Building that
Federal Competition and Economic Growth
John William Hatfield & Katrina Kosec
Journal of Public Economics, forthcoming
Abstract:
This paper exploits exogenous variation in the natural topography of the United States to estimate the causal impact of inter-jurisdictional competition on income growth. We find that doubling the number of county governments in a metropolitan area leads to a 17% increase in the average annual growth rate of earnings per employee over 1969-2006, and a 10% increase in 2006 income per employee. Decomposing income effects using 2000 Census worker-level data, we find that approximately half of the effect stems from making workers more productive, while the other half comes from changing the composition of the workforce and inducing workers to work more hours. We also present evidence that inter-jurisdictional competition leads local governments to raise more in taxes, spend more, and issue more debt, but does not help them obtain more inter-governmental transfers. However, the additional cost from this increase in expenditures to a median-wage employee is much smaller than the increase in that employee's wages due to greater inter-jurisdictional competition.
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The Output Effect of Fiscal Consolidations
Alberto Alesina, Carlo Favero & Francesco Giavazzi
NBER Working Paper, August 2012
Abstract:
This paper studies whether fiscal consolidations cause large output losses. We find that it matters crucially how the fiscal correction occurs. Adjustments based upon spending cuts are much less costly in terms of output losses than tax-based ones. Spending-based adjustments have been associated with mild and short-lived recessions, in many cases with no recession at all. Tax-based adjustments have been associated with prolonged and deep recessions. The difference cannot be explained by different monetary policies during the two types of fiscal adjustments, and is mainly due to the different response of private investment. Rather than studying the effects of individual shifts in taxes and spending, as the literature has so far typically done, we study the effects of the adoption of a fiscal consolidation plan, that is a combination of tax increases and spending cuts, some unanticipated, other anticipated, all announced at the same date. This allows us to obtain much more precise estimates of tax and spending multipliers and is important also because isolated shifts in taxes or spending occur very rarely - almost never in our sample. We find that the correlation between unanticipated and anticipated shifts in taxes and spending is heterogeneous across countries, suggesting that the degree of persistence of fiscal corrections varies.
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Why do crises go to waste? Fiscal austerity and public service reform
David Hugh-Jones
Public Choice, forthcoming
Abstract:
In the tight budgetary conditions following the 2008 financial crisis, governments have proposed saving money by reforming public services. This paper argues that tight budget constraints make reform harder by introducing an information problem. Governments are uncertain about bureaucratic departments' effectiveness. Normally, effective departments can be identified by increasing their budget, since they can use the increase to produce more than ineffective departments can. When budgets must be cut, however, ineffective departments can mimic effective ones by reducing their output. Budget cuts thus harm both short-run productive efficiency, and long-run allocative efficiency. I confirm these predictions in a US dataset. Low marginal productivity bureaucracies reduce output by more than expected in response to a budget cut, and budget setters respond less to observed short-run marginal productivity after cutback years.
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George Selgin, William Lastrapes & Lawrence White
Journal of Macroeconomics, September 2012, Pages 569-596
Abstract:
As the 100th anniversary of the 1913 Federal Reserve Act approaches, we assess whether the nation's experiment with the Federal Reserve has been a success or a failure. Drawing on a wide range of recent empirical research, we find the following: (1) The Fed's full history (1914 to present) has been characterized by more rather than fewer symptoms of monetary and macroeconomic instability than the decades leading to the Fed's establishment. (2) While the Fed's performance has undoubtedly improved since World War II, even its postwar performance has not clearly surpassed that of its undoubtedly flawed predecessor, the National Banking system, before World War I. (3) Some proposed alternative arrangements might plausibly do better than the Fed as presently constituted. We conclude that the need for a systematic exploration of alternatives to the established monetary system is as pressing today as it was a century ago.
