Checks and Balances
Government investment and fiscal stimulus
Eric Leeper, Todd Walker & Shu-Chun Yang
Journal of Monetary Economics, forthcoming
Abstract:
Effects of government investment are studied in an estimated neoclassical growth model. The analysis focuses on two dimensions that are critical for understanding government investment as a fiscal stimulus: implementation delays for building public capital and expected fiscal adjustments to deficit-financed spending. Implementation delays can produce small or even negative labor and output responses to increases in government investment in the short run. Anticipated fiscal adjustments matter both quantitatively and qualitatively for long-run growth effects. When public capital is insufficiently productive, distorting financing can make government investment contractionary at longer horizons.
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Why Does the Treasury Issue Tips? The Tips-Treasury Bond Puzzle
Matthias Fleckenstein, Francis Longstaff & Hanno Lustig
NBER Working Paper, September 2010
Abstract:
We show that the price of a Treasury bond and an inflation-swapped TIPS issue exactly replicating the cash flows of the Treasury bond can differ by more than $20 per $100 notional. Treasury bonds are almost always overvalued relative to TIPS. Total TIPS-Treasury mispricing has exceeded $56 billion, representing nearly eight percent of the total amount of TIPS outstanding. TIPS-Treasury mispricing is strongly related to supply factors such as Treasury debt issuance and the availability of collateral in the financial markets, and is correlated with other types of fixed-income arbitrages, These results pose a major puzzle to classical asset pricing theory. In addition, they raise the issue of why the Treasury issues TIPS, since in so doing it both gives up a valuable fiscal hedging option and leaves large amounts of money on the table.
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Religious and Economic Preferences: An Empirical Analysis of State Tax Rates and Public Spending
Ayman Reda
International Economic Journal, September 2010, Pages 297-316
Abstract:
In an attempt to examine the role of religion and religious institutions in the formation of economic and political preferences, we empirically test the relationship between religious and economic variables in the context of the 50 US states. Specifically, we test whether changes in the religious composition of states over time influences state tax rates (public revenue), and state spending patterns (public expenditure). We use church membership rates and religious contributions as alternative measures of a state's religiosity level. The results report a weak relationship between state tax rates and the religiosity of the state population over time. However, a negative relationship was observed between religiosity and public welfare spending, and a positive relationship between religiosity and public education spending. Variations arise when Catholics are included in the analysis of public spending.
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Take the Money and Run: Political Turnover, Rent-Seeking and Economic Growth
Tony Caporale & Jonathan Leirer
Journal of Economic Behavior & Organization, November 2010, Pages 406-412
Abstract:
We find a negative and significant relationship between gubernatorial turnover and U.S. state economic growth. Although our finding of an inverse relationship between growth and political instability may seem to contradict Olson's (1982a) famous hypothesis regarding the growth retarding nature of political stability, such constitutional political changes were not primarily what Olson had in mind. We argue that enhanced political turnover is associated with more rent seeking since payoffs to focusing on special interest (redistributive) policies vs. general (growth enhancing) ones are greater for less durable regimes. Therefore, we interpret our evidence as supportive of Olson's broader argument concerning the negative affect of rent seeking behavior on growth.
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Managing Credit Booms and Busts: A Pigouvian Taxation Approach
Olivier Jeanne & Anton Korinek
NBER Working Paper, September 2010
Abstract:
We study a dynamic model in which the interaction between debt accumulation and asset prices magnifies credit booms and busts. We find that borrowers do not internalize these feedback effects and therefore suffer from excessively large booms and busts in both credit flows and asset prices. We show that a Pigouvian tax on borrowing may induce borrowers to internalize these externalities and increase welfare. We calibrate the model by reference to (i) the US small and medium-sized enterprise sector and (ii) the household sector, and find the optimal tax to be countercyclical in both cases, dropping to zero in busts and rising to approximately half a percentage point of the amount of debt outstanding during booms.
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Labor-dependent capital income taxation
Sagiri Kitao
Journal of Monetary Economics, forthcoming
Abstract:
Capital taxation which is negatively correlated with labor supply is proposed. This paper uses a life-cycle model of heterogeneous agents that face idiosyncratic productivity shocks and shows that the tax scheme provides a strong work incentive when households possess large assets and high productivity later in the life-cycle, when they otherwise would work less. The system also adds to the saving motive of prime-age households and raises aggregate capital. The increased economic activities expand the tax base and the revenue neutral reform results in a lower average tax rate. The negative cross dependence generates a sizable welfare gain in the long-run relative to the tax system that treats labor and capital income separately as a tax base. The reform, however, can hurt the elderly during the transition with a high marginal tax on their capital income.
