Free Cash Flow
Martin Feldstein
NBER Working Paper, July 2011
Abstract:
The real trade weighted value of the dollar fell 11 percent against the Federal Reserve Bank's index of major currencies during the 12 months through May 2011 and 31 percent during the past ten years. Four strong market forces are likely to cause further declines over the next several years: a portfolio rebalancing by major international investors who regard their portfolios as overweight dollars, the large US current account deficit, a Chinese policy to raise consumption, and interest rate differences that make dollar investments less attractive. A declining dollar could have a powerful positive effect on the short-run performance of the American economy by raising exports (now more than $1.3 trillion) and inducing American consumers to shift from imports to American made products and services. Without a boost to demand from an increase in net exports, the U.S. recovery is likely to remain weak and could run out of steam. There are of course also negative effects of a falling dollar: reducing the real value of any given level of personal incomes by raising the cost to households of the imported products that they consume and creating inflationary pressures as import prices rise.
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The Behavioral Political Economy of Budget Deficits: How Starve the Beast Policies Feed the Machine
Joseph Daniel Ura & Erica Socker
The Forum: A Journal of Applied Research in Contemporary Politics, July 2011
Abstract:
The notion of "starving the beast" has been an important justification for fiscal programs emphasizing revenue reductions since the mid-1970s. While the idea of restraining government spending by limiting government revenues has an intuitive appeal, there is convincing evidence that reducing federal tax rates without coordinated reductions in federal spending actually produces long-term growth in spending. This perverse result is explained by a theory of "fiscal illusion." By deferring the costs of government services and benefits through deficit financing, starve the beast policies have the effect of lowering the perceived price of government in the minds of many citizens. We assess the principal behavioral prediction of the fiscal illusion theory. Incorporating estimates of the effects of federal deficits into a standard substantive model of Stimson's mood index, we find strong support for a subjective price-driven theory of demand for government. In particular, we find that the size of the federal budget deficit is significantly associated with greater demand for government services and benefits. This may have important implications for contemporary debates about fiscal discipline.
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The Oh-So Straight and Narrow Path: Can the Health Care Expenditure Curve Be Bent?
Robert Woodward & Le Wang
Health Economics, forthcoming
Abstract:
Although there is much talk about whether or not the current health care reform will 'bend' the health care expenditure 'curve', exactly which 'curve' is to be 'bent' is often ill-specified. This essay notes that the 'curve' defined by the log of US national health care expenditures per capita plotted against the log of the US gross domestic product per capita has been remarkably straight since 1929 despite Medicare and Medicaid and all of the more recent reform attempts. After establishing stationarity and considering cointegration and endogeneity, the slope of this log-log relationship suggests a per capita expenditure-income elasticity of 1.388. The authors suggest two explanatory hypotheses consistent with the observed constant slope. First, many new technologies are endogenous because their introduction is determined by their expected market, which is in turn dependent on GDP per capita. Second, the authors emphasize the potential utility gained by spending disproportionately larger proportions of our growing income on hope, uncertainty-reducing information, and consumer amenities, all of which may be independent of any improved health outcome.
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Why Did Estonia Choose Fiscal Retrenchment after the 2008 Crisis?
Ringa Raudla & Rainer Kattel
Journal of Public Policy, August 2011, Pages 163-186
Abstract:
The budgetary response of Estonia to the 2008 global financial crisis poses a puzzle. While many other countries increased public expenditure and ran high deficits in 2009, the Estonian government was different: it undertook fiscal retrenchment, combining expenditure cuts and tax increases, despite a large drop in economic output. This article explains why the Estonian government opted for fiscal consolidation during the crisis. The ideological position of the governing parties and their desire the join the euro-zone played an important role in driving fiscal discipline. It also argues that the key to understanding Estonia's fiscal decisions in 2009 is what happened in the 1990s: fiscal policy choices became path-dependent as a result of positive feedback loops from previous periods of fiscal consolidation. Path-dependency was further reinforced by institutional capabilities (or lack thereof) created by initial macroeconomic policy choices.
