Abstract
This paper tests for political budget cycles among U.S. municipalities. According to the political budget cycle hypothesis, in election years government officials engage in opportunistic fiscal policy manipulation for electoral gains. We test that hypothesis using data on taxes, spending, and employment for a panel of 268 U.S. cities over the period 1970–2004. While our estimates provide no evidence of altered total expenditures or taxes in election years, we do find a 0.7 % increase in total municipal employment, including increases in police, education, and sanitation employment.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
Specifically, the excess volatility caused by the political budget cycle reduces welfare by making it more difficult for constituents to smooth their levels of consumption over time.
As discussed below, Levitt (1997) finds that cities increase police hiring while Krebs (2008) finds evidence of an increase in intergovernmental revenue in election years. However, no other study details how local governments manipulate total expenditures, taxes, and intergovernmental revenue, as well as their disaggregated components. In this sense, our paper adds to our understanding of local political budget cycles by describing the phenomenon in significantly more detail.
Levitt (1997) exploits electoral cycles in police hiring to identify the effect of police on crime, but it does not examine political budget cycles per se.
Drazen and Eslava (2010) examine electoral cycles in the composition of taxes and spending in a developing country context.
Using data from the U.S., Tufte (1978) finds evidence of a pre-election increase in social security payments and veterans’ benefits. Alesina (1988), using US data over the years 1961–1985 finds an increase in net transfers over GNP in election years. Alesina et al. (1992), Alesina et al. (1997) examine data from thirteen OECD countries over years 1961–1993 and find that the government budget deficit is 0.6 % of GDP higher in election years. There has also been substantial work examining the prevalence of country-level political budget cycles in developing countries. According to Schuknecht (1996), developing countries have greater potential to manipulate fiscal policy, as checks and balances are weaker and the incumbent has more power over fiscal policy. Schuknecht examines 35 developing countries over years 1970–1992 and finds that the deficit is increased in election years, but decreased the year following an election. Using data from 17 Latin American countries over years 1947–1982, Ames (1987) finds that government expenditures increased by 6.3 % in election years, but decreased by 7.6 % in the year after elections. Block (2000) used data from 44 sub-Saharan African countries over years 1980–1995 and finds that the deficit, as a share of GDP, increases by 1.0–2.6 % in election years and decreases by 1.5 % in the year after an election.
Veiga and Veiga (2007) and Foucault et al. (2008) find evidence of increased pre-election expenditures at the municipal level in Portugal and France, respectively. Drazen and Eslava (2010), using municipal election data from Colombia, find evidence of changes in the composition of expenditures in election years.
Poterba and Rueben (1995) define the following 11 states as those that do not have effective limits: Connecticut, Georgia, Hawaii, Maine, Maryland, New Hampshire, South Carolina, Tennessee, Vermont, Virginia, and Wisconsin.
Smart et al. (2011), using data on German local governments, find evidence that changing from a council-manager system to a mayor-council system leads to increased local government expenditures. Since the sample used in our analysis is limited to city-years in which a mayor-council system is used, we do not expect that this “switching forms of government” effect is influencing our results.
To examine year-to-year growth rates in spending we need consecutive years of fiscal data, so we forgo the use of 1967 data.
If an election takes place in a city-year, but we do not directly observe this election, it will be falsely recorded as a non-election year. If we then compare outcomes for election years and non-election years, the difference in means between these two groups would be biased downwards.
Elections were held in 27.5 % of city-year observations in 2003–2004, but only 18.5 % of city-year observations in 2005–2006.
Elections were held in 24.8 % of city-year observations with population less than 50,000, and 29.3 % of city-year observations with population greater than or equal to 50,000. Hoover, AL; Miramar, FL; Mount Vernon, IN; Wells, NV; and Newark, OH, are all examples of cities with population less than 50,000 reporting only one election in years 1970–2004. This could be due to underreporting of elections, as we found Hoover, AL, held elections every 4 years from 1980 through 2008 (Velasco 2000; U.S. States News 2008).
