Analysis of Government Data on Whether State Governments Are Patient Stewards of the Public Purse
Thursday, November 7, 2019
11:00 am - 12:00 pm
Speaker: Steven G. Craig, Ph.D. - Professor of Economics, the University of Houston
Abstract: This paper examines US Census of Government data to illustrate how US state governments manage their finances in the face of fluctuations in revenue caused by business cycles. Due to the severe problems caused by the Great Recession of 2008, there has been renewed attention given to Rainy Day Funds, which are a relatively new mechanism in most states by which they can save for a “rainy day.”
State government savings, however, have been considered almost impossible because government officials are presumed to be “impatient,” meaning they would want to spend all savings for immediate political gain. This research project combines extermal data with Census of Government data to statistically examine state government saving and spending behavior over time.
The goal of the examination is to determine the willingness of governments to hold savings. We discover data that suggests that state government savings accounts are much larger than their rainy day funds. Through statistical analysis, we also find that states manage their savings surprisingly responsibly, and with an eye on whether their savings are sufficient to overcome possible recessions (parameterized as risk aversion).
The interesting result of this work is that balanced budget requirements, which have been thought to prevent irresponsible borrowing, may not be much of a constraint on government behavior. We also find that the implementation of rainy day funds may simply be a public relations gambit, as data shows state savings appear much larger than widely believed, and our analysis shows management of those savings more effective than widely believed.