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Mathias Trabandt & Harald Uhlig
Journal of Monetary Economics, forthcoming
Abstract:
Laffer curves for the US, the EU-14 and individual European countries are compared, using a neoclassical growth model featuring "constant Frisch elasticity" (CFE) preferences. New tax rate data is provided. The US can maximally increase tax revenues by 30% with labor taxes and 6% with capital taxes. We obtain 8% and 1% for the EU-14. There,54% of a labor tax cut and 79% of a capital tax cut are self-financing. The consumption tax Laffer curve does not peak. Endogenous growth and human capital accumulation affect the results quantitatively. Household heterogeneity may not be important, while transition matters greatly.
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The role of securitization in mortgage renegotiation
Sumit Agarwal et al.
Journal of Financial Economics, forthcoming
Abstract:
We study the effects of securitization on renegotiation of distressed residential mortgages over the current financial crisis. Unlike prior studies, we employ unique data that directly observe lender renegotiation actions and cover more than 60% of the U.S. mortgage market. Exploiting within-servicer variation in these data, we find that bank-held loans are 26-36% more likely to be renegotiated than comparable securitized mortgages (4.2-5.7% in absolute terms). Also, modifications of bank-held loans are more efficient: conditional on a modification, bank-held loans have 9% lower post-modification default rates (3.5% in absolute terms). Our findings support the view that frictions introduced by securitization create a significant challenge to effective renegotiation of residential loans. We also provide evidence supporting the affordability focus of recent policy actions, such as the Home Affordability Modification Program.
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Should the Government Directly Intervene in Stock Market during a Crisis?
Salman Khan & Pierre Batteau
Quarterly Review of Economics and Finance, forthcoming
Abstract:
Unlike foreign exchange markets where central banks frequently intervene, the governments strive not to intervene in the stock markets since intervention transmit negative signals and carry market-related side effects. The main reasons often cited in support of intervention are to bring price stability and to restore investors' confidence. During the recent economic turmoil, opportunities for the governments to intervene in the stock markets were mainly exploited in emerging and developing countries. We study the outcome of the Russian government's intervention in its major stock market between September-October 2008. This intervention was intended to reverse the sudden and swift declining trend in traded security prices by altering the market's expectations. By using a combination of event study and a multivariate GARCH model, our findings does not support direct government intervention in the stock market during a crisis.
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Nathan Rosenberg
Industrial and Corporate Change, August 2011, Pages 1215-1222
Abstract:
This article explores the degree to which Joseph Schumpeter may be regarded as a follower of Karl Marx. It argues that Schumpeter and Marx shared a common vision, including agreement on the growth in the size of the firm and in industrial concentration, the inherent instability of capitalism and the inevitability of "crises", and the eventual destruction of capitalist institutions and the arrival of a socialist form of economic organization as a result of the working out of the internal logic of capitalist evolution. Schumpeter's main qualification is his insistence upon the importance of temporal lags, i.e., social forms that persist after they have lost their economic rationale, and he suggests that the essence of capitalism lies in the inevitable tendency of that system to depart from equilibrium. The article emphasizes the continuing importance of economic history for economics.
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Panel evidence on economic freedom and growth in the United States
Ryan Compton, Daniel Giedeman & Gary Hoover
European Journal of Political Economy, September 2011, Pages 423-435
Abstract:
Using the measures of economic freedom developed by Karabegovic et al. (2003), we are able to create a dataset spanning the period 1981 to 2004 in order to investigate the nature of the relationship between economic freedom and economic growth for the fifty US states. Overall, we find a significant positive relationship between economic freedom and economic growth. However, not all components of economic freedom affect growth equally.
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Public Pension Promises: How Big Are They and What Are They Worth?
Robert Novy-Marx & Joshua Rauh
Journal of Finance, August 2011, Pages 1211-1249
Abstract:
We calculate the present value of state employee pension liabilities using discount rates that reflect the risk of the payments from a taxpayer perspective. If benefits have the same default and recovery characteristics as state general obligation debt, the national total of promised liabilities based on current salary and service is $3.20 trillion. If pensions have higher priority than state debt, the value of liabilities is much larger. Using zero-coupon Treasury yields, which are default-free but contain other priced risks, promised liabilities are $4.43 trillion. Liabilities are even larger under broader concepts that account for salary growth and future service.
