School finance reforms caused some of the most dramatic increases in intergovernmental aid from states to local governments in U.S. history. We examine whether teachers' unions affected the fraction of reform-induced state aid that passed through to local spending and the allocation of these funds. Districts with strong teachers' unions increased spending nearly dollar-for-dollar with state aid and spent the funds primarily on teacher compensation. Districts with weak unions used aid primarily for property tax relief and spent remaining funds on hiring new teachers. The greater expenditure increases in strong union districts led to larger increases in student achievement.

Using California ballot proposition returns and exogenous shifts to labor demand, we provide the first large-scale causal evidence of the impact of economic conditions on policy preferences. Consistent with economic theory, we find that positive economic shocks decrease support for redistributive policies. More notably, we find evidence of a need for cognitive consistency in voting behavior as economic shocks have a smaller significant impact on voting on noneconomic ballot issues. While we also demonstrate that positive shocks decrease turnout, we present evidence that our results reflect changes in the electorate's preferences and not simply to its composition.