Fiscal Outputs: Determinants and Policy Consequences

Fiscal Outputs: Determinants and Policy ConsequencesIntergovernmental Fiscal Relations in the United States by George F. Break; Politics,Economics, and the Public: Policy Outcomes in the American States by Thomas R. Dye; ThePolitics of State Expenditures in Illinois by Thomas J. AntonReview by: Alan K. CampbellPublic Administration Review, Vol. 28, No. 6 (Nov. - Dec., 1968), pp. 571-577Published by: Wiley on behalf of the American Society for Public AdministrationStable URL: http://www.jstor.org/stable/973338 .

Accessed: 14/06/2014 12:18

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .http://www.jstor.org/page/info/about/policies/terms.jsp

.JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range ofcontent in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new formsof scholarship. For more information about JSTOR, please contact [email protected].

.

Wiley and American Society for Public Administration are collaborating with JSTOR to digitize, preserve andextend access to Public Administration Review.

http://www.jstor.org

This content downloaded from 188.72.126.182 on Sat, 14 Jun 2014 12:18:02 PMAll use subject to JSTOR Terms and Conditions

http://www.jstor.org/action/showPublisher?publisherCode=black

http://www.jstor.org/action/showPublisher?publisherCode=aspa

http://www.jstor.org/stable/973338?origin=JSTOR-pdf

http://www.jstor.org/page/info/about/policies/terms.jsp


BOOK REVIEWS 571

4. Grant McConnell, Private Power and American Democracy (New York: Alfred A. Knopf, 1966).

5. Theodore J. Lowi, "The Public Philosophy: Interest-Group Liberalism," American Political Science Review, Vol. LXI (March 1967), pp. 5-24. See also the review by Philip Green, "Science, Government, and the Case of Rand: A Singular Pluralism," World Politics, Vol. XX (January 1968), pp. 301-326.

6. Michael D. Reagan's paper, "Policy Issues: The Interaction of Substance and Process," delivered at the 1967 annual meeting of the American Political Science Association in Chicago, contains

a useful discussion of these and related points. 7. Ibid., p. 3. 8. For an example of an analysis which employs

structure as an independent variable, see Robert L. Lineberry and Edmund P. Fowler, "Reform- ism and Public Policies in American Cities," American Political Science Review, Vol. LXI (September 1967), pp. 701-716.

9. A stimulating discussion on this point is found in the article by Theodore J. Lowi, "American Business, Public Policy, Case Studies and Politi- cal Theory," World Politics, Vol. XVI (July 1964), pp. 677-715.

FISCAL OUTPUTS: DETERMINANTS AND

POLICY CONSEQUENCES

ALAN K. CAMPBELL Syracuse University

INTERGOVERNMENTAL FISCAL RELATIONS IN

THE UNITED STATES, George F. Break. Studies of Government Finance, Washington, D.C.: The Brookings Institution, 1967.

POLITICS, ECONOMICS, AND THE PUBLIC:

POLICY OUTCOMES IN THE AMERICAN

STATES, Thomas R. Dye. Chicago: Rand McNally & Company, 1966.

THE POLITICS OF STATE EXPENDITURES IN

ILLINOIS, Thomas J. Anton. Urbana and London: University of Illinois Press, 1966.

POLITICAL SCIENTISTS have long been in- terested in the public decision-making process, but only recently have they begun to examine its quantitatively measurable fiscal dimensions. Economists, in contrast, have traditionally used public finance measures as a means of examining both the content and fiscal impact of public policy decisions. By combining the interests and techniques of political scientists and economists it is possible that new light may be shed on the decision process as well as on the determinants of public policy.

The analysis of fiscal behavior may provide, for example, some significant clues to the

NOVEMBER / DECEMBER 1968

relative values which public decision makers, both public officials and the electorate, place on different services. Beyond their preference patterns, it is also possible to examine the impact of different governmental and political systems on fiscal decisions. Since the U.S. is characterized by a great variety of governmental arrangements-50 state-local systems, the Washington, D.C., pattern, and numerous local combinations within states-the oppor- tunities for comparative analysis are almost unlimited. And, the significance of governmental and political variables may be con- trasted with the impact of economic and social variables.

