. Rather, we suggest that more research is needed on specific state and local policies for specific circumstances, consistent with the general principles that guide place‐based policy.

State‐level austerity, education, and large urban labor markets: Evidence from fiscal policy experiments in Kansas and Wisconsin

“…Thus, it is important to understand how state‐level policies influence growth in large urban areas (Irwin et al., ). This is a notable departure from the previous literature on fiscal austerity and the studies that examine the fiscal policy experiments in Kansas and Wisconsin, which use state‐level data or counties on state borders (Rickman & Wang, ).…”

“…Rickman and Wang () survey the more recent empirical literature. Their review covers over 60 peer‐reviewed articles, working papers, and books.…”

“…In particular, Kansas underperformed against its control group in six out of seven outcomes, while Wisconsin faced a similar fate in five out of 7 outcomes. Rickman and Wang () extend this analysis to include several additional states with fiscal policy changes. Their results are consistent with the previous work that shows Kansas and Wisconsin grew slower relative to their control group after instituting austerity policies.…”

“…CZs also allow for a larger donor pool to measure the desired treatment effect in the SCM analysis. For instance, my analysis has 258 potential donor urban CZs, while the state‐level analysis in Rickman and Wang () use 32 and 33 donor states, respectively.…”

“…Third, I leverage the SCM to examine treatment effect heterogeneity and account for differences in the underlying labor market fundamentals driving each urban area. This is one of the few studies on local fiscal policy that leverages the SCM (Rickman & Wang, ). The SCM offers a formalized data‐driven procedure that reduces the “ad hoc" nature of choosing the control group.…”