Association for Public Policy Analysis & Management

Classical public choice models (e.g. Romer 1975; Meltzer and Richard 1981) suggest that rising income inequality heightens pressure for redistribution.  An implication of these models is that democratic governments will respond to greater inequality by augmenting direct transfers from the wealthy to the middle class and poor.  Yet empirical support for these theories has been decidedly mixed, both cross-nationally (Alesina and Glaeser 2004, though see Milanovic 2000) and within the United States (McCarty, Poole, and Rosenthal 2006; Hero and Levy 2013).  Recent research calls attention to between-group inequality as a critical determinant of redistributive preferences and policies that may help explain the inconsistent association between inequality and the size of government (Lind 2007; Baldwin and Huber 2010; Hero and Levy 2013).  Part of a larger body of scholarship on the “structure of inequality” and redistribution (e.g. Lupu and Pontusson 2011), this research is predicated on the expectation that redistributive policy is in part a function of the “affinity” the median voter feels for the social groups she perceives as its beneficiaries.

This line of research has focused on pure redistributive transfers, but we argue that it has implications for the provision of public goods as well.  So long as tax policies are flat or progressive, producing most public goods entails transfer from the wealthy to the less well off.  Social identity theory’s emphasis on the motivation to achieve “positive distinctiveness” (Tajfel and Turner 1986) of one’s own group suggests that, ceteris paribus, citizens will disdain such transfers more when they perceive them to burden their own racial or ethnic group and benefit an out-group.  As a consequence, we would expect the impact of income inequality on local public goods provision to depend on the racial group structure of inequality.  At any total level of inequality, a larger between-race component reduces pressure for public spending on public goods.    

Testing this expectation requires measuring the extent to which income inequality is accounted for by between-race disparities (cf. Lind 2007; Hero and Levy 2013).  To this end, we employ the Theil Index, an entropy-based measure of inequality that can be decomposed into between- and within-group components.  We examine the association of the between-race share of total inequality and various measures of local and state government spending on public goods between 1980 and 2000.  We test the robustness of our findings to different levels of aggregation (U.S. counties and metropolitan statistical areas).  Preliminary results indicate that the racial structure of inequality conditions the relationship between total inequality and public goods spending as predicted.  This also helps clarify that group affinities – and not only divergent group preferences over public goods – contribute to the negative relationship between ethnic diversity and the size of government (Luttmer 2001; Poterba 1997; Alesina, Baqir, and Easterly 1999; though see also Boustan et al. 2010; Hopkins 2011; cf. Lind 2007).