Accounting for state economic performance: a time-series cross-sectional analysis of the limits of state economic policy.

• Author: Brierly, Allen Bronson

Abstract

State capital, labor, and technological market conditions are important determinants of state economic performance, but these conditions should be considered exogenous variables because state government has only a marginal influence on the capital, labor, and technological resources within their political boundaries. Development and growth involve different tradeoffs, and therefore mixtures, of capital, labor, and technology across the American states. The production model specified in this paper accounts for both the direction and relative impacts of capital, labor, and technology on state economic development and state economic growth rates.

Our time series regression estimations reval that increasing capital has a greater positive short-term impact on state development levels and growth rates, than increases in labor supply. Increases in labor and technology do not produce contemporaneous increases in state economic performance because these variables involve longer-term adjustments. The findings also suggest state economies were responsive to international energy price changes and national policy reforms in the 1970's and 1980's.

Introduction

There is a growing consensus state economic performance is beyond either the political control or public policy influence of state government. The results in the state politics and policy literature also suggest national trends exert a strong influence on state labor and capital markets, and the value of goods and services produced within a state's boundaries. While the results of these influences have important implications for state and local politics, these influences are deemed largely independent of state policies and policymaking processes (Brace, 1993). These findings reveal an ironic truth about American state politics in the 1990's: states are more important institutions today, but they are important because of the growth in their economies, which is largely independent of state government.

This paper examines the two-edged sword presented by the increasing significance and autonomy of state level economic performance. The first part of the argument is simply that a federal policy of decentralization and a context of increasing international competition magnify the importance of comparative resource advantages at the state level. This expanded role increases the responsibility for state level economic performance for both state and federal officials (Fosler, 1988), while producing greater variation and isolation of state economies from national labor, capital, and technological market conditions and policies.

The second part of the argument concerns the increasing autonomy of state economic performance from federal policy. This greater autonomy is partially the result of budget deficits and their related impact on federal politics and policies (Walker, 1995: pp. 3-13; Bowman and Kearney, 1996: pp. 52-60). The other side of this coin is a twenty-five-year effort to decentralize policymaking to the state level. Under budget deficits, the federal government has engaged in either an active or a benign policy of decentralization (Gray and Eisinger, 1997: pp. 38-44). While different factors motivate the politics of decentralization (Eisinger, 1988: pp. 55-76), federal resource constraints play an important role in shaping attitudes toward state government (Elling and Thompson, 1997). The perception may be that state officials have a better understanding of state market conditions, and, increasingly, more resources to solve economic problems. While there is evidence of increased state capacity and organizational resources to administer policies (Bowman and Kearney, 1988; Walker, 1995: pp. 249-267), this trend is in sharp contrast to the view of states which led to a greater centralization of policymaking (Press and Adrian, 1964).

The irony of this long-wave cycle of administrative and policy centralization and decentralization should not be lost on those who study state politics or federal policy. Economic crises in the 1890's, 1930's, and 1970's all resulted in transformations of federalism and intergovernmental relations (Wright, 1988). Today, the dual expansions in the role of state economic performance and in the increased capacity of state government have produced a false sense of security at the state level because state's appear more willing and able to adopt greater responsibility for current economic policies and future development. In this more decentralized policymaking process, responsibilities for state economic problems are becoming more localized as federal deficits reduce intergovernmental revenue and world prices penetrate all industries and markets in the United States economy. Improved economic and financial conditions have further encouraged state officials to assume a greater role. While some studies argue for the importance of state government in economic policy, few state researchers would argue that state's have sufficient financial resources to solve economic development problems, particularly during periods of economic crisis or transformation.

This paper assesses the growing autonomy of state economic performance. The findings reveal state capital and labor market conditions explain most of the variation in state economic performance. Given the significance of these conditions, these results could be used to support arguments for greater policy decentralization to the state level. The findings also confirm the importance of state level, rather than federal or international level problems as determinants of state economic performance. This evidence generally supports the conservative political view of returning greater policy responsibilities to the states.

The findings also show which economic conditions have the most influence on state economic performance. The results demonstrate that state level capital, labor, and technological resources all exert a significant impact on levels of state economic development and state economic growth rates. This evidence is contrary to a state-centered view of federalism, confirming a sizable literature suggesting state government has almost no influence on state capital, labor, or technological resources. These findings also support a more liberal view of administrative and policy centralization., where the significance of exogenous state level forces confirms the importance of an ongoing federal role for sharing resources and policy responsibilities for economic performance in both good and bad economic times.

The models presented in this paper develop a framework for evaluating state economic performance. The model estimates provide a baseline for assessing how much variation remains for state politics and policymaking to influence. Because, after all, if state conditions account for most of the variation in development levels and growth rates, there is almost no potential for state or federal policy to make a difference in state economic performance.

The theoretical framework developed here assesses the extent state market conditions determine state economic performance. After considering the evidence concerning internal versus exogenous influences, this study specifies a model of state economic performance. The results explore the relative influences of capital, labor, and technology on the level of economic development and growth in output value produced within states.

Literature Review

The role of exogenous forces in state policy has generated considerable attention, if not debate, in recent years. An extensive literature demonstrates the importance of national effects on state economies beginning with two articles by Paul Brace (in 1989 and 1991). There are several important conclusions to be drawn concerning the exogeneity construct developed in this literature. First, national market conditions have a greater impact on state economies than state political processes or policies. Second, the influence of national trends on state market conditions has declined from the 1960's to the present. Third, the importance of state level effects are increasing as states assume more active roles in the economy. Fourth, changing economic conditions are creating a new federal relationship between the national and state governments. This emerging new federalism is leading to increased decentralization of state economic policy and performance.

The decentralization of economic policy and performance has raised many issues concerning state capacity for solving economic development problems. As evidence of this concern, there has been an extensive debate in the literature over whether state and local development policies influence economic performance (Wilson, 1989). Beyond the direct incidence of programs, there is limited evidence state governments have the institutional capacity to administer an elaborate policy intervention in the economy. For example, Susan MacManus (1986: pp. 640) writes "the effectiveness of state economic development programs is contingent on successful coordination of traditional physical capital and human capital improvement activities," yet the evidence in the literature suggests state governments have neither the financial resources nor the institutional capacity to coordinate capital and labor policies. Some consensus is emerging in this literature. Unfortunately, the consensus is that the effects depend on the specific policy, the level of government intervention, the period of study, and the indicator used to measure performance. Effects of State Policies

As the previous discussion suggests, there have been a mixture of empirical findings in the literature relating state policies to economic growth. For example, one study found little or no statistical relationship between infrastructure expenditures and economic growth (Goss and Phillips, 1994). Another study supports this conclusion by estimating a similar null relationship between total state...