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Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds
Robert Gordon
NBER Working Paper, August 2012
Abstract:
This paper raises basic questions about the process of economic growth. It questions the assumption, nearly universal since Solow's seminal contributions of the 1950s, that economic growth is a continuous process that will persist forever. There was virtually no growth before 1750, and thus there is no guarantee that growth will continue indefinitely. Rather, the paper suggests that the rapid progress made over the past 250 years could well turn out to be a unique episode in human history. The paper is only about the United States and views the future from 2007 while pretending that the financial crisis did not happen. Its point of departure is growth in per-capita real GDP in the frontier country since 1300, the U.K. until 1906 and the U.S. afterwards. Growth in this frontier gradually accelerated after 1750, reached a peak in the middle of the 20th century, and has been slowing down since. The paper is about "how much further could the frontier growth rate decline?" The analysis links periods of slow and rapid growth to the timing of the three industrial revolutions (IR's), that is, IR #1 (steam, railroads) from 1750 to 1830; IR #2 (electricity, internal combustion engine, running water, indoor toilets, communications, entertainment, chemicals, petroleum) from 1870 to 1900; and IR #3 (computers, the web, mobile phones) from 1960 to present. It provides evidence that IR #2 was more important than the others and was largely responsible for 80 years of relatively rapid productivity growth between 1890 and 1972. Once the spin-off inventions from IR #2 (airplanes, air conditioning, interstate highways) had run their course, productivity growth during 1972-96 was much slower than before. In contrast, IR #3 created only a short-lived growth revival between 1996 and 2004. Many of the original and spin-off inventions of IR #2 could happen only once - urbanization, transportation speed, the freedom of females from the drudgery of carrying tons of water per year, and the role of central heating and air conditioning in achieving a year-round constant temperature. Even if innovation were to continue into the future at the rate of the two decades before 2007, the U.S. faces six headwinds that are in the process of dragging long-term growth to half or less of the 1.9 percent annual rate experienced between 1860 and 2007. These include demography, education, inequality, globalization, energy/environment, and the overhang of consumer and government debt. A provocative "exercise in subtraction" suggests that future growth in consumption per capita for the bottom 99 percent of the income distribution could fall below 0.5 percent per year for an extended period of decades.
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Evaluating "Cash-for-Clunkers": Program Effects on Auto Sales and the Environment
Shanjun Li, Joshua Linn & Elisheba Spiller
Journal of Environmental Economics and Management, forthcoming
Abstract:
"Cash-for-Clunkers" was a $3 billion program that attempted to stimulate the U.S. economy and improve the environment by encouraging consumers to retire older vehicles and purchase fuel-efficient new vehicles. We investigate the effects of this program on new vehicle sales and the environment. Using Canada as the control group in a difference-in-differences framework, we find that, of the 0.68 million transactions that occurred under the program, the program increased new vehicle sales only by about 0.37 million during July and August of 2009, implying that approximately 45 percent of the spending went to consumers who would have purchased a new vehicle anyway. Our results cannot reject the hypothesis that there is little or no gain in sales beyond 2009. The program will reduce CO2 emissions by only 9 to 28.2 million tons based on upper and lower bounds of the estimate of the program effect on sales, implying a cost per ton ranging from $92 to $288 even after accounting for reduced criteria pollutants.
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Keun Lee et al.
Journal of Comparative Economics, forthcoming
Abstract:
A large body of qualitative studies on the positive role played by big businesses in promoting economic growth is widely available. However, any rigorous attempt to measure this impact has yet to be made. In this paper, we attempt to fill this gap by utilizing new and internationally comparable databases such as those of the Global Fortune 500, the Business Week 1000, and the Forbes 2000 publications, and by using rigorous quantitative methods. We measure big businesses by both the number of these firms and by their sales volumes in each country. The empirical results of all models consistently show four major patterns. First, big businesses have a significant and positive effect on economic growth. Second, such businesses in each nation are positively associated with stability in economic growth. Third, the significant and positive effect of big businesses on economic growth remains even with the inclusion in the estimations of the share of SME employment and the control for possible endogeneity in big businesses and SMEs. Fourth, in considering both the absolute and the relative presence of big businesses within each country, their absolute presence is positively linked to economic growth, whereas the relative presence of big businesses within the national economy is negatively linked to economic growth.
