Governed
The Excess Burden of Government Indecision
Francisco Gomes, Laurence Kotlikoff & Luis Viceira
Tax Policy and the Economy, 2012, Pages 125-164
Abstract:
Governments are known for procrastinating when it comes to resolving painful policy problems. Whatever the political motives for waiting to decide, procrastination distorts economic decisions relative to what would arise with early policy resolution. In so doing, it engenders excess burden. This paper posits, calibrates, and simulates a life cycle model with earnings, life span, investment return, and future policy uncertainty. It then measures the excess burden from delayed resolution of policy uncertainty. The first uncertain policy we consider concerns the level of future Social Security benefits. Specifically, we examine how an agent would respond to learning in advance whether she will experience a major Social Security benefit cut starting at age 65. We show that having to wait to learn materially affects consumption, saving, labor supply, and portfolio decisions. It also reduces welfare. Indeed, we show that the excess burden of government indecision can, in this instance, range as high as 0.6% of the agent's economic resources. This is a significant distortion in and of itself. It is also significant when compared to other distortions measured in the literature. The second uncertain policy we consider concerns marginal tax rates. We obtain similar results once we adjust for the impact of tax rates on income.
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The Effects of Fiscal Stimulus: Evidence from the 2009 'Cash for Clunkers' Program
Atif Mian & Amir Sufi
Quarterly Journal of Economics, forthcoming
Abstract:
We evaluate the impact of the 2009 "Cash for Clunkers" program on short and medium run auto purchases. Our empirical strategy exploits variation across U.S. cities in ex-ante exposure to the program as measured by the number of "clunkers" in the city as of the summer of 2008. We find that the program induced the purchase of an additional 370,000 cars in July and August of 2009. However we find strong evidence of reversal; high clunker counties bought fewer autos in the ten months after the program expired which offset most of the initial purchases. We find no evidence of an effect on employment, house prices, or household default rates in cities with higher exposure to the program.
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Choosing Size of Government Under Ambiguity: Infrastructure Spending and Income Taxation
Charles Manski
NBER Working Paper, July 2012
Abstract:
Attempting to shed light on the optimal size of government, economists have analyzed planning problems that specify a set of feasible taxation-spending policies and a social welfare function. The analysis characterizes the optimal policy choice of a planner who knows the welfare achieved by each policy. This paper examines choice of size of government by a planner who has partial knowledge of population preferences and the productivity of spending. This is a problem of decision making under ambiguity. Focusing on income-tax financed public spending for infrastructure that aims to enhance productivity, I examine scenarios where the planner observes the outcome of a status quo policy and uses various decision criteria (expected welfare, maximin, Hurwicz, minimax-regret) to choose policy. The analysis shows that the planner can reasonably choose a wide range of spending levels - thus, a society can rationalize having a small or large government. I conclude that to achieve credible conclusions about the desirable size of government, we need to vastly improve current knowledge of population preferences and the productivity of public spending.
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Tax Expenditures, the Size and Efficiency of Government, and Implications for Budget Reform
Leonard Burman & Marvin Phaup
Tax Policy and the Economy, 2012, Pages 93-124
Abstract:
One possible explanation for the difficulty in controlling the budget is that a major component of spending - tax expenditures - receives privileged status. It is treated as tax cuts rather than as spending. This paper explores the implications of that classification and illustrates how it can lead to higher taxes, larger government, and an inefficient mix of spending (too many tax expenditures). The paper then analyzes alternative budgeting approaches that would explicitly incorporate and measure tax expenditures. It concludes by analyzing ways to control tax expenditures (and other spending) and the special challenges presented by tax expenditures.
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Legislative Term Limits and Fiscal Policy Performance
Daniel Lewis
Legislative Studies Quarterly, August 2012, Pages 305-328
Abstract:
Do term limits impede the ability of legislators to effectively set fiscal policy? To address this question, I examine state bond ratings from 1996 to 2009. Bond ratings serve as a valuable indicator of a state's fiscal performance, gauging the risk and uncertainty that investors face when buying these bonds. In addition, bond ratings are important policy ends in themselves. High bond ratings make it easier for states to borrow and raise revenue, while lowering interest rates. Results from analyses of "Term-Limitedness" and legislator experience suggest that term limits negatively impact a state's fiscal performance, leading to lower bond ratings.
