Hatfield for Tiebout: A Reply

I think that even local government is terribly inefficient. My friend and Salem Center colleague John Hatfield is unconvinced. Here’s my reply, point-by-point. Hatfield’s in blockquotes; I’m not.

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You argue that local governments are very inefficient in providing local services (“far below [the] efficiency frontier”). I think there are two definitional issues that must be clarified before we can evaluate this statement:

1. What is “local”? I think you would say that L.A. County is a “local government,” but it administers as many people as Switzerland or Sweden. Is that really local? In Tiebout’s formulation, we generally think of each locality as homogenous. L.A. County is not homogenous in any meaningful way, and neither is any “big urban government” in the United States. And Tiebout does not predict that such big urban governments will be efficient! And I am fine with saying that big urban government is very inefficient.

You’re forgetting a key implication of Tiebout: If local governments are above the minimum efficient scale, competition forces them to subdivide. Otherwise, they won’t be able to compete with lower-cost, smaller governments.

And properly understood, Tiebout doesn’t really require “homogeneity” either. A key point of the model is that competition will give consumers a full menu of service/tax options - low tax/low service, medium tax/medium service, high tax/high service - with each of the these options on the efficiency frontier.

Relatedly, Tiebout’s model only works if local leaders feel there is a significant probability that they will be replaced if they fail to provide reasonable quality services; this is certainly not true in big urban governments, but it is at least somewhat true in suburban and rural local governments.

The whole point of Tiebout is that mobility, not elections, is the constraint that matters! What prevents bad government in Tiebout is not the threat of losing office. It’s the threat of all the people and capital moving away, leaving you the Mayor of Emptytown.

2. What is “efficient”? I doubt you would say that the nuclear power industry is very inefficient, even though it does not do a good job of providing electricity at reasonable cost; you would say it is hamstrung by horrific regulation. And local government is a highly regulated industry!

Local government is highly regulated in some ways, yes. But to figure out if that’s a major cause of their inefficiency, you have to see how they maneuver within their constraints. Do local governments standardly do the most efficient thing they’re allowed to do? I say no, not even close. Public schools could easily save piles of taxpayer money, but they don’t. Cities could charge market-clearing prices for parking, but they don’t. See my original presentation.

You argue at the end of your slides that “Localities can ignore inefficient state/federal laws via selective enforcement.” I’m not sure I understand: If the state imposes high taxes on certain activities by local government—and they do!—how can a local government ignore that?

For starters, they could cut public school spending to the bone, and just let families spend their own money on private schools. If Tiebout were right, this would be a common policy model, crafted to appeal to the rich and childless.

But the key point is that we should expect local governments to be more efficient than super-local (i.e., state and national) governments and—in that sense—I think his model has been proven out by the data. An easy example of this is that most people, when they have a choice, eschew “big urban government” and instead choose local government—do you and your friends with means live in D.C. proper or out in the ‘burbs?

I’m baffled. Everyone in the U.S. “has a choice” about where to live. And the high prices in big urban areas surrounded by suburbs show that many people find the big urban package their best choice. At least for “my friends with means,” the best predictor of distance from DC is family size. The childless tend to prefer DC; families with one or two kids, the near-suburbs; families with four kids, the far suburbs.

In particular, you argue that local government is “far below [the] efficiency frontier” in its three main areas of responsibility, and you later discuss what I would consider a 4th major area of responsibility, local infrastructure:

1. Law enforcement: Do local (i.e., not big urban governments) do poorly on this dimension? I think that is a hard claim to make—sure, Baltimore or the South Side of Chicago are horrible, but those are big urban governments. And it seems to me that law enforcement outside of these areas delivers more or less what consumers want. If you disagree, let me know.

I’d say they deliver what voters say they want, not what consumers actually want. To repeat my slogan: In markets, actions speak louder than words; in politics, words speak louder than actions. Again, remember that Tiebout predicts a full menu of options. If he were right, there would have long been many localities that catered to e.g. victimless crime participants by studiously neglecting to enforce vice laws. Remember, law enforcement has near-total discretion about what laws to enforce.

