Funds
Enrico Moretti
American Economic Journal: Applied Economics, forthcoming
Abstract:
A large literature has documented a significant increase in the difference between the wage of college graduates and high school graduates over the past 30 years. I show that from 1980 to 2000, college graduates have experienced relatively larger increases in cost of living, because they have increasingly concentrated in metropolitan areas that are characterized by a high cost of housing. When I deflate nominal wages using a location-specific CPI, I find that the difference between the wage of college graduates and high school graduates is lower in real terms than in nominal terms and has grown less. At least 22% of the documented increase in college premium is accounted for by spatial differences in the cost of living. The implications of this finding for changes in well-being inequality depend on why college graduates sort into expensive cities. Using a simple general equilibrium model of the labor and housing markets, I consider two alternative explanations. First, it is possible that the relative supply of college graduates increases in expensive cities because college graduates are increasingly attracted by amenities located in those cities. In this case, the higher cost of housing reflects consumption of desirable local amenities, and there may still be a significant increase in well-being inequality even if the increase in real wage inequality is limited. Alternatively, it is possible that the relative demand for college graduates increases in expensive cities due to shifts in the relative productivity of skilled labor. In this case, the relative increase in skilled workers' standard of living is offset by the higher cost of living. The evidence indicates that changes in the geographical location of different skill groups are mostly driven by changes in their relative demand. I conclude that the increase in well-being disparities between 1980 and 2000 is smaller than previously thought.
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Presidents, Parties, and the Business Cycle, 1949-2009
Michael Comiskey & Lawrence Marsh
Presidential Studies Quarterly, March 2012, Pages 40-59
Abstract:
Scattered works by political scientists since the 1970s have reported that Democratic presidents have compiled stronger economic records than their Republican counterparts: economic growth has been higher, unemployment lower, and inequality has fallen during Democratic administrations while the opposite outcomes have occurred under Republican presidents. Recently, however, Campbell has vigorously challenged these findings. This article reexamines the data for 1949-2009 using new methods and measures, and confirms the earlier findings for unemployment and real gross domestic product (GDP).
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The Distributional and Revenue Consequences of Reforming the Mortgage Interest Deduction
Adam Cole, Geoffrey Gee & Nicholas Turner
National Tax Journal, December 2011, Pages 977-1000
Abstract:
The mortgage interest deduction (MID) is costly, and half the benefits accrue to the top 10 percent of taxpayers. This paper analyzes how five modifications to the MID would affect federal individual income tax revenue and the distribution of the tax burden. Under full repeal, federal individual income tax revenue is estimated to increase by up to $1.3 trillion, equal to 0.7 percent of GDP, between 2012 and 2021. Converting the deduction to a 15 percent non-refundable credit could increase federal individual income tax revenue by up to $599 billion, equal to 0.3 percent of GDP, over this period.
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Michelle Alexopoulos & Trevor Tombe
Journal of Monetary Economics, forthcoming
Abstract:
To evaluate the effect of managerial innovations on the economy, a series of new indicators capturing these advances is constructed. Three findings emerge from the analysis. First, following a positive managerial shock, output and productivity significantly increase and hours modestly rise in the short run. Second, management innovations are generally as important as non-managerial ones in explaining movements in these variables at business cycle frequencies. Finally, product and process innovations help promote the development of new managerial techniques.
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Does Inequality Lead to a Financial Crisis?
Michael Bordo & Christopher Meissner
NBER Working Paper, March 2012
Abstract:
The recent global crisis has sparked interest in the relationship between income inequality, credit booms, and financial crises. Rajan (2010) and Kumhof and Rancière (2011) propose that rising inequality led to a credit boom and eventually to a financial crisis in the US in the first decade of the 21st century as it did in the 1920s. Data from 14 advanced countries between 1920 and 2000 suggest these are not general relationships. Credit booms heighten the probability of a banking crisis, but we find no evidence that a rise in top income shares leads to credit booms. Instead, low interest rates and economic expansions are the only two robust determinants of credit booms in our data set. Anecdotal evidence from US experience in the 1920s and in the years up to 2007 and from other countries does not support the inequality, credit, crisis nexus. Rather, it points back to a familiar boom-bust pattern of declines in interest rates, strong growth, rising credit, asset price booms and crises.
