Bills to pay
Measuring Economic Policy Uncertainty
Scott Baker, Nicholas Bloom & Steven Davis
NBER Working Paper, October 2015
Abstract:
We develop a new index of economic policy uncertainty (EPU) based on newspaper coverage frequency. Several types of evidence - including human readings of 12,000 newspaper articles - indicate that our index proxies for movements in policy-related economic uncertainty. Our US index spikes near tight presidential elections, Gulf Wars I and II, the 9/11 attacks, the failure of Lehman Brothers, the 2011 debt-ceiling dispute and other major battles over fiscal policy. Using firm-level data, we find that policy uncertainty raises stock price volatility and reduces investment and employment in policy-sensitive sectors like defense, healthcare, and infrastructure construction. At the macro level, policy uncertainty innovations foreshadow declines in investment, output, and employment in the United States and, in a panel VAR setting, for 12 major economies. Extending our US index back to 1900, EPU rose dramatically in the 1930s (from late 1931) and has drifted upwards since the 1960s.
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The Effect of Public Spending on Private Investment: Evidence from Census-Shock
Taehyun Kim & Quoc Nguyen
University of Illinois Working Paper, August 2015
Abstract:
This paper examines the causal impact of public sector spending on private sector investment. Based on the fact that federal funds allocated to local governments are largely dependent on local population level, we use population count revisions in census years as exogenous shocks to the cross-sectional allocation of federal funds. We find that exogenous increases in federal spending reduce firms' capital investment, R&D spending, employment growth, and sales growth. The effect is stronger for firms in regions with higher employment and firms that are more labor-intensive, smaller-sized, and geographically concentrated. An exogenous increase in government hiring also reduces corporate hiring.
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The Time for Austerity: Estimating the Average Treatment Effect of Fiscal Policy
Oscar Jorda & Alan Taylor
Economic Journal, forthcoming
Abstract:
After the Global Financial Crisis a controversial rush to fiscal austerity followed in many countries. Yet research on the effects of austerity on macroeconomic aggregates was and still is unsettled, mired by the difficulty of identifying multipliers from observational data. This paper reconciles seemingly disparate estimates of multipliers within a unified and state-contingent framework. We achieve identification of causal effects with new propensity-score based methods for time series data. Using this novel approach, we show that austerity is always a drag on growth, and especially so in depressed economies: a 1% of GDP fiscal consolidation translates into a loss of 3.5% of real GDP over five years when implemented in a slump, rather than just 1.8% in a boom. We illustrate our findings with a counterfactual evaluation of the impact of the UK government's shift to austerity policies in 2010 on subsequent growth.
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Fiscal Multipliers in the 21st Century
Pedro Brinca et al.
Journal of Monetary Economics, forthcoming
Abstract:
Fiscal multipliers appear to vary greatly over time and space. Based on VARs for a large number of countries, we document a strong correlation between wealth inequality and the magnitude of fiscal multipliers. In an attempt to account for this finding, we develop a life-cycle, overlapping-generations economy with uninsurable labor market risk. We calibrate our model to match key characteristics of a number of OECD economies, including the distribution of wages and wealth, social security, taxes, and government debt and study how a fiscal multiplier depends on various country characteristics. We find that the fiscal multiplier is highly sensitive to the fraction of the population who face binding credit constraints and also to the average wealth level in the economy. These findings together help us generate a cross-country pattern of multipliers that is quite similar to that in the data.
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Takings and Tax Revenue: Fiscal Impacts of Eminent Domain
Carrie Kerekes & Dean Stansel
Review of Law & Economics, forthcoming
Abstract:
In the landmark 2005 Kelo case, the Supreme Court ruled that eminent domain takings for private development constituted permissible "public use" because of their potential to produce higher revenue. This paper provides the first examination of that relationship between eminent domain activity and state and local revenue. We find virtually no evidence of a positive relationship between the number of eminent domain takings for private use (such as the one that led to the Kelo decision) and the level of revenue. We find some limited evidence of a negative relationship between eminent domain and future revenue growth.
