Taxation, Public Borrowing And Economic Development: A Metropolitan Area Analysis

Abstract

Despite a substantial body of evidence to the contrary, state and local fiscal policy variables loom to many political leaders as important determinants of economic growth.  Using instrumental variables regression analysis reveals that prior population growth has a strong and significant influence on subsequent job growth.  Differential factor costs, such as earnings per worker and electricity costs, have a statistically significant effect on employment growth. The results for total employment growth and for manufacturing employment growth suggest that factor costs are more important statistically for growth in the 1980s than they were during the 1970s.   The degree of labor unionization has had mixed effects on economic growth.  Fiscal variables, however, are not generally statistically significant except for the limited effects of per capita state non-property taxes on the change of total employment. There is no demonstrable long term effect of public expenditures on growth patterns over the 20 year period analyzed.  Finally, per capita private purpose public bonds do not influence employment growth.  The results reveal that, if anything, metropolitan areas with declining employment are more likely to use economic development bonds in unsuccessful attempts to stem employment decline.