The Financial Crisis, Fiscal Federalism, and the Creditworthiness of US State Governments

McBrayer Markie, Shea Patrick E. and Kirkland Justin H. ()
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McBrayer Markie: Department of Political Science, University of Idaho, Moscow, ID, USA
Shea Patrick E.: Department of Political Science, University of Houston, Houston, TX, USA
Kirkland Justin H.: Department of Politics, University of Virginia, Charlottesville, VA, USA

Statistics, Politics and Policy, 2018, vol. 9, issue 1, 1-30

Abstract: This study examines why credit rating agencies offered optimistic assessments of some US states during the 2008–2009 financial crisis. Focusing on the creditworthiness of state governments, we argue that because states are procyclic spenders, growth in a state’s economy is actually harmful to that state’s ability to maintain its fiscal promises. As the federal government spends more heavily in a state, however, the procyclic tendencies of that state matter less to credit raters, and the negative effects of growth in a state’s economy diminish. We test our theory in two ways. We first model the Great Recession as an intervention, finding that states receiving less money from the federal government are more likely to experience increases in their credit scores following the crisis. We then test whether this pattern holds outside of the financial crisis for the years 1990–2006. We observe that increases in gross state product are negatively correlated with credit ratings when there are little to no changes in federal dollars flowing into a state.

Date: 2018
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DOI: 10.1515/spp-2018-0003

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