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An occasional publication of economic research and commentary that centers on a regional or national issue, often with emphasis on the Eighth Federal Reserve District. Written for a generally informed readership.

OCTOBER 2006 Vol. 2, No. 2

Editor’s Introduction

Encouraging Development through Better Integration of U.S. and Canadian Transportation: The Open Prairies Proposal

The two largest economic blocks in the world, the European Union (EU) and the area encompassed by the North American Free Trade Agreement, were formed to exploit efficiencies inherent in having larger markets that permit the freest possible flows of capital, labor, and goods and services. In this spirit, throughout much of the EU, member state motor carriers enjoy cabotage, the right to perform domestic movements within another member state. For all practical purposes, motor carrier cabotage does not exist in North America. In this article, the feasibility and likely benefits and costs of North American cabotage are explored in a limited experiment called “Open Prairies.” Open Prairies would allow cabotage for U.S. and Canadian carriers throughout the Canadian Prairie provinces and several Upper Great Plains U.S. states.

Intra-NAFTA Trade and Surface Traffic: A Very Disaggregated View

This paper studies surface traffic from intra-North American Free Trade Agreement (NAFTA) trade in five Mid-South states using trade data disaggregated by state, industry, and transportation mode. The data reveal that intra-NAFTA trade traffic differs widely across states, industries, and transportation modes. Unfortunately, the aggregated data used in most previous studies of NAFTA sacrifice valuable information about these differences. Accounting for these variations is crucial if analysts seek accurate estimates of the economic relationships within the NAFTA region or seek reliable forecasts of transportation needs. The data demonstrate that, within the NAFTA region, (i) the pattern of surface transported trade within each state differs across industries; (ii) the pattern of surface-transported trade within each industry differs across states; and (iii) the mode of transport for intra-NAFTA trade depends on the importer, the exporter, and the industry.

Transportation and Infrastructure, Retail Clustering, and Local Public Finance: Evidence from Wal-Mart's Expansion

The author examines the role highway infrastructure and local property tax rate variability play in retail agglomeration in Indiana from 1988 through 2003. To account for data errors and the potential endogeneity of taxes and infrastructure on retail agglomeration, he introduces a unique identification strategy that exploits the entrance timing and location of Wal-Mart stores in Indiana. Using a time-series cross-sectional model of Indiana’s 92 counties from 1988 through 2003, he estimates the impact highway infrastructure, property taxes, and big-box competition have in creating regional agglomerations. Among two separate specifications and a full and rural-only set of the data, the author finds considerable agreement in the results. In the full sample, he finds no relationship between property tax rates or highway infrastructure and retail agglomeration. Within the non metropolitan statistical area (MSA) counties, this relationship is very modest, though it possesses considerable statistical certainty. Highway impacts within the non-MSA counties are significant and positively related to retail agglomeration, with the presence of highways explaining about 10 percent of total agglomeration variability.

On the Economic Analysis of Smoking Bans

This paper evaluates the literature on the economic effects of smoking bans. Many studies focus exclusively on aggregate impact and thus may overlook the importance of distributional effects, which reveal inefficiencies often undetectable in analyses of aggregated data. These effects also account for the political economy of smoking bans, igniting controversy and public debate. The political resolution often involves exemptions for certain types of establishments, which limits the applicability of many existing studies to the more comprehensive smoking-ban proposals. The paper also analyzes data from Maryville, Missouri—the first city in Missouri to ban smoking in restaurants—to illustrate some of these points.

What Do We Know About Oil Prices and State Economic Performance?

The persistent rise of oil and gasoline prices during the past few years raises the issue of the effect of oil prices on the aggregate economy. Recent research shows that oil prices have an asymmetric effect: Rising prices have a measurable negative impact on aggregate economic activity, but falling prices do not have a commensurate positive impact. This study examines the effect of oil price changes on the states of the Eighth Federal Reserve District, using various measures of oil price increases. The study finds that some states are more sensitive to oil price changes than others. The study also finds only limited support for the asymmetry hypothesis at the state level.

The Long-Run Relationship Between Consumption and Housing Wealth in the Eighth District States

The authors examine the long-run relationship between consumption and housing wealth for the seven individual states in the Federal Reserve System’s Eighth District. Given that state-level consumption data are not available, the authors develop a novel proxy for state-level consumption based on state-level data for personal income and savings income. They use this consumption proxy to estimate a cointegrating relationship between consumption spending and housing wealth, stock market wealth, and income in each of the Eighth District states. Their results indicate that increases in housing wealth produce sizable increases in consumption for most of the states in the Eighth District. Interestingly, the authors also find that consumption typically responds much more strongly to changes in housing wealth than to changes in stock market wealth. Their results imply that the strong increases in housing prices and home construction over the past decade have helped to buoy consumption and decrease saving in most Eighth District states.

 

MARCH 2006 Vol. 2, No. 1

Chairman's Remarks

Editor's Introduction

Alternative Education Finance Strategies

Differences in the formulas states use to fund education account for some of the equity issues in education finance. But the implicit pricing of public school access through housing markets plays a much larger role by rationing valuable nonfinancial inputs into schools that are disproportionately attended by children from higher-income households. This paper then considers two broad categories of state finance policies: those that channel funds to traditional local public schools and those that instead channel such funds to parents or school entrepreneurs. Both types of policies can be targeted in various ways to address equity concerns related to financial school inputs, but the latter allows for a greater severing of the link between school access and housing markets and thus opens a way for addressing inequities in nonfinancial input allocations. The paper concludes that state policies should aim at a greater balance between the two types of state aid.

Discussion

K-12 Public School Finance in Missouri: An Overview

The level and distribution of spending for public K-12 education remains a contentious matter of policy in many states because of increasing expectations for school performance and widespread school finance litigation. In this paper, the authors examine the policies that have generated school funding in Missouri and the outcomes of these policies in terms of the overall level of school spending and interdistrict spending gaps. Interdistrict inequality in average spending is higher in Missouri than in surrounding states, but the spending gaps are equalizing in the sense that poor children tend to be concentrated in districts with above-average spending. A new school funding formula is grounded on a purported link between spending and student achievement. Since that association is tenuous statistically, challenges are likely to arise as this new scheme is fully implemented.

School Accountability and Student Performance

The introduction of student accountability systems across the United States has been controversial both because of its focus on standardized achievement tests and because of questions about its effectiveness. Past evidence, however, shows that performance on standardized tests of the type central to state accountability systems has powerful economic effects. Additionally, analysis of performance across states indicates that accountability policies in general lead to higher levels of achievement, though the magnitudes of the effects are influenced by the design of the policy. Finally, however, despite positive effects overall, recent work shows that these policy instruments are not effective at closing the black-white achievement gap.

Discussion

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