State and Local Public Finance and the Rising Value of a California "Rainy Day" Fund
How Does California's Huge Budget Deficit Hinder Climate Change Adaptation Investment?
Lee Ohanian has written a great article for Hoover. In this column, I want to expand upon his points about the intended versus the unintended consequences of extravagant government expenditure. Here is a quote from Lee’s piece.
California’s ambitious Governor will seek to reduce our state’s deficit by raising taxes on the rich (this effort will offer a “silver lining” as urban economists will have a new natural experiment to study the Laffer Curve. Will California’s revenue go up or down as our high marginal tax rates rise further?). The Governor will also seek larger transfers from the Biden Administration (spending Other People’s Money).
I share all of Lee’s concerns but I want to focus on the consequences going forward of my state not having a Rainy Day Fund. 30 years ago, Jim Poterba was writing about State and Local balanced budgets. Here is one paper and here is another.
Poterba, James M., and Kim Rueben. "State fiscal institutions and the US municipal bond market." In Fiscal institutions and fiscal performance, pp. 181-208. University of Chicago Press, 1999.
I do believe that weather shocks are growing more severe and more “Rainy Day” funds are needed so state and local governments have the discretionary $ to pay for their own ex-ante defenses and ex-post to help with inevitable disaster relief and recovery.
States and localities that spend $ inefficiently will face higher insurance costs and higher interest rate costs for their debt. This limits their affordable menu of adaptation strategies. Put in simple terms, California’s inefficient government expenditure makes it more vulnerable to climate shocks because it will face a higher cost to invest in lumpy adaptation. In a series of papers, I present my points;
#1 Here is my recent Senate Hearing Testimony sketching out how a pro-active local government adapts to emerging climate risk.
#2 Here are two of my papers on the inefficiency (i.e higher government costs) in locations with powerful public sector unions;
Jerch, Rhiannon, Matthew E. Kahn, and Shanjun Li. "The efficiency of local government: The role of privatization and public sector unions." Journal of Public Economics 154 (2017): 95-121.
Kahn, Matthew E. Is Local Public Sector Rent Extraction Higher in Progressive Cities or High Amenity Cities?. No. w23201. National Bureau of Economic Research, 2017.
#3 Here are my papers documenting that California’s environmental and land use regulations cause it to have fewer people and lower tax revenue than it would have it allowed housing to be built.
Kahn, Matthew E. "Do liberal cities limit new housing development? Evidence from California." Journal of Urban Economics 69, no. 2 (2011): 223-228.
Kahn, Matthew E., Ryan Vaughn, and Jonathan Zasloff. "The housing market effects of discrete land use regulations: Evidence from the California coastal boundary zone." Journal of Housing Economics 19, no. 4 (2010): 269-279
Glaeser, Edward L., and Matthew E. Kahn. "The greenness of cities: Carbon dioxide emissions and urban development." Journal of urban economics 67, no. 3 (2010): 404-418.
In a Blog Post back in 2016, I argued that California, Oregon and Washington State local land use zoning cost Hilary Clinton the Presidency. I claim that 50% of America would live in these 3 states if zoning rules would be relaxed. Also read this sequel to the 2016 post.