Samuel Cohn: Global Social Trends

It has been a long-standing position of this website that governments actually solve social problems. They produce economic growth. They provide critical infrastructure. In recessions, they provide the economic stimulus necessary to keep unemployment rates low.

It has also been the position of this website that governments need sufficient revenue in order to be able to do their job effectively. This generally means taxation. High taxes lead to high economic growth and high standards of living for the population.

Generally, when I talk about governments and state capacity, I discuss this at the national level. In my book on Brazil, I did discuss state governments which were responsible for much of the employment creation I observed in the various industries I was studying. In my book on societal death, I discuss state capacity and taxation only at the national level, discussing cases like ancient Byzantium, mid-century South Korea and the contemporary United States.

I almost never talk about smaller units of government. Counties, cities, or planning regions are not key players in my stories.

However, both in the United States and elsewhere, counties, cities and planning regions count for a lot. In the United States, where government willingness to spend money to fight poverty differs enormously between red states and blue states, counties and municipalities make a substantial difference. The political policies of the City of Chicago are very different from those of the Chicago suburbs or those in downstate Illinois. The policies of Madison, Wisconsin are far more liberal than are those of Green Bay.

Linda Lobao, of the Ohio State Sociology Department, has been examining these differences for much of her career. Working with large teams, she has investigated the role of local governments in the United States in producing economic growth, poverty reduction and general social well-being. She finds very strong effects – which drives home her main point. The evidence shows that government spending at the local level and local governments having adequate tax revenue make a positive impact in residents’ lives.

A study her team did in 2021 drives her point home very convincingly. This was published in the 2021 Sociology of Development. Lobao was writing with Alexandra Tsvetkova, Gregory Hooks and Mark Partridge and the article is titled “Seeing the Local State: Poverty and Income Inequality Across the United States During the Great Recession”. The Lobao team looked at poverty and inequality during a particularly rough period in the American economy, the 2008-2013 recession. Lobao et al. took a dataset with all of the counties in the 48 contiguous U.S. states. In many parts of the U.S., the county is in and of itself the most meaningful unit of local government; in these cases, county is exactly the unit one would want to look at. In other places, municipalities or non-county level planning units are more important. Their data aggregates material on smaller local government units so that one can see the combined aspect of all of these levels of local government.

They follow the traditional and basically sound lines of analysis used by scholars who assess the economic effects of government at the national level. One key variable is fiscal autonomy, the degree to which the government finances itself without needing funds from some larger unit, such as a state or national government. The more autonomy, the more the local government can set its own direction. If the local governments in liberal Travis County, Texas (where Austin is located) had to get all of their revenue from the more conservative State of Texas, their capacity to create their own government programs would be very limited. Another variable is fiscal burden, the ability of the local population to provide tax revenues in the first place. This is the ratio of local revenue to per capita income. The lower this is, the easier it is for a locality to generate the revenues that governments need. The team also looked at welfare spending and government spending in general.

As is generally the case in studies of this kind, there are 9,999 other factors that one can think of that affect poverty or income inequality besides government policy. The standard approach to dealing with this is to include a vast number of control variables that consider things like the industrial mix, the percentage of high-wage and low-wage occupations in the economy, and the ethnic composition of the population. No one can control for everything – and generally social scientists should NOT control for everything. Putting too many variables into a statistical equation makes the estimation unreliable and leads to bizarre, erroneous results. The Lobao team, however, included a lot of non-governmental variables in their analysis. The selections were well conceived and the number of variables added in was reasonable given the properties of their data.

The bottom line of their findings is that:

1. Welfare spending significantly reduces poverty. It also reduces income inequality.

2. The more financially autonomous local governments are, the lower the poverty and the lower the income inequality. Cities and counties that need to depend on Washington D.C., or need to depend on their state government don’t seem to be able to reduce poverty. They are better off when they collect and use their own taxes.

3. Local governments that tax more than their constituencies can comfortably pay have higher levels of poverty. Governments need to be well funded but need to keep their revenues in line with the financial capacity of their base population.

4. General all purpose government spending does not particularly reduce poverty. The most effective anti-poverty measure that governments can take is to give welfare payments.

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I am highly supportive of all of these conclusions. If I had to add my own personal comments, I would argue that the primary focus of the Lobao team is on social redistribution. The government taxes people who can afford to pay taxes, and transfers that money to people who cannot afford to eat or pay rent. This lowers poverty and lowers inequality as well. To capture that redistributive effect, the Lobao team statistically controlled for unemployment and GDP per capita. Reducing poverty actually increases GDP. People with no money are terrible consumers. People with enough money to live put money back into the economy by buying the necessities of life. No landlord fills any vacancies or collects any rent from people so poor they are homeless. Giving people enough money to be able to pay rent also gives a landlord the revenues from being able to rent his units. The redistribution is a meaningful component of economic growth.

There are other ways that local governments support the local economy. Some governments provide subsidies to key employers to attract them to move into their jurisdiction. Other governments support sports teams or music festivals to bring tourists into their city. Local governments run school systems. They build roads. They build parks to support the real estate industry’s houses around those parks. They provide police protection to ensure the security of local businesses and to attract residents who would otherwise move if they did not feel safe.

All of these activities support the economy – and by supporting the economy, they reduce poverty in their own right. Modelling those activities is at least as important as modelling the effects of welfare programs.

That said, what the Lobao team has put forward here is important. It not only matters that a city or county alleviates poverty by giving money to the poor. It matters that city and county finances are sound and that cities and counties are in control of their own finances. Where the money comes from and the supply of money that exists is just as important as any liberal instinct to provide public charity to the poor. Public finance matters, particularly for cities and counties that cannot run a deficit. The Lobao team shows that those considerations affect poverty rates as well.