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Fiscal Spending Jobs Multipliers: Evidence from the 2009 American Recovery and Reinvestment Act
Daniel Wilson
American Economic Journal: Economic Policy, forthcoming
Abstract:
This paper estimates the "jobs multiplier" of fiscal stimulus spending using the state-level allocations of federal stimulus funds from the American Recovery and Reinvestment Act (ARRA) of 2009. Because the level and timing of stimulus funds that a state receives was potentially endogenous, I exploit the fact that most of these funds were allocated according to exogenous formulary allocation factors such as the number of federal highway miles in a state or its youth share of population. Cross-state IV results indicate that ARRA spending in its first year yielded about eight jobs per million dollars spent, or $125,000 per job.
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How large is the Government Spending Multiplier? Evidence from World Bank Lending
Aart Kraay
Quarterly Journal of Economics, forthcoming
Abstract:
This article proposes a novel approach to empirically identifying government spending multipliers that relies on two features unique to many low-income countries: (1) borrowing from the World Bank finances a substantial fraction of government spending, and (2) spending on World Bank-financed projects is typically spread out over several years following the original approval of the project. The first fact means that fluctuations in spending on World Bank-financed projects are a significant source of fluctuations in overall government spending in these countries. The second fact means that fluctuations in World Bank-financed spending in a given year are largely determined by fluctuations in project approval decisions made in previous years, and so are unlikely to be correlated with shocks to output in the current year. I use World Bank project-level disbursement data to isolate the component of World Bank-financed government spending in a given year that is associated with past project approval decisions. I use this as an instrument for total government spending to estimate multipliers in a sample of 29 primarily low-income countries where variation in government spending from this source is large relative to the size of the economy. The resulting spending multipliers are small and reasonably precisely estimated to be in the vicinity of 0.5.
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Mobility Constraints, Productivity Trends, and Extended Crises
Domenico Delli Gatti et al.
Journal of Economic Behavior & Organization, forthcoming
Abstract:
In this paper we propose an interpretation of the current Global Financial Crisis which emphasizes sectoral dislocation following localized technical change in the presence of barriers to labor mobility. This tale is reminiscent of a similar tale concerning the Great Depression. In the 30s technical change was localized in agriculture, where income fell because rising productivity could not be offset by a shrinking labor force due to the costs of moving out of agriculture for unemployed workers, inelastic demand for agricultural output meant that as output increased income declined. As individual incomes fell below the level necessary to finance the transition to manufacturing, excess labor became trapped in agriculture, reducing wages and exacerbating the rise in output. Shrinking incomes in agriculture reverberated on the other sectors, mainly manufacturing causing a large depression. Nowadays, it is manufacturing that plays the role of epicenter of technical change. Falling incomes in manufacturing yield a lack of demand for goods produced in the rest of the economy, namely the service sector. This may be the deep rooted cause of the long lasting slump and the painfully slow recovery.
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Gabriel Chodorow-Reich et al.
American Economic Journal: Economic Policy, forthcoming
Abstract:
The American Recovery and Reinvestment Act (ARRA) of 2009 included $88 billion of aid to state governments administered through the Medicaid reimbursement process. We examine the effect of these transfers on states' employment. Because state fiscal relief outlays are endogenous to a state's economic environment, OLS results are biased downward. We address this problem by using a state's prerecession Medicaid spending level to instrument for ARRA state fiscal relief. In our preferred specification, a state's receipt of a marginal $100,000 in Medicaid outlays results in an additional 3.8 job-years, 3.2 of which are outside the government, health, and education sectors.