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Income Tax and the Motivation to Work
Scott Rick, Gabriele Paolacci & Katherine Alicia Burson
University of Michigan Working Paper, September 2015
Abstract:
How does income tax influence the motivation to work? We propose that the degree of effort exertion in the presence of income tax depends on people's attitudes toward two key components of taxation: redistribution and government intervention. For people favorable toward both, working while taxed is aligned with personal identity and may actually enhance motivation. All others, however, may find taxes demotivating. In two incentive-compatible labor experiments, framing wages as subject to an income tax reduced participants' productivity unless they were chronically favorable toward both redistribution and government intervention. This latter group was significantly more productive when taxed. An objectively equivalent intervention that did not redistribute a portion of participants' wages (framed as a wage "match" rather than a "tax") did not motivate anyone to work harder. Our findings suggest that the net effect of income tax on productivity depends on the distribution of attitudes toward redistribution and government intervention.
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Welfare State Myths and Measurement
Irwin Garfinkel & Timothy Smeeding
Capitalism and Society, 2015
Abstract:
Myths about welfare states and their effects on economic development abound. In this paper, we rebut three central, related myths: that the current American welfare state is unusually small, that the United States has always been a welfare state laggard, and that the welfare state undermines productivity and economic growth. Very reasonable changes in measurement reveal that all three beliefs are untrue. The American welfare state appears relatively small only by restricting the comparison to rich nations, ignoring employer-provided health insurance, pensions, and public education, and measuring size relative to GDP, rather than on a real per capita basis. The inclusion of public education turns the United States from a laggard to a leader in welfare state development. Including public education and public health as well as cash benefits suggests that welfare state programs as a whole enhance the productivity of capitalism and spur economic development.
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The Financial Feasibility of Delaying Social Security: Evidence from Administrative Tax Data
Gopi Shah Goda et al.
NBER Working Paper, September 2015
Abstract:
Despite the large and growing returns to deferring Social Security benefits, most individuals claim Social Security before the full retirement age, currently age 66. In this paper, we use a panel of administrative tax data on likely primary earners to explore some potential hypotheses of why individuals fail to delay claiming Social Security, including liquidity constraints and private information regarding one's expected future lifetime. We find that approximately 31-34% of beneficiaries who claim prior to the full retirement age have assets in Individual Retirement Accounts (IRAs) that would fund at least 2 additional years of Social Security benefits, and 24-26% could fund at least 4 years of Social Security deferral with IRA assets alone. Our analysis suggests that these percentages would be considerably higher if other assets were taken into account. We find evidence that those who claim prior to the full retirement age have higher subjective and actual mortality rates than those who claim later, suggesting that private information about expected future lifetimes may influence claiming behavior.
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Social Program Substitution and Optimal Policy
Nicholas Lawson
Labour Economics, December 2015, Pages 13-27
Abstract:
The large size and rate of growth of the US Disability Insurance (DI) system makes it important to understand the factors that influence the decision to apply for DI. In a context of imperfect DI screening, the generosity of other social programs can play a role in this decision, and one empirically relevant factor is the availability and generosity of Unemployment Insurance (UI) benefits. UI's impact on DI applications and enrollment has been ignored in welfare analyses of UI, but I show that it leads to significantly altered results: the optimal level of unemployment benefits increases by about 50 percent, as more generous UI prevents workers from applying for DI, with significant cost savings to the government. The same logic applies to a wide variety of other social programs and contexts, and in a more general model I show that the impact of any such program on welfare can be expressed in terms of its redistributional effect and its effects on the tax base and on enrollment on other programs.
