Fiscal federalism: US history for architects of Europe's fiscal union
Ever since first the blueprints for monetary union in Europe were drawn up, the United States, considered as a collection of individual states or regions, has served as a benchmark for assessing its feasibility and evaluating alternative policy options. Starting with Robert Mundell’s seminal 1961 article on optimal currency areas, countless papers have explored the inner workings of US labour, product and capital markets, and of its public finances, in the hope of learning lessons for Europe.It could be argued that this US inspiration is mistaken. After all, it is not the only economic and monetary federation in the world. Other federations work on different principles – especially when it comes to public finances – and there is no guarantee that US arrangements are optimal – especially, again, regarding public finances. But we know the US better and we think we understand it better, so success or failure relative to the US test carries much more weight than with the Australian, Canadian, Indian or Swiss tests. For better or worse, the US remains our ultimate policy laboratory.This essay on US fiscal federalism by Randall Henning and Martin Kessler builds on the established tradition. But unlike many papers that take current US features as a given, they tell us what present arrangements governing responsibility over public debt gradually emerged from, and why. By bringing in the historical dimension and the trial-and-error process that took place over more than two centuries, they help us understand the logic behind alternative arrangements and why the current one has in the end prevailed. Their careful historical account yields several important lessons. It first recalls that the US system as we know it, with its combination of a large federal budget responsible for the bulk of public debt and limited thrifty state budgets subject to balanced budget rules, emerged gradually from a sequence of events; in fact the initial set-up, as designed and enforced by Alexander Hamilton, was almost exactly the opposite.Second, it makes clear that beyond economic principles, attitudes towards what was in the aftermath of independence called the ‘assumption’ of state debt were shaped by broader political considerations – not least the aim of building a genuine federal government.Third, it explains how after the US was firmly established as a federation, changing political conditions led to a reversal of the federal government’s stance and to the enforcement of a ‘no bail-out’ principle.An intriguing feature of US history is therefore that the competences and features of federal government grew out of its assumption of state debt, and that the centre imposed a de-facto no bail-out regime only after having assumed essential powers.Another interesting observation by Henning and Kessler is that balanced budget rules were adopted spontaneously by states in response to financial stress and defaults, rather than as a disciplinary device mandated by the centre. Thus, there is still significant variability between states regarding the modus operandi and strictness of budget rules. The question remains if what matters is the strictness of the rule, or deeper political preferences at state level, of which the rule is only an expression.Finally, Henning and Kessler emphasise, a no less important lesson for Europe is that policy principles and institutions should be looked at as a system rather than in isolation. As the authors point out, it may seem obvious to recall that states in the US can abide by strict budget balance rules to the extent the federal government is responsible for stabilisation and the bail-out of insolvent banks, but this simple lesson is sometimes overlooked in European discussion.Jean Pisani-FerryDirector of Bruegel
|Date of creation:||Jan 2012|
|Date of revision:|
|Contact details of provider:|| Postal: Rue de la Charité, B-1210 Brussels|
Phone: +32 2 227 4210
Web page: http://www.bruegel.org
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fatás, Antonio & Mihov, Ilian, 2004.
"The Macroeconomic Effects of Fiscal Rules in the US States,"
CEPR Discussion Papers
4372, C.E.P.R. Discussion Papers.
- Fatas, Antonio & Mihov, Ilian, 2006. "The macroeconomic effects of fiscal rules in the US states," Journal of Public Economics, Elsevier, vol. 90(1-2), pages 101-117, January.
- Ang, Andrew & Longstaff, Francis A., 2013.
"Systemic sovereign credit risk: Lessons from the U.S. and Europe,"
Journal of Monetary Economics,
Elsevier, vol. 60(5), pages 493-510.
- Andrew Ang & Francis A. Longstaff, 2011. "Systemic Sovereign Credit Risk: Lessons from the U.S. and Europe," NBER Working Papers 16982, National Bureau of Economic Research, Inc.
- James M. Poterba, 1993.