2. Schooling: Again, I agree that big urban school districts were a disaster on Covid. But many small local districts reopened much sooner (at least in Texas). On schooling more generally, big urban school districts are a disaster, but many suburban school districts are comparable to private schools—that is a big reason why people move to the suburbs when they have kids.

What we don’t see are districts with ultra-low taxes and minimal public schooling. Why not? Neither do we see public schools that aggressively strive to control costs by e.g. hiring less-credentialed workers. Why do you need a college degree to teach gym?

You could object, “Private schools are even more gold-plated than public schools.” But there’s a straightforward explanation: Public schools’ predatory pricing all but eliminates demand for bargain private schools. As I’ve explained elsewhere: “Unless the government rations the free mediocre product, consumers have virtually no reason to ever pay for products of mediocre or lower quality out of their own pockets.   At minimum, then, government’s gratis products kill private production of all products of equal or lower quality – a textbook case of predatory pricing.”

You argue that “better schooling policies...[are] largely imposed by state governments.” I am not sure about this: Serrano v. Priest was a state court decision that was the beginning of the end of quality CA public schools (see Fischel, 2005), and Robin Hood has been a huge burden on local public schools in Texas (see Hoxby and Kuziemko, 2004).

I fully agree that state governments have plenty of bad policies. I was talking about:

1. Voucher programs, most of which originate with state governments.

2. School reopenings and removal of school Covid restrictions. We both know that it was the state government of Texas that pushed these forward despite some fierce local opposition.

My local district pays 60% of its budget to the state; this is like facing a 150% average tax on school spending! And I would guess its marginal tax rate is even higher. And imagine if a local school district decided that it would not recognize/negotiate with the local AFT—good luck getting the NLRB to agree!

This 150% tax makes the non-existence of localities with ultra-low taxes and minimal public education spending even more puzzling, no?

3. Local infrastructure: Actually, local governments do a pretty good job (as far as I can tell) on local roads and the like. It is true that highways (particularly in California!) need congestion pricing and a lot of refurbishment/expansion but that is a state government responsibility.

Local governments at least have some say in road congestion pricing. And they have near-total control of the pricing of street parking. Yet almost no locality has market-clearing pricing for parking. Ultra-inefficient, yet popular.

4. Housing policy: You and I may think local housing policy is really inefficient, but it is pretty clear at this point that local residents don’t agree. On this issue, local governments have been very responsive to the demands of their consumers/shareholders, even if such demands are misguided.

Let’s say it together: In markets, actions speak louder than words; in politics, words speak louder the actions. Developers want to build dense housing; consumers want to buy dense housing; but local governments smother this market with regulation. Again, the unavoidable puzzle for Tiebout is: Why isn’t laissez-faire at least one common approach to housing?

(I think consumers’ demand for cigarettes is also misguided, but I don’t think the “cigarette industry is inefficient” because of this.)

A bad analogy. Local housing policy is more like a regime where everyone is forced to buy cigarettes, whether they want them or not.

And Fischel (2005) argues quite convincingly (“the homevoter hypothesis”) that local governments work very hard to maximize local home values.

Sorry, Fischel seems dogmatic and Panglossian to me.

You could argue that local governments—if truly efficient—would find a way to make the value creation of building more housing work for their residents. But doing this would almost certainly require the state government to work with those local governments. For instance, if the influx of new residents requires us to build a new high school and we face a very high marginal tax rate on any new school spending, it might well not be possible to make a deal that makes local residents better off.

You’re thinking too much like a defense lawyer for local governments, and not enough like a judge. There are lots of creative ways around these problems, starting with transparent surcharges on newcomers. Imagine how happy developers would be if they could simply pay a big fee and immediately break ground, instead of jumping through multiple levels of bureaucracy just to get started!

Voters won’t go for it? Of course not, because demagoguery rules government at all levels - local, state, and federal.

But local government does significantly better than national/state government, and I think that is the point that Tiebout was trying to make—or at least the point we should take away from Tiebout’s analysis.

I used to kind of agree, but the more I study local government, the worse it looks. The main benefit of local government that I continue to acknowledge is mere variance: Even if the average local government is awful, at least you can shop around for something tolerable.

That’s why I spent three months of Covid hanging out with all y’all in Texas, after all!