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Does Monitoring Local Government Fiscal Conditions Affect Outcomes? Evidence from Michigan
Thomas Luke Spreen & Caitlin Cheek
Public Finance Review, forthcoming
Abstract:
The goal of this article is to assess whether state monitoring and reporting of local government fiscal condition causes improvement in the financial situation of local governments. From 2006 to 2011, Michigan scored the fiscal conditions of each of its local governments based on their performance across nine indicators of fiscal health. Using audited financial data, we construct a panel of several of those financial indicators for a sample of county and municipal governments in Michigan and neighboring states with no similar program. We employ a difference-in-differences methodology to test whether Michigan's local governments performed better across the selected indicators relative to their peers in neighboring states. The results of the analysis show no significant change in the monitored indicators among Michigan's local governments relative to local governments in control states. We largely duplicate the baseline results using propensity score matching.
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Evaluating the impact of the American Recovery and Reinvestment Act's BTOP on broadband adoption
J.A. Hauge & J.E. Prieger
Applied Economics, Fall 2015, Pages 6553-6579
Abstract:
The American Recovery and Reinvestment Act's Broadband Technology Opportunities Program (BTOP) spent $4.7 billion during 2009-2013 to, inter alia, increase broadband adoption in underserved communities. We characterize the BTOP grants and examine the impact of the awards on broadband adoption. Econometric specifications controlling for award endogeneity related to observed and unobserved county-level factors find that spending is apparently associated with increased broadband adoption. Further investigation, however, reveals that the impacts of spending are nonlinear and even nonmonotonic over the range of county-level BTOP spending in the data. Controlling for trends to reduce the potential for spurious correlation between spending and outcomes removes most of the significance of the results. We conclude with three lessons for policymakers derived from the uncertain outcomes of BTOP spending found in our exploration.
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Lars-Erik Borge, Pernille Parmer & Ragnar Torvik
Journal of Public Economics, November 2015, Pages 101-114
Abstract:
Utilizing an output based efficiency measure we investigate whether higher public revenues harm efficiency in the production of local public goods. Much variation in revenues among Norwegian local governments can be explained by revenues collected from hydropower production. This revenue variation, combined with good data availability, can be used to address a main concern in the resource curse literature; that public sector revenue, and in particular the revenue from natural resources, is endogenous. We obtain an exogenous measure of local revenue by instrumenting the variation in hydropower revenue, and thus total revenue, by topology, average precipitation and meters of river in steep terrain. We find support for what we term the Paradox of Plenty hypothesis - that higher local government revenue reduces the efficiency in production of public goods. We do not find support for what we term the Rentier State hypothesis - that revenue derived from natural resources should harm efficiency more than revenue derived from other sources such as taxation.
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Ready to Bargain: The Effect of Fiscal Stress on Supermajority Requirements to Raise Taxes
Ellen Seljan
Public Budgeting & Finance, Fall 2015, Pages 24-43
Abstract:
This paper analyzes the interaction effect between fiscal stress and supermajority requirements to raise taxes. I hypothesize that fiscal stress nullifies the effects of supermajority requirements, making states with and without supermajority requirements equally likely to raise taxes during these periods. This conclusion was drawn from a theory on how fiscal stress affects the legislative bargaining environment. The hypothesis was tested using data from 49 states from 1980 to 2010, and the results confirmed expectations. This research contributes to a growing literature that suggests that the effect of institutions cannot be analyzed without considering the context of the political environment.
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State Taxation and the Reallocation of Business Activity: Evidence from Establishment-Level Data
Xavier Giroud & Joshua Rauh
NBER Working Paper, September 2015
Abstract:
In a sample of over 27 million establishments of U.S. firms with activities in more than one state, we estimate the impact of state business taxation on business activity. Only firms organized as subchapter C corporations are subject to the corporate tax code, whereas the income of partnerships, sole-proprietorships, and S corporations is passed through annually to the firm's owners and taxed at individual rates. For C corporations, both employment at existing establishments (intensive margin) and the number of establishments in the state (extensive margin) have corporate tax elasticities of -0.4. Pass-through entities, which serve as a control group for the corporate tax reforms, respond only to the personal tax code, with tax elasticities of -0.2 to -0.3. Around half of the effects are driven by reallocation of productive resources to other states where the treated firms have establishments. Capital shows similar patterns but is 36% less elastic than labor. A narrative approach confirms that the results are robust and strongest in the sample of tax changes that were implemented due to inherited budget deficits, long-run goals, or cross-state variation caused by Federal tax reforms.
