Money in the System
U.S. Infrastructure: 1929-2023
Ray Fair
Yale Working Paper, February 2025
Abstract:
This paper examines the history of U.S. infrastructure since 1929 and in the process reports an interesting fact about the U.S. economy. Infrastructure stock as a percent of GDP began a steady decline around 1970, and the government budget deficit became positive and large at roughly the same time. The infrastructure pattern in other countries does not mirror that in the United States, so the United States appears to be a special case. The overall results suggest that the United States became less future oriented beginning around 1970, an increase in the social discount rate. This change has persisted. This is the interesting fact. The paper contains speculation on possible causes.
Was Pandemic Fiscal Relief Effective Fiscal Stimulus? Evidence from Aid to State and Local Governments
Jeffrey Clemens, Philip Hoxie & Stan Veuger
University of California Working Paper, January 2025
Abstract:
We use an instrumental-variables estimator reliant on variation in congressional representation to analyze the macroeconomic effects of federal aid to state and local governments across all four major pieces of COVID-19 response legislation. Through December 2022, we estimate that the federal government allocated $603,000 for each state or local government job-year preserved. Our baseline confidence interval allows us to rule out estimates smaller than $220,400. Our estimates of effects on aggregate income and output are centered on zero and imply modest if any spillover effects onto the broader economy.
Efficacy of Congressional Oversight
Pamela Ban & Seth Hill
American Political Science Review, forthcoming
Abstract:
Oversight, scholars argue, allows Congress to control the executive agents it empowers to implement law. Yet the tools of oversight are rather limited and debate continues as to how much influence oversight provides. How well can members of Congress motivate bureaucratic performance? To measure the efficacy of oversight, we create a new dataset matching oversight efforts to a bureaucratic deficiency Congress has sought to reduce since the early 2000s: improperly made payments to contractors and clients. We estimate the effect of congressional hearings, one of the most important tools of congressional oversight, as well as correspondence, appropriation committee reports, statutes, and executive action. We find that hearings lead to subsequent declines in improper payments. The magnitude of the effect, however, is small relative to the scope of the problem, suggesting strong limits on the efficacy of oversight. Our findings imply that America's elected officials struggle to effectively manage implementation of policy.
Robust Fiscal Stabilization
Alan Auerbach & Danny Yagan
NBER Working Paper, January 2025
Abstract:
Any fiscal path is sustainable if future fiscal policy responds sufficiently to high deficits. Previous work found that Congress reduced the deficit during 1984-2003 when projected deficits rose. We find that this year-to-year feedback has disappeared: Congress on average during 2004-2024 did not respond to the projected deficit. We quantify how strong fiscal feedback needs to be going forward in order to keep the debt-GDP ratio below 250% in one hundred years, taking as given the debt sensitivity of interest rates implicit in official projections. Without fiscal risk, the government can succeed either by modestly and gradually reducing the deficit or by suddenly and permanently reducing the deficit once this century by 1.5% of GDP. When considering large transitory deficit shocks like the COVID-19 pandemic and persistent interest rate shocks, keeping the debt ratio below 250% with 95% probability requires stronger gradual feedback -- 0.5%-1.1% of GDP average deficit reduction in the next decade -- though less strong than actually observed during 1984-2003. Successful sudden feedback requires being able to undertake 1.5%-of-GDP deficit reductions twice in thirteen-year periods, suggesting that a "wait-and-see" approach to successful deficit reduction sometimes allows little waiting.
Long shadow of the U.S. mortgage expansion: Evidence from local labour markets
Aruni Mitra & Mengying Wei
European Economic Review, February 2025
Abstract:
We construct U.S. county-level credit supply shocks by interacting the national mortgage growth of lenders in the early 2000s with a county's initial exposure to those lenders. Counties with a more expansionary credit shock experienced a greater housing boom between 2003 and 2006 without a positive spillover to local labour market performance. During the Great Recession, the same counties experienced a larger drop in growth rates of mortgages, house prices and wages, and a larger increase in unemployment rates. While unemployment rates declined faster in those areas after the recession, wage growth remained depressed. The credit shock also induced a long-run increase in older firms' employment share, suggesting a reduction in business dynamism.
Declining r* in the US: The role of Social Security
Jacopo Bonchi & Giacomo Caracciolo
Journal of Public Economics, January 2025
Abstract:
We develop a quantitative life-cycle model to study the impact of Social Security on the US natural interest rate, r*. Past reforms mitigated the r* decline, raising the natural rate by approximately 1 percentage point between 1970 and 2015 through higher replacement rate and retirement age. In the future, increasing the retirement age would counteract the downward pressure on r* due to demographics more than reforms entailing higher contribution or lower replacement rates, with the latter reform delivering the lowest r* value across different future productivity scenarios for the US economy.
The Efficiency of Municipal Bond Tax Shields
Hala Moussawi
Stanford Working Paper, January 2025
Abstract:
U.S. states exempt residents from taxation on the interest income of local municipal bonds. I evaluate the efficiency of these tax shields. I use changes in millionaire taxes to calibrate an equilibrium model of the municipal bond market with state competition over tax shields. I show that state tax shields raise resident demand for local municipal bonds but impose negative externalities on other states and distort risk-sharing across municipal investors. Welfare could be significantly improved by repealing state tax shields. Reducing state tax shields by 1 percentage point raises aggregate welfare by about 0.07% of state GDP.
CSR scores versus actual impacts: Banks' main street lending during the Great Recession
Dong Beom Choi & Seongjun Jeong
Journal of Banking & Finance, March 2025
Abstract:
We examine the relationship between banks' corporate social responsibility (CSR) scores, measured at the peak of the boom, and their lending behaviors during the Great Recession. High-CSR banks, expected to better support local borrowers during critical periods, instead reduced small business lending more sharply than their low-CSR counterparts. This paradox arises from CSR scores' emphasis on visible but less material attributes, such as employee benefits, which are easier to measure during booms but deplete financial slack necessary for sustained lending under stress. Our findings highlight a misalignment between CSR metrics and material social impacts, underscoring the need for more reliable performance measures to implement stakeholderism effectively.
Tax havens and reputational costs
Adrienne DePaul, Frank Murphy & Mary Vernon
Journal of Accounting and Economics, forthcoming
Abstract:
In 2017, the European Commission (EC) published a list of non-cooperative tax havens. We study whether country-level tourism and foreign direct investment (FDI) change as a result of this list. Consistent with a reputational cost of the EC's "name and shame" campaign, there is a modest reduction in EU tourism among listed countries compared to unlisted ones. This relative reduction is concentrated among tourists from countries that view cheating on taxes as less justifiable. In contrast, listed countries experience a general increase in FDI following the list, a benefit potentially offsetting the costs of reduced tourism.