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Tomer Blumkin, Bradley Ruffle & Yosef Ganun
European Economic Review, August 2012, Pages 1200-1219
Abstract:
The public finance literature demonstrates the equivalence between consumption and labor-income (wage) taxes. We introduce an experimental paradigm in which individuals make real labor-leisure choices and spend their earned income on real goods. We use this paradigm to test whether a labor-income tax and an equivalent consumption tax lead to identical labor-leisure allocations. Despite controlling for subjects' work ability and inherent labor-leisure preferences and disallowing saving, subjects reduce their labor supply significantly more in response to an income tax than to an equivalent consumption tax. We discuss the economic implications of a policy shift to a consumption tax.
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"Getting the Biggest Bang for the Buck in Fiscal Policy"
Miles Kimball
NBER Working Paper, June 2012
Abstract:
In ranking fiscal stimulus programs, it is useful to focus on the ratio of extra aggregate demand to extra national debt that results. This note argues that (because of repayment after the end of a recession) "national lines of credit" - that is, government-issued credit cards with countercyclical credit limits and favorable interest rates - would generate a higher ratio of extra aggregate demand to extra national debt than tax rebates. Because it involves government loans that are anticipated in advance to involve some losses and therefore involve a fiscal cost even after efforts to minimize losses, such a policy lies between traditional monetary policy and traditional fiscal policy.
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Reassessing the fiscal mix for successful debt reduction
Emanuele Baldacci, Sanjeev Gupta & Carlos Mulas-Granados
Economic Policy, July 2012, Pages 365-406
Abstract:
This paper assesses the determinants of the duration of debt reduction episodes in a large sample of countries over the last three decades using a survival model. Results show that increases in the primary balances are the main source of debt reduction. Expenditure-based fiscal adjustments are key for reducing the length of debt consolidation spells, including in the aftermath of financial crises. Political fragmentation and the proximity of elections make debt sustainability more difficult to achieve, while structural reforms that help spur growth decrease the duration of debt reduction. In contrast to previous findings, however, we show that when adjustment needs are large - as in many advanced economies today - fiscal consolidations that rely also on revenue-enhancing measures are more likely to accelerate debt reduction. We label it as the 'Rebalancing Adjustment Effect'. This result is particularly strong when countries experience a financial crisis.
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The Political Economy of Flexicurity
Tito Boeri, Ignacio Conde-Ruiz & Vincenzo Galasso
Journal of the European Economic Association, August 2012, Pages 684-715
Abstract:
We document the presence of a trade-off in the labor market between the protection of jobs and the support offered to unemployed people. Different countries' locations along this trade-off represent stable political-economic equilibria. We develop a model in which individuals determine the mix of job protection and support for the unemployed in a political environment. Agents are heterogeneous along two dimensions: employment status (insiders and outsiders) and skills (low and high). Unlike previous work on the political economy of labor market institutions, we emphasize the role of job protection and unemployment benefits in the wage-setting process. A key implication of the model is that flexicurity configurations with low levels of job protection and high levels of support to the unemployed should emerge in the presence of a highly educated workforce. Panel regressions of countries' locations along this institutional trade-off are consistent with the implications of our model.
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Are U.S. Multinational Corporations Becoming More Aggressive Income Shifters?
Kenneth Klassen & Stacie Laplante
Journal of Accounting Research, forthcoming
Abstract:
This paper examines income shifting of U.S. multinational companies over the past two decades. Domestic and foreign policymakers are increasingly concerned with the effect of income shifting on dwindling tax revenues, however, extant research on income shifting by U.S. multinational enterprises is mixed. We address the disconnect between the academic literature and the policymaker's perceptions by examining the extent of multijurisdictional income shifting by U.S. multinational companies. We directly address conflicting results in extant literature and show that using either multi-period proxies or instrumental variables overcome weaknesses of annual proxies in this setting. Our tests show that U.S. companies have become more active at shifting income out of the U.S. as the regulatory costs of shifting have changed. Holding tax rate differences between U.S. and foreign jurisdictions constant, our empirical estimates suggest that our sample of 380 corporations with low average foreign tax rates collectively shift approximately $10 billion of additional income out of the U.S. annually during 2005-2009 relative to 1998-2002 due to varying regulatory costs of shifting.
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Words Speak Louder Than Actions: The Impact of Politics on Economic Performance
Steffen Osterloh
Journal of Comparative Economics, August 2012, Pages 318-336
Abstract:
In this paper, a new approach to disclose the impact of politics on economic growth is presented: data derived from content analysis of party manifestos is used as measures of party preferences. In a panel of 23 OECD countries, a positive impact of party support for various market-liberal policies on economic performance can be detected. In particular, I show that parties which were more concerned with market interventions and - to a lesser extent - welfare state policies impacted on growth negatively; those which proposed incentives for business as well as technology and infrastructure had a positive impact. Moreover, the robustness of the results is demonstrated in a model averaging framework.
