The Role of Constitutions in Defaulting on State Debt in the 19th Century

John Dove (Troy University) and Andrew Young (Texas Tech) have a new working paper on that subject titled “US State Constitutional Entrenchment and Default in the Nineteenth Century.”

Basically, an “entrenched” constitution is one where “generality and abstraction” are key features that result in a rigid and long living constitutions precisely because they leave out detailed policy directives. An “unentrenched” constitution is the opposite, and consequently uses specificity to limit what agents of government can do, which somewhat necessarily means you have to make the constitution more adaptable to change with the times. As Dove and Young put it (p. 4-5):

A fundamental tradeoff between entrenched and unentrenched models is one of costs associated with agents capturing the rules versus benefits associated with principals having greater use of the rules to constrain agents.

Both of these models have implications for the ability of a government to credibly commit to a goal such as sustainable fiscal policies. On the one hand, the governed may issue political agents directives that fail to constrain their actions in a way that is consistent with the goal. Priors may then need to be updated and new directives issued that may or may not then be effective; and so on. In that case, being able to “micromanage” within an unentrenched constitutional framework may be part of a credible commitment to the goal. On the other hand, “micromanagement” invites time-inconsistency. Without strong and durable rules, political agents can have incentives to renege on commitments to obtain short-run gains for themselves.

So now bring on the story of debt:

In the nineteenth century US, a wave of state-level constitutional changes were associated with major debt crises stemming from the Panic of 1839 and the subsequent US Civil War. The resulting constitutional changes were designed to commit state governments to sustainable fiscal patterns and prevent defaults moving forward. We employ a panel of states from 1841 to 1884 (the years of actual default) to determine whether certain dimensions of constitutional design (entrenchment, specificity, and scope) correlate with the probability of default. We exploit data from the National Bureau of Economic Research (NBER) State Constitutions Database and construct measures of these dimensions following Versteeg and Zackin (2016).

Under their measurement system, they do find states with entrenched constitutions have a lower likelihood of default in a panel-probit regression, and there is not much difference on the variable of interest between their kitchen sink regression and that which only controls for entrenchment (see below). They split out some dimensions of their score into separate categories like “specificity”, “scope”, and “detail” to find that detail and specificity seem to carry the load. The authors infer this to be consistent with the view that constitutional entrenchment arguably increases the credibility of political commitments.

Enchrencment

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