Mundane cash management policies in the American states: a preliminary assessment using the political economy model.

Abstract

A political economy model, incorporated curved and interactive terms, is used to explain levels of five dimensions of cash management policies in the American states. Results point to a predominant role for economics, political culture, and interest groups as the explanation for policy levels. Further, the explanations are, in many instances, curved and conditional. [C] 2002 Elsevier Science Inc. All rights reserved.

1. Introduction

The political economy model has predicted policy levels in the American states in such diverse areas as welfare, medicaid, and disability policy (Barrilleaux & Miller, 1988; Erickson, Wright, & McIver, 1987; Hanson, 1983; Hwang & Gray, 1991; Wright, Erickson, & McIver, 1987), education policy (Hwang & Gray, 1991), abortion (Meier & McFarland, 1992), environmental regulation (Ringquist, 1993), economic development (Brierly & Feiock, 1993), consumer protection (Meier, 1987a), public utility, insurance, and banking regulation (Skalaban, 1992, 1993), tax policy (Hansen, 1990; Johnson & Meier, 1990), the death penalty (Nice, 1992), and drug abuse policy (Meier, 1992). However, policy areas studied in the cited literature either engendered controversy or periodically experienced some crisis event which caused the issue to percolate to the top of the policy agenda. Under these conditions, the model worked: developed economic and political forces, existing bureaucratic structure, and the presence of well-organized in terest/advocacy groups combined to, one degree or another, explain public policy. But what about policy areas which, by comparison, are comparatively mundane, banal, or everyday in nature? Can the political economy model explain policy levels in these areas as well?

Mundane means, for purposes of this research, that the policy domain operates in an environment relatively free from crisis or controversy. A policy area is therefore classified as mundane only by comparison to other policy areas (Allen, 1999). Cash management policies are one such area. State governments have adopted a broad range of policies which govern such items as allowable state investments and banking relations/investment practices--to name but a few. Nestled with these dimensions are a host of individualized policies--such as policies governing investment of U.S. Treasury obligations, competitive bidding practices on deposits and compensatory balances, account reconciliations services and state authority to invest in Eurodollars. These items do not attract high levels of public scrutiny or agenda attention. Nor does it seem plausible to conceptualize the studied domain in terms of crisis events which periodically cause other policy debates to percolate to the top of the policy agenda. For example, a variety of forces periodically push welfare and education policy, environmental regulations, and taxes to the forefront of the American political consciousness (Hansen, 1990; Hwang & Gray, 1991; Lowery, 1987; Ringquist, 1993; Sigelman, Lowery, & Smith, 1983). By comparison, accounting for and processing funds between collection and expenditure appears to slide within the ground clutter of the public's political radar scope.

2. Measuring cash management policies

Cash management policies refer to procedures adopted by state governments to monitor cash-on-hand between collection of tax revenues and their corresponding expenditure for public purposes. Dichotomous data in the Book of the States, 1996-1997 (Council of State Governments, 1997) allowed for isolation of five policy dimensions. The Guttman scales created to measure the dimensions are defined in Table 1, along with the individual items collected in each scale. (1) High scores on each scale represent high levels of policy.

Table 2 lists state Guttman scale scores according to allowable state investments. High scores reflect high levels of public policy. Standardized scores, used as the dependent measure, provide a comparison across dimensions. Descriptive statistics indicate that all scales are unidimensional, conform to relatively normal univariate distributions, reflect sufficient variation to allow for analysis, are generally uncorrelated, and adequately discriminate among cases, although--as expected given the ratio of cases to items--ties are present.

3. The model: concepts, measurement and hypotheses

The political economy model maintains that policy levels are a function of the economic environment, which constrains all civic activity in American states, the behavior of political institutions, which is constrained by attitudinal pre-dispositions of the polity, and the activities of bureaucratic entities and interest groups.

3.1. Economics

Economics' role with regard to predicting policy is well known (Barrilleaux & Miller, 1988; Brierly & Feiock, 1993; Hansen, 1990; Hwang & Gray, 1991; Williams & Matheny, 1984).

And given that the dimensions of the policy under study all reflect an economic aspect (i.e., money) a relatively substantial association should exist between this component of the model and the policy dimensions. Three measures reflect the economic component of the model (general economic complexity, tax revenue pressure, and social class). Positive relationships are expected between all economic measures and the cash management policy dimensions.

A general economic complexity factor, based on 1990 U.S. Census data, was constructed using total population, population density, and the number of manufacturing establishments and manufacturing employees in a state. A larger population generates more absolute tax revenues which require a broad array of cash management policies. Population density, an urbanism surrogate, is included because high population concentrations indicate a high concentration of taxpayers--and the returns from such areas would require more complex cash management procedures. The industrialization measures reflect the long standing practice of including similar variables in this type of research and are also included because industrialized societies produce a variety of tax revenue streams which necessitate complex cash management stratagems on the part of government. The four variables, subjected to principal components factor analysis, yielded a unidimensional general economic complexity scale. (2) High positive scores reflect highly and densely populated industrialized states.

Tax pressure is important with regard to cash management. The force of tax revenue streams could drive states to adopt more policies to keep track of and manage cash-on-hand between time of collection and expenditure. Six different tax revenues in millions of dollars, subjected to principal components factor analysis using a varimax rotation, resulted in two scales reflecting tax pressure. The first dimension reflects revenue from sales/licensing taxes. The second dimension collected revenues from individual/corporate income taxes. (3) High positive scale scores represent high levels of tax pressure.

Social class, another relevant economic determinants measure, indicates that states with wealthier, more educated citizens would possibly encourage a well regulated cash management system. The social class measure, consisting of traditional indicators of income (median family income and per capita income) and education (percent of college graduate in the population and percentage of the population 18-24 years of age in college) were combined into a unidimensional social class scale through principal components factor analysis. (4) High positive scores represent a financial well-off and well-educated polity.

3.2. Politics

Actions of political institutions are constrained by the forces of public opinion and political culture. In sum, public opinion conditions the range of responses of elected policy makers while political culture limits institutional action by structuring the parameters of acceptable political behavior (Elazar, 1972; Erickson et al., 1987; Wright, Erickson, & McIver, 1985).

Since this article focuses on policy adoption, the central political institution under consideration is the state legislature. A professional legislature, with comparatively better educated members, more resources, and more support staff is, in all likelihood, comparatively better able to navigate its way through the technical requirements of a wide variety of policy issues. Further, such legislatures, one may reasonable surmise, would see a need for regulating the cash management practices inherent in governing state revenue flow. Squire's (1992) professionalization index, which compares state legislatures to the U.S. Congress and assigns a score to each state based upon how closely the state legislature approximates the U.S. Congress, was used in this research. Increasing scores indicate increasing legislative professionalization. (5) A positive relationship is expected between professionalization and level of policy.

In a democratic system, public opinion is presumed to shape the response of political institutions. Two forms of public opinion are partisanship and ideology. Wright et al. (1985) established direct measures for the two aspects of public opinion. The measures, based on aggregated polling data, reflect the party affiliation and liberal/conservative bias of a state's polity. Because Republicans and conservatives are posited as being fiscally conservative and distrustful of bureaucratic schemes, and because high scores on the indices reflect Republican partisanship and a conservative ideology, a negative relationship is expected between these measures and rates of policy adoption.

American political culture is defined as a subset of beliefs, values and styles of action derived from the general culture which constrain state political structures, political behavior and modes of political …