The economic consequences of democratic backsliding: Evidence from US states

Abstract

Recent research has demonstrated that US states are bellwethers of national institutional decline, acting as ‘laboratories of autocratisation’ through voter repression and gerrymandering. We provide the first evidence on the economic consequences of sub-national democratic backsliding in the United States. We find that backsliding episodes during 2000-2023 do not systematically lead to a reduction in per capita income but do cause an increase in inequality and impoverishment. Innovation efforts (business R&D expenditure) and outputs (patenting) contract substantially, undermining the endogenous growth engine of the economy. International exports are unaffected, which suggests that foreign accountability operates through national-level institutions rather than sub-national ones.

Non Technical Summary

Democracy is in retreat globally. Over the past decade, more countries have shifted from democracy to autocracy than the reverse, and by 2023, the average global citizen experienced levels of democracy comparable to those in 1985. This reversal is not limited to developing nations. Emerging economies like Hungary, Turkey, and Brazil are frequently cited as examples of democratic backsliding—where democratic institutions erode gradually rather than collapse outright. Alarmingly, recent developments in the United States suggest that even mature democracies are not immune.

Since the inauguration of the Second Trump Administration in January 2025, observers have noted a marked increase in executive actions that undermine democratic institutions—targeting courts, universities, and civil rights protections. However, the health of US democracy is arguably shaped much more by the actions of individual state governments. In the US federal system, states hold significant authority over elections, districting, and policing. Practices such as gerrymandering, voter suppression, and felon disenfranchisement have led some scholars to describe states as “laboratories of authoritarianism.”

Recent research by Jacob Grumbach has made it possible to systematically track democratic institutions at the US state level. His State Democracy Index (SDI) covers all 50 states from 2000 to 2023, measuring electoral integrity, suffrage, and gerrymandering. Grumbach’s findings reveal that state governments have often led the way in democratic backsliding, driven largely by national partisan dynamics: Republican control of both chambers in a state legislature is the strongest predictor of institutional decline.

Against this backdrop, our study asks: What are the economic consequences of democratic backsliding in US states? While the Trump administration claims strong economic performance, isolating the effects of federal policy is difficult. Instead, we leverage the variation in democratic quality across states over time to assess how institutional deterioration affects economic outcomes in the US context.

Using Grumbach’s SDI, we identify episodes of democratic backsliding in each state, following a methodology similar to the V-Dem Episodes of Regime Transformation dataset. We focus on sustained periods of decline rather than short-term fluctuations, which may reflect normal political dynamics. Our empirical strategy adopts a treatment effects model, using binary ‘treatment’ indicators to mark backsliding episodes.

We examine five key dimensions of economic performance:

1. Average income: GDP per capita and GDP per worker.
2. Income distribution: Median household income and within-state top income share.
3. Poverty and deprivation: Poverty rates, headcounts, and health insurance coverage.
4. Innovation: Business R&D spending and patent grants.
5. International exports: State-level export flows to foreign markets.

Our findings show a consistent negative relationship between the duration of backsliding episodes and state GDP per capita, though this result is sensitive to alternative model specifications. More robustly, we find that backsliding increases income inequality and poverty: while average income may not decline significantly, the number of people living in poverty rises, and economic disparities widen.

Our results for innovation outcomes are particularly concerning. States experiencing democratic backsliding see significant reductions in private R&D investment and patenting activity. These trends suggest that institutional decline undermines the drivers of long-term economic growth, such as technological advancement and entrepreneurship.

Interestingly, we find no evidence that sub-national backsliding affects international export flows. This contrasts with country-level studies, which show that democratic erosion can lead to trade penalties from democratic partners. This suggests that foreign trading partners primarily assess risk through national-level institutions such as federal courts and overarching rule-of-law guarantees, effectively insulating backsliding US states from external economic penalties.

Our study makes two key contributions. First, we introduce a new dataset of democratic backsliding episodes across all 50 US states, enabling systematic subnational analysis. Second, we provide the first empirical evidence of the economic costs of democratic backsliding within a federal democracy. These findings underscore that institutional decline is not just a normative concern – it carries tangible economic costs.

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