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The Phillips curve and US monetary policy: What the FOMC transcripts tell us
Ellen Meade & Daniel Thornton
Oxford Economic Papers, April 2012, Pages 197-216
Abstract:
The Phillips curve framework, which includes the output gap and natural rate hypothesis, plays a central role in the canonical macroeconomic model used in analyses of monetary policy. It is now well understood that real-time data must be used to evaluate historical monetary policy. We believe that it is equally important that macroeconomic models used to evaluate historical monetary policy reflect the framework that policymakers used to formulate that policy. To that end, we use the Federal Open Market Committee (FOMC) transcripts to examine the role that the Phillips curve framework played in Fed policymaking from 1979 through 2003. The FOMC's transcripts allow us to trace the evolution in policymakers' discussion of the Phillips curve framework over time. Our analysis suggests that the Phillips curve was much less central to the formulation and implementation of US monetary policy than it is in models commonly used to evaluate that policy.
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Olivier Coibion, Mary Yuriy Gorodnichenko & Johannes Wieland
Review of Economic Studies, forthcoming
Abstract:
We study the effects of positive steady-state inflation in New Keynesian models subject to the zero bound on interest rates. We derive the utility-based welfare loss function taking into account the effects of positive steady-state inflation and solve for the optimal level of inflation in the model. For plausible calibrations with costly but infrequent episodes at the zero-lower bound, the optimal inflation rate is low, typically less than two percent, even after considering a variety of extensions, including optimal stabilization policy, price indexation, endogenous and state-dependent price stickiness, capital formation, model-uncertainty, and downward nominal wage rigidities. On the normative side, price level targeting delivers large welfare gains and a very low optimal inflation rate consistent with price stability. These results suggest that raising the inflation target is too blunt an instrument to efficiently reduce the severe costs of zero-bound episodes.
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Rates of return to public agricultural research in 48 US states
Alejandro Plastina & Lilyan Fulginiti
Journal of Productivity Analysis, April 2012, Pages 95-113
Abstract:
The internal rate of return to public investment in agricultural R&D is estimated for each of the continental US states. Theoretically, our contribution provides a way of obtaining the returns to a local public good using Rothbart's concept of virtual prices. Empirically, a stochastic cost function that includes own knowledge capital stock as well as spillover capital stock variables is estimated. Stochastic spatial dependency among states generated by knowledge spillovers is used to define the ‘appropriate' jurisdictions. We estimate an average own-state rate of 17% and a social rate of 29% that compare well to the 9 and 12% average returns of the S&P500 and NASDAQ composite indexes during the same period.
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Johannes Schmieder, Till von Wachter & Stefan Bender
Quarterly Journal of Economics, forthcoming
Abstract:
One goal of extending the duration of unemployment insurance (UI) in recessions is to increase UI coverage in the face of longer unemployment spells. Although it is a common concern that such extensions may themselves raise nonemployment durations, it is not known how recessions would affect the magnitude of this moral hazard. To obtain causal estimates of the differential effects of UI in booms and recessions, this article exploits the fact that in Germany, potential UI benefit duration is a function of exact age which is itself invariant over the business cycle. We implement a regression discontinuity design separately for 20 years and correlate our estimates with measures of the business cycle. We find that the nonemployment effects of a month of additional UI benefits are, at best, somewhat declining in recessions. Yet the UI exhaustion rate, and therefore the additional coverage provided by UI extensions, rises substantially during a downturn. The ratio of these two effects represents the nonemployment response of workers weighted by the probability of being affected by UI extensions. Hence, our results imply that the effective moral hazard effect of UI extensions is significantly lower in recessions than in booms. Using a model of job search with liquidity constraints, we also find that in the absence of market-wide effects, the net social benefits from UI extensions can be expressed either directly in terms of the exhaustion rate and the nonemployment effect of UI durations, or as a declining function of our measure of effective moral hazard.
