Federalism and Capital Markets in Canada and the U.S.: Financing Infrastructure in the Wake of Hurricane Katrina

Abstract

Hurricane Katrina was much more than a natural disaster, it also left New Orleans and the Gulf Coast of the United States financially devastated. The re-building effort will take place on the ground, coordinated largely by the state and federal governments, and financed in capital markets. Markets can supplement federalism. A key advantage of debt markets is that these competitive, risk-bearing institutions are less prone to accept questionable projects and financial plans than are politicians up the federalism hierarchy. This paper examines the financial relationship and programs of the federal governments in the US and Canada with the "sub-national governments" at the state/provincial and municipal levels, and concludes each country could learn from the other. Citizens in both countries were left in awe of the sudden disintegration of New Orleans and its infrastructure. As with infrastructure questions elsewhere, the solution is likely to be found in a combination of federalism and capital markets.

Keywords: State and local borrowing, intergovernmental relations, US Canada country studies, public investment, international financial markets

JEL Classification: H74, H77, O51, R53, G15