Abstract
Studies of economic globalization and government spending often view the United States as an outlier case. Surprisingly, ours is the first empirical study to take advantage of the variation in U.S. states’ exposure to global markets, ideological orientations of the governments, and the relative size of the public sector, to assess the role of trade exposure on government spending in the American states. Using state-level data from the past three decades, we use error correction models (ECMs) to test three competing globalization theories. We find that the effect of trade exposure on government spending varies across states. Our results suggest that when conservatives control state governments, high levels of trade exposure negatively relate to changes in public expenditures such as welfare and infrastructure. With liberal governments in power, trade exposure does not accelerate state spending growth in welfare and infrastructure, which diverges from the pattern found in European social democracies.
Highlights
The concept of market preserving federalism stemming from economics and developed by Weingast (1995) has been directly used to understand how fiscally decentralized political units will compete to create the most hospitable environments for firms engaged in international trade
Since we suggest that state government ideology may moderate the relationship between trade exposure and government spending, we include the multiplicative term of the two core independent variables: trade exposure × state government ideology to capture the conditional effect
The interaction term of lagged trade exposure and lagged state government ideology (b=0.0002) makes straightforward interpretation of the coefficients challenging from the tables alone
Summary
The concept of market preserving federalism stemming from economics and developed by Weingast (1995) has been directly used to understand how fiscally decentralized political units will compete to create the most hospitable environments for firms engaged in international trade. The efficiency school, sometimes called the “race-to-the-bottom” or neo-liberal convergence thesis, contends that a heavy reliance on global trade leads to shrinking government spending because large public sectors repel international investment and decrease the competitiveness of export manufacturing (Garrett and Mitchell, 2001; Rudra, 2002; Swank, 2005; Genschel, 2002; Swank & Steinmo, 2002; see Mosley, 2005; Genschel, 2004) These two schools offer contradictory conclusions because the former emphasizes the demand by citizens for government protection, but the latter focuses on the downward pressure on government spending exerted by corporations competing in a global marketplace.
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