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Short-Run and Long-Run Implications of Environmental Regulation on Financial Performance
Dylan Rassier & Dietrich Earnhart
Contemporary Economic Policy, forthcoming
Abstract:
Opposing theoretical arguments exist regarding the effect of environmental regulation on financial performance. Some studies argue that environmental regulation constrains firms' abilities to exploit revenue-enhancing or cost-reducing opportunities. Other studies, representing the Porter hypothesis, argue that environmental regulation motivates firms to innovate, which ultimately improves financial performance. Although much of the debate focuses on long-run effects, there are also important short-run effects. This study provides empirical evidence regarding the short-run and long-run effects of Clean Water Act regulation on financial performance. To generate this evidence, we examine the effect of permitted wastewater discharge limits, on the return on sales, using panel data on publicly owned firms in the chemical manufacturing industries. We find that Clean Water Act regulation improves financial performance in both the short run and the long run with a stronger effect in the long run. These results suggest that some net benefits may be realized during a short-run transition to comply with a tighter permitted discharge limit, with additional benefits accruing to the firm in the long run because the firm has more time to innovate.
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Is Crowding Out Due Entirely to Fundraising? Evidence from a Panel of Charities
James Andreoni & Abigail Payne
NBER Working Paper, September 2010
Abstract:
When the government gives a grant to a private charitable organization, do the donors to that organization give less? If they do, is it because the grants crowd out donors who feel they gave through taxes (classic crowd out), or is it because the grant crowds out the fund-raising of the charities who, after getting the grant, reduce efforts of fund-raising (fund-raising crowd out)? This is the first paper to separate these two effects. Using a panel of more than 8,000 charities, we find that crowding out is significant, at about 72 percent. We find this crowding out is due primarily to reduced fund-raising. Depending on which types of organizations are included in the analysis, crowding out attributable to classic crowd-out ranges from 30% to a slight crowd-in effect, while fund-raising crowd out ranges from 70% to over 100% of all crowd out. Such a finding could have important consequences for how governments structure grants to non-profits. Our results indicate, for example, that requirements that charities match a fraction of government grants with increases in private donations might be a feasible policy that could reduce the detrimental effects of crowding out.
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The expansion of higher education and time-consistent taxation
Panu Poutvaara
European Journal of Political Economy, forthcoming
Abstract:
This paper analyzes educational choices and political support for subsidies to higher education in the presence of a time-consistency problem in income redistribution. There may be political support for so generous subsidization that it motivates the median voter to obtain higher education. Therefore, the expansion of participation in higher education during the second half of the 20th century may have partly been driven by the aim to limit the political support for overly generous income redistribution. The paper concludes by considering the implications of globalization on the future of public financing of higher education.
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Tax Revisions of 2004 and Pro Sports Team Ownership
Edward Coulson & Rodney Fort
Contemporary Economic Policy, October 2010, Pages 464-473
Abstract:
Tax law revisions of 2004 altered the "roster depreciation allowance" enjoyed by pro sports team owners. Supporters claimed this would practically eliminate costly legal oversight by the IRS and, ultimately, increase owner tax bills. Government officials and leagues remained silent on team value impacts but outside analysts argued they would rise by 5%. We model this policy change and investigate it empirically. Supporters in Congress were absolutely correct that owner tax payments should increase but outside analysts underestimated team value increases by half. No wonder Major League Baseball and the National Football League favored the revision.
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Home run or strikeout: The dynamics of public opinion on new sports facilities
Scott Lasley & Joel Turner
Social Science Journal, forthcoming
Abstract:
Determinants of political support for new sports facilities are explored. We test to what extent the civic attachment and civic optimism of a respondent promotes support for new facilities. Survey data from the 2005 CBS News/New York Times monthly poll were analyzed to find variables that affected public support for a new stadium for the New York Mets and a new arena for the New Jersey Nets. Whether New Yorkers' were optimistic about the future of New York and whether they planned to continue living in New York had a significant impact on whether they supported new facilities. Demographic factors that frequently explain political differences did not have a significant effect. Respondents with greater civic attachment and optimism were more likely to support major sports projects. The findings open the door for additional research on how civic attachment and optimism impact the willingness of community residents to support major public projects.
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The impact of public capital on the US private economy: New evidence and analysis
James Heintz
International Review of Applied Economics, September 2010, Pages 619-632
Abstract:
This paper presents new evidence on the impact of public capital on the productivity of the US private sector. Using a production function approach, we estimate the impact of public investment on private capital productivity, specifically addressing the empirical critiques of earlier studies. We find evidence of a cointegrating relationship in a dynamic specification of an empirical model that includes public infrastructure as a factor of production, indicating the existence of a long-run relationship between the US public capital stock and the productivity of the private capital stock. The results are used to explore how the decline in the growth rate of the public capital stock would have affected the performance of the private sector.
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Should Public Retirement Plans be Fully Funded?