"State Responses to Fiscal Crisis: The Effects of Budgetary Institutionsand Politics,"
NBER Working Papers
4375, National Bureau of Economic Research, Inc.
- Poterba, James M, 1994. "State Responses to Fiscal Crises: The Effects of Budgetary Institutions and Politics," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 799-821, August.
- Sørensen, Bent E & Yosha, Oved, 1999.
"Output Fluctuations and Fiscal Policy: US State and Local Governments 1978-1994,"
CEPR Discussion Papers
2286, C.E.P.R. Discussion Papers.
- Sorensen, Bent E. & Wu, Lisa & Yosha, Oved, 2001. "Output fluctuations and fiscal policy: U.S. state and local governments 1978-1994," European Economic Review, Elsevier, vol. 45(7), pages 1271-1310.
- Bent E. Sorensen & Lisa Wu & Oved Yosha, 1999. "Output fluctuations and fiscal policy : U.S. state and local governments 1978-1994," Research Working Paper 99-05, Federal Reserve Bank of Kansas City.
- Sorensen, B.E. & Wu, L. & Yosha, O., 1999. "Output Fluctuations and Fiscal Policy: U.S. State and Local Governments 1978-1994," Papers 22-99, Tel Aviv.
- Adam Posen & Nicolas Véron, 2009.
"A solution for Europe's banking problem,"
- Mark Hallerberg, 2011. "Fiscal federalism reforms in the European Union and the Greek crisis," European Union Politics, , vol. 12(1), pages 127-142, March.
- Dolls, Mathias & Fuest, Clemens & Peichl, Andreas, 2012.
"Automatic stabilizers and economic crisis: US vs. Europe,"
Journal of Public Economics,
Elsevier, vol. 96(3), pages 279-294.
- Mathias Dolls & Clemens Fuest & Andreas Peichl, 2010. "Automatic Stabilizers and Economic Crisis: US vs. Europe," NBER Working Papers 16275, National Bureau of Economic Research, Inc.
- Dolls, Mathias & Fuest, Clemens & Peichl, Andreas, 2010. "Automatic stabilisers and economic crisis: US vs Europe," EUROMOD Working Papers EM2/10, EUROMOD at the Institute for Social and Economic Research.
- Mathias Dolls & Clemens Fuest & Andreas Peichl, 2009. "Automatic Stabilizers and Economic Crisis: US vs. Europe," CESifo Working Paper Series 2878, CESifo Group Munich.
- Dolls, Mathias & Fuest, Clemens & Peichl, Andreas, 2009. "Automatic Stabilizers and Economic Crisis: US vs. Europe," IZA Discussion Papers 4310, Institute for the Study of Labor (IZA).
- Mathias Dolls & Clemens Fuest & Andreas Peichl, 2010. "Automatic Stabilizers and Economic Crisis: US vs. Europe," Cologne Graduate School Working Paper Series 01-02, Cologne Graduate School in Management, Economics and Social Sciences.
- Edwin Perkins, 2011. "Founding choices: American economic policy in the 1790s," Business History, Taylor & Francis Journals, vol. 53(4), pages 649-651.
- Glenn Follette & Byron Lutz, 2010.
"Fiscal Policy in the United States: Automatic Stabilizers, Discretionary Fiscal Policy Actions, and the Economy,"
Revista de Economía y Estadística,
Universidad Nacional de Córdoba, Facultad de Ciencias Económicas, Instituto de Economía y Finanzas, vol. 0(1), pages 41–73, January.
- Glenn Follette & Byron F. Lutz, 2010. "Fiscal policy in the United States: automatic stabilizers, discretionary fiscal policy actions, and the economy," Finance and Economics Discussion Series 2010-43, Board of Governors of the Federal Reserve System (U.S.).
- Clay, Karen, 2011. "Founding Choices: American Economic Policy in the 1790s. Edited by Douglas A. Irwin and Richard Sylla. Chicago and London: University of Chicago Press. Pp. ix, 352. $110.00, cloth; $35.00, paper," The Journal of Economic History, Cambridge University Press, vol. 71(04), pages 1124-1126, December.