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Explaining the welfare state: Power resources vs. the Quality of Government
Bo Rothstein, Marcus Samanni & Jan Teorell
European Political Science Review, March 2012, Pages 1-28
Abstract:
The hitherto most successful theory explaining why similar industrialized market economies have developed such varying systems for social protection is the Power Resource Theory (PRT), according to which the generosity of the welfare state is a function of working class mobilization. In this paper, we argue that there is an under-theorized link in the micro-foundations for PRT, namely why wage earners trying to cope with social risks and demand for redistribution would turn to the state for a solution. Our approach, the Quality of Government (QoG) theory, stresses the importance of trustworthy, impartial, and uncorrupted government institutions as a precondition for citizens' willingness to support policies for social insurance. Drawing on data on 18 OECD countries during 1984-2000, we find (a) that QoG positively affects the size and generosity of the welfare state, and (b) that the effect of working class mobilization on welfare state generosity increases with the level of QoG.
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Branko Milanovic
Journal of Economic Inequality, March 2012, Pages 1-18
Abstract:
The results of new direct price level comparisons across 146 countries in 2005 have led to large revisions of PPP (purchasing power parity) exchanges rates, particularly for China and India. The recalculations of international and global inequalities, using the new PPPs, show that inequalities are substantially higher than previously thought. Inequality between global citizens is estimated at 70 Gini points rather than 65 as before. This high level of inequality is confirmed by the results obtained from the new set of 122 national household surveys from around year 2005.
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Evaluating evolutionary changes in state TANF policies
Hal Snarr, Dan Friesner & Daniel Underwood
Applied Economics Letters, Fall 2012, Pages 1753-1758
Abstract:
Over the past decade narrowly focused studies have evaluated the effectiveness of state-level welfare policies. In general, they evaluate reforms within a particular state, focus on a small number of outcome variables (usually caseload levels) and/or use a very narrowly defined time period. This narrow and partial analysis is perplexing, from an institutional perspective, as Temporary Assistance for Needy Families (TANF) forces states into a zero-sum funding game, where shares depend on differential relative success in achieving policy objectives metrics. This institutional structure incentivizes states to mimic and improve upon more successful counterparts to recapture a larger share of TANF block grants. Given this dynamic institutional structure, an evolutionary evaluation of state TANF programmes is warranted. This article uses cluster analysis to explore evolutionary changes in state TANF policies (as characterized by a comprehensive set of outcome variables) immediately following the imposition of TANF (1997-2005). We identify or benchmark clusters of ‘successful' and ‘less successful' TANF programmes. The results allow us to track which states in which year fall into the ‘successful' and ‘less successful' clusters over the 9-year period. The results support the notion that initially unsuccessful states mimic other successful state programmes over time.
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Behavioral Responses to Taxpayer Audits: Evidence from Random Taxpayer Inquiries
Norman Gemmell & Marisa Ratto
National Tax Journal, March 2012, Pages 33-57
Abstract:
This paper argues that random audit programs provide income taxpayers with information that alters their perceptions of, and hence their behavioral responses to, audits. Comparing samples of randomly selected audited and non-audited UK taxpayers, the evidence confirms predictions that audited taxpayers found to be "compliant" reduce their subsequent compliance. The opposite response is observed for taxpayers found to be "noncompliant." The results highlight the importance of testing separately the responses of taxpayers facing different opportunities and incentives to evade tax in order to avoid conflating their different effects, and to reveal both positive and negative indirect revenue effects from random auditing.
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The effect of FOMC statements on asset prices
Mira Farka & Adrian Fleissig
International Review of Applied Economics, May/June 2012, Pages 387-416
Abstract:
Given their increased importance during recent years, FOMC (Federal Open Market Committee) statements can have a significant impact on asset prices. To capture the effect of FOMC statements on asset prices, an indicator variable is created that takes into account the information content of policy statements. Results show that both ‘interest rate surprises' and ‘FOMC statements' affect the mean and the volatility of asset prices. The volatility impact is tent-shaped, jumping within the policy announcement interval and declining before and after the release. FOMC statements have a much more pronounced impact on stock returns, intermediate and long-term yields, while short-term rates are largely driven by target rate decisions. We also find that the evolution of the language of the FOMC statements does matter to market participants and, in particular, the ‘forward-looking' language adopted in mid-2003 has reduced market volatility associated with ‘interest rate surprises' on announcement days.