Economics of Governance

, Volume 17, Issue 2, pp 185–209 | Cite as

Do fiscal constraints prevent default? Historical evidence from U.S. municipalities

  • John A. Dove
Original Paper


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.


Default Sovereign debt Fiscal constraints Panic of 1893 Credible commitments 

JEL Classification

D78 H73 H74 N21 N41 


  1. Abrams BA, Dougan WR (1986) The effect of constitutional restraints on governmental spending. Public Choice 49(2):101–116CrossRefGoogle Scholar
  2. Alesina A, Bayoumi T (1996) The costs and benefits of fiscal rules: evidence from the U.S. states. NBER working paper no. 5614 Natl Bur Econ Res, CambGoogle Scholar
  3. Allison PD, Waterman RP (2002) Fixed-effects negative binomial regression models. Sociol Methodol 32(1):247–265CrossRefGoogle Scholar
  4. Alt JE, Lassen DD, Skilling D (2002) Fiscal transparency, gubernatorial approval, and the scale of government: evidence from the states. State Polit Policy Q 2(3):230–250CrossRefGoogle Scholar
  5. Alt JE, Lowry RC (1994) Divided government, fiscal institutions, and budget deficits: evidence from the states. Am Polit Sci Rev 88(4):811–828CrossRefGoogle Scholar
  6. Amiel L, Deller S, Stallman J, Maher C (2014) Does the restrictiveness of state tax and expenditure limitations affect state revenues and expenditures? Int J Public Adm 37(4):237–248CrossRefGoogle Scholar
  7. Bae S, Gais T (2007) The effects of state-level tax and expenditure limitations on revenues and expenditures. The Nelson A. Rockefeller Institute of Government, Albany, New YorkGoogle Scholar
  8. Bails DG (1982) A critique on the effectiveness of tax-expenditure limitations. Public Choice 38(2):129–138CrossRefGoogle Scholar
  9. Bails DG (1990) The effectiveness of tax-expenditure limitations: a re-evaluation. Am J Econ Sociol 49(2):223–238CrossRefGoogle Scholar
  10. Bails DG, Tieslau MA (2000) The impact of fiscal constitutions on state and local expenditures. Cato J 20(2):255–277Google Scholar
  11. Bayoumi T, Goldstein M, Woglom G (1995) Do credit markets discipline sovereign borrowers: evidence from the U.S. states. J Money Credit Bank 27(4–1):1046–1059CrossRefGoogle Scholar
  12. Besley T (2006) Principled agents? The political economy of good government. Oxford Univ Press, OxfordGoogle Scholar
  13. Blundell R, Griffith R, Van Reenen J (1995) Dynamic count data models of technological innovation. Econ J 105(429):333–344CrossRefGoogle Scholar
  14. Bohn H, Inman RP (1996) Balanced-budget rules and public deficits: evidence from the U.S. states. Carnegie-Rochester Conf Ser Public Policy 45:13–76CrossRefGoogle Scholar
  15. Cameron AC, Trivedi PK (2013) Regression analysis of count data, 2nd edn. Cambridge University Press, CambridgeCrossRefGoogle Scholar
  16. Dove JA (2012) Credible commitments and constitutional constraints: state debt repudiation and default in nineteenth century america. Const Polit Econ 23(1):66–93CrossRefGoogle Scholar
  17. Dove JA (2014) Financial markets, fiscal constraints, and municipal debt: lessons and evidence from the panic of 1873. J Inst Econ 10(1):71–106Google Scholar
  18. Eichengreen B (1992) Should the maastricht treaty be saved?. Princet Stud in Int Financ #74 Princet Univ Press, PrincetGoogle Scholar
  19. Goodspeed TJ (2002) Bailouts in a federation. Int Tax Public Financ 9(4):409–421CrossRefGoogle Scholar
  20. Grinath A III, Wallis JJ, Sylla R (1997) Debt, default, and revenue structure: the american state debt crisis in the early 1840s. NBER work pap no. h0097 Natl Bur Econ Res, CambGoogle Scholar