For instance, no elections are reported for Berkeley, CA, before 1998, but Shirley Dean was first elected Mayor of Berkeley in 1994. See http://www.berkeley.edu/news/berkeleyan/1998/1209/dean.html. Similarly, no mayoral elections are reported for Las Vegas, NV, after 1999, but Oscar Goodman was reelected twice after first becoming mayor in 1999. See http://www.deseretnews.com/article/700124524/Vegas-Mayor-Goodman-backs-wife-in-city-election.html.
When testing for manipulation of education spending in election years we further restrict our sample to cities with dependent school districts. Limiting our sample to cities with dependent school districts decreases our sample size from 6394 city-year observations to 1345 city-year observations. Additionally, as there were large year-to-year changes in per capita education expenditures in some cities, we delete potential education spending outliers by dropping city-year observations with a year-to-year change in per capita education expenditures greater than 100 %. This leaves us with data on education expenditures for 1218 city-year observations.
We do this because our analysis is intended to describe the typical mayor or typical city, rather than the expected effect for the typical city resident. As a robustness check, we also tested all specifications with observations weighted by population, such that the results represent the average person rather than the average city. All results were very similar in magnitude, direction, and statistical significance, suggesting that there is little heterogeneity of effects across city-year population sizes.
By average we mean log-average, or geometric mean.
The specification of Finkelstein (2009) was also notably similar, as she regressed the first difference in the log state minimum tolls on an indicator for whether state elections are held.
In addition, we analyzed several other categories of spending, employment, and revenues, but in the interests of space we here report only results with substantial statistical or economic significance. The rest of the results are available upon request.
The only exception is in the parks and recreation spending category. In Column 3 of Table 4, we observe a 1.9 % increase in parks and recreation spending with a p value of 0.11. In Column 3 of Table 13, when state fixed effects are included, the point estimate increases to 3.0 % with a p value of 0.09, marginally statistically significant at the 10 % level. Tables 14 and 15 provide similar results for disaggregated employment categories and revenue sources, respectively.
Relatedly, Morgan and Watson (1995) show that mayoral strength is not a significant predictor of municipal expenditures.
References
Alesina A (1988) Macroeconomics and politics, NBER macroeconomic annual, 11–55. The MIT Press, Cambridge
Alesina A, Roubini N, Cohen G (1992) Macroeconomic policy and elections in OECD economies. Econ Polit 4:1–30
Alesina A, Roubini N, Cohen G (1997) Political cycles and the macroeconomy. The MIT Press, Cambridge
Ames, B (1987) Political survival: politicians and public policy in Latin America. University of California Press, California
Anderson N (2006) Beggar thy neighbor? Property taxation of vacation homes. Natl Tax J 59(4):757–780
Anderson N, Pape AD (2008) An insurance model of property tax limitations. Working paper
Avellaneda CN (2009) Municipal performance: does mayoral quality matter? J Public Admin Res Theory 19(2):285–312
Block S (2000) Political business cycles, democratization, and economic reform: the case of Africa. Fletcher School, Tufts University, Medford, MA. Working paper
Bogart W, Bradford D (1990) Incidence and allocation effects of the property tax and a proposal for reform. Res Urban Econ 8:59–82
Brender A, Drazen A (2005a) Political budget cycles in new versus established democracies. J Monet Econ 52:1271–1295
Brender A, Drazen A (2005b) How do budget deficits and economic growth affect reelection prospects? Evidence from a large cross-section of countries. Working paper no. 11862. NBER, Cambridge, MA
Brooks L, Phillips J (2010) An institutional explanation for the stickiness of federal grants. J Law Econ Organ 26(2):243–264
