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

• Author: Brian S. Krueger,Ping Xu
• DOI: 10.1177/1532673X15572251
• Published date: 01 September 2015
• Date: 01 September 2015
• Subject Matter: Articles

American Politics Research

2015, Vol. 43(5) 793 –820

© The Author(s) 2015

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DOI: 10.1177/1532673X15572251

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Article

Trade Exposure and

the Polarization of

Government Spending

in the American States

Brian S. Krueger1 and Ping Xu1

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

use 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.

Keywords

trade exposure, state government spending, policy polarization, efficiency

theory, compensation theory

1University of Rhode Island, Kingston, RI, USA

Corresponding Author:

Ping Xu, University of Rhode Island, 130 Washburn, 80 Upper College Road, Kingston, RI

02881, USA.

Email: pingxu@uri.edu

572251APRXXX10.1177/1532673X15572251American Politics ResearchKrueger and Xu

research-article2015

794 American Politics Research 43(5)

A large number of cross-national studies have sought to assess economic glo-

balization’s influence on government spending, particularly welfare spending

in Western democracies (Burgoon, 2001; Cameron, 1978; Garrett, 1995, 1998;

Garrett & Mitchell, 2001; Genschel, 2004; Katzenstein, 1985; Rodrik, 1998).

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, 2001; Iversen & Cusack, 2000; Korpi &

Palme, 2003; Rudra, 2002). It is not fully understood how economic globaliza-

tion, 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 United States’s outsized importance in the global econ-

omy and the retrenchment of many government programs over time.

With only one case to examine, empirical researchers have not well disen-

tangled the influence of global trade on government spending in the United

States. In his classic essay, Lijphart (1971) recommends that researchers use

intra-nation comparisons to overcome this type of problem, “unless the politi-

cal system itself constitutes the unit of analysis” (pp. 686-689). 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.S.

units to examine the effect of trade on spending may seem to violate Lijphart’s

limiting condition. Yet, national trade policy only represents one of many tools

that governments can use to influence the degree of international trade. For

example, states often try various tactics to retain and attract businesses

engaged in international trade; these tactics include lowering overall corporate

tax rates, providing targeted incentives, loosening environmental and work-

place regulations toward manufacturing, and keeping a low minimum wage.1

Indeed, the concept of market preserving federalism stemming from eco-

nomics and developed by Weingast (1995) has been directly used to under-

stand how fiscally decentralized political units will compete to create the

most hospitable environments for firms engaged in international trade. In

Globalization and Fiscal Decentralization, Garrett and Rodden (2001) sum-

marize this framework’s view of the connection between federalism and eco-

nomic globalization: “Fiscal decentralization forces governments to compete

more fiercely for mobile capital, which creates incentives for politicians to

provide good investment environments, keep taxes (and rents) low, and ulti-

mately preserve markets” (p. 10). Considering that the United States ranks

among the most fiscally decentralized countries in the world, under this

framework, American states are expected to compete against each other for

globally active firms (Garrett and & Rodden, 2001).2

As important, and as reviewed in later sections, the key globalization theo-

ries that connect international trade with government spending rarely consider