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Comments on “New Orleans: Political Economy of Public Money” by Aaron Schneider

Comments on “New Orleans: Political Economy of Public Money” by Aaron Schneider. James Alm.

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Comments on “New Orleans: Political Economy of Public Money” by Aaron Schneider

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  1. Comments on“New Orleans: Political Economy of Public Money”by Aaron Schneider James Alm

  2. Purpose of paper: How does the public finance system of New Orleans affect delivery of public services? In particular, “is there significant public activity…outside the boundaries of traditional accounting?” My comments: • Theoretical framework: When does local governance really work? • Empirical framework: Is New Orleans “different” than other cities in its pattern of public finances?

  3. Theoretical framework: When does local governance really work? • Aaron’s framework: What are “best practices” in public budgeting, and how does New Orleans compare? • The underlying notion here is: With these actual practices, can New Orleans deliver services effectively?

  4. Aaron discusses this in the context of some general principles of “international best practice” in public budgeting: • Comprehensiveness • Transparency • Legitimacy • Plus: • Discipline • Flexibility • Predictability • Contestability • Honesty • Information • Accountability Here is a slightly different formulation, from the theory of “optimal decentralization” and its implementation.

  5. Why Decentralize? Economic Reasons – Efficiency Gains/Economic Development • Better matching of services with citizen demands • Self-sorting of individuals by preferred local government • Greater willingness to pay for services • More revenue mobilization • More governmental innovation • Move government “closer to the people” Political Reasons • More grassroots participation • More local control • Greater ability to accommodate ethnic/religious differences • More accountability – more “democracy” • Autonomy versus dissolution →Oates’ Decentralization Theory/Subsidiarity Principle

  6. But: Decentralization can create problems: • Creation of more macroeconomic instability • Loss of central government budget control (e.g., mandated transfers) • Policy coordination problems (e.g., monitoring) • Moral hazard problems (e.g., bailouts) • Loss of ability to direct social investment or to achieve national objectives (e.g., “merit goods”) • Loss of ability to equalize income distribution across jurisdictions • Loss of efficiency from: • Economies of scale • Externalities • Local government capacity

  7. Balancing the various criteria Economies of scale, spillover of benefits, lack of local capacity, national objectives, macroeconomic stability, and income distribution call for centralization, while diversity – and the efficiency gains from tailoring services to local circumstances – calls for decentralization. But: When can local governments – like New Orleans – really capture the benefits of local provision by providing services effectively?

  8. Can any local government deliver services effectively? Requirements for effective service delivery Is there a …? • Locally elected government? • Local appointment of chief local officers? • Locally approved budget? • Absence of mandates on local governments? • Some local government control of revenues? • Some local government power to borrow? • Transparent grant system? • Clear expenditure assignment? • Local government capacity: • To collect taxes? • To deliver services? • To keep adequate books? • Central government ability to monitor?

  9. SCORECARD

  10. So, in the case of New Orleans: Is there a …? • Locally elected government? • Local appointment of chief local officers? • Locally approved budget? • Absence of mandates? • Clear expenditure assignment? • Some control of revenues? • Some power to borrow? • Transparent grant system? • Local government capacity: • To collect taxes? • To deliver services? • To keep adequate books? • State and/or central government ability to monitor?

  11. Empirical framework: Is New Orleans “different” than other cities in its pattern of public finances? • Aaron’s empirical work suggests the answer may be “yes”, perhaps in part because of its deviations from “best practices”. • Still… • The data are for 2005. • The regressions and other analyses are suggestive but not definitive (e.g., additional controls, per capita measures, …) • Why not look at additional data?

  12. Percentage Change in Local Government Property Tax Collections, 2006-2009, by State (weighted)

  13. Some other considerations: • One has to consider the total number of local governments in any area, not just the “city” government. • In 2007, there were 89,476 “local governments” (including public school systems) in the United States. • Louisiana had 526, placing it 43rd among all states in numbers. (Illinois was 1st, with 6,994.) • A complete picture of “local government public finances” requires considering this “layer cake” of governments.

  14. Conclusions

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