The three studies reviewed here illustrate the variety of purposes which fiscal analysis may serve. Professor Break's study is a traditional economic analysis of the growing role played by the intergovernmental flow of funds, while Professor Dye attempts to determine the causes of variations in fiscal response (plus a few nonfiscal responses) among all the states. Professor Anton describes the political and administrative process by which budget decisions are made by the state government of Illinois. Although the foci and methodologies of these studies are quite different, each sheds some light on many current issues in the fiscal field. Among those issues are the relative significance of political and economic variables in "explaining" variations in fiscal levels, the role of intergovernmental aid in meeting the state-local fiscal "crisis," the merits of programmatic vs. general aid, the possible contribution of state governments to solving city fiscal problems, and the potential impact of reapportionment on fiscal behavior.



572 PUBLIC ADMINISTRATION REVIEW

Explaining Variations in Fiscal Levels

Of great interest to both political scientists and economists is an understanding of the determinants of interstate and intercommunity differences in the level of fiscal activity. While political scientists have not been traditionally concerned with these problems, economists have generally ignored their political aspects. On the one hand, economists for some years have been attempting to construct a "positive" theory of public expenditures from the assump- tion that comparative analysis of observed levels of fiscal activity will permit an identification of demand and cost determinants. On the other hand, political scientists have traditionally concerned themselves with questions of governmental form and political behavior or with the issue of "who governs?"

Attempting to analyze these matters with a regression technique, Dye finds that economic variables -urbanization, industrialization, wealth, and education-make a much larger contribution to explaining differences in policy outputs than do governmental and political variables (division of two-party con- trol, interparty competition, voter participation, and legislative apportionment). Dye's findings about the importance of socioeconomic variables are consistent with those of other investi- gators and brings into question whether governmental forms, political behavior, or who governs has any significant impact on fiscal outputs. The response of political scientists to these findings has ranged from a questioning of their correctness with an emphasis on how much is "unexplained," to an insistence that there are underlying nonfiscal outputs which are also a function of these general economic variables, i.e., the determinants of public budget structures are also the determinants of the basic political factors which ultimately shape the local fisc.

Critics of this approach include James Q. Wilson, who argues that the use of socioeconomic variables "directs attention away from local governmental arrangements, political history and culture, party activities, and the political attitudes of key participants." 1 But recent studies have attempted to include governmental structures as a factor shaping the

public revenues-expenditures decision. Wilson, however, remains critical, pointing out that, "Unless we are willing to assume that a given distribution of preferences among voters that arises out of the socioeconomic characteristics of those voters is directly and faithfully trans- lated into public policy, then we must explain why politicians and bureaucrats choose some preferences rather than others, or impute to certain groups one preference rather than another, or even ignore public preferences in favor of what leaders think is good for the community." 2

The problem with including political and governmental factors in analyses of fiscal behavior is one of measurement-it is difficult to identify proxy variables for these factors, for example, what "variable" can be used to measure governmental fragmentation? More- over, the identification problem is compounded by colinearities in the data. For example, the number of governmental units with property taxing power (1962) in SMSA's is significantly correlated with the population size of central cities, making it impossible to separate the individual effects of the two variables with a technique such as regression analysis. But with some ingenuity in the selection of variables, and a careful examination of intercor- relations, the single equation least squares model can serve the researcher well in uncover- ing systematic associations among factors.

Among the commonly used proxy variables for governmental structure are the ones in- cluded by Dye, plus measures of governmental fragmentation, the division of responsibilities between state and local governments, and a variety of measures of local government form. When these are introduced into national cross- section analyses they do not show great significance in their impact on differences in policy and fiscal response. Nevertheless, in more restricted environments where the other variables are held constant, not by statistical technique, but by the environment itself, a variety of governmental and political variables may be found significant.

