American Domestic Priorities [Reprint 2020 ed.] 9780520311428

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American Domestic Priorities

California Series in Real Estate, Economics, and Finance E D I T E D B Y KENNETH T. ROSEN

S U P P O R T E D BY THE CENTER F O R REAL ESTATE AND URBAN E C O N O M I C S UNIVERSITY O F CALIFORNIA, BERKELEY

American Domestic Priorities An Economic Appraisal

Edited by John M. Quigley Daniel L. Rubinfeld

U N I V E R S I T Y OF C A L I F O R N I A PRESS Berkeley

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Los Angeles

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London

University of California Press Berkeley and Los Angeles, California University of California Press, Ltd. London, England © 1985 by The Regents of the University of California Printed in the United States of America 1

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L I B R A R Y O F C O N G R E S S CATALOGING IN P U B L I C A T I O N DATA

Main entry under title: American domestic priorities. (California series in real estate economics and finance) Includes bibliographical references. 1. United States—Economic p o l i c y — 1 9 8 1 —Addresses, essays, lectures. 2. Intergovernmental fiscal relations—United States—Addresses, essays, lectures. I. Quigley, John M . II. Rubinfeld, Daniel L. III. Series. HC106.8.A435 1985 338.973 84-28013 ISBN 0 - 5 2 0 - 0 5 5 2 1 - 7 ISBN 0 - 5 2 0 - 0 5 5 2 2 - 5 (pbk.)

Contents

Preface

xi

Acknowledgments

xv

PART ONE THE UNITED STATES FEDERAL SYSTEM

1

1. Fiscal A l l o c a t i o n s in a Federalist E c o n o m y : U n d e r s t a n d i n g the " N e w " Federalism

by Robert P. Inrnan Our Current Federalist Fiscal Structure

3 5

Will the " N e w " Federalism Work?

12

New Federalism as a Federal Issue

21

Conclusion

27

Acknowledgments

27

Notes

27

References

30

2 . R e f o r m i n g U . S . Federal Fiscal A r r a n g e m e n t s

by Edward M. Grämlich

34

The Theory of Federalism and the United States System: The Musgrave Trichotomy Tax Assignment

36 45

Intergovernmental Grants

52

The Reform Agenda

58

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Contents

Appendix: Decentralization of Income Distribution Responsibilities

60

Acknowledgments

65

Notes

65

References

67

3. Commentary

by Henry J. Aaron

70

Commentary

by George F. Break

75

Notes

79

Commentary

by Julius Margolis

80

The Phenomenal Growth of Government

80

Technological Change

83

The Decline of Political Parties

84

The New Household Economy

84

Democratization and Egalitarianism

85

Summary

86

PART TWO DISTRIBUTIONAL PROGRAMS: EDUCATION AND ANTIPOVERTY

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4 . I n c o m e T r a n s f e r s a n d Poverty in t h e 1 9 8 0 s

by Sheldon Danziger and Daniel Feaster

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Income Transfers and Antipoverty Policy

89

Measuring Poverty and the Impact of Transfers

89

Geographical Variations in Poverty

91

The Reagan Policy Toward Income Transfers

95

Changes in Transfers and the Trend in Poverty

99

An Econometric Model of the Antipoverty Impacts of Transfers

103

Implications for Antipoverty Policy during the Mid 1 9 8 0 s

107

Appendix: Specification of Econometric Model

109

Acknowledgments

114

Notes

115

References

116

Contents

vii

5. An Economist's Look at Federal and State Education Policies by Richard J. Murnane

118

Testscore Trends and Explanations

119

Status of the Teacher Labor Force

123

Federal Education Policies

127

State School Finance Policies

131

State Policies to Improve Teaching

134

State Policies to Stimulate Students' Efforts

142

Specific Questions to Ask

143

Acknowledgments

144

References

144

6. Commentary by Paul N. Courant

148

Antipoverty Effects of Transfer Programs

149

Elementary and Secondary Education Policy

151

Notes

153

Commentary by Eric A. Hanushek

154

Poverty and Welfare

154

Education

157

Commentary by David Stern

161

Education as an Equalizer: the 1960s and 1970s

162

Enter "Excellence" (Again)

164

Incentives and Information

166

References

171

Commentary by Jennifer R. Wolch

173

Education and the Cities: Questions for Research and Policy The Urban Poor: Service-Dependent Subpopulations San Jose: A Case Study Prospects for Social Policy References

173 175 177 178 179

Contents

viii PART T H R E E URBAN PROGRAMS: T R A N S P O R T A T I O N AND H O U S I N G

181

7. The Federal Role in Urban Transportation

by Jose A. Gomez-lbahez

183

Development of Federal Programs

185

Evaluating Highway Aid

196

Evaluating Transit Aid

206

The Federal Role Reconsidered

218

Notes

219

8. The Agenda for Metropolitan Housing Policies

by Sherman Maisel

224

Recent Developments and the Future Housing Agenda Federal Expenditures for Housing Housing Complexity and Expense Rental Assistance for Low-Income Families Tax Expenditure and Credit Programs Ownership Costs Externalities and Aids to Community Development Conclusions: The Agenda for the Future Notes

