Government Spending and Local Demographics: Evidence from Moody's Municipal Ratings Recalibration

Abstract

We examine how Moody’s ratings scale recalibration in 2010, which has been linked to higher county-level government spending and income, affects income and population distributions. We find that the recalibration decreases median and average per capita income and increases income inequality and the poverty rate. These effects are driven by population flows. After the recalibration, there is an increase in population, a decrease in average income of population inflows, and an increase in the average income of population outflows. Collectively, our findings suggest that local government spending affects the income distribution through changes in local population composition and income flows due to migration.