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Joshua Aizenman & Gurnain Pasricha
The Economists' Voice, 2011
Abstract:
Understanding how the economy reacted to fiscal stimulus in the aftermath of the deepest recession of the last fifty years is essential. Joshua Aizenman of the University of California, Santa Cruz, and Gurnain Kaur Pasricha of the Santa Cruz Institute for International Economics and the Bank of Canada show that aggregate fiscal expenditure stimulus in the United States, properly adjusted for the declining fiscal expenditure of the fifty states, was close to zero in 2009. Furthermore, the USA is ranked at the bottom third in terms of the rate of expansion of the consolidated government consumption and investment of the 28 OECD countries they studied recently.
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Timothy Bates, Magnus Lofstrom & Lisa Servon
Economic Development Quarterly, August 2011, Pages 255-266
Abstract:
Small business lending programs designed to move disadvantaged low-income people into business ownership have been difficult to implement successfully in the U.S. context. Based in part on the premise that financing requirements are an entry barrier limiting the ability of aspiring entrepreneurs to create small businesses, these programs are designed to alleviate such barriers for low net-worth individuals with limited borrowing opportunities. The authors' analysis tracks through time nationally representative samples of adults to investigate the role of financial constraints and other factors delineating self-employment entrants from nonentrants. Paying particular attention to lines of business most accessible to adults lacking college credentials and substantial personal net worth, the authors' analysis yields no evidence that financial capital constraints are a significant barrier to small-firm creation.
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Individual versus systemic risk and the Regulator's Dilemma
Nicholas Beale et al.
Proceedings of the National Academy of Sciences, forthcoming
Abstract:
The global financial crisis of 2007-2009 exposed critical weaknesses in the financial system. Many proposals for financial reform address the need for systemic regulation - that is, regulation focused on the soundness of the whole financial system and not just that of individual institutions. In this paper, we study one particular problem faced by a systemic regulator: the tension between the distribution of assets that individual banks would like to hold and the distribution across banks that best supports system stability if greater weight is given to avoiding multiple bank failures. By diversifying its risks, a bank lowers its own probability of failure. However, if many banks diversify their risks in similar ways, then the probability of multiple failures can increase. As more banks fail simultaneously, the economic disruption tends to increase disproportionately. We show that, in model systems, the expected systemic cost of multiple failures can be largely explained by two global parameters of risk exposure and diversity, which can be assessed in terms of the risk exposures of individual actors. This observation hints at the possibility of regulatory intervention to promote systemic stability by incentivizing a more diverse diversification among banks. Such intervention offers the prospect of an additional lever in the armory of regulators, potentially allowing some combination of improved system stability and reduced need for additional capital.
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Dan Bogart
Economic History Review, forthcoming
Abstract:
The Glorious Revolution has been linked with Britain's economic development in the eighteenth century. This article argues that it contributed to the early transport revolution. First, it shows that the regulatory environment became more favourable for undertakers, with their rights being better protected. Second, it shows that investment in improving roads and rivers increased substantially in the mid-1690s shortly after the Glorious Revolution. Regression analysis and structural breaks tests confirm that there was a change in investment even after controlling for other determinants of investment. The results have implications for debates on the role of political change in British economic growth.
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Shiri Noy
International Journal of Comparative Sociology, June 2011, Pages 215-244
Abstract:
Much of our knowledge of the development of the welfare state centers on historical contingencies that characterized the industrial, political, and demographic context of Western Europe and North America. However, young welfare states in developing countries are emerging in response to different pressures than those faced by early welfare state; while globalization influences both young and established welfare states. Using newly released data for Latin America, this article provides a systematic comparison of social spending, spending on welfare and social security and government health spending in the OECD and Latin America and the Caribbean in the 1980s and 1990s. Results from cross-section time-series models indicate that the logic of industrialism welfare state approach is useful for examining social spending in Latin America. Namely, unemployment is associated with higher levels of social spending and spending on welfare and social security in both regions while a larger proportion of elderly population is associated with higher spending in Latin America. Globalization in the form of trade openness is associated with lower spending in the OECD across outcomes. In Latin America and the Caribbean the presence of international financial institutions powerfully pattern health and social spending: decreasing spending on welfare and social security and increasing health spending.