Trade Exposure and the Polarization of Government Spending in the American States

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 employ 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. 2 TRADE EXPOSURE AND THE POLARIZATION OF GOVERNMENT SPENDING IN THE AMERICAN STATESA large number of cross-national studies have sought to assess economic globalization's influence on government spending, particularly welfare spending in western democracies (Cameron, 1978;Katzenstein, 1985;Garrett, 1995Garrett, , 1998Rodrik, 1998;Burgoon, 2001;Garrett & Mitchell, 2001;Genschel, 2004). These studies often view the United States as an empirical outlier that does not fit neatly into the dominant theoretical framework that reserves a special role for social democracies (Garrett, 1998;Iversen & Cusack, 2000;Garrett, 2001;Rudra, 2002;Korpi & Palme, 2003). It is not fully understood how economic globalization, with global trade at its core, interacts with the special features of American political institutions to influence government spending. This lack of attention is unfortunate given the U.S.'s outsized importance in the global economy and the retrenchment of many government programs over time.With only one case to examine, empirical researchers have not well disentangled the influence of global trade on government spending in the United States. In his classic essay, Lijphart recommends that researchers use intra-nation comparisons to overcome this type of problem, "unless the political system itself constitutes the unit of analysis" (1971,(686)(687)(688)(689).Because the first Article of the U.S. Constitution provides the U.S. Congress, and not the states, with the power to regulate international trade, using subnational U. does trade exposure ultimately lead to cuts to government spending on these programs.The structure of the paper is as follows. In the next section, we discuss the three competing theories in the CPE literature, globalization compensation theory, efficiency theory, and new growth theory, and specify how these theories view the relationship between trade exposure and government spending. We also note that the theoretical framework that best explains the connection between trade exposure and g...

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