I study the effect of a financial crisis on local public good provision using a comprehensive, novel, archival panel data on U.S. cities and municipal bonds during the 1920s and 1930s. Cities issued vast amounts of debt to fund infrastructure projects and provide important public services during rapid urbanization in the early 20th century. The financial crisis during the Great Depression, however, quickly put an end to urban growth. In this paper, I estimate the effect of financial leverage on municipal spending and investment and find a significant impact of pre-crisis debt on municipal austerity. I disentangle finance-driven from demand-driven mechanisms and find strong evidence of a significant negative impact of financial market frictions. Cities that were forced to refinance during the Depression drastically cut public expenditure, especially capital investment and police services.
Crises and Intergenerational Mobility [Link]
Between 1910 and 1940, the high school graduation rate in the United States increased five-fold, setting the stage for human capital-led economic growth throughout the 20th century. In this paper, I study the impact of a macroeconomic shock - the Great Depression - on these shifting schooling choices for households across the socioeconomic spectrum. I use novel local data on youth unemployment and school quality during the Depression and study their effect on secondary education. Using Census data on males and their fathers, my difference-in-differences strategy attempts to explain the variation in schooling and intergenerational mobility across cohorts. I find that worsening labor markets for youth significantly increased the school attendance of youth from poor, but not wealthy, families while public spending cuts decreased it. Overall, the Depression not only contributed significantly to the rise of secondary education in the U.S., but it also narrowed the achievement gap between the rich and the poor.
Correlation in State and Local Tax Changes [Link]
We develop a comprehensive dataset of state and local taxes from 2000-2015 that includes personal income taxes, property taxes, corporate income taxes, sales taxes, estate taxes and excise taxes. We illustrate how state and local taxes have changed over time, in response to business cycles, and to what extent different taxes co-move within a state or locality. Across states and local jurisdictions, large differences in the mix of taxes are observed, and these differences have tended to become more pronounced over time. Moreover, we note that different types of taxes tend to co-move within a state or local jurisdiction, highlighting the importance for researches to take into account the entirety of the tax system, rather than just a single tax type, when examining household or firm responses to state and local tax changes. At both a state and local level, increases in tax rates of all types tend to increase tax revenue but worsen business conditions and employment.
Lender of Last Resort and
Local Economic Outcomes [Link]
Economic recovery from financial crises is typically slow, possibly due to credit rationing by financial intermediaries. This paper used novel, archival, panel data on local manufacturing and banking conditions in the United States to investigate the link between policy, bank failures, and firm production and employment during the Great Depression. I study whether lender- of-last-resort policies of the Atlanta Federal Reserve Bank during the Depression strengthened the banking sector and eased firms’ financial constraints. Consistent with prior literature, I find robust evidence in support of the former. However, I find little evidence in support of the latter, suggesting that lender of last resort policies were not an important determinant of local, non-banking, economic outcomes.