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State and Local Fiscal Behavior and Federal Grant Policy PURCHASES BY STATE AND LOCAL GOVERNMENTS have long been the most rapidly rising component of aggregate demand. While real consumption and investment expenditures have both doubled since the end of the Korean war, and federal purchases have increased barely at all, state and local purchases of goods and services have almost tripled. They have grown at an annual average rate of 5.5 percent and now account for over 10 percent of real gross national product (GNP).For much of this period, the budgetary surplus for state and local governments hovered very close to zero, being negative as often as positive and never amounting to more than $2 billion. Recently, however, the surplus has grown at a remarkable rate. It was only $0.7 billion as late as * We have benefited from the comments of several members of the Brookings panel, and also from discussions with Frank de Leeuw, has supplied us with unpublished national income accounts data, Joseph Valenza ably assisted with the computer work, Su Nokkeo with data preparation, and Kathryn Breen and Patricia Sachs with the typing. Some of the results in the paper are taken from an Urban Institute study, financed by the Office of Economic Opportunity, on the distributional aspects of urban fiscal behavior. A preliminary report on this project can be found in 1969 but then began a rapid expansion, reaching $4.8 billion in 1971 and $12.3 billion in 1972-when it attained an annual rate of almost $20 billion in the fourth quarter. Though special factors have accounted for some of this rise, a 1972 report on the fiscal policies of President Nixon and Senator George McGovern predicted that the state and local surplus would rise even higher under both sets of proposals.'Grants to state and local governments from the federal government were undoubtedly responsible for much of the increase in expenditures, and possibly the budget surplus as well. Whereas in 1954 these grants amounted to only $2.9 billion, by 1974 they are expected to reach $41.6 billion, a thirteen-fold expansion.2 And grants are of current interest not only because of their sheer growth. The recent enactment of general revenue sharing, the administration proposal to convert existing categorical grants to special revenue sharing, and numerous other plans to federalize welfare payments or to provide property tax relief or income tax credits to state and local taxpayers-all indicate that fundamental changes are occurring in the form of federal assistance to states and localities.The increasing importance of the state and local sector and the changing role of federal grants point to the need for a more thorough understanding of the budgetary behavior of state and local governments, particularly the way in which it is influenced by intergovernmental transfers. To explore this topic, we first estimate a model of state and local fiscal behavior and then use it to examine these policy questions.We begin by discussing different forms of grant assistance and how they might ...

This paper develops an approach for incorporating regulation into the theory of production, distribution, and trade, using environmental regulation as an example. Four major conclusions emerge in the course of the analysis. 1. Production process regulation is equivalent in its effect on other cooperating factors to neutral technical regress (i.e. negative progress). 2. Specific unambiguous income redistribution consequences follow from such regulation. If commodity prices are held constant. the factor used relatively intensively in the non-regulated industry will gain absolutely in terms of both goods. 3. Unilateral or uncoordinated regulation destroys the link between uniform world commodity prices and identical factor proportions/factors prices across trading countries or regions. 4. If any factor of production is freely mobile across frontiers, the least differential regulation as between countries will entirely drive out the regulated industry from the more to the less regulated economy.

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Will a more risk-averse individual spend more or less to improve probabilities, say on marketing efforts that enhance the chance of a sale? For any two payoffs and starting probabilities, the answer is unfortunately indeterminate. However, interpreting gambling as increasing small chances of good outcomes and insurance as reducing small chances of bad outcomes, the more risk-averse individual will pay less (more) to gamble (insure). We find a critical switching probability that depends on the individuals and outcomes involved. If the good outcome is less (more) likely than this critical value, the expenditures represent gambling (insurance).