Further, it is evident that the socioeconomic variables do influence political behavior and governmental systems. In this way socioeconomic variables are directly relevant for political scientists. Finally, there are reasons




BOOK REVIEWS 573

to examine political behavior and governmental systems quite apart from their relevance to policy outcomes. Dye quite properly points out:

It is still vitally important that we understand what goes on in the little black box labeled political system. Finding a correlation between cigarette- smoking and the incidence of cancer does not in itself increase our understanding of the functioning of human cells: we still want to know how can- cerous cells are formed and how they behave. So also, finding a correlation between industrialization and protection against unemployment does not in itself increase our understanding of the functioning of political systems: we still want to know how a political system goes about transforming socioeconomic inputs into policy outcomes. In this study we suggest only that certain political variables have no measurable impact on policy outcomes in the states, which is not to say that party competition, political participation, malapportionment, or other system variables do not vitally affect state governmental systems and political processes (pp. 299-300).

Although further refinements in specifying and measuring the determinants of policy out- put differentials may alter current conclusions, Dye seems justified in asserting:

. . . correlation analysis reveals that these system characteristics have relatively little independent effect on policy outcomes in the states. Economic development shapes both political systems and policy outcomes, and most of the association that occurs between system characteristics and policy outcomes can be attributed to the influence of economic development. Differences in the policy choices of states with different types of political systems turn out to be largely a product of different socioeconomic levels rather than a direct product of political variables (p. 295).

Quite indirectly, the Anton study gives considerable support to Dye's findings. His analysis of the process by which the budget is made in Illinois reveals that there is little opportunity for considered choices among significant policy alternatives.

The budget process as described by Anton begins with last year's appropriations. Each agency adds an increment to that total in order to improve its program or to meet a larger work load. The legislative response is devoted primarily to a discussion of these incremental increases and whether they are approved is based, in large part, on the potential of the tax system to provide increased revenues. If


tax rate increases appear necessary, the issue becomes how to politically accomplish that increase without creating massive public oppo- sition. The process produces incremental changes and responds largely to improvements in the economy as reflected in revenue receipts. There is no evidence that Democratic or Republican legislators act differently in this budget process, or that city representatives have very different motives than rural or suburban ones.

Intergovernmental Aid to the Rescue

If fiscal levels are primarily determined by socioeconomic conditions, it follows that an allocation of additional resources to the public sector is largely dependent on the general economic condition of each state and its com- munities. Since many of the most serious domestic problems are located in jurisdictions, state and local, with the least favorable socioeconomic conditions, resources are not likely to be available to tackle those problems. It is this situation which has caused increasing emphasis to be placed on the role of intergovernmental aid, both state and federal.

The state tax base is stronger than the tax base of some of its local jurisdictions, while the federal base, because of the taxes which compose it and perhaps because of greater political freedom at the federal level, has greater resource strength than either state or local bases. For these reasons it is often argued that state and federal aid should play an increasingly greater role. But the justification of such an increase requires that aid flow to those areas where the needs-resources imbalance is greatest. In the case of state aid, there is considerable evidence that the present pattern of distribution is inconsistent with the pattern of local resources and needs. On the whole, state legislatures tend to put greater emphasis on the needs of suburban and rural rather than city jurisdictions.

The redistribution of people and economic activities between central cities and their suburbs is a fairly well understood phenomenon. This results in a concentration of social problems in the central city and an inadequate resource base. This fiscal imbalance is much




less severe in suburbia despite growing public service needs there, too. Central cities, there- fore, must tax themselves more heavily than do their suburban jurisdictions. In 1964-65, for example, the average per capita taxes in the central cities of the 37 largest metropolitan areas was $173, while for suburban residents it was $137. This difference in tax effort is apparently not weighed in the distribution of intergovernmental aid. Average combined federal and state per capita aid to cities and suburbs for these 37 areas was exactly the same, $78. In other words, the combined federal-state aid pattern does not reflect the special needs of the great core cities.

Probably the service most in need of im- provement in central cities is education, yet the pattern of average current expenditures for the 37 largest areas is $449 per pupil in the cities and $574 per pupil in the suburban areas. Further, state aid for education is, with the exception of a few cities, larger in suburban areas than in cities.

