John A. Dove

Financial markets, fiscal constraints, and municipal debt: lessons and evidence from the panic of 1873

The current paper explores the municipal debt crisis that resulted from the panic of 1873, which caused a significant number of local governments in the United States to default on their debt obligations. The aftermath of that episode was one of constitutional change meant to constrain municipal governments from pursuing similar activities in the future. This paper empirically investigates the impact that these restrictions had on municipal borrowing costs, analyzed from bond yield data taken from several major US financial markets, so as to evaluate how binding and significant markets actually perceived these constraints to be. Overall, the results suggest that borrowing costs were lower for municipal governments that faced more stringent creditor guarantees regarding the issuing and repayment of debt, hard budget constraints, and also strict debt limits, while tax limits generally increased borrowing costs. These results not only conform too much of the current literature regarding the political economy of institutional constraints on public finance, they also add several important insights, especially when comparing defaulting to non-defaulting municipalities.

Policing the Chain Gang: Panel Cointegration Analysis of the Stability of the Suffolk System, 1825-1858

Conventional monetary theory suggests that a closed system banking regime may lead to in-concert overexpansions of circulation by its banks. However, Selgin (2001, 2010) argues that this is unlikely as long as there are enough banks to ensure (i) routine interbank settlement and (ii) no collusion amongst banks refraining from redeeming one another’s notes. Banks effectively form a “chain gang” where in-concert expansion requires coordination that is prohibitively costly in a system with many banks. In order to test this conjecture, we examine state-level data on circulations and reserves from the Suffolk Banking System (1825–1858) in New England. In addition to narrative evidence on the stability of the Suffolk, panel cointegration tests provide evidence of a long-run relationship between state-level circulations and total reserves. The estimated error-correction mechanisms suggest a deviation half-life of about 2years. We argue that a cointegrating relationship between circulations and reserves, along with rapid error-correction, supports the Selgin hypothesis.

Do Fiscal Constraints Prevent Default? Historical Evidence from U.S. Municipalities

Through the nineteenth century numerous U.S. states developed extensive municipal fiscal constitutions. These generally came in the wake of financial crises and large-scale default of public debts. Although the constraints were imposed in order to minimize the likelihood that such outcomes would occur in the future, little work has been undertaken to analyze whether they were successful in achieving that goal. Therefore, this current study attempts to do so by empirically investigating how procedural safeguards and outright prohibitions on debt accumulation, along with hard budget constraints, and tax limits impacted the likelihood of default. This is done by evaluating municipal defaults that centered on the Panic of 1893. Overall, the results suggest that outright prohibitions on debt accumulation and hard budget constraints actually reduced the likelihood of municipal default across states, while tax limits and procedural safeguards increased that likelihood.

Analyzing the Effectiveness of State Regulatory Review

This article provides a systematic empirical study of how differences in regulatory review processes across the fifty US states affect the level of regulation. We examine whether rules for regulatory review matter in terms of lowering the overall level of regulation in states. Our findings suggest that sunset provisions are the most effective means of reducing state regulatory levels. Requirements for reviewing the fiscal impacts of new regulations on state government budgets and to present lower-cost alternatives for achieving the same policy goals also appear to be somewhat effective. There is limited evidence that a regulatory review process within the state legislative branch or an independent agency reduces new regulations.

It's Easier to Contract than to Pay: Judicial Independence and U.S. Municipal Default in the 19th Century

It is well established in the literature that an independent judiciary can act as a signal of credibility by a sovereign state and also as a guarantor of creditor rights. However, to date there has been little systematic work analyzing how an independent judiciary reacts to fiscal stress and public sector default. This article addresses that very question by evaluating how and if judicial independence effects default rates using U.S. municipal data through the nineteenth century. Overall, the results do indicate that greater judicial independence is associated with a significantly lower likelihood of default. This channel largely occurs through the method by which a member of a state’s court of last resort is selected (either appointment or popular election) and also term length.

The relationship between local government economic freedom and bond ratings

Purpose With a newly developed measure of economic freedom across US local government jurisdictions, this paper aims to estimate the relationship between economic freedom and bond ratings. Design/methodology/approach The author uses a battery of cross-sectional econometric models to identify the impact that economic freedom might have on bond ratings using a sample of US municipal governments. Findings Overall, the results indicate that relatively more economic freedom within a local jurisdiction is associated with higher bond ratings and thus lower borrowing costs. However, similar to Roychoundhury and Lawson (2010), no specific subcomponent seems to affect bond ratings. Originality/value To the author’s knowledge this is the first scholarly work to address this topic at the local level.

VOTER PREFERENCES, INSTITUTIONS, AND ECONOMIC FREEDOM

The enormous impact that economic freedom can have on economic outcomes makes an understanding of the factors or forces affecting its level paramount. To what extent do citizen preferences regarding the role of government in the economy drive the level of or changes in economic freedom? We explore this question using a new index of voting in the U.S. Congress constructed consistent with the Fraser Institute indices of economic freedom. We use voting on national legislation to examine state-level economic freedom to clearly separate the measurement of preferences from policies that at least partly reflect these preferences. We find that Congressional votes, both from the House and Senate, are related to increases in state economic freedom, and that the result is generally statistically and economically significant, and robust to inclusion of a variety of socioeconomic control variables. (JEL D72, H10, H50)

Entrepreneurial creative destruction and legal federalism

Legal federalism is a system in which a government’s legal powers (judicial and legislative) are separated both vertically and horizontally with multiple levels of decentralized government. This type of system results in differences in legal rules and interpretations across sub-regions within the nation, in contrast to a more centralized legal system in which laws would be more uniform. In this chapter, we consider how the presence of horizontal legal variation across jurisdictions affects the level of innovation and entrepreneurship in an economy. In addition, we examine how the disruptive and unpredictable process of product innovation itself helps to push the evolution of law through time. Because entrepreneurs constantly create new products that require new interpretations of existing statutory law (or the creation of new statutory law), we argue that it is the predictability of the dynamic application of the law into new areas that matters most in attracting entrepreneurs to an area and supporting innovation within an economy.

Some additional evidence on the interplay between corruption, tax policy and firm entry using US states

ABSTRACT The effects that corruption and tax policy have on entrepreneurship and firm growth have been often studied in the literature. This current article adds to that literature by evaluating how the interaction effect between corruption and tax policy influences firm entry at the US state level, using a panel data set of all 50 US states between 2001 and 2014. Overall, the findings are consistent with the literature and suggest that while high levels of corruption and relatively burdensome tax policy have a negative effect on firm entry, high levels of corruption tend to dampen the negative effects associated with relatively high tax rates. Potential policy implications are discussed within this article.

Local Government Type and Municipal Bond Ratings: What's the Relationship?

ABSTRACT There is an extensive literature analysing the executive branch within local U.S. government jurisdictions. This has largely revolved around the differences between elected mayors and appointed city managers. Much of the academic work has considered the potential efficiency gains that may be associated with either form of government and comparative analyses between the two. However, the empirical literature has been divided regarding the relative efficiency of either form. This article attempts to add to that literature by considering how bond markets may perceive potential efficiencies that emerge from one executive type over the other by evaluating bond ratings for a sample of large municipal governments in the United States. Overall, the results suggest that municipalities headed by a city manager are associated with increased bond ratings (and thus lower borrowing costs), which may lend support that this form of administration is, on some margin, relatively more efficient than others. These results are robust to a number of specifications.