State Government and Economic Performance.

• Author: Weiss, Stephen Gene

State Government and Economic Performance by Paul Brace is an easy-to-read, concise book that attempts to measure the influence state policy has on state economic prosperity. The author compares Arizona and Texas to Michigan and New York to determine if the limited form of state government in Arizona and Texas had more influence over state economic activity than the activist form of state government in Michigan and New York between 1968 and 1989. Brace divides the 21 years into two parts, pre-and post-Reagan national economic periods. The author establishes a model to evaluate each state's political capacity, economic development policy, taxing and spending patterns, and other important influences on state economic performance.

The book begins with a review of Adam Smith's market-based theory of limited government activity and John Maynard Keynes' interventionist theory of a highly active government to stimulate economic prosperity. A terse review of the nation's economic history follows.

Brace strongly criticizes the application of traditional economic theories to states. State and local governments are not autonomous economic entities, and both exist in a dramatically different context than nation-states. Brace also argues that the recent changes in American political economy, ushered in by the Reagan revolution that shifted many economic and policy functions from the federal government to state and local governments during the early 1980s, represent a strong American political economic tradition.

Throughout this book, three main theories explain why state efforts at economic development provide conflicting and inconclusive results: the easy transport of capital and labor from one state to the next, the state capacity necessary to afford continued development and the fact that state economics exist within the overall national context. Having established these themes, Brace reviews Arizona and Texas as laissez-faire states and New York and Michigan as interventionist states.

In his review of Arizona and Texas, Brace highlights both states' theme of "the business of the state is business;" however, when oil prices, real estate value and land development collapsed, so did the economies of Arizona and Texas. Brace argues that the states' low-tax, low-wage policies created an environment of underfunded education and infrastructure systems. The end of the cold war and reductions in defense expenditures compounded the problems for both states...