FUNCTIONAL GRANTS-IN-AID* BY GEORGE F. BREAK In broadening their horizons far beyond the local community, modern producers and consumers have greatly complicated the fiscal problems of State and local governments. Previous chapters have concentrated on the political and economic risks faced by legislators who seek to raise State and local tax rates and the difficulties governments have had in treating overlapping tax bases equitably. Other problems, of special concern to large metropolitan areas, will be dealt with in chapter V. Here the discussion turns to an important source of relief for harried State and local officials-one that, paradoxically, was created by the same forces that have seriously weakened State and local taxing powers. In the modern world some of the most important local governmental programs generate benefits that accrue to people living in other parts of the country. These spillovers, unless offset by forces to be discussed later, justify Federal aid in the form of functional, matching grants to State and local governments, as well as State aid of the same kind to cities and counties. These aid programs are discussed in seven main parts. The first deals with the external public benefits that provide the basic rationable for intergovernment action. Though our knowledge of these spillovers is limited, recent economic research has greatly clarified their role in the field of education, the single most important kind of State and local activity. Education is accordingly used as an example to identify the factors that must be considered by intergovernmental policy makers and to illustrate the importance and probable geographical scope of the external benefits that result. The conclusion is that external benefits, which will probably continue to grow in importance, are already pervasive enough to support a strong prima facie case for Federal and State functional grants to lower levels of government. The nature of this case for functional grants is examined in the second part of the chapter. Decisionmaking at the local governmental level, it is shown, will be influenced not only by the presence of benefit spillouts but also by any benefit spillins or cost spillouts that are related to the program under consideration. Satisfactory choices, therefore, are likely to result only if all of these spillovers are absent or if, being present, they are so well balanced that their opposing effects simply cancel out. In the absence of these rather special circumstances, intergovernmental grants are required both to improve the allocation of resources and to achieve interpersonal equity. The ideal kind of grant for this purpose is described in the third section to provide a basis for the subsequent discussion of existing Federal grant-in-aid programs. The major criticisms of these programs are then presented and Reprinted from Break, George, Intergovernmental Fiscal Relations in the United States, The Brookings Institution, Washington, January 1967, Chapter III. analyzed in the next two sections. Then the wide variety of functions the grant-in-aid programs perform is described, with particular reference to the existence or nonexistence of benefit spillovers. The final section of the chapter stresses the important role that States play as intermediaries for intergovernmental grants and presents a broad statistical picture of the aid they extend to their own local governments. EXTERNAL BENEFITS OF STATE AND LOCAL SPENDING PROGRAMS Economists normally distinguish two kinds of benefits that arise from government spending programs: those which flow directly to specific individuals, called private benefits, and those which accrue broadly to the society as a whole, called social benefits. Both of these become external whenever they are enjoyed by persons outside of the government jurisdiction that generated them. When this happens local voters, lacking any financial contribution from outside beneficiaries, are likely to undersupport the programs in question, thereby impairing economic performance by distorting the allocation of resources. The external benefits of State and local expenditures, therefore, should be important elements in any set of policies designed to achieve fiscal equity and efficiency in a federal system. Public education took 38 percent of State and local general governmental expenditures of $69.3 billion in 1963-64. Education, of course, produces important benefits not only to the individual student and his family throughout his life, but also to many other people who are associated with him in production or consumption or who are simply members of the same economic and political system. It is only the benefits to other people that concern us here, and among them only the ones that accrue outside the school district or State in which the education was received. Such external educational benefits occur for three reasons. The first is that some of the most important of all educational benefits accrue broadly to everyone in the country. Take the long-recognized relationship between a well-functioning democratic political system and the educational attainment of its citizens. That this relation is a close and important one is generally agreed, and recent empirical research confirms this belief. Voter participation and education are positively related, sometimes to a striking degree. Among males aged less than 34 years and not living in the South, for example, only 60 percent of those with a grade school education voted in the 1952 and 1956 presidential elections, compared to 78 percent of those with a high school, and 88 percent of those with a college education.1 More comprehensive measures of citizen participation in political activities, based on work done for political organizations, financial contributions to campaigns, attendance at meetings and so forth, show similar results. Meriting a top rating on these tests were 20 percent of grade school graduates, 30 percent of high school graduates, and 45 percent of college graduates. These measures, of course, deal only wih the quantitative dimension of political action, but we may assume that quality also increases with educational level. 1 In the South, where restrictions on voting obscure the relationship in which we are interested, comparable figures were 19 percent for grade school, 55 percent for high school, and S1 percent for college educations. See Angus Campbell, Warren Miller, Philip Converse, and Donald Stokes, The American Voter (Wiley, 1960), p. 495. 2 V. O. Key, Jr., Public Opinion and American Democracy (Knopf, 1961), pp. 331 and 564-565. Nor is political participation the only social benefit to be considered. For many people, variety and change, the excitement of new discoveries, the satisfactions from meeting new challenges and from accomplishing undreamed-of things are all part of the good life; and the good life, in this sense, is much more likely to be found in an educated, and particularly a well-educated, society. În general, the more a society is geared to technological advancement and economic growth, the more universal is its need for minimum levels of public education. Those who lack training in the mechanics of learning are often unable to I adapt to new conditions of work, and by failing to keep up, these people impede the attainment of the goals society has set for itself. Needless to say, no part of this first class of external educational benefits lends itself to quantitative measurement. It is no less important for that reason, however. 