At cross purposes? Housing markets and innovation in American Political Economy

The Comparative Political Economy (CPE) literature offers two distinct but insufficiently integrated institutional accounts of US growth dynamics: the Varieties of Capitalism (VoC) approach, emphasising the economy's capacity for radical innovation, and the CPE growth models perspective, which views the US economy as consumption-driven, supported by rising house prices and household debt. This paper argues that these two institutional complexes coexist within the US economy, generating conflicting pressures on innovation capacity that existing CPE frameworks have not adequately theorised. Specifically, the demand-side dynamics sustaining consumption-driven growth, supported by financial product innovations widening access to mortgage credit, may undermine the supply-side conditions underpinning innovation capacity, a cross-level tension that neither the VoC nor the CPE growth models perspective has incorporated. Using error correction models applied to an unbalanced panel of 50 US states from 1975 to 2016, the long-run results show that rising house prices are significant negative long-run predictors of innovation outputs, whilst expansionary state government fiscal expenditure can compensate for these negative effects. Furthermore, left-leaning state governments produce short-run innovation gains but long-run negative effects. Together, these findings suggest that understanding US growth dynamics requires moving beyond frameworks that treat the innovation-and-consumption-oriented institutional complexes as complementary, toward a more integrated account that incorporates the conflicting pressures they generate and the compensatory state government fiscal policies through which those pressures can be managed, with important implications for understanding the conditions underpinning US’ growth and its international economic competitiveness.