Robert Shiller Shouldn't Waste His Time on Revenue Sharing

Robert Shiller Shouldn't Waste His Time on Revenue Sharing

Robert Shiller Shouldn't Waste His Time on Revenue Sharing

A blog about business, finance, and economics.
Aug. 29 2010 11:52 AM

Robert Shiller Shouldn't Waste His Time on Revenue Sharing

The estimable Robert Shiller wants to restore revenue sharing between federal and local governments, as an essential but untried part of a Keynesian stimulus package. I might have been able to save him the trouble of devoting his whole Sunday New York Times column to the topic with four words: It ain't gonna happen . We'll get to the political viability issue, but first: Is revenue sharing a good idea?

In theory, it is. The idea goes at least as far back as Thomas Jefferson, and it seeks to divide taxing and spending into those parts of governments that seem to be most efficient at the tasks. The federal government is very good at collecting taxes, and many economists notably Walter Heller, who championed revenue sharing in the 1960s believe that local governments are most efficient at spending it. (There are many reasons that local governments are considered to be less efficient at taxation, mostly having to do with the scattershot ways they raise revenue, and the fact that their revenues often don't increase at the same rate as their needs.) Revenue sharing, to its proponents, efficiently allocates money from where it's generated to where it's needed. Richard Nixon's economic team put revenue sharing into place in 1972, and we had it until 1987.

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I won't assess here the success of America's foray into revenue sharing (although those weren't exactly dream years, macroeconomically). But Shiller's argument for it rests on a concept that is historically false namely, that local governments do a better job of putting money where it is needed. As he puts it: "when faced with a need for stimulus, members of Congress seem to prefer to start their own projects, for which they are likely to get more credit from voters. Local governments, meanwhile, which are more likely to know where spending is really needed, remain in deep trouble."

Two problems here: One is the premise that federal stimulus money that began flowing last year has had no input from local governments. That's just wrong; as this Times article from July 2009 put it , "The stimulus law provided $26.6 billion for highways, bridges and other transportation projects, but left the decision on how to spend most of it to the states."

Which leads to the second problem states will spend it unequally. For decades, one of the big criticisms of how local governments spend taxpayer money is that a disproportionate amount goes to rural areas and smaller states. This is politically expedient but not efficient in terms of targeting unemployment. If you look, for example, at Pro Publica's data on how stimulus money has been spent , the state receiving the second-highest amount of stimulus money per capita (not counting the District of Columbia) is tiny South Dakota, which has the second-lowest unemployment rate in the country. By contrast, Florida, where unemployment is more than twice as high, gets the least per capita of all states. The same pattern repeats itself within states; smaller towns get a disproportionate amount of money . In addition, any reporter who's ever covered municipal government can tell you that state and local laws are often a porous ethical net, meaning that a lot of money gets siphoned off into projects that are political favors or outright graft.

Restoring revenue sharing will make these problems worse. Yes, theoretically you could jigger a revenue-sharing formula to make the allocation between states more equitable. But, given all the natural enemies that revenue sharing already has including fiscal conservatives and labor unions that formula will be about as popular as a recalled egg . In the current political environment, we'll never learn whether revenue sharing is a good idea or not; it's destined to be one of those tomes sitting on an economist's shelf that dreams of being dusted off. 

James Ledbetter is the editor of Inc. and the host of Panoply’s podcast Inc. Uncensored.