3 A second group of educational benefits is private in nature, but these accrue to outsiders-people who associate in one way or another with the person who is educated. Knowledge and skills tend to rub off onto fellow workers, and employers can often accomplish more when they are dealing with a trained and literate labor force. Education also has a pervasive effect on the flavor of community life. Families with few, or no, children may support the schools partly to secure a quieter and more responsible neighborhood in which to live and partly in the hope that the cultural and artistic life of the whole community will thereby be improved. One of the attractions of the big city, surely, is the escape it offers from the stultifying atmosphere created by limited intellectual attainments. In the past, there have been so few highly educated and talented people that only the largest cities could contain enough of them to make a difference in community life. In the future, however, more and more of the smaller cities and towns should be able to achieve comparably high cultural and intellectual standards. Education, therefore, may represent an important, long-run solution to the problem of urban congestion (see ch. V). Finally, we must note the important effect of education on governmental expenditures for police and fire protection and for health and welfare services of all kinds. By spending money now to develop a man's talents and interests so that he can support his family and lead a satisfactory life, society can avoid the future costs that are imposed on it by ineffectual and frustrated people. Benefits of this second kind, which are attached to the educated person himself, become external, in the geographic sense, whenever that person moves away from the area in which he received his schooling. Migration, then, is the force that creates these spillovers, and there is no need to stress its importance in the postwar U.S. economy. About one-fifth of the Nation's population moves each year, and though many of these moves are within the area served by particular local governmental units, a large portion of them undoubtedly are not. The Council of Economic Advisers noted in its last report that ". nearly 6.5 million people move across State lines every year," and a recent study of migration patterns in Clayton, Missouri, a suburb of St. Louis, showed the following results: 3 Werner Z. Hirsch, Elbert W. Segelhorst, and Morton J. Marcus, Spillover of Public Education Costs and Benefits, Institute of Government and Public Affairs, University of California (1964), pp. 335-341. Economic Report of the President (January 1966), p. 95. Rest of St. Louis County.. Metropolitan St. Louis. Rest of United States. Rest of world.. From Clay. ton to area 34 281⁄2 On the basis of these and other data the author of the study concluded: "Mobility of the U.S. population is such that the vast majority of financial returns from public elementary and secondary schooling are generally realized outside the school districts which provided the child's education." 5 Many of the educational benefits that are external to the student and his family, therefore, will also be external to the government that educated him. The third and final kind of external educational benefit results from overlapping units of government. Consider a group of people who, having received a certain amount of additional education, produce during their lifetimes more goods and services and earn higher personal incomes than they otherwise would have. These additional incomes, so long as they are at least equal to the value of the additional goods and services, will, in the absence of government intervention, enable the educated group to purchase for their own use all of the additional output that they create. Modern methods of taxation, however, divert some of the extra buying power to all three levels of government and, through them, redistribute it to other people in all parts of the country. Whether this redistribution takes the form of lower tax rates or higher levels of governmental services or lower terms of credit because the government competes less vigorously for loans is immaterial for the present study. What does matter is that some of the additional output created by education flows, as a result of governmental operations, into the hands of people who live outside the governmental unit of the educated group. The benefits they receive may consequently be classified as external educational benefits." Education, then, is one state and local government program that generates large amounts of external benefits and disseminates them broadly throughout the entire country. Other public programs have similar benefits though their importance is sometimes more open to question and their scope is often confined to one region. While this study need not undertake a comprehensive analysis of all of these benefits, there are specific questions that, in my opinion, should be asked about any functional grant-in-aid program that purports to serve the national interest. The questions are three in number: 1. Does the program generate external benefits of at least one of the three types discussed in the case of education? 5 Burton A. Weisbrod, External Benefits of Public Education (Industrial Relations Section, Princeton University, 1964), p. 62. This conclusion rests on the assumption, which appears reasonable, that better educated people do not counterbalance the extra taxes they pay by additional demands for government services whose benefits accrue entirely to themselves. Additional demands for public goods that generate only social benefits will, of course, benefit others as well as themselves. Ibid., p. 70. 2. Exactly what is the nature of the benefits? Research by economic and political scientists has now reached the point where policymakers can demand more than vague generalities in support of a given activity. They can expect to be told in what specific ways a program operated in one area is likely to benefit other areas by expanding possibilities of production, by raising consumption and living standards, or by improving the operation of the political system. 3. How important are the benefits? Answering this question requires a combination of rough quantitative measurements and subjective political judgments. All external effects of the kinds discussed earlier should be evaluated on their merits, but many others can be excluded the purely pecuniary spillovers that merely change the values of existing resources and alter the distribution of a given amount of national income. These distributional effects are ordinarily too insignificant and too thinly spread to be worth including in the evaluation of specific public programs. These three questions are the basis of the evaluation of existing Federal grant-in-aid programs given in later sections. As a background for that discussion, table III-1 presents a classification of a selected group of government services according to the scope and importance of their external benefits. In the local category are placed programs with few spillovers beyond the jurisdiction of the operating government; the intermediate category contains programs that tend to spread significant benefits over an entire region, such as a metropolitan area or a river valley; and the third class includes activities that appear to have sufficient interstate spillovers to qualify them for Federal grant assistance. TABLE III-1.-Classification of selected Government services by the geographical scope of their benefits 1 Services with few important benefit spillovers beyond the local level of government. Services with significant spillovers beyond the local level but not beyond the regional level. 'Services with significant spillovers beyond the regional level. See Roland N. McKean, Efficiency in Government Through Systems Analysis (Wiley, 1958), pp. 134-150. 80-491-67-vol. II- -28 |