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The Trend is the Cycle: Job Polarization and Jobless Recoveries
Nir Jaimovich & Henry Siu
NBER Working Paper, August 2012
Abstract:
Job polarization refers to the recent disappearance of employment in occupations in the middle of the skill distribution. Jobless recoveries refers to the slow rebound in aggregate employment following recent recessions, despite recoveries in aggregate output. We show how these two phenomena are related. First, job polarization is not a gradual process; essentially all of the job loss in middle-skill occupations occurs in economic downturns. Second, jobless recoveries in the aggregate are accounted for by jobless recoveries in the middle-skill occupations that are disappearing.
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Lessons from the experience of OECD nations on macroeconomic growth and economic freedom, 2004-2008
Richard Cebula & J.R. Clark
International Review of Economics, September 2012, Pages 231-243
Abstract:
This study empirically investigates the impact on per capita real economic growth of each of the ten measures of economic freedom computed annually by the Heritage Foundation. Within the context of the Random Effects Model, panel least squares estimations using a 5-year panel (2004 through 2008) dataset for the OECD nations as a group reveal that the percentage growth rate in the purchasing-power-parity adjusted per capita real GDP for OECD nations was, at the 5 % statistical significance level or better, an increasing function of at least seven of the ten economic freedom measures. The results underscore the critical role that economic freedom plays in a nation's economic growth and prosperity and the importance of pursuing policies that are consistent with increasing economic freedom.
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Weber Was Right: Death, Taxes, Working Capital, and the Excessive Propensity for Accumulation
Dorothy Chandler Weaver & Phyllis Fry
Sociological Forum, September 2012, Pages 780-787
Abstract:
It turns out that Max Weber was on to something when he suggested that it was not natural or automatic that wealthy individuals invest their capital rather than keep it or spend it on themselves. Patterns of economic growth and capital investment in the United States over the last century indicate that in general some inducement or pressure is necessary to convince those who control money to risk it rather than hoard it.
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Policy Intervention in Debt Renegotiation: Evidence from the Home Affordable Modification Program
Sumit Agarwal et al.
NBER Working Paper, August 2012
Abstract:
The main rationale for policy intervention in debt renegotiation is to enhance such activity when foreclosures are perceived to be inefficiently high. We examine the ability of the government to influence debt renegotiation by empirically evaluating the effects of the 2009 Home Affordable Modification Program that provided intermediaries (servicers) with sizeable financial incentives to renegotiate mortgages. A difference-in-difference strategy that exploits variation in program eligibility criteria reveals that the program generated an increase in the intensity of renegotiations while adversely affecting effectiveness of renegotiations performed outside the program. Renegotiations induced by the program resulted in a modest reduction in rate of foreclosures but did not alter the rate of house price decline, durable consumption, or employment in regions with higher exposure to the program. The overall impact of the program will be substantially limited since it will induce renegotiations that will reach just one-third of its targeted 3 to 4 million indebted households. This shortfall is in large part due to low renegotiation intensity of a few large servicers that responded at half the rate than others. The muted response of these servicers cannot be accounted by differences in contract, borrower, or regional characteristics of mortgages across servicers. Instead, their low renegotiation activity-which is also observed before the program-reflects servicer specific factors that appear to be related to their preexisting organizational capabilities. Our findings reveal that the ability of government to quickly induce changes in behavior of large intermediaries through financial incentives is quite limited, underscoring significant barriers to the effectiveness of such polices.
