Hostname: page-component-78c5997874-s2hrs Total loading time: 0 Render date: 2024-11-17T16:14:14.864Z Has data issue: false hasContentIssue false
  • English
  • Français

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

Published online by Cambridge University Press:  20 August 2013

JOHN A. DOVE
JOHN A. DOVE*
Affiliation:
Manuel H. Johnson Center for Political Economy, 137N Bibb Graves Hall, Troy University, Troy, AL 36082, USA
*
*Email: [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract:

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.

Type
Research Article
Information
Journal of Institutional Economics , Volume 10 , Issue 1 , March 2014 , pp. 71 - 106
Copyright
Copyright © Millennium Economics Ltd 2013 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Abrams, B. A. and Dougan, W. R. (1986), ‘The Effect of Constitutional Restraints on Governmental Spending’, Public Choice, 49: 101–116.Google Scholar
Adams, H. C. (1887), Public Debts: An Essay in the Science of Finance, New York: D. Appleton and Company.Google Scholar
Alesina, A. and Bayoumi, T. (1996), ‘The Costs and Benefits of Fiscal Rules: Evidence From The U.S. States’, NBER Working Paper No. 5614, Cambridge, MA: National Bureau of Economic Research.Google Scholar
Bails, D. and Tieslau, M. A. (2000), ‘The Impact of Fiscal Constitutions on State and Local Expenditures’, Cato Journal, 20: 255–277.Google Scholar
The Bankers’ Magazine and Statistical Register (May 1884), ‘City Indebtedness’ (Last accessed July, 2013).Google Scholar
Bayoumi, T., Goldstein, M., and Woglom, G. (1995), ‘Do Credit Markets Discipline Sovereign Borrowers: Evidence from the U.S. States’, Journal of Money, Credit, and Banking, 27: 1046–1059.Google Scholar
Bohn, H. and Inman, R. P., (1996), ‘Balanced-Budget Rules and Public Deficits: Evidence from the U.S. States’, Carnegie-Rochester Conference Series on Public Policy, 45: 13–76.Google Scholar
Burhans, J. A. (1889), The Law of Municipal Bonds, New York: S.A. Kean & Co.Google Scholar
Burnham, W. D. (1984), ‘Partisan Division of American State Governments’, Inter-University Consortium for Political and Social Research.Google Scholar
Cabases, F., Pascual, P., and Valles, J., (2007), ‘The Effectiveness Of Institutional Borrowing Restrictions: Empirical Evidence From Spanish Municipalities’, Public Choice, 131: 293–313.Google Scholar
Capeci, J. (1991), ‘Credit Risk, Credit Ratings, and Municipal Bond Yields: A Panel Study’, National Tax Journal, 44: 41–56.Google Scholar
Capeci, J. (1994), ‘Local Fiscal Policies, Default Risk, and Municipal Borrowing Costs’, Journal of Public Economics, 53: 73–89.Google Scholar
Chatters, C. H. (1933), Municipal Debt Defaults: Their Prevention and Adjustment, Chicago, Illinois: Public Administration Service.Google Scholar
Dean, M. B. (1912), Municipal Bonds Held Void, New York: Moody's Magazine Book Department.Google Scholar
Dillon, J. F. (1873), The Law of Municipal Corporations, New York: James Cockcroft & Co.Google Scholar
Detroit Growth and Stability Act of 2012, H.R. 4308.Google Scholar
The Economist Magazine (3 December 2011), ‘The Sewers of Jefferson County.’ http://www.economist.com/node/21541053Google Scholar
The Economist Magazine (7 April 2012), ‘Stalled in Motor City.’ http://www.economist.com/node/21552249Google Scholar
Eichengreen, B. (1992), Should the Maastricht Treaty Be Saved? Princeton Studies in International Finance #74, Princeton, NJ: Princeton University Press.Google Scholar
