Political control and public sector savings: Evidence from the States

The right to access (and ultimately spend) public sector savings is determined by the party which can control the political outcome. This implies that anticipated future changes in the state's controlling political party may systematically adversely affect current savings. Extending the Life Cycle/Permanent Income model, I show that a representative legislator will opt to forgo current saving in favor of spending when his prospects for future political control diminish. Estimating a panel data model of 39 states from 1973-1995, I find that an actual future change in the controlling party of a state's lower house significantly reduces current saving.