Reelection, Growth and Public Debt
50 Pages Posted: 10 May 2017 Last revised: 11 May 2020
Date Written: September 24, 2019
Abstract
In this work we examine how economic growth affects public debt when interacted with reelection prospects. Reelection considerations shorten political time horizons and give rise to political myopia that exacerbates debt accumulation. That laxer institutional reelection restrictions (e.g. no term limits) mitigate this effect is well known. Incorporating growth, we find that this mitigation can be reversed because less myopic incumbents put more emphasis on smoothing the effects of growth across generations. We test these predictions using a panel of U.S. states over the period 1963-2007. Our identification strategy rests on constitutionally-entrenched differences in gubernatorial term limits that provide plausibly exogenous variation in reelection prospects, and aggregate national TFP shocks that are exogenous to individual states. Our more conservative estimates indicate that over a course of five years, a one standard deviation positive TFP shock induces a relative increase of approximately $312 in the real per capita public debt of states with laxer institutional reelection restrictions.
Keywords: Reelection prospects, economic growth, public debt, electoral accountability, political myopia
JEL Classification: H63, H74, C61
Suggested Citation: Suggested Citation