These patterns of taxes, expenditures, and intergovernmental flows raise the question of whether aid, in fact, can make a significant contribution to the solution of those problems which dominate the American domestic scene. The Break study argues that there are two justifications for intergovernmental aid. For functional grants in aid, the justification is the externalities produced by governmental expenditures. Where such externalities exist, he argues: The appropriate means would be a set of optimizing intergovernmental grants based squarely on external benefit flows and varying with changes in the relative importance of these flows from one state and local program to another. Such grants would ration- alize decision-making at all levels of government, improve the allocation of resources both within the public sector and between it and the private sector, and raise the general level of fiscal equity (pp. 105- 106).

The other justification for aid suggested by Break is the existence of general fiscal deficiencies:

These deficiencies can arise from two reasons. The first is that a high concentration of low-income families tends to make the cost of providing even an ordinary level of public services prohibitive, to say nothing of the additional services that such

families, typically, require from government.... The second type of fiscal deficiency arises from what many regard as a fundamental gap between state- local spending responsibilities and their revenue- raising abilities. Even the richest states, it is argued, cannot levy enough taxes to finance the program expansions that are justified by the benefits that could be obtained from them (p. 108).

Both of these justifications for increased governmental aid would result in larger amounts of resources flowing to the areas of greatest need. "The spillout of benefits from state and local educational programs, for example, is presumably greater for lower income than for high income areas, since the former typically have the higher rates of out- migration" (p. 77). The fiscal deficiency argument calls directly for more aid to those areas which, from a fiscal resources-requirement point of view, need it most.

Aid: Stimulative, Additive, or Replacive

If aid is to help close the resources- requirement gap it must be additive, in some degree, to local effort. If the intergovernmental flow of funds simply results in a reduction in state-local effort, the amount of resources allocated to the public sector will not be increased by increasing the amount of aid. There is disagreement about whether intergovernmental aid is stimulative, replacive, or additive. For example, the Dye study, in discussing the impact of aid on educational expenditures, concludes: It is noteworthy, however, that the partial coefficients do not permit us to conclude that state and federal participation leads to increases in per pupil expenditures. The partial coefficients are too low to assert any positive relationship between state or federal participation and per pupil expenditures. This tends to confirm the findings of a special study on the effect of state participation in school expenditures by Edward F. Renshaw. Renshaw found that increasing ratios of state aid do not necessarily bring about increased expenditures per pupil. State aid is more a substitute for local support than it is a stimulant to educational expenditures. The same is apparently true of federal aid in its present form (pp. 90-91 ).

Break leaves the issue up in the air by citing studies with contrary findings, one of which indicates that aid is largely additive while another argues that it is replacive. The Anton




BOOK REVIEWS 575

study of the budget process in Illinois tends, at least, to suggest that the availability of federal aid will cause, if not a replacement of state tax effort, a shift in expenditure patterns. State funds which might have been used for a federally aided function may be transferred to some other function. In commenting on how budget balancing is accomplished in Illinois, Anton says:

More significantly, however, the use of federal funds to support these programs has permitted the state organization to blunt the demand on its own resources and has thus aided the system in continuing to achieve its major goal: the balanced budget (pp. 239-240).

More recent studies, however, support the proposition that aid is generally additive to state-local tax effort. A study in which this reviewer participated found that in the case of combined state-local taxes there is no evidence of replacement.3 More significant, perhaps, than this general finding is that aid apparently acts differently in suburban than in city areas. A recent study of educational finance indicates that education aid to suburban areas is totally additive to local tax effort, while in central cities such aid is, in part, replaced by a reduction in local tax effort for education.4 It seems likely that increased aid for education to cities causes a shift of funds from education to noneducation purposes. However, these conclusions are all based on cross-sectional studies and really explain little about the secular reaction of central cities and suburbs to state and federal aids. Further evidence on the stimulative- substitutive argument must await the badly needed comparable time series data on local government fiscal activity.

