Collaborative Research: The Great Depression, the New Deal, and the Origins of Modern State Government Fiscal Policies

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The Great Recession of the 2000s has led to renewed debates about the appropriate responses of the national and state governments to economic crises and to long run trends. The debates and the government policies have their modern origins in the Great Depression and New Deal. The national and most state governments face continuing and future budgetary problems based on pension and health care promises that are currently underfunded. The 1930s offer the most relevant historical example to the current situation, as tax revenues at all levels dropped in the early 1930s, demands on state governments expanded, and the federal government provided a large amount of new funding to the states and established a host of policies. The states themselves began a fiscal revolution that expanded their capacity to generate revenue and the interactions between the national and state governments changed in ways that expanded the long run economic responsibilities of national and state governments in the economy. Thus, understanding how these policies were established in the 1930s can provide numerous insights into the modern policy issues. The Census Bureau stopped compiling state financial statistics during the years 1932 through 1936, leaving a gaping hole in a series that runs from 1915 to the present. This gap in the state fiscal data occurs precisely during the key years when modern state government policies were going through a fiscal revolution in response to the Depression and the New Deal. Our goal is to fill the gap by going directly to the reports of Treasurers and Auditors in each state to collect the financial data from 1930 through 1940. When the project is completed, we will have developed a panel data set that covers the period from 1915 through 1940 for the 48 contiguous states with information on total state revenues and expenditures, as well as with information on several revenue and expenditure categories. This panel will be matched up with a panel data set from 1919 through 1940 that contains information on state income per capita, farm activity, manufacturing activity, births, deaths, banking activity, federal spending in multiple categories, federal tax revenue in multiple categories, highway mileage built, construction in a variety of categories, weather, the political makeup of state legislatures and the governorship, and election results for congressional, presidential and gubernatorial elections.The broader impact of this proposal can be seen through the questions we will answer using this data. Some of the questions we plan to address are: Did the increased national government grants and loans encourage additional state spending and revenue or did the states respond by allowing the national spending to crowd out state spending and reduce tax collections? To what extent did the states introduce new types of taxes and new forms of expenditures in the 1920s and 1930s and what were the factors that led them to choose the specific forms? What was the impact of state deficits and surpluses on state economic activity after controlling for national spending?