State Local Government Spending Macroeconomic Fiscal Policy And The Business Cycle PDF Download

This dissertation investigates state and local government budget behavior over the business cycle with the aim of improving the design and implementation of fiscal policy. It examines how the various components of state-local government budgets have behaved historically and seeks to understand how on-the-ground, practical, and political issues impact state and local government's ability to engage in countercyclical spending. The first chapter of this dissertation motivates the need to account for state and local government budgets in macroeconomic fiscal policy. It shows that the contemporary macroeconomic fiscal policy literature overlooks the role of state and local government budgets. I argue that it is critical to fill this gap because of the significant impact state and local government budgets can have on overall fiscal policy. Chapter 2 investigates the behavior of state and local government budgets over business cycles from 1954 to 2015. It classifies each component of state and local government budgets as pro-cyclical, countercyclical, or non-cyclical. This analysis helps us see clearly which components of state-local government budgets have historically supported countercyclical fiscal policy and which have hindered it. Chapter 3 examines the effectiveness of state-local government capital spending as a countercyclical tool. Capital spending has the most potential for countercyclical purposes. This chapter identifies institutional and on-the-ground barriers to using capital spending for countercyclical purposes. Chapter 4 analyzes the role of state and local government spending in the most recent economic recovery from 2010 to 2015. State and local government spending has historically contributed to federal government recovery efforts. However, in the 2010 recovery, state and local government spending became a drag. Analyzing the state-local government slowdown during the 2010 recovery can help us identify the key factors that turned state-local government spending from a supportive source to a barrier. Chapter 5 develops policy proposals for state and local government countercyclical spending taking into account all the lessons from the previous chapters. I argue that the most promising areas for policy change are: 1) expanding federal government support; 2) reforming rainy day funds; 3) utilizing the capital budget; 4) loosening financial constraints; and 5) addressing political constraints.