Eichengreen, B. and Bayoumi, T. (1994), ‘The Political Economy of Fiscal Restrictions: Implications for Europe from the United States’, European Economic Review, 38: 783–791.CrossRefGoogle Scholar
Epple, D. and Spatt, C. (1986), ‘State Restrictions on Local Debt: Their Role in Preventing Default’, Journal of Public Economics, 29: 199–221.Google Scholar
Farnham, P. G. (1985), ‘Re-Examining Local Debt Limits: A Disaggregated Analysis’, Southern Economic Journal, 51: 1186–1201.Google Scholar
The Financial Chronicle and Commercial Review. Various Issues.Google Scholar
Gillette, C. P. (2003), ‘Direct Democracy and Debt’, Journal of Contemporary Legal Issues, 13: 365–409.Google Scholar
Goldstein, M. and Woglom, G. (1992), ‘Market-Based Fiscal Discipline in Monetary Unions: Evidence from the U.S. Municipal Bond Market’, in Canzoneri, M. B., Grilli, V., and Masson, P. R. (eds.), Establishing a Central Bank: Issues in Europe and Lessons from the United States, Cambridge: Cambridge University Press.Google Scholar
Goodall, L. E. (1964), State Regulation of Local Indebtedness in the United States, Research Study No. 9, Arizona State University: Bureau of Government Research.Google Scholar
Goodrich, C. (1950), ‘The Revulsion Against Internal Improvements’, The Journal of Economic History, 10: 145–169.Google Scholar
Goodrich, C. (1960), Government Promotion of American Canals and Railroads, New York: Columbia University Press.Google Scholar
Goodspeed, T. J. (2002), ‘Bailouts in a Federation’, International Tax and Public Finance, 9: 409–421.Google Scholar
Hillhouse, A. M. (1930), Defaulted Municipal Bonds, 1830–1930, Chicago, IL: Municipal Finance Officers’ Association.Google Scholar
Hillhouse, A. M. (1936), Municipal Bonds: A Century of Experience, New York: Prentice Hall.Google Scholar
Johnson, C. and Kriz, K. (2005), ‘Fiscal Institutions, Credit Ratings, and Borrowing Costs’, Public Budgeting and Finance, 25: 84–103.Google Scholar
Kiewiet, D. R. and Szakaly, K. (1996), ‘Constitutional Limitations on Borrowing: An Analysis of State Bonded Indebtedness’, Journal of Law, Economics, and Organization, 12: 62–97.Google Scholar
Kornai, J., Maskin, E., and Roland, G. (2003), ‘Understanding the Soft Budget Constraint’, Journal of Economic Literature, 41: 1095–1136.Google Scholar
Kousser, T., McCubbins, M. D., and Moule, E. (2008), ‘For whom the TEL Tolls: Can State Tax and Expenditure Limits Effectively Reduce Spending?’, State Politics and Policy Quarterly, 8: 331–361.Google Scholar
Larson, J. L. (2001), Internal Improvements, Chapel Hill: University of North Carolina Press.Google Scholar
Lowry, R. C. and Alt, J. E. (2001), ‘A Visible Hand? Bond Markets, Political Parties, Balanced Budget Laws, and State Government Debt’, Economics and Politics, 13: 49–72.CrossRefGoogle Scholar
Metcalf, G. (1993), ‘Federal Taxation and the Supply of State Debt’, Journal of Public Economics, 51: 269–285.Google Scholar
Mullins, D. R. (2004), ‘Tax and Expenditure Limitations and the Fiscal Response of Local Government: Asymmetric Intra-Local Fiscal Effects’, Public Budgeting and Finance, 24: 111–147.Google Scholar
Mullins, D. R. and Joyce, P. G. (1996), ‘Tax and Expenditure Limitations and State and Local Fiscal Structure: An Empirical Assessment’, Public Budgeting and Finance, 16: 75–101.Google Scholar
The New York Times (11 January 1876), ‘Ohio Legislation.’Google Scholar
