THE INFLUENCE OF AIR CONDITIONING ON THE GROWTH OF STATE GOVERNMENT EXPENDITURES.

• Author: Garrett, Thomas A.
• Position: Report

A key feature of the U.S. economy is the dramatic increase in expenditures by all levels of government beginning in the 20th century. At the national level, the U.S. government annually spent roughly $142 (in 2017 dollars) per capita from the 1790s to the 1910s compared to $11,500 per capita in 2017. (1) Expenditure growth outpaced the growth in income as well as population, with U.S. government expenditures accounting for 3.3 percent of gross domestic product (GDP) in 1930 compared to 20.5 percent of GDP in 2017. The behavior of state government expenditures parallels that of the U.S. government: total state government spending increased from $1,470 (in 2017 dollars) per capita in 1960 to nearly $6,980 per capita in 2017. Total state government expenditures increased from 5.8 percent of GDP in 1960 to roughly 12 percent of GDP in 2017.

The growth in government has attracted considerable academic research that has generated numerous theories to explain (or partially explain) government growth in the United States. All theories assume that a market for public sector output and expenditures exists (Mueller 2003). (2) The demand for government output and expenditures is determined by individual citizens or a collection of citizens organized into special interest groups. Essentially, demand-side theories argue that government has grown because citizens have demanded more government. These theories make use of the median-voter model (Downs 1957, 1961) to explain why citizens have had an increased demand for public goods (e.g., increased income) and a reduction in externalities (Baumol 1967; Ferris and West 1996; Mueller 2003), as well as a greater demand for more redistribution of income (Meitzer and Richard 1978,1981,1983). (3) In addition, citizen-based interest groups can increase government size by organizing members and applying political pressure more effectively than individuals (Olson 1965; Becker 1983; Ekelund and Tollison 2001).

Supply-side theories of government growth argue that government expenditures are determined by legislators and bureaucrats who face certain incentives, the inherent inefficiencies in the provision of government goods, and the structure of government (e.g., representative democracy versus democracy). Niskanen's (1971) theory of bureaucracy postulates that government bureaucrats maximize the size of their agencies' budgets in accordance with their own preferences, and are able to do so because of the unique monopoly position of the bureaucrat. (4) Fiscal illusion theory (Buchanan 1967) assumes that government, specifically legislators and the executive branch, can deceive voters as to the true size of government by using taxes and tax collection measures that are less obvious to citizens. (5) Finally, the idea that representative governments behave as monopolists was first suggested by Breton (1974) and extended further by Brennan and Buchanan's (1977, 1980) model of leviathan government where a monopoly government's sole objective is to maximize revenue. (6)

It is not unreasonable to argue that government growth is likely the result of both demand-side and supply-side factors. Thus, research along these lines to deepen our understanding of the market for government output and expenditures seems warranted. In this article, we argue that the introduction of air conditioning in states' capitol buildings was a permanent technology shock that may have contributed to the growth in state government output, and thus expenditures, by increasing the productivity (output per unit of labor input) of legislators, lobbyists, bureaucrats, and others involved in producing government output and expenditures. We also argue that the effects of air conditioning would have been most pronounced in warmer states.

The following quotations suggest that the hypotheses of this article merit more rigorous attention:

The installation of air conditioning in the 1930s did more, I believe, than cool the Capitol, .... members were no longer in a hurry to flee Washington. The southerners especially had no place else to go that was half as comfortable [Martin 1960: 49].

Six months of every year, the nation enjoyed a respite from the promulgation of more laws, the depredation of lobbyists, the hatching of new schemes for Federal expansion and, of course, the cost of maintaining a government running at full blast. Once air conditioning arrived, Congress had twice has much time to exercise its skill at regulating and plucking the population [Baker 1978: 6].

Prior to air conditioning, attempts to cool buildings or rooms, including those in states' capitols, were typically done with electric fans or swamp coolers (which worked on the principle of evaporation), neither of which reliably cooled rooms to comfortable levels (Arsenault 1984).' Air conditioning, however, effectively lowered both room temperatures and humidity levels, thus greatly improving working and living conditions. There is little doubt that the introduction of air conditioning transformed society during the 20th century by increasing the productive efficiency of businesses and households (Arsenault 1984; Cooper 1998; Solomon 2003). There is thus reason to presume that the public sector was also influenced by die transformative and productivity-enhancing effects of air conditioning.

Our theory of government growth is not an independent explanation for growth but rather a contributing explanation. That is, we take the supply-side and demand-side factors as given and reasonable and argue that the introduction and existence of air-conditioning has enhanced the supply-side and demand-side factors that have been hypothesized to influence state government growth--for example, lobbying in states' capitals by citizens and legislators became more pleasant and occurred all year without summer break. While we are agnostic about the precise effect of air conditioning on specific supply-side and demand-side factors that influence state government growth, it seems reasonable to suggest that air conditioning could have a direct effect on die productivity of all parties involved in producing government output just as it did for households and businesses.

The analysis proceeds in several steps. As a motivation for our empirical methodology, we first present a simple model of technological growth to demonstrate how the introduction and subsequent existence of air conditioning in a state capital may have led to increased growth in state government output. A brief discussion is then provided to motivate the link between state government output and state government expenditures. We then discuss the panel data, identification strategy, and the empirical methodology that is used in order to test our hypothesis that the growth in state government expenditures was greater after the introduction of air conditioning in states' capitols. Finally, we present our empirical results, which support our hypothesis that the growth in state government expenditures was higher after the introduction of air conditioning in state capitols, and that this effect was more pronounced in the warmer southern states.

Conceptual Framework and Motivation

As the starting point for our conceptual framework, it is important to first examine how the introduction of air conditioning could have influenced the growth in the output of state governments. As discussed shortly, there is a direct link between the growth in government output and the growth in government expenditures.

We assume that the introduction of air conditioning, both generally and in state capitols, acted as a one-time and permanent labor-augmenting technology shock. (8) Let the labor-augmenting technology be represented by the parameter A, where A = 1 before the labor-augmenting technology shock and A > 1 after the technology shock. We can write a representative production function for a state government's output (q) as

q = q(K,A * L),

where K and L are capital and labor inputs, respectively. (9) Rewriting the above production function as a function of time to capture output growth as a result of air conditioning gives

(1) q(t) = q(K(t), A * L(t)).

Totally differentiating with respect to t yields

[mathematical expression not reproducible].

Dividing both sides by q gives

[mathematical expression not reproducible],

or, equivalently,

(2) [mathematical expression not reproducible].

Rewriting in familiar terms gives the following expression for output growth due to labor-augmenting technological progress:

(3) [mathematical expression not reproducible],

where [[epsilon].sub.q,K] is the elasticity of output with respect to capital and [[epsilon].sub.q,L] is the elasticity of output with respect to labor. (10) It should be clear from (3) that output growth, [??], is higher after the introduction of air conditioning (A >1) than before the introduction of air conditioning (A=l), regardless of whether the usage of inputs remains constant or increases over time. (11) Note that the technology shock essentially increases output by increasing the marginal product of labor, ([absolute value of q]/[absolute value of]L) * A, in equation (2) even if the quantity of labor remains constant.

There is a clear link between government output and government expenditures; namely, that government expenditures reflect the total cost of...