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Public Sector Unions and the Costs of Government
Sarah Anzia & Terry Moe
Stanford Working Paper, August 2012
Abstract:
As recent political battles in Wisconsin, Ohio, and a number of other states attest, public sector unions are among the most active interest groups in American politics. They are also different from other interest groups in two key respects: they engage in collective bargaining, and are thus in a position to shape the organization of government in ways that other groups are not, and their members are the government's own employees - its bureaucrats - who not only influence government from the inside through their official roles, but also from the outside through their unions. For all of these reasons, public sector unions are eminently worthy of scholarly attention, and yet political scientists have almost never studied them. This paper is an attempt to make some headway. Our focus is on how unions and collective bargaining in the public sector affect the costs of government. We present three separate studies, using different datasets from different historical periods, and we examine a range of cost-related outcomes: wages and salaries, health benefits, employment levels, and pension liabilities. In all three studies, our findings show that strong unions and collective bargaining do tend to increase the costs of government, and the impacts are both substantively and statistically significant. In presenting these findings, we hope to encourage other scholars to view public sector unions as important subjects of analysis.
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Jack Strauss
Journal of Urban Economics, forthcoming
Abstract:
National and state-level building permits significantly lead economic activity in nearly all U.S. states over the past three decades, and produce substantially more accurate out-of-sample forecasts of state-level job and income growth than other traditional indicators including the leading indicator index, housing prices and wealth. We demonstrate that building permits have substantially declined before every recession since 1970, and that differences in permits across states before the last seven recessions explain the relative severity of a state's job and income losses during these recessions. Hence, we can use permits to predict which states will suffer the greatest job losses in a recession. We show further that housing reflects expectations of future economic activity as permits are closely related to movements in consumer expectations, and both lead the business cycle by four quarters. Differences across regions in consumer expectations and permits are also highly correlated, and both can forecast interstate differentials in job and income losses across regions, particularly during recessions.
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Opportunity Cost of Defense: An Evaluation in the Case of France
Julien Malizard
Defence and Peace Economics, forthcoming
Abstract:
The aim of this article is to explore the defense-growth relationship in France. In particular, in the context of the crisis, we would like to compare the effects of military and nonmilitary spending on growth. Our results reveal that this is a complex relationship with a bidirectional causality. In the long run, defense expenditure exerts a positive influence and outperforms the impact of nondefense expenditure. However, an opportunity cost arises in the short run.
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Subsidizing firm entry in open economies
Michael Pflüger & Jens Suedekum
Journal of Public Economics, forthcoming
Abstract:
We develop a two-country model with monopolistic competition and heterogeneous firms where entrants pay a sunk cost and randomly draw their productivity level. Governments collect lump-sum taxes and subsidize these sunk entry costs for the domestic entrepreneurs. One motive for this policy, valid already in autarky, is to tighten market selection. This selection effect leads to better firms that produce and sell more output at lower prices. In the open economy there is another, strategic motive for entry subsidies as the tightening of market selection leads to a competitive advantage for domestic producers in international trade. Our analysis shows that entry subsidies in the Nash equilibrium are first increasing, then decreasing in the level of trade freeness. Comparing the non-cooperative and the cooperative policies, we furthermore show that there is first too much and then too little entry subsidization in the course of trade integration.
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New Multi-City Estimates of the Changes in Home Values, 1920-1940
Price Fishback & Trevor Kollmann
NBER Working Paper, August 2012
Abstract:
The boom and bust in housing during the 2000s has led to renewed interest in the boom and bust in housing between 1920 and 1940. The most commonly used housing value series for this period is reported by Robert Shiller in Irrational Exuberance. We investigate the changes in housing values in cities between 1920 and 1940 using a variety of alternative sources with many more cities available for comparison than in the Shiller series. We find that all nominal housing value series show a strong decline between the late 1920s and the early 1930s. However, all of the series except the Shiller series imply that housing values in 1920 were well below the 1930 value and thus imply much stronger growth rates in housing values during the 1920s housing boom. Only the Shiller series predicts a strong recovery in housing values to within 5 percent of the 1930 level. All of the others suggest that nominal housing values in 1940 remained at least 18 percent below the 1930 values and several series suggest that values lurched downward between 1933 and 1940. The results suggest that a significant reconsideration of the operation of housing markets in the 1920s and 1930s is required.
