"Blue States and Red States: Business Cycle Divergence and Risk Sharing"

Abstract:

We examine business cycle divergence and risk sharing within the United States.
In doing so, we also separately examine states whose populations have consistently
voted either Democrat (Blue) or Republican (Red) in national elections. We find that
states' business cycles have diverged markedly since the start of this century: they
are now more asynchronous than is typical across the international borders of distinct
countries. This divergence is even more striking between Blue states and Red states.

At the same time, we find that states smooth their consumption across these diverging business cycles: they share risk much more than is typical internationally. While they share most of their idiosyncratic risk through nancial markets, Blue, Red and swing states share the remainder of their risk in very dierent ways. Red states smooth the remainder largely through fiscal flows (taxes and transfers), while they are left with more than twice the idiosyncratic risk of the other states. In contrast, swing states smooth the remainder largely through migration, while fiscal flows hardly matter at all. Finally, Blue states smooth the remaining idiosyncratic risk through a combination of fiscal flows, migration and the purchases of consumer durables; and they are left with little residual risk.