Factors Contributing to Better Fiscal Conditions among States

By Childs, Bradley D.; Cochran, Howard H., Jr. et al. | Atlantic Economic Journal, December 2012 | Go to article overview

Factors Contributing to Better Fiscal Conditions among States


Childs, Bradley D., Cochran, Howard H., Jr., Velikova, Marieta V., Atlantic Economic Journal


Fiscal conditions among states in the United States improve with more personal freedom, greater economic freedom, and less state legislature professionalism. The magnitude of the state international manufacturing export sector and the level of inward state foreign direct investment seem to tamp down fiscal conditions. Evidence from all states suggests a variety of useful metrics that contribute to alleviating deficit pressure on state fiscal conditions.

A change in state net assets is indicative of an actual surplus or deficit in state fiscal conditions. Fiscally healthy states have larger surpluses or smaller deficits. Improving fiscal health is possible even in a tough economic environment. Using a multivariate regression analysis, results suggest a significant relationship between fiscal conditions and several socioeconomic variables. Data is drawn for all 50 states in the United States covering a period from 2003 to 2010 from the Comprehensive Annual Financial Report (CAFR) filings of state government.

Previous inquiries document the influence of both economic and political freedom on the fiscal conditions of national governments. Elements of freedom such as the rule of law, limits on the scope of government, efficiency of administrative regulation, and openness to Wade and investment affect material well-being. However, inquires still have yet to document the effect of freedom on the fiscal conditions of subnational state level governments. The Mercatus Institute has developed comprehensive indices of economic and personal freedom at the state level.

A rise in state economic freedom correlates with better fiscal health. State economic freedom has two components: fiscal and regulatory policy. Measures of fiscal policy divide between spending and taxation approaches. Measures of regulatory policy include aspects such as labor regulation, utility oversight, the exercise of eminent domain, and health insurance regulation. For example, a rise in economic freedom reduces state level unemployment. A lower unemployment rate brings a greater propensity to collect tax revenue, thereby improving fiscal health, ceteris paribus, notwithstanding national economic conditions. Together, the fiscal and regulatory policy variables become an index that measures economic freedom, and this measure relates positively to fiscal health.

A rise in state personal freedom also correlates with better fiscal health. Personal freedom is found in the latitude of personal choice. Measures of personal freedom include aspects of gun control, gambling laws, marriage laws, and education policies, among several others, that combine to become an index of personal freedom that again relates directly to fiscal health.

State fiscal conditions depend on the extent of state legislature professionalism. Legislative bodies that meet full-time throughout the year and employ large professional staffs rank as more professional than part-time legislatures with fewer staff members. …

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