Brooks L, Phillips J, Sinitsyn M (2011) The cabals of a few or the confusion of a multitude: the institutional trade-off between representation and governance. Am Econ J Econ Policy 3(1):1–24
Drazen A (2000) The political business cycle after 25 years. NBER macroeconomics annual. The MIT Press, Cambridge, MA
Drazen A (2008) Political budget cycles. In: Durlauf SN, Blume LE (eds) The new palgrave dictionary of economics, 2nd edn. Macmillan Palgrave, London
Drazen A, Eslava M (2010) Electoral manipulation via expenditure composition: theory and evidence. J Dev Econ 92:39–52
Ferreira F, Gyourko J (2009) Do political parties matter? Evidence from U.S. cities. Q J Econ 124(1):399–422
Finkelstein A (2009) E–Z tax: tax salience and tax rates. Q J Econ 124(3):969–1010
Foucault M, Madies T, Paty S (2008) Public spending interactions and local politics. Empirical evidence from French municipalities. Public Choice 137:57–80
Krebs T (2008) Urban fiscal policy and elections: an examination of election year revenue patterns. Working paper
Levitt S (1997) Using electoral cycles in police hiring to estimate the effect of police on crime. Am Econ Rev 87(3):270–290
McCrary J (2002) Using electoral cycles in police hiring to estimate the effect of police on crime: comment. Am Econ Rev 92(4):1236–1243
Morgan DR, Watson SS (1995) The effects of mayoral power on urban fiscal policy. Policy Stud J 23(2):231–243
Mullins DR, Cox KA (1995) Tax and expenditure limits on local governments. Indiana University, Center for Urban Policy and the Environment
Mullins DR, Wallin BA (2004) Tax and expenditure limitations: introduction and overview. Public Budgeting and Finance, Winter pp 2–15
Poterba JM, Rueben KS (1995) The effect of property-tax limits on wages and employment in the local public sector. Am Econ Rev Pap Proc 85(2):384–389
Rogoff K (1990) Equilibrium political budget cycles. Am Econ Rev 80:21–36
Rogoff K, Sibert A (1988) Elections and macroeconomic policy cycles. Rev Econ Stud 55:1–16
Rosenberg J (1992) Rationality and the political business cycle: the case of local government. Public choice 73(1):71–81
Schuknecht L (1996) Political business cycles and fiscal policies in developing countries. Kyklos 49(2):155–170
Shi M, Svensson J (2002) Conditional political budget cycles. Discussion paper no. 3352. CEPR, London
Shi M, Svensson J (2003) Political budget cycles: a review of recent developments. Nord J Polit Econ 29:67–76
Smart M, Koethenbuerger M, Egger P (2011) Proportional influence? Electoral rules and special interest spending. Working paper
Strate J, Wolman H, Melchior A (1993) Are There election-driven tax-and-expenditure cycles for Urban governments? Urban Aff Q 28:462–479
Tufte E (1978) Political control of the economy. Princeton University Press, Princeton
U.S. Census Bureau (1970–2006) Annual survey of state and local government finances and census of governments
U.S. States News (2008) Notice of election of municipal officers. 7/1/2008
Veiga L, Veiga F (2007) Political business cycles at the municipal level. Public choice 131(1–2):45–64
Velasco E (2000) Dry revenues, reservoirs elections also played big role in year’s news. Birmingham News (Alabama), Neighborhoods section, 12/27/2000
Author information
Authors and Affiliations
Corresponding author
Additional information
We thank Bill Evans and Abigail Wozniak for detailed feedback on early drafts of this manuscript. We thank Jim Sullivan, Marko Koethenbuerger, Dan Hungerman, Kasey Buckles, and brown-bag participants at the University of Notre Dame and the Census Bureau for helpful comments. We also thank Fernando Ferreira for generously providing the election data and Craig Langley at the Census Bureau for access to the Annual Survey of Governments Historical Finance Database. C. Adam Bee gratefully acknowledges partial support from National Science Foundation Grant #DGE-0504495 “Global Linkages of Biology, the Environment and Society,” awarded to the University of Notre Dame.
Appendix
Appendix
Rights and permissions
About this article
Cite this article
Bee, C.A., Moulton, S.R. Political budget cycles in U.S. municipalities. Econ Gov 16, 379–403 (2015). https://doi.org/10.1007/s10101-015-0171-z
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10101-015-0171-z