Aid: Programmatic or General

These characteristics of aid raise some com- plex issues about the form it should take. There has been a vigorous argument in the past few years about the relative merits of program vs. general aid. Break argues that the spillover justification for aid requires that program aid be specifically designed to take account of spillovers for each function as well as for each type geographical area. On the


other hand, the general fiscal deficiency justification clearly argues for a system of general nonprogram aid.

Currently, state programmatic aid provides larger quantities of support to nonurban areas than to urban areas. The reasons for this are two-fold: aided functions make up a larger portion of the basket of public services pro- vided in suburban and rural areas than in cities and, further, the formulas for providing that aid generally take into account factors which result in more aid flowing to the suburban-rural parts of states.

In contrast to this pattern of state aid, post- war federal aid programs emphasize some- what more the needs of cities. There is now a set of federally aided urban programs designed to deal with the problems of cities. These include the earlier programs generally related to urban renewal and more recent programs designed to aid the disadvantaged. In fact, there may well be emerging a pattern in which states help suburban and rural areas, while the federal government fills the resulting urban gap.

It is of some interest that the relative amounts of aid going to the city and noncity areas were never discussed by legislators in the Illinois budgetary process. Because of the program emphasis, the total budget discussion was related to questions of specific functional areas, rather than to the impact of the aid system on the needs of different kinds of areas.

This characteristic of the budgetary process and the historical pattern of state aid raises serious questions as to the appropriateness of general federal aid for the states, such as pro- posed in the Heller-Pechman plan. Many have argued that granting federal aid to the states without program limitations would result in a distribution of this new aid in the same fashion that states have distributed their own monies. If this pattern were followed such aid would make little if any contribution to the solution of city problems.

Further, there is the possibility that such aid would reduce state fiscal effort. There is not yet sufficient evidence about the additive quality of aid to conclusively demonstrate that the flow of general grants to the state would not reduce state tax effort. It is possible that




the additive quality of aid is a product of its programmatic character plus the normally imposed matching requirements. General aid might produce a different result.

Of course, it can be argued that federal general grants to the states would be good policy, even if they do not result in increasing the total amount of resources allocated to the public sector. One of the participants in a conference called to discuss the Break study argues this position when he says:

I think the major point has to be made in terms of the fact that this plan is viewed as an alternative to a further federal tax cut, and I favor this plan even if it doesn't add a nickel to state-local expenditures and even if it doesn't add one point to the intelligence quotient or ability quotient of state-local administrators, because if it doesn't do either of those things then what it must do by definition is to reduce the extent to which state and local governments will depend upon taxes on beer and cigarettes and property and general consumption, and even some of their peculiar income taxes; and if it achieves that latter objective, and only that latter objective, I am all for it because of the improvements that I can see forthcoming in terms of resource allocations, and certainly in terms of dis- tributional effects of the overall federal-state-local tax system (pp. 247-248).

Since the arguments about general assistance are no longer related to the potential of a federal tax surplus, it is probably more important than ever that the outcome of such aid relative to the total resource allocation to the public sector be taken into account. Further, the per cent pattern of aid distribution suggests that great care will have to be taken in designing any general aid program if the funds are to flow where they are most needed. Perhaps, as some have suggested, a "flow through" provision should be attached which would require that some portion of any general aid be given by the states to city areas.

The demand for a "flow through" suggests a distrust of states which is based on a record of inattention to urban problems. Only in recent years has there been any evidence that state governments are willing to pay major attention to their urban areas. The evidence today, in the states which have made some effort-Connecticut, New York, and Michigan

is hardly overwhelming since even in these states the steps taken have been small ones.

The only complete major state urban program ever presented to a state legislature was offered this spring by Governor Hughes of New Jer- sey.5 Current evidence indicates that the legislature will not respond favorably to this gubernatorial initiative.

Reapportionment: City or Suburban Gain?

Finally, there is the question of the impact of reapportionment. For many years students of state and local government have placed the blame for the lack of state concern for urban problems on the overrepresentation of rural interests in state legislatures. Early optimism about the Supreme Court-imposed reapportionment, however, has recently given way to considerable pessimism about the contribution such reapportionment will make to urban needs.