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Does democratization facilitate economic liberalization?
Martin Rode & James Gwartney
European Journal of Political Economy, forthcoming
Abstract:
Previous empirical studies have found that the institutions and policies of democracies are generally more supportive of economic freedom than authoritarian political regimes. This paper employs a new dataset by Cheibub et al. (2010) to examine the impact of transitions to democracy on economic freedom. The dataset identifies 48 political transitions from authoritarianism to democracy since the mid-1970s, for which the data on economic freedom are available. Both cross-sectional and panel data analysis are employed to examine these transitions within the framework of fixed- and random effects models. The results indicate that transitions to democracy are associated with subsequent increases in economic liberalization as measured by changes in the Economic Freedom of the World index. Moreover, the economic liberalization appears to follow the path of an inverted U, ascending for approximately ten years after the democratic transition, but receding thereafter. There was also evidence that stable (long-term) democracies achieved larger increases in economic freedom than authoritarian regimes, while unstable democratic transitions adversely affected economic liberalization.
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The market for protection and the origin of the state
Kai Konrad & Stergios Skaperdas
Economic Theory, June 2012, Pages 417-443
Abstract:
We examine a stark setting in which security or protection can be provided by self-governing groups or by for-profit entrepreneurs (kings, kleptocrats, or mafia dons). Although self-governance is best for the population, it faces problems of long-term viability. Typically, in providing security, the equilibrium market structure involves competing lords, a condition that leads to a tragedy of coercion: all the savings from the provision of collective protection are dissipated and welfare can be as low as, or even lower than, in the absence of the state. Thus, we explain the tendency towards autocracy both in history, before the appearance of modern representative governance, and in many low-income countries in modern times.
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Andrew Farrant, Edward Mcphail & Sebastian Berger
American Journal of Economics and Sociology, July 2012, Pages 513-538
Abstract:
Hayek famously claimed that he would prefer a "liberal" dictator to "democratic government lacking in liberalism." While Hayek's views of the Pinochet regime have generated much controversy, surprisingly little has been written about Hayek's defense of transitional dictatorship. Making use of previously un-translated foreign language archival material, this paper helps shed light on Hayek's views of authoritarianism, totalitarianism, transitional dictatorship, and the Pinochet regime as well as helping to separate Hayekian 'fact' from Hayekian 'fiction'.
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Leaving Money on the Table: Learning from Recent Refusals of Federal Grants in the American States
Sean Nicholson-Crotty
Publius, Summer 2012, Pages 449-466
Abstract:
Recent years have been marked by high-profile refusals of federal grant aid by state governments. These refusals raise several questions. First, is there anything new here? Second, does partisanship alone explain these decisions? And finally, do the explanations for recent decisions provide insights into state behavior over the longer term? This article reviews state refusals of federal money over the past fifty years, explores the degree to which partisanship can explain recent grant refusals, and uses those insights to predict state-level applications to three very different grant programs. The results suggest that there is little novelty in recent events and that the interaction of partisan and electoral pressures has been influencing state-level applications for grants-in-aid for decades.
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Legislatures, Bureaucracies, and Distributive Spending
Michael Ting
American Political Science Review, May 2012, Pages 367-385
Abstract:
This article develops a theory of bureaucratic influence on distributive politics. Although there exists a rich literature on the effects of institutions such as presidents, electoral systems, and bicameralism on government spending, the role of professional bureaucrats has yet to receive formal scrutiny. In the model, legislators bargain over the allocation of distributive benefits across districts. The legislature may either "politicize" a program by bargaining directly over pork and bypassing bureaucratic scrutiny, or "professionalize" it by letting a bureaucrat approve or reject project funding in each district according to an underlying quality standard. The model predicts that the legislature will professionalize when the expected program quality is high. However, politicization becomes more likely as the number of high-quality projects increases and under divided government. Further, more competent bureaucrats can encourage politicization if the expected program quality is low. Finally, politicized programs are larger than professionalized programs.