  21. Hallerberg M, Wolffand GB (2008) Fiscal institutions, fiscal policy and sovereign risk premia in EMU. Public Choice 136(3–4):379–396CrossRefGoogle Scholar
  22. Hempel GH (1964) The postwar quality of municipal bonds. Dissertation, Univ of MIGoogle Scholar
  23. Hillhouse AM (1930) Defaulted municipal bonds, 1830–1930. Munic Financ Off Assoc, ChicagoGoogle Scholar
  24. Hillhouse AM (1936) Municipal bonds: a century of experience. Prentice Hall, Upper Saddle RiverGoogle Scholar
  25. Hoffmann C (1970) The depression of the nineties: an economic history. Grenwood Publ, WestportGoogle Scholar
  26. Hopland AO (2013) Central government control and fiscal adjustment: Norwegian evidence. Econ Gov 14(2):185–203CrossRefGoogle Scholar
  27. Hopland AO (2014) Voter information and electoral outcomes: the Norwegian list of shame. Public Choice 161(1–2):233–255CrossRefGoogle Scholar
  28. Hou Y, Smith DL (2006) A framework for understanding state balanced budget requirement systems: reexamining distinctive features and an operational definition. Public Budg Financ 26(3):22–45CrossRefGoogle Scholar
  29. Hou Y, Smith DL (2010) Do state balanced budget requirements matter? Testing two explanatory frameworks. Public Choice 145(1–2):57–79CrossRefGoogle Scholar
  30. Johnson CL, Kriz KA (2005) Fiscal institutions, credit ratings, and borrowing costs. Public Budg Financ 25(1):84–103CrossRefGoogle Scholar
  31. Journal of the House of Representatives of the State of Indiana (1849) John D. Defrees, IndianapolisGoogle Scholar
  32. Journal of the Senate of the State of New York (1846) E. Mack, AlbanyGoogle Scholar
  33. Joyce PG, Mullins DR (1991) The changing fiscal structure of the state and local public sector: the impact of tax and expenditure limitations. Public Adm Rev 51(3):240–253CrossRefGoogle Scholar
  34. Kiewiet DR, Szakaly K (1996) Constitutional limitations on borrowing: an analysis of state bonded indebtedness. J Law Econ Organ 12(1):62–97CrossRefGoogle Scholar
  35. Kousser T, McCubbins MD, Moule E (2008) For whom the TEL tolls: can state tax and expenditure imits effectively reduce spending? State Polit Policy Q 8(4):331–361CrossRefGoogle Scholar
  36. Kornai J, Maskin E, Roland G (2003) Understanding the soft budget constraint. J Econ Lit 41(4):1095–1136CrossRefGoogle Scholar
  37. Krol R (2007) The role of fiscal and political institutions in limiting the size of state government. Cato J 27(3):431–445Google Scholar
  38. Lee D, Borcherding TE, Kang Y (2014) Public spending and the paradox of supermajority rule. South Econ J 80(3):614–632CrossRefGoogle Scholar
  39. Lowry RC, Alt JE (2001) A visible hand? Bond markets, political parties, balanced budget laws, and state government debt. Econ Polit 13(1):49–72CrossRefGoogle Scholar
  40. McGrane RC (1935) Foreign bondholders of american state debts. Macmillan, New YorkGoogle Scholar
  41. McMillan MC (1955) Constitutional development in alabama 1798–1901: a study in politics, the negro and sectionalism. The James Sprunt studies in history and political science, vol 37. University of North Carolina Press, Chapel Hill, NCGoogle Scholar
  42. Mullins DR, Joyce PG (1996) Tax and expenditure limitations and state and local fiscal structure: an empirical assessment. Public Budg Financ 16(1):75–101CrossRefGoogle Scholar
  43. The New York Times (1875) Illinois: municipal and county debtsGoogle Scholar
  44. The New York Times (1877) Reform in city affairsGoogle Scholar
  45. Oates WE (2005) Toward a second-generation theory of fiscal federalism. Int Tax Public Financ 12(4):349–373CrossRefGoogle Scholar