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The Indiana Toll Road Lease as an Intergenerational Cash Transfer
John Gilmour
Public Administration Review, forthcoming
Abstract:
In a recent incarnation of the public-private partnership, state or city governments agree to lease revenue-producing assets to a private operator for a lengthy period, up to 99 years. The government receives an up-front payment, allowing it to collect many years of future revenue at once. This article evaluates the distributional consequences across time of one asset lease, the Indiana Toll Road. The analysis finds that the majority of benefits, in the form of road construction, are enjoyed in the early part of the lease, while the bulk of the costs fall late in the lease, raising important questions about intergenerational fairness.
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Teaching New Markets Old Tricks: The Effects of Subsidized Investment on Low-Income Neighborhoods
Matthew Freedman
Journal of Public Economics, forthcoming
Abstract:
This paper examines the effects of investment subsidized by the federal government's New Markets Tax Credit (NMTC) program, which provides tax incentives to encourage private investment in low-income neighborhoods. I identify the impacts of the program by taking advantage of a discontinuity in the rule determining the eligibility of census tracts for NMTC-subsidized investment. Using this discontinuity as a source of quasi-experimental variation in commercial development across tracts, I find that subsidized investment has modest positive effects on neighborhood conditions in low-income communities. Though spillovers appear to be small and crowd out incomplete, the results suggest that some of the observed impacts on neighborhoods are attributable to changes in the composition of residents as opposed to improvements in the welfare of existing residents.
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Size of Home, Homeownership, and the Mortgage Interest Deduction
Andrew Hanson
Journal of Housing Economics, forthcoming
Abstract:
This paper offers an empirical test of the effect of the mortgage interest deduction (MID) on both the extensive (own vs. rent) and intensive (size of home) housing purchase margins. Using state level differences in MID availability to identify, I examine this relationship using standard ordinary least squares, instrumental variables, regression discontinuity, and sample selection estimation techniques. I find the MID to be responsible for a 10.9 - 18.4 percent increase in the size of home purchased, but that no relationship exists between the MID and home ownership. These results imply an elasticity of home size with respect to changes in user cost between -1 and -1.4.
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Alicia Sasser Modestino & Julia Dennett
Regional Science and Urban Economics, forthcoming
Abstract:
U.S. policymakers are concerned that negative home equity arising from the housing market crash may be constraining geographic mobility and consequently serving as a factor in the persistently high national unemployment rate. Indeed, the widespread drop in house prices since 2007 has increased the share of homeowners who are underwater on their mortgages. At the same time, migration across states and among homeowners has fallen sharply. Using a logistic regression framework to analyze data from the Internal Revenue Service on state-to-state migration between 2006 and 2009, we discover evidence that "house lock" decreases mobility but find that it has a negligible impact on the national unemployment rate. A one-standard deviation increase in the share of underwater nonprime households in the origin state reduces the outflow of migrants from the origin to the destination state by 2.7 percent. When aggregated across the United States, this decrease in mobility reduces the national state-to-state migration rate by 0.05 percentage points, resulting in roughly 103,000 to 140,000 fewer individuals migrating across state lines in any given year. A back-of-the-envelope calculation shows that the impact of reduced mobility due to negative housing equity on the national unemployment rate is likely to be small - on the order of less than one-tenth of a percentage point each year.