The Dye study justifies such pessimism, since he finds little evidence that reapportionment will have any substantial impact on policy outputs. He concludes:

On the whole, the policy choices of malappor- tioned legislatures are not noticeably different from the policy choices of well apportioned legislatures. Most of the policy differences which do occur turn out to be a product of socioeconomic differences among the states, rather than a direct product of apportionment practices. Relationships which do appear between malapportionment and public policy are so slight that reapportionment is not likely to bring about any significant policy changes (p. 280).

This finding, plus the small increase in city representation which reapportionment has or will produce, small because population shifts will give the major increases in representation to suburban areas; add, too, the nature of the budgetary process as described by Anton, and there seems little reason to assume that reapportionment will produce major changes in the policy outputs of state-local governmental systems.

Aid: The Crucial Variable

Taken together, these studies reveal much about the dynamics of fiscal decision making in the American governmental system. They support the proposition that state-local fiscal outcomes are primarily the result of differences in socioeconomic characteristics; they illustrate




BOOK REVIEWS 577

the rather rudimentary character of the budget process at the state level; and they are not inconsistent with the proposition that the single most important variable available for shifting public policy directions is federal aid. The issue of whether the political process at the federal level will produce the kind of inter- vention needed is not answered by these studies. The evidence to date is not clear, although some starts have been made in recent years: the elementary and secondary education act, the antipoverty program, medicare, and model cities legislation.

The studies also illustrate the valuable contribution which can be made to understanding the American political and administrative process by examining the fiscal decision- making system. The studies do not eliminate, however, the possibility that there are very significant political variables which help to determine fiscal outcomes. It is possible that a combination of the shortcomings of the regression technique and the detail sacrified in broad national cross-section analyses does not permit a proper consideration of governmental and political factors-important though they may be. Carefully designed comparative case studies would seem as necessary as the appli- cation of certain potentially fruitful statistical techniques, e.g., multiequation models and multivariate interdependency techniques such as factor analysis.

From a political science point of view these studies do help in pointing the direction in which political scientists might find answers to the questions of what difference does it make "who governs?" and what difference do variations in governmental systems and political cultures make? Further, these studies illustrate the possibility of important and pro- ductive collaboration between economists and political scientists.

The economist among these three scholars, using the analytical tools of that discipline, states with precision the nature of the sub- stantive issues surrounding intergovernmental aid. The political scientists add to this analysis by considering the role of governmental and political forces. Examining those forces which determine policy outputs, they make a significant contribution to an understanding of the


way the outcomes differ from the economic model. More important, they provide at least some clues to policy alternatives and their political acceptability.

Notes

1. James Q. Wilson, "Introduction," in City Politics and Public Policy, James Q. Wilson (ed.) (New York: John Wiley and Sons, Inc., 1968), p. 4.

2. Ibid., pp. 4-5. 3. Alan K. Campbell and Seymour Sacks, Metro-

politan America: Fiscal Patterns and Govern- mental Systems (New York: The Free Press, 1967).

4. Dave Ranney, School Government and the De- terminants of the Fiscal Support for Large City Education Systems, doctoral dissertation, Syra- cuse University, 1966.

5. Richard J. Hughes, "A Moral Recommitment for New Jersey," special message to the legislature, April 25, 1968.

Book Notes Challenge to Reason, C. West Churchman. New York: McGraw-Hill Book Co., 1968. Pp. 223, $3.95 paper.

The author challenges traditional theories of management, economic analysis, and ethics as they relate to modern social and techno- logical change. He notes that planning, policy making, and systems science allow no sound basis for showing that change is an improve- ment of the entire system. Further, the notion that management is satisfactory and that it controls science is questioned, with the con- clusion that neither scientific nor management practice is capable of dealing effectively with social change. The author posits the necessity of a holistic consideration of social, philo- sophical, and ethical problems as they are created by society, business, technology, and science.

Representation and Misrepresentation, Robert A. Goldwin (ed.). Chicago: Rand McNally, 1968. Pp. 189, $2.00 paper.



Documents

Fiscal Outputs: Determinants and Policy Consequences