Henning Bohn
NBER Working Paper, September 2010
Abstract:
Most state and local retirement plans strive for full funding, at least by actuarial standards. Funding measured at market values fluctuates and often falls short. A common argument for full funding is that pensions are a form of deferred compensation that does not justify a debt. The paper examines public finance, political economy, and financial market issues that bear on optimal funding, broadly and in a series of models. In a model where most taxpayers hold debt and face intermediation costs, returns on pension assets are less than taxpayers' cost of borrowing. Pension funding is costly and hence zero funding is optimal. The model also implies that unfunded pension promises are properly discounted at a rate strictly greater than the government's borrowing rate. If pension funds serve as collateral, funding can be warranted despite the cost. This is shown in a model with legal ambiguity and default risk. Except in special cases, the optimal funding ratio is less than full funding.
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Jeremy Hall
Economic Development Quarterly, November 2010, Pages 311-324
Abstract:
This article seeks to determine the effect of rurality and need on per capita federal grant receipts in local areas over time, controlling for local and regional government capacities. In other words, are rural places treated differently than urban places in federal grant distributions? Kentucky is used as the case state, with 120 county areas considered over an 11-year period from 1993 to 2003. Factor analysis is used to explore the underlying capacity constructs, and a pooled cross-sectional analysis reveals differential effects of grant receipts per person according to a county's position on the rural-urban continuum (aka Beale code) and need-based indicators. Whereas rurality significantly increases grant funding per capita, need has the opposite effect.
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Reexamining the Border Tax Effect: A Case Study of Washington State
Rossitza Wooster & Joshua Lehner
Contemporary Economic Policy, October 2010, Pages 511-523
Abstract:
Without an income tax, Washington State relies heavily upon its sales tax revenue to fund public goods and services. Bordering Idaho and especially Oregon, where the sales tax is substantially lower, the juxtaposition of the different tax structures generates the border tax effect in Washington's border counties. Controlling for unobservable county-specific characteristics and spatial autocorrelation, we find that the price elasticity generated by the sales tax discrepancy over the years 1992-2006 is -3.11. We estimate that elimination of the sales tax differential between Washington and its neighboring states would generate tax revenue in excess of $145 million at the state level and over $21 million at the county level in border counties.
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Promoting Agency Reputation through Public Advice: Advisory Committee Use in the FDA
Susan Moffitt
Journal of Politics, July 2010, Pages 880-893
Abstract:
When do government agencies invite public review for their policy decisions, and when do they maintain secrecy? Scholarship has long focused on procedures elected officials impose on bureaucrats to induce transparency and to encourage democratic participation in agency work. Yet, models of elected officials' decisions largely overlook bureaucrats' preferences and choices for public participation. Building on theories of bureaucratic reputation, I argue bureaucrats actively pursue publicity and public participation for tasks that risk implementation failure. I test these claims through models of FDA advisory committee agenda setting and subsequent policy implementation from 1985 to 2006. Consistent with bureaucratic reputation hypotheses, the FDA seeks public advice for its riskiest tasks. Such advice is associated with a lower probability of subsequent Congressional oversight and with a greater probability of subsequent agency information campaigns. Publicity, this suggests, complements secrecy as a source of bureaucratic power.
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How Should Standards Be Set and Met?: On the Allocation of Regulatory Power in a Federal System
Cynthia Lin
B.E. Journal of Economic Analysis & Policy, 2010
Abstract:
Regulation often takes the form of a standard that can be met through the implementation of any of a number of different policies. This paper examines how the authority to set the standard and the authority to choose the combination of policies to meet the standard should be allocated between a central government and local governments. In the context of the United States, for example, should standards regarding such public goods as the environment or education be set and implemented by the federal government, by individual state governments, or by both? Because decisions about setting and/or meeting the standard can be non-contractible, an incomplete contracting approach is used. A central finding is that "conjoint federalism" (the central government sets the standard while the local governments meet the standard), which is the regulatory structure often used in federations such as the United States and the European Union, can be the least efficient form, while a reverse form of delegation, in which local governments choose their own individual standards which the central government then decides how to collectively meet, can be the most efficient.
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Business Incentive Use Among U.S. Local Governments: A Story of Accountability and Policy Learning
Lingwen Zheng & Mildred Warner
Economic Development Quarterly, November 2010, Pages 325-336
Abstract:
Use of business incentives is one of the most common local economic development strategies. The authors analyze national surveys of 700 to 1,000 local governments from 1994, 1999, and 2004 to track use of business incentives over time. They find a shift from primary reliance on business incentives to use of a broader set of strategies that includes business retention and small business support. The authors also find evidence of policy learning with increased attention to accountability among governments that use business incentives. The 2004 model results also suggest that governments that rely most heavily on incentives may face more intergovernmental competition, stagnating or declining economies, and lower tax bases. For such governments, business incentives may contribute to a cycle of destructive competition.