225 228 229 236 239 243 248 250 252

9. Black Suburbanization in the Eighties: A N e w Beginning or a False Hope?

by John F. Kain

253

History of Government Policy Federal Support for Fair Housing The Extent of Racial Segregation and Its Causes Black Suburbanization During the '70s Policy Recommendations Appendix References

254 255 260 266 274 281 282

10. Commentary

by Michael A. Goldberg

285

Alternative Policies

286

Conclusions

291

Notes

292

Contents

ix

Commentary by Theodore

E. Keeler

References

294 296

Commentary by Richard

F. Muth

Notes

297 303

Commentary by Melvin M. Webber

304

PART F O U R REGIONAL ISSUES

309

11. T h e Environment and the E c o n o m y : Environmental Policy at the Crossroads by Wallace E. Oates

311

Background

312

The State of the Environment

314

The Cost of Pollution Control

319

Standards for Environmental Quality

322

Regulatory Strategies for Controlling Pollution

329

The Reagan Administration Record and Some Conclusions

340

Acknowledgments

342

Notes

342

References

344

1 2 . T h e Differential Effect of the Foreign Trade Deficit on Regions in the United States by Peter Mieszkowski

346

Structural Problems in Manufacturing, Structural Trade Deficit, and Current Administration Policy Employment Effects of a Change in the Trade Deficit Policies to Protect Specific Industries Regional Effects of Increased Defense Expenditures Conclusions Acknowledgments References

347 349 358 359 361 362 362

13. Commentary by Paul R. Portney

364

References

367

Contents

x

Commentary by Timothy

J.Sullivan

369

Commentary by Jerome

373

Rothenberg

Infrastructure Needs and Financing

3 73

Intergovernmental Policy: A Typology for Intervention

3 75

Intergovernmental Policy: Issues in Implementation

3 76

Acknowledgments PART FIVE

377

OVERVIEW

379

1 4 . D o m e s t i c Priorities in O u r Federal System by John M. Quigley

and Daniel

L. Rubinfeld

381

Stabilization

383

Redistribution

385

Shifting Public Functions

387

Allocation by Function

389

The Budget Deficit

393

References

395

Contributors

397

Preface

Domestic programs and their budgetary implications will be scrutinized closely during the 99th Congress and the second term of the Reagan administration. Can further cuts in these programs reduce massive federal deficits? Or must spending cuts be made either in social security entitlements or in defense appropriations? Can the Reagan administration succeed in shifting many public functions from the federal government to the states? Would such transfers affect public support for these programs? Is a shift away from federal responsibility and control desirable? A forthright evaluation of domestic programs was conspicuously absent during the recent election campaign. Public debate about domestic priorities during the fall of 1984 was partisan and political, with ideological statements and misinformation the rule rather than the exception. In contrast, the urgency of the issue of the federal deficit, and of the unusually high interest rates the deficits cause, will now require elected officials to pay close attention to details of the domestic budget in defining public priorities for the next term. This will require facts about program operation, analysis of program outcomes, and knowledge of the budgetary consequences of policy alternatives. This book provides the kind of analysis needed for this crucial debate about federal policy. It offers a serious and in-depth evaluation of domestic programs and priorities, with coverage of a broad range of issues, from education and welfare to urban transportation, from housing policy to environmental regulation. It supplies a framework for assessing the proXI

xii

Preface

posals of the New Federalism and the consequences of continued trade deficits. This book presents the views of a group of nationally prominent economists, including many who have served in policymaking positions in the administrations of both parties. It carefully summarizes the recent history of government policies and their outcomes. The authors review program priorities and offer proposals for the future. The analysis is addressed to a wide audience and is enriched by lively commentary and discussion by economists knowledgeable about each of the substantive programs. The authors present no unified opinion about what our domestic priorities ought to be. There is, however, a general consensus as to appropriate directions in a number of areas. The analysts clearly sense that we ought to move to less intrusive federal command and control and also to greater state involvement in a number of programs such as transportation, education, and the environment. The New Federalism receives substantial support in many areas, not involving poverty and welfare, from a group of economists who supported a stronger federal role a decade ago. Despite this intellectual shift, the authors present convincing evidence that the Reagan program is really a federal budget-cutting exercise in disguise. They have forceful and controversial ideas about desirable reforms. They believe that substantial reductions in expenditures would adversely affect the quality of domestic programs. The economic perspective of the authors is an important one, given the current policy debate and the budgetary emphasis. Economic analysis of the 1983 federal budget indicates that spending on national defense amounted to $201 billion, and spending on social security, veterans' benefits, and interest came to over $442 billion. With a federal budget of $ 8 2 0 billion and political promises not to cut defense or social security, the administration appears committed to cuts in the remaining $ 2 4 0 billion. It is hard to see how a deficit of roughly $ 2 0 0 billion can be removed by domestic cuts alone. The only options appear to be tax increases, large and growing federal deficits, or blind faith that growth in the economy will alleviate all problems. Economists familiar with programs and outcomes clear up the often confused and confusing facts. For example, authors Sheldon Danziger and Daniel Feaster demonstrate irrefutably that poverty did increase under the first term ofthe Reagan administration. From 1978 to 1983 the poverty rate increased from 11.4 percent to 15.2 percent, while real dollars of federal aid to the poor decreased by more than one percent. Commentator Jennifer Wolch shows that many of those removed from