- Benedicta Marzinotto & André Sapir & Guntram B. Wolff, 2011.
"What kind of fiscal union?,"
- Michael D. Bordo & Lars Jonung & Agnieszka Markiewicz, 2013.
"A Fiscal Union for the Euro: Some Lessons from History ,"
CESifo Economic Studies,
CESifo, vol. 59(3), pages 449-488, September.
- Michael D. Bordo & Agnieszka Markiewicz & Lars Jonung, 2011. "A Fiscal Union for the Euro: Some Lessons from History," NBER Working Papers 17380, National Bureau of Economic Research, Inc.
- Anna Iara & Guntram B. Wolff, 2011.
"Rules and risk in the euro area,"
- Sylla, Richard & Wilson, Jack W., 1999. "Sinking funds as credible commitments: Two centuries of US national-debt experience," Japan and the World Economy, Elsevier, vol. 11(2), pages 199-222, April.
- Neal, Larry, 2011. "Douglas A. Irwin and Richard Sylla (eds.), Founding Choices: American Economic Policy in the 1790s, National Bureau of Economic Research Conference Report (Chicago: University of Chicago Press, 2011, ," Financial History Review, Cambridge University Press, vol. 18(03), pages 357-360, December.
- Bent E. Sorensen & Oved Yosha, 2001. "Is state fiscal policy asymmetric over the business cycle?," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 43-64.
- Aizenman, Joshua & Pasricha, Gurnain Kaur, 2011.
"Net Fiscal Stimulus During The Great Recession,"
Santa Cruz Department of Economics, Working Paper Series
qt8df5z6j8, Department of Economics, UC Santa Cruz.
- Poterba, James M. & Rueben, Kim S., 2001. "Fiscal News, State Budget Rules, and Tax-Exempt Bond Yields," Journal of Urban Economics, Elsevier, vol. 50(3), pages 537-562, November.
- Wallis, John Joseph, 2005. "Constitutions, Corporations, and Corruption: American States and Constitutional Change, 1842 to 1852," The Journal of Economic History, Cambridge University Press, vol. 65(01), pages 211-256, March.
- Robert P. Inman, 1996. "Do Balanced Budget Rules Work? U.S. Experience and Possible Lessons for the EMU," NBER Working Papers 5838, National Bureau of Economic Research, Inc.
- James M. Poterba, 1996. "Do Budget Rules Work?," NBER Working Papers 5550, National Bureau of Economic Research, Inc.
- John Joseph Wallis & Richard E. Sylla & Arthur Grinath III, 2004. "Sovereign Debt and Repudiation: The Emerging-Market Debt Crisis in the U.S. States, 1839-1843," NBER Working Papers 10753, National Bureau of Economic Research, Inc.
- Wallace E. Oates, 1999. "An Essay on Fiscal Federalism," Journal of Economic Literature, American Economic Association, vol. 37(3), pages 1120-1149, September.
- English, William B, 1996. "Understanding the Costs of Sovereign Default: American State Debts in the 1840's," American Economic Review, American Economic Association, vol. 86(1), pages 259-75, March.
- Mark Hallerberg & Guntram Wolff, 2008. "Fiscal institutions, fiscal policy and sovereign risk premia in EMU," Public Choice, Springer, vol. 136(3), pages 379-396, September.
- Jonathan A. Rodden & Gunnar S. Eskeland (ed.), 2003. "Fiscal Decentralization and the Challenge of Hard Budget Constraints," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262182297.
- Mahdavi, Saeid & Westerlund, Joakim, 2011. "Fiscal stringency and fiscal sustainability: Panel evidence from the American state and local governments," Journal of Policy Modeling, Elsevier, vol. 33(6), pages 953-969.
- Bertrand Candelon & Rabah Arezki & Amadou N. R. Sy, 2011. "Are there Spillover Effects From Munis?," IMF Working Papers 11/290, International Monetary Fund.
When requesting a correction, please mention this item's handle: RePEc:bre:esslec:669. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bruegel)
If references are entirely missing, you can add them using this form.