Competition between governments is important for economic freedom


Think about where you live. Why did you choose to live there? Is it close to your job? Low taxes? Good schools? Beautiful roads and sidewalks? Maybe all of these factors played a role in your decision. The are nearly 36,000 municipal or municipal governments in America, and each offers a different mix of government goods and services depending in part on the preferences of residents and local officials. The large number of choices helps us find a city that suits us, and in a new study, economists Brad Hobbs, Dean Stansel, and I find that more choice is also associated with more economic freedom.

In one influential articleEconomist Charles Tiebout believed that the existence of many local governments allows each of us to choose the one that best matches our preferences for public goods and services. The old thread of real estate ‘location, location, location’ includes the fact that people without children may prefer a city with lower taxes and inferior schools, while some parents prefer to pay more taxes in a city. city ​​with better schools. Tiebout’s analysis inspired the phrase “vote with their feet,” the idea that people often move to their preferred location rather than trying to change things by voting in elections.

In their 1980 book “The Power to Tax”, economists Geoffrey Brennan and James Buchanan take Tiebout’s idea a step further. They argue that because people can vote with their feet, government behavior is limited. If a city raises taxes but doesn’t use the money to improve services, people will move to a better run city.

More generally, the threat of exiting individuals, businesses and entrepreneurs creates competition between governments which limits the ability of governments to exploit their citizens. The Brennan and Buchanan conjecture became known as the Leviathan hypothesis. He postulates that the more choices of governments there are, the more difficult it will be for a government to exploit its citizens .

To test this, my co-authors and I use a measure of economic freedom built for American metropolitan areas, where more economic freedom means less government exploitation. Other studies have shown that this measure of local economic freedom is associated with faster growth in per capita income, more entrepreneurial activity, and lower borrowing costs via better bond ratings.

In our analysis, we find that a greater number of local governments per square mile – a statistic that captures the ease of moving between jurisdictions – is associated with greater economic freedom in metropolitan areas. However, the strength of this relationship varies by region. The relationship is strongest in metropolitan areas in the Northeast and Midwest regions of the country and weakest in the South.

Some of the regional variation is likely due to historical factors. Economist William Fischel argues that due to precipitation and historical segregation based on race, the power of local governments is more concentrated in the governments of the western and southern counties than in the denser regions of the Northeast and Midwest.

In the relatively flat north where rains are abundant, population densities in the 19th and 20th centuries were high enough to warrant the formation of many local governments. The city or town government held most of the power, and the county governments, which are the local administrative units of the states, played a relatively minor role. As the urban population expanded in the mid-20th century, small rural towns in the North evolved into suburbs, each with its own separate local government.

In more arid and mountainous western regions such as Arizona, Nevada, Utah and Colorado, populations were more dispersed. To achieve economies of scale in the provision of government goods and services (school districts, fire districts, etc.) with such sparse populations, local government had to cover a larger area. Thus, the larger county, and not a small local government, has become more influential in local governance in these areas.

The South is similar to the Arid West due to racial segregation. “Separate but equal” government services required local jurisdictions to cover a large area in order to be economical. To maintain black-white segregation, more power was given to the state and the state’s local administrative unit, the county. Because of this history, local government in the South looks more like the arid West than the North, although the South has similar terrain and rainfall to the North.

When government power is concentrated at the county level, it is more difficult for cities and municipalities in the same county, and therefore in the same metropolitan area, to differentiate and compete for residents. This helps explain the better results in the more competitive Northeast and Midwest.

Critics of competition between local governments point out local service duplication costs, such as police and fire protection, and the difficulty of getting local governments to agree on large projects that would be expected to benefit the whole region, such as large infrastructure projects. According to them, having a government at the metropolitan level would reduce costs and streamline the decision-making process.

A comprehensive metropolitan government created to maximize the well-being of a region at the least cost may sound formidable, but how do we make sure it is doing its job? Experience shows us that the best way to ensure that any supplier remains responsive to its customers is through competition. Consumers compete with other consumers (think the last house you bid on) and producers compete with other producers (think Google and Apple).

Competition between companies leads to the duplication of products and services (UPS and FedEx, Old Spice and Speed ​​Stick), but it also forces companies to pay attention to what their customers want. If they don’t, their customers will find a new supplier. It is reasonable to assume that similar competitive forces are needed for governments to remain attentive to their constituents.

That’s not to say that a certain amount of government at the metropolitan level, perhaps to oversee large infrastructure projects, isn’t worth the effort. But we also need to consider the ability of competition to discipline local governments and increase economic freedom when considering the pros and cons of government consolidation.

Source link


Comments are closed.