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Equilibrium federal impotence: why the states and not the American national government financed economic development in the antebellum era

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Why did states dominate investments in economic development in early America? Between 1787 and 1860, the national governments spent $54 million on transportation infrastructure while the states spent $450 million. Using models of legislative choice, we show that Congress could not finance projects that provided benefits to a minority of districts while spreading the taxes over all. Although states faced the same political problems, they used benefit taxation schemes that coordinated taxation and benefits – for example, by assessing property taxes on the basis of the increase in value due to an infrastructure investment. The US Constitution required the federal government to allocate direct taxes on the basis of population, effectively prohibiting benefit taxation. As a result, federal government expenditures were concentrated in collections of small projects – such as lighthouses and rivers and harbours – that spent money in all districts. Federal inaction was the result of the equilibrium political forces in Congress, and hence an equilibrium impotence.
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Keywords: AMERICAN HISTORY; FEDERALISM; INFRASTRUCTURE; POLITICAL ECONOMY; PUBLIC CHOICE

Document Type: Research Article

Publication date: 01 April 2018

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