In a new study at Harvard's Program on Education Policy and Governance, we discovered why the Obama administration is so interested in helping out the states. States with a bluish hue--that is, states with legislatures that are heavily Democratic and have a highly unionized public-sector work force--must pay interest rates that are often an extra half a percentage point higher than states with a reddish coloring.| Our new study shows that under the Obama jobs bill, debt-ridden states will get another big handout. |
The impact of these political factors on interest rates is in addition to the impact of standard economic factors, such as a state's unemployment rate, its gross domestic product growth, and its debt-to-GDP ratio, all of which are themselves shaped in part by the state's political climate.
In short, the bond market has concluded that the more unionized the state and the bluer its political coloring, the riskier it is to hold bonds marketed by that state.