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Capitalization of Targeted Property Tax Relief in Home Prices: Evidence from Virginia Elections
Jeremy Grant Moulton, Bennie Waller & Scott Wentland
University of North Carolina Working Paper, September 2015
Abstract:
This study examines the market impact of targeted property tax relief, which is critical for understanding who exactly benefits from this policy. Specifically, we investigate this in the context of two state-wide ballot measures in Virginia that provided property tax relief intended to aid seniors and disabled veterans respectively. Using residential MLS microdata from Virginia, results from a regression discontinuity analysis show that once the 2010 tax relief measures passed on Election Day, property values rose sharply in response to the sudden increase in demand of homeownership among the targeted groups. As part of our identification strategy, we find that "senior preferred" housing as well as areas with higher proportions of seniors and veterans experienced the highest price appreciation, while areas with fewer veterans or seniors saw little impact. Further, we explore numerous alternative hypotheses and specifications that might explain this discontinuity. The findings suggest that this policy provides an immediate benefit to current homeowners, thereby offsetting benefits for subsequent homeowners within the targeted groups. This represents a critical unintended consequence of targeted property tax relief as a (very popular) policy tool more generally, as an immediate capitalization into home prices subsequently increases the cost of housing for many individuals the relief was intended to help.
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Can Chen, Kenneth Kriz & Qiushi Wang
Public Finance Review, forthcoming
Abstract:
A well-developed and carefully maintained public infrastructure system is of critical importance to ensure that the economy can function effectively. To investigate the consequence of deficient public transportation infrastructure conditions on states' creditworthiness, this study constructs an infrastructure health index to measure the physical conditions of state highway transportation systems and empirically estimates the effect of the overall health of state highway transportation infrastructure on Moody's and Standard and Poor's state credit ratings by using a data set from 1999 to 2009. The empirical results indicate that the poorer the quality of a state's highway infrastructure, the lower the probability that the state will be in a higher credit rating category, and the higher the probability that the state will be in the medium or low credit rating category. This finding suggests that state policy makers should be cautioned about the negative consequences of cutting spending on infrastructure maintenance and expansion.
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Leviathan or Flypaper: Examining the Fungibility of Earmarked Local Sales Taxes for Transportation
Whitney Afonso
Public Budgeting & Finance, Fall 2015, Pages 1-23
Abstract:
Analyses of the relationships of earmarked finances on their respective programs and total expenditures have produced conflicting views of how governments spend earmarked revenue. Some show that earmarks are used in addition to existing finances to increase the total level of funding for recipient programs while others show that earmarks are fungible and program spending is unchanged. An analysis on local option sales taxes earmarked for transportation (LOST-Ts) suggests that transportation spending is increased by more than LOST-T revenue. For every dollar generated by LOST-Ts, transportation spending increases by an estimated $1.76 and nontransportation spending decreases by an estimated $0.73.
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Can State Tax Policies Be Used to Grow Small and Large Businesses?
Erin Borchers, John Deskins & Amanda Ross
Contemporary Economic Policy, forthcoming
Abstract:
The existing literature studying the relationship between small business activity and U.S. state tax policy has focused primarily on a few measures of small business. We expand this literature by estimating the effect of state tax policy on small businesses by using broader measures of small business activity using a longitudinal dataset for the U.S. states. We also estimate the relationship between state tax policy and large business activity. Results provide evidence that state tax policy can influence small business firm, establishment, payroll, and employment growth in important ways but provide limited evidence that such policy significantly influences large business growth.