  46. Padovano F (2014) Distribution of transfers and soft budget spending behaviors: evidence from italian regions. Public Choice 161(1–2):11–29CrossRefGoogle Scholar
  47. Persson T, Tabellini G (2004) Constitutional rules and fiscal policy outcomes. Am Econ Rev 94(1):25–45CrossRefGoogle Scholar
  48. Pettersson-Lidbom P (2010) Dynamic commitment and the soft budget constraint: an empirical test. Am Econ J Econ Policy 2(3):154–179CrossRefGoogle Scholar
  49. Pinsky DE (1963) State constitutional limitations on public industrial financing: an historical and economic approach. Univ Pa Law Rev 111(3):265–327CrossRefGoogle Scholar
  50. Porter RP (1880) State debts and repudiation. Int Rev 9(1):556–604Google Scholar
  51. Poterba JM, Rueben K (1999) State fiscal institutions and the U.S. municipal bond market. In: Poterba JM, von Hagen J (eds) Fiscal institutions and performance. Univ of Chicago Press, ChicagoCrossRefGoogle Scholar
  52. Poterba JM, Rueben K (2001) Fiscal news, state budget rules, and tax-exempt bond yields. J Urban Econ 50(3):537–562CrossRefGoogle Scholar
  53. Primo DM (2006) Stop us before we spend again: institutional constraints on government spending. Econ Polit 18(3):269–312CrossRefGoogle Scholar
  54. Qian Y, Roland G (1998) Federalism and the soft budget constraint. Am Econ Rev 88(5):1143–1162Google Scholar
  55. Ratchford BU (1941) American state debts. Duke Univ Press, DurhamGoogle Scholar
  56. Rodden J, Litvack J, Eskeland G (Eds) (2003) Decentralization and the challenge of hard budget constraints. MIT Press, CambridgeGoogle Scholar
  57. Romer C (1986) Spurious volatility in historical unemployment data. J Polit Econ 94(1):1–37CrossRefGoogle Scholar
  58. Rose S (2010) Institutions and fiscal sustainability. Natl Tax J 63(4):807–838CrossRefGoogle Scholar
  59. Rueben KS (1997) Tax limitations and government growth: the effect of state tax and expenditure limits on state and local government. Dissertation Ma Inst TechnolGoogle Scholar
  60. Scott WA (1893) The repudiation of state debts. Thomas Y. Crowell & Co, BostonGoogle Scholar
  61. Seljan EC (2014) The limits of tax and expenditure limits: TEL implementation as a principal-agent problem. Public Choice 159(3–4):485–501CrossRefGoogle Scholar
  62. Shadbegian RJ (1996) Do tax and expenditure limitations affect the size and growth of state government? Contempl Econ Policy 14(1):22–35CrossRefGoogle Scholar
  63. Shadbegian RJ (1998) Do tax and expenditure limitations affect local government budgets? Evidence from panel data. Public Financ Rev 26(2):118–136CrossRefGoogle Scholar
  64. Steeples D, Whitten DO (1998) Democracy in desperation: the depression of 1893. Greenwood Press, WestportGoogle Scholar
  65. Streb JM, Torren G (2013) Making rules credible: divided government and political budget cycles. Public Choice 156(3–4):703–722CrossRefGoogle Scholar
  66. Summers MW (1984) Railroads, reconstruction, and the gospel of prosperity: aid under the radical republicans, 1865–1877. Princet Univ Press, PrincetonGoogle Scholar
  67. Thies CF (2002) The american railroad network during the early 19th century: private versus public enterprise. Cato J 22(2):229–261Google Scholar
  68. Wallis JJ (2015) NBER/university of maryland state constitution project. Accessed 24 March 2015
  69. White GT (1982) Years of transition: the united states and the problems of recovery after 1893. Univ Ala Press, TuscaloosaGoogle Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2015

Authors and Affiliations

  1. 1.Manuel H. Johnson Center for Political EconomyTroy UniversityTroyUSA

Personalised recommendations