This next post will probably continue with the remaining parts of this paper. In this draft, I would like to basically summarize what Oates says in section 4 of his paper as well as give some geopolitical examples that are not only from the U.S.
Oates says that there is a tradeoff between “internalizing spillover benefits (and costs) and allowing local differentiation” (p. 1130). If we look at the eastern United States, we could conclude that states are “too small”, or rather more precisely, they are unable to self-contain both positive and negative externalities. Local and state jurisdictions are forced to not only avoid nonbenefit taxation, but “actively engage in benefit taxation” on nonmobile economic units (p. 1125). However, this system of taxation is not enough to address certain problems such as crime, pollution, and transportation.
It is now common for Pennsylvania practicing attorneys to registrar for the bar both in their home state as well as New Jersey. Why? Clients typically bring complicated cases that involve plaintiffs from mutiple jurisdictions but in and out of state. Crime in itself is not constrained by artificial boundaries on the federal level, let alone on the local or state level. Luckily, the structure of federal court jurisdictions (circuits) aims to contain this externality.
Pollution is another example of a negative externality that must be contained within (as well as between) small states. Delaware offers corporate incentives in order to attract businesses to incorporate within their boundaires. However, if federal laws did not exist, they could just as easily lower environmental standards to absymal levels just to attract the most industrious businesses. Through the Coasian process [where “interjurisdictional externalities are addressed through negotiation and coordinated decision-making” (p. 1131)] compacts or associations can be created to deal with specific issues. Oates offers us the examples of the Chesapeake Bay Management, Ozone Transport Region (OTR), and the failure of the Delaware River Basion Commission.
Lastly, the issue of transportation is probably one of the dauntest challenges before local and state governments. How does New Jersey exercise control over the traffic influxes throughout its state? What happens when the people in New York or Philadelphia live in New Jersey, but have taxes removed from their salaries in another state? Are the highway tolls enough to correct this externality? Can local or state governments discriminate against individuals who reside in one state, but work in another? Should they pay more taxes in their state of residence?
Not all countries took the same approach as the United States during the early years of their development. More precisely, not all countries began with an array of small states as their economic impetus.
Let’s look at Argentina. The province of Buenos Aires is enormous. Effectively, it comprises of all of the land outside of Buenos Aires, historically the only port on the Atlantic. In the beginning years of the colonization process, the northern parts of Argentina (with trade links tto Perú) were the richest and subsequentially.. also some of the smallest in land area.
The total land area for the province of Buenos Aires is: 191,115 square miles. If we include the autonomous capital city of Buenos Aires, we can add another 78 square miles. What happens with a land area of this size? All of the “externalities are contained” (rivers, highways, ports etc.), at least until the distinction was created that separates the capital from the province.
To put the combined 191,193 square miles with a familar geographical areas:
New Hampshire: 9,350
New Jersey: 8,722
Rhode Island: 1,545
New York: 54,556
= 136,338 square miles [combined]
One of the unresolved problems as a result has been the problems faced by transportation system. Nobody wants to invest in the trains, since both the city and provincial governments are hoping that the other one will flip the bill.
Another consideration is the “timing” of the creation of artificial provincial or state boundaries. When the economic weight in Argentina shifted to the province of Buenos Aires, it held a generally monopoly. Once industrialization occured, the city and the outskirts acted as a magnet, attracting increasingly amounts of not only immigrants from abroad, but citizens from within to the city limits.
Perroux speaks about “polarization’s ” negative effects on the other limits of Paris.
“For example, the regional economy of Paris can be considered to be a growth pole. The case of Paris shows that effect of polarization on the surrounding geographic area is not always positive. The attraction of Paris has been so great that it has been extremely difficult to promote any economic development in the area outside of the Paris region. French planning literature refers to this as the phenomenon of Paris and the French Desert.”
I would like to drawn a similar conclusion for Argentina. If Argentina’s seaboard were cartographed like that of the northeastern United States, would local and state jurisdictional competition prevent “dead zones”. Argentina prevented “negative externalities” in the beginning of its existence, quickly rising to become the 8th richest economy in the world before WWI. Is it that eventually, you need to allow for jurisdictional inefficiencies because concentrations of power eventually turn what should have been by design “efficient” into only concentrations of corruption?
Criticisms & Considerations for Sections 1-3 without providing a summary of Oates’ arguments:
“At the most general level, this theory contends that the central government should have the basic responsibility for the macroeconomic stabilization function and for income redistribution in the form of assistance to the poor. In both cases, the basic argument constraints on lower levels of governments. In the absense of monetary and exchange-rate prerogatives and with highly open economies that cannot contain much of the expansionary impact of fiscal stimuli, provincial, state, and local governments simply have very limited means of traditional macroeconomic control of their economies” (p. 1121).
Why make the assumption that national governments are more capable of controling their macroeconomic policy? What about small countries? What about countries that had their monetary policy essentially controlled by the FMI and/or World Bank? Are national governments less apt to protect the poor in a globalized world? How much of an advantage do national governments have over state/local governments through the control of macroeconomic and monetary policy? Even if this power is increasingly diminishing, can we measure it?
“The presumption in favor of decentralized finance is established by simply assuming that centralized provision will entail a uniform level of output across all jurisdictions. In a setting of perfect information, it would obviously be possible for a benevolent central planner to prescribe the set of differential local outputs that maximizes overall social welfare…” (p. 1123).
Why can we not assume that very small countries do have “perfect information” or better termed, “a higher degree of efficiency in collecting information and providing for their citizens”. Does this matter when we consider the advantages of decentralization?
Note for me: Samuelson Condition: ∑ marginal rates of substituion = marginal cost [variant per jurisdiction] (p.1124).
“Taxes, as we know, can be the source of distortions in resource allocation, as buyers shift their purchases away from taxed goods. In a spatial setting, such distortions take the form of local inefficiencies, as taxed units (or owners of taxed items) seek out jurisdictions where they can obtain relatively favorable tax treatment” (p. 1125)
“Fiscal equalization… …may actually hold back the development of poorer areas by impeding the needed interregional flow of resources (both emigration and immigration) in response to cost differentials” (p. 1128).
I want to take a leap in connecting these two quotations from Oates without loosing the meaning of the original context. From the first quote (and as already known) federal government use taxes to purposely create distortions in incentives. I typically think of my friends in São Paulo, Brazil who complain about the high taxation levels.
I would like to consult the book below to analyze the changes in the tax structure:
The graphes on pages 55 & 57 are particulary inciteful. The measure the pieces of the federal tax structure as components in the total net sum of revenues derived and as shifting percentages in comparison to one another.
In this essay written by Geraldo Biasoto Jr., we are also reminded that we are assuming that the federal government has a coeherent tax policy. We could assume that the federal tax program is piecemeal (and possibly ineffective) or also that the federal government is purposely taxing certain areas and individuals more, as an incentive to get them to inhabit other sections of the country. (Encourage individuals to move out of São Paulo Metropolitánia). The reverse could be seen in the United States as “lower wages and costs… ultimately induced economic movement to the South, bringing with it a new prosperity” [Oates p. 1128/ McKinnon (1997a)].