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Associational Networks and Welfare States in Argentina, Brazil, South Korea, and Taiwan
Cheol-Sung Lee
World Politics, July 2012, Pages 507-554
Abstract:
This article investigates the structures of civic networks and their roles in steering the political choices of party and union elites regarding the retrenchment or expansion of welfare states in four recently democratized developing countries. Utilizing coaffiliation networks built upon two waves of World Values Surveys and evidence from comparative case studies for Argentina, Brazil, South Korea, and Taiwan, the study develops two explanatory factors that account for variations in welfare politics: cohesiveness and embeddedness. In Argentina and, to a lesser degree, in Taiwan, party and union leaders' cohesive relationships, being disarticulated from the informal civic sphere, allowed them to conduct elite-driven social policy reforms from above, by launching radical neoliberal reforms (Argentina) or by developing a generous transfer-centered welfare state (Taiwan). In Brazil and South Korea, however, party and union leaders' durable solidarity embedded in wider civic communities enabled them to resist the retrenchment of welfare states (Brazil) or implement universal social policies (South Korea) based on bottom-up mobilization of welfare demands. This article demonstrates that elites in the formal sector make markedly different political choices when confronting economic crisis and democratic competition depending upon their organizational connections in formal and informal civic networks.
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The Rise and Fall of a Regulator: Adventure Sports in the United Kingdom
Laurence Ball-King, John Watt & David Ball
Risk Analysis, forthcoming
Abstract:
Following a tragic accident in 1993 involving the deaths of teenagers while kayaking a new regulatory regime was imposed upon some adventure sports providers in the United Kingdom. In particular, a new regulatory body, the Adventure Activities Licensing Authority (AALA), was established to oversee the sector. Yet in 2010, a government-sponsored review recommended that AALA be abolished and this recommendation has been quickly accepted by government. This article explores the background to these developments through documentation, interviews with those affected by the AALA regime, and court cases. Evidence reported here, perhaps surprising, is that AALA itself is seen in a very positive light by many, even those it regulates. What may have happened is that AALA became caught up in a wider debate about the place and management of risk in life beyond the workplace, which has been simmering in the United Kingdom for a decade or more, and of which it fell foul. It may also be that adventure sports, because they entail voluntary engagement with high consequence hazards, starkly expose serious questions about the application of conventional, factory-originated risk assessment approaches to life in general.
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Imprisoned in a Tesseract: NASA's Human Spaceflight Effort and the Prestige Trap
Roger Launius
Astropolitics, Summer 2012, Pages 152-175
Abstract:
This essay focuses on the decision by senior National Aeronautics and Space Administration (NASA) officials at the creation of the agency to focus its efforts on human spaceflight, Moon and Mars missions, and human settlement of the solar system. Its leaders made a conscious decision to downplay space applications projects, exclusive of technological research and development, and eschew operational activities. They did so in favor of concentrating on the human exploration and development of space. In so doing, NASA fell into the prestige trap that dominated this mission in the 1950s and early 1960s. At sum it was a tesseract, a four-dimensional object, which locked NASA into a quest for ever greater space spectaculars featuring human involvement. Power and prestige, therefore, has cast a long shadow on the space agency, forcing it into a series of programs that have been oversold and undervalued.
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Threats to Security of Property Rights in a Transition Economy: An Empirical Perspective
Rostislav Kapeliushnikov et al.
Journal of Comparative Economics, forthcoming
Abstract:
Effective property rights protection plays a fundamental role in promoting economic performance. Yet measurement problems make the relationship between property rights and entrepreneurship an ambiguous issue. As an advancement on previous research in this paper we propose a new approach to the evaluation of the security of property rights based on direct measures that overcomes some limitations of previous studies. We apply this new metrics to a survey of manufacturing firms in Russia to identifying the economic effects associated with the lack of property protection in a transition economy. Our analysis supports the view that there is a close relationship between institutions, property rights and economic growth. Our findings confirm that redistributive risks provide a depressing effect on investment and innovative activity of manufacturing enterprises and potentially result in a huge loss in efficiency and economic growth, which in other institutional settings could have been avoided.
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Contract enforcement in Russian serf society, 1750-1860
Tracy Dennison
Economic History Review, forthcoming
Abstract:
This article examines questions about contract enforcement in the absence of formal legal institutions, using archival evidence for one particular rural society in pre-emancipation Russia. The evidence presented indicates that enforcement services provided by the local landlord made it possible for Russians from different socioeconomic and legal strata to engage in a wide variety of contractual transactions. However, this system had significant drawbacks in that the poorest serfs could not afford these services and no serf had recourse beyond his local estate.