The Effects of State and Local Public Services on Economic Development

T he purpose of this paper is to summarize the burgeoning literature concerning the relationship between public services, or at least government spending, and economic development in the jurisdiction providing those services, as measured by changes in population, employment, income, or the number of firms. Much of this work, particularly the initial studies, arose as a reaction to research examining the effects of taxes on economic growth. Taxes, of course, are a means by which public services may be financed. If taxes reduce growth or inhibit development, then presumably no democratic government would collect taxes unless there were (at least partially) offsetting benefits. Accurate estimates of the possible negative effects of taxes require similar estimates of the possible benefits from the public services financed by the taxes. As this work has advanced, however, the public policy focus has become more positive, as the research seeks to identify public service actions that governments might use to stimulate various types of development. Just as the focus of this research has evolved, so has the technical sophistication of the underlying theoretical models and econometric methods. The initial attempts to include government services often were simply " afterthoughts " to research focused on tax effects. In many instances, one or two measures of government spending were included in a more or less ad hoc manner as controls. As the research has become more sophisticated and more concerned about service effects, attempts have been made to include the entire governmental budget, to better measure the quantity and quality of public services, to account for the possible reverse causation of growth affecting public service choice, and to allow for possible differential effects of public services on different industries or factors of production. The paper begins with a survey of the general results concerning the economic development or growth effects of transportation, public safety, and education spending or services as well as the results of studies relating public capital to national productivity. These results represent