The New York Times (1 February 1878), ‘Railroad debts of New York towns.’Google Scholar
Oates, W. (1972), Fiscal Federalism, New York: Harcourt, Brace, Jovanovich.Google Scholar
Oates, W. (2005), ‘Toward a Second-Generation Theory of Fiscal Federalism’, International Tax and Public Finance, 12: 349–373.Google Scholar
Pinsky, D. E. (1963), ‘State Constitutional Limitations on Public Industrial Financing: An Historical and Economic Approach’, University of Pennsylvania Law Review, 111: 265–327.Google Scholar
Poole, K. T. and Rosenthal, H. (1985), ‘A Spatial Model for Legislative Roll Call Analysis’, American Journal of Political Science, 29: 357–384.Google Scholar
Poterba, J. M. (1994), ‘State Responses to Fiscal Crises: The Effects of Budgetary Institutions and Politics’, Journal of Political Economy, 102: 799–821.Google Scholar
Poterba, J. M. (1996), ‘Budget Institutions and Fiscal Policy in the U.S. States’, The American Economic Review, 86: 395–400.Google Scholar
Poterba, J. M. and von Hagen, J. (eds.) (1999), Fiscal Institutions and Fiscal Performance, Chicago: University of Chicago Press.Google Scholar
Poterba, J. M. and Rueben, K. (1999), ‘State Fiscal Institutions and the U.S. Municipal Bond Market’, in Poterba, J. M. and von Hagen, J. (eds.), Fiscal Institutions and Fiscal Performance, Chicago: University of Chicago Press.Google Scholar
Qian, Y. and Roland, G. (1998), ‘Federalism and the Soft Budget Constraint’, American Economic Review, 88: 1143–1162.Google Scholar
Ratchford, B. U. (1941), American State Debts, Durham, North Carolina: Duke University Press.Google Scholar
Raymond, W. L. (1932), State and Municipal Bonds, Boston: Jordan & More Press.Google Scholar
Secrist, H. (1914), ‘An Economic Analysis of the Constitutional Restrictions upon Public Indebtedness in the United States’, Madison, Wisconsin: Bulletin of the University of Wisconsin.Google Scholar
Shadbegian, R. J. (1996), ‘Do Tax and Expenditure Limitations Affect the Size and Growth of State Government?’, Contemporary Economic Policy, 14: 22–35.Google Scholar
Shadbegian, R. J. (1998), ‘Do Tax and Expenditure Limitations Affect Local Government Budgets? Evidence From Panel Data’, Public Finance Review, 26: 118–136.Google Scholar
Studenski, P. (1930), Public Borrowing, Baltimore, Maryland: National Municipal League.Google Scholar
Swain, H. H. (1898), Economic Aspects of Railroad Receiverships, New York: Macmillan Company.Google Scholar
Tiebout, C. M. (1956), ‘A Pure Theory of Local Expenditures’, Journal of Political Economy, 64: 416–424.Google Scholar
Wallis, J. J. NBER/University of Maryland State Constitution Project. www.stateconstitutions.umd.edu (Last accessed April 15, 2012).Google Scholar
Wallis, J. J. (2005), ‘Constitutions, Corporations, and Corruption: American States and Constitutional Change, 1842 to 1852’, Journal of Economic History, 65: 211–256.Google Scholar
Wallis, J. J. and Weingast, B. R. (2008), ‘Dysfunctional or Optimal Institutions? State Debt Limitations, the Structure of State and Local Governments, and the Finance of American Infrastructure’, in Garrett, E., Graddy, E. A., and Jackson, H. E. (eds.), Fiscal Challenges: An Interdisciplinary Approach, New York: Cambridge University Press.Google Scholar
Weingast, B. R. (1995), ‘The Economic Role of Political Institutions: Market-Preserving Federalism and Economic Growth’, Journal of Law, Economics, and Organization, 11: 1–31.Google Scholar