Preface

xiii

the poverty rolls were in serious need of assistance—these are the "service-dependent" poor, who suffered severely during the first Reagan term. Further budgetary cuts in welfare can only exacerbate their problems, problems which cannot be cured simply by the benefits of a growing economy. Sherman Maisel's economic analysis of housing programs clarifies the effects of current subsidy policies and of the alternative programs proposed by the administration. Housing affordability is a spreading problem, argues Maisel, despite the fact that 75 percent of federal housing subsidies go to the non-poor. John Kain claims that the most pressing domestic social problem in America is discrimination in the housing market. His detailed analysis of the 1980 Census of Housing suggests that some gains have been made in reducing residential segregation. Campaign press releases indicated that student test scores had improved as a result of government programs. Economist Richard Murnane provides a detailed analysis of outcomes and program effects. He finds that reading skills of students have improved over the past decade, but that math and science skills have declined substantially. How can this crisis in education be resolved, especially in light of the need for budgetary savings ? Murnane argues that the program and its solution lie in the labor market for teachers and suggests some important, but inexpensive, reforms to make it operate more effectively. The economic analyses of domestic programs in this book conclude that there are real opportunities to reduce the federal deficit—by applying the principles of the New Federalism to revenues as well as expenditures in the federal domestic budget, and by reducing and redirecting intergovernmental grants. In fact, recommendations presented here suggest that a large share of the current deficit could be eliminated by such reforms. The detailed discussion and commentary that follows the papers provides thought-provoking and valuable recommendations for action. John M. Quigley Daniel L. Rubinfeld Berkeley, California

Acknowledgments

This book grew out of a conference on domestic public policy held at the University of California, Berkeley, in September 1984. The conference was supported financially by the Center for Real Estate and Urban Economics at Berkeley and encouraged intellectually by the Center's director, Kenneth T. Rosen. The Center continued to play an important role in the development of this book by providing financial and administrative support during the preparation process. A number of individuals helped in manuscript preparation. We are grateful for the extraordinary efforts of Jo Magaraci of the Real Estate Center and Michelle Dethke of the Graduate School of Public Policy.

XV

PART

ONE

The United States Federal System An analysis of the United States federal system provides a useful framework for an evaluation of domestic budgetary programs. First, Robert Inman describes the Reagan administration's New Federalism, with its implied reallocation of functions between the states and the federal government. Edward Gramlich then addresses the fundamental normative question of federalism: Which levels of government ought to be assigned the right to levy taxes and to utilize other revenue-raising sources? In the Commentary, Henry Aaron discusses arguments for the important fiscal role of intergovernmental grants; George Break argues, against Gramlich, that the federal income-tax deduction for state and local taxes, although it may be less than efficient, does contribute to equity; and Julius Margolis provides a broad sociopolitical perspective on the rapid growth of government in the twentieth century.

CHAPTER

ONE

Fiscal Allocations in a Federalist Economy: Understanding the "New" Federalism Robert P. Inman

From its constitutional beginnings to today, the United States public economy has been committed to the concept of federalism in the provision of public services. The use of multiple layers of government, with each higher level possessing rights of control over a lower level, is a founding principle of our fiscal structure. 1 But while the constitutional commitment to a federalist system is clear, the precise structure and performance of that system are not. Significant changes have taken place in our federalistfiscalsystem, both historically and in recent years. Scheiber (1966) has identified four stages of historical development of United States federalism: first, a period of "dualism" (1790—1860) in which states and the federal sector coexisted with essentially equivalent responsibility and powers; second, a time of "centralizing federalism" (1860-1933) as power began to gravitate to the federal level; third, a period of "cooperative federalism" growing out of the social programs to deal with the national crisis of the Great Depression (1933-1964); and finally, the recent period of "creative federalism" in which the federal government has taken an active policy interest in the specific problems of state and local governments. The first three periods can be characterized as times when the states (and their localities) made fiscal policy largely independently of direct federal interventions, while the recent period of creative federalism has involved the federal government directly in state and local fiscal affairs. Federal grants-in-aid and all their spending requirements, as well as the many new federal regulations 3

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