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Michael Cantor & Mark Rosentraub
City, Culture and Society, forthcoming
Abstract:
In the 1990s the owner of the San Diego Padres and San Diego entered into a partnership for the building of a new ballpark. The public sector invested $209 million and the team spent $187.1 million and retained all revenues from the new facility. At first blush this might seem like the typically imbalanced public/private partnership with the public sector spending more than the team and the ballclub getting to keep all of the revenues. What made this deal unique, however, was that the team owner also guaranteed that $487 million in new real estate development would occur near the ballpark adhering to a plan approved by the City that would create a new downtown neighborhood that included amenities and elements specified by San Diego. Despite this guarantee criticisms included fears of gentrification and that the development would merely replace what would have happened elsewhere. Those issues have been analyzed elsewhere. This article focuses on (1) the extent to which a new neighborhood was populated and sustained; (2) the creation of an economically integrated neighborhood; (3) the ability of the Ballpark District to attract young well-educated individuals as well as older higher income residents, and (4) the ability of the new neighborhood to protect property values during the recession. The data analyzed suggest that an economically integrated neighborhood has been created with property values that remained relatively stable during the recession. In addition, the neighborhood has attracted a large number of highly educated workers with few demands for public services.
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Does Government Investment in Local Public Goods Spur Gentrification? Evidence from Beijing
Siqi Zheng & Matthew Kahn
Real Estate Economics, forthcoming
Abstract:
In Beijing, the metropolitan government has made enormous place-based investments to increase green space and to improve public transit. We examine the gentrification consequences of such public investments. Using unique geocoded real estate, new restaurant count data and demographic data by neighborhood, we document that the construction of the Olympic Village and two recent major subway systems have led to increased new housing supply in the vicinity of these areas, higher local prices and an increased quantity of nearby private chain restaurants. Recent time trends in local resident income and human capital attainment support the claim that these investments have caused local gentrification.
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Military expenditure and economic growth: A meta-analysis
Aynur Alptekin & Paul Levine
European Journal of Political Economy, forthcoming
Abstract:
Meta analysis is conducted to review 32 empirical studies with 169 estimates of the effect of military expenditure on economic growth. We formulate four hypotheses to examine the empirical evidence and to provide overall conclusions while controlling for systematic heterogeneity in the studies reviewed. The hypotheses are: (H1) Military expenditure reduces economic growth; (H2) Military expenditure is detrimental to economic growth in less developed countries (LDCs); (H3) The effect of military expenditure on economic growth is positive and (H4) The effect of military expenditure on economic growth is non-linear. We find that the hypothesis of a negative military expenditure-growth relationship is not supported for both LDCs and in general, while a positive effect of military expenditure on economic growth is supported for developed countries. The hypothesis of a non-linear military expenditure-growth relationship is confirmed. The main sources of study-to-study variation in the findings of military expenditure and economic growth literature are attributable to the sample, time periods, and functional forms.
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Military Expenditure and Economic Growth in Developing Countries: Evidence from System GMM Estimates
Na Hou & Bo Chen
Defence and Peace Economics, forthcoming
Abstract:
The effect of military expenditure on economic growth in developing countries has been investigated by many empirical literatures. However, there is little consensus of that effect and the diversity seems to come from the use of different models and different estimators. This article applies the Augmented Solow Growth Model to examine the influence of military expenditure on economic growth for 35 developing countries over the period of 1975-2009. By using the system Generalized Method of Moments (GMM) estimators, empirical results indicate that defence has a negative and significant effect on economic growth in the sample countries.
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Natural Beauty, Money, and the Distribution of Talent: A Local-Level Panel Data Analysis
Xinxiang Chen & Guangqing Chi
Population Research and Policy Review, October 2012, Pages 665-681
Abstract:
While factors affecting highly educated migrants are well documented, controversies on whether noneconomic or economic factors matter remain largely unexplored. This manuscript investigates the effects of natural amenities (water and forests) and economic forces (household income and unemployment rate) on talent distribution at the subcounty level. Natural amenities and economic forces were analyzed with respect to talent share empirically estimated at the municipal level in an amenity-rich lakes region of the North Central United States from 1970 to 2000. The limited panel data analysis results suggest that "natural beauty" (natural amenities) has no direct positive effect on talent share but that "money" (household income) matters. When interacting with "money," water coverage has a positive effect on talent share. Unemployment rate generally does not have any effect on talent distribution. The finding has important implication for local policy making in attracting talent migrants.