Findings

Public Monies

Kevin Lewis

January 03, 2023

Risk and demand for social protection in an era of populism
Kate Baldwin & Isabela Mares
Political Science Research and Methods, forthcoming 

Abstract:

Economic and health crises have profound political consequences for public support for social policy, historically setting in motion a massive expansion of governmental programs. Is demand for social protection likely to increase among citizens exposed to risk in an era in which populist messages are prominent? We show that this depends critically on the precise targets that populists evoke as enemies of the people. We distinguish between two types of political rhetoric deployed by populist politicians in their claims to represent the authentic people -- one opposing the authority of domestic elites, including technocrats, and one attacking foreigners. We examine the extent to which each rhetorical strategy reduces or enhances popular demand for social policies by randomly exposing Americans to these frames as part of a public opinion survey conducted during the Covid-19 pandemic. Our results show that the two messages have different consequences for support for redistribution among respondents exposed to risk: populist anti-foreign rhetoric that blames foreign countries for the onset of the pandemic increases demand for expansion of social protection compared to populist anti-elite rhetoric.


Quantifying the Costs and Benefits of Quantitative Easing
Andrew Levin, Brian Lu & William Nelson
NBER Working Paper, December 2022 

Abstract:

We conduct a systematic analysis of the costs and benefits of large-scale securities purchases, using the Federal Reserve's QE4 program as a concrete example. This program was initiated at the onset of the pandemic in March 2020 and continued for two years, leading to a doubling of the Fed's securities holdings to about $8.5 trillion as of March 2022. QE4 was initially aimed at mitigating strains in markets for Treasuries and agency mortgage-backed securities but was subsequently aimed more broadly at supporting market functioning and providing monetary stimulus. Nonetheless, QE4 did not have any notable benefits in reducing term premiums. Moreover, since the securities purchases were financed by expanding the Fed's short-term liabilities, QE4 amplified the interest rate risk associated with the publicly-held debt of the consolidated federal government. Our simulation analysis indicates that QE4 is likely to reduce the Federal Reserve's remittances to the U.S. Treasury by about $760 billion over the next ten years.


Desperate Capital Breeds Productivity Loss: Evidence from Public Pension Investments in Private Equity
Vrinda Mittal
Columbia University Working Paper, November 2022

Abstract:

I study the effects of private equity (PE) buyouts on labor productivity using a novel micro-data on investments in PE funds and PE buyout deals, combined with confidential Census data. I show that while PE increased productivity at target firms until 2011, it substantially decreased productivity post 2011. In the time series, the decrease in labor productivity is correlated with an increase in capital from the most underfunded public pensions. In the cross-section, I show that firms financed predominantly by the most underfunded public pensions experience a -5.2% annual change in labor productivity, as compared to firms financed by other investors which experience a +5.2% annual change. Firms supported by low quality PE funds face productivity decreases. The key mechanism is the notion of desperate capital, where the most underfunded public pensions allocate capital to low quality GPs, and realize lower PE returns. I introduce a novel instrument of public unionization rates to establish support for underfunded positions causing selection into low quality GPs, which ultimately leads to capital misallocation within private markets.


Measuring the size and dynamics of U.S. state-level shadow economies using a dynamic general equilibrium model with trends
Emily Marshall et al.
Journal of Macroeconomics, forthcoming 

Abstract:

We use a two-sector dynamic deterministic general equilibrium model that specifically accounts for trends among time-series variables to estimate the size of the shadow economy for the 50 U.S. states from 1999 to 2019, following Solis-Garcia and Xie (2018, 2022). This paper improves on existing measures of the state-level shadow economy (such as the multiple indicators, multiple causes (MIMIC) methodology by Wiseman (2013a)). In particular, this new measure is based on theoretical foundations, extends the previous measure to include the Great Recession, includes dollar value estimates of the shadow economy, and produces considerably more variation over time and across states. Furthermore, we explore determinants of this new shadow economy measure using a panel vector autoregressive model and find that, on average, states with higher levels of economic freedom, lower regulatory barriers, and larger real GDP have smaller shadow economies. States with bigger governments, on average, have larger shadow economies, and the effect of corruption on shadow economic activity is non-linear, with a positive initial and subsequent negative impact.


Government Contracting, Labor Intensity, and the Local Effects of Fiscal Consolidation: Evidence from the Budget Control Act of 2011
Timothy Komarek, Kyle Butts & Gary Wagner
Journal of Urban Economics, November 2022

Abstract:

The U.S. federal government awards billions of dollars of contracts annually to private-sector firms to produce a wide range of goods and services. However, little is known about how a reduction in federal procurement, also referred to as fiscal consolidation, impacts local labor markets. In this paper, we leverage the institutional details of the Budget Control Act of 2011 (BCA) and highly detailed transaction-level data for procurement by all federal agencies to estimate the effect of fiscal consolidation on local employment and wages. Our identification strategy uses a shift-share instrument and is based on the exogeneity of the BCA-induced spending cuts across industries, i.e. exogenous shocks. Our results show that relative to wages, employment appears to be the key margin for local labor market adjustment in the wake of consolidation. In particular, we estimate that a $1 million reduction in federal procurement spending reduces employment by more than 10 jobs, while a $1 decline in spending only reduces aggregate wages by about $0.19. We also show that the local labor market effects of consolidation depend on the sectors receiving federal dollars. Federal contracts in high labor-intensive industries reduce employment by more than those in low labor-intensive industries, while the effect on aggregate wages is relatively modest and constant across sectors. These findings have implications both for understanding regional economic development and for improving regional resiliency to negative demand shocks.


The Macroeconomic Implications of US Market Power in Safe Assets
Jason Choi, Rishabh Kirpalani & Diego Perez
NBER Working Paper, December 2022

Abstract:

The US government is the dominant supplier of global safe assets and faces a downward-sloping demand for its debt. In this paper, we ask if the US exercises its market power when issuing debt and study its macroeconomic consequences. We develop a model of the global economy in which US public debt generates a non-pecuniary value for its holders, analyze the equilibrium in which the US government is the monopoly provider of this safe asset, and contrast this case with the one in which the US government acts as a price taker. We use variation in estimated demand elasticities for US debt during high- and low-volatility regimes to empirically distinguish between these two models and find that the data reject the price-taking behavior in favor of the monopoly one. We then quantify the distortions due to market power and find that it generates a significant underprovision of safe assets, a sizable markup in the convenience yield, and large welfare benefits for the US to the detriment of the rest of the world. Finally, we study the implications of increasing competition in safe assets from other sovereigns and private institutions.


The Geography of US Homeownership Tax Expenditures
Casey Dawkins
Journal of Housing Economics, forthcoming 

Abstract:

US homeowners receive income tax deductions for mortgage interest payments and state and local property taxes, pay no income tax on their home's imputed rental income, and may exclude most of the capital gains earned from a home sale. This paper characterizes the geographic distribution of the tax expenditures from these tax preferences using a new method that exploits household-level microdata from the 2019 Census Public Use Microdata Sample to simulate homeownership tax expenditures at the Public Use Microdata Area level. I estimate that in the 2018 tax year, $226.05 billion in taxable revenue was lost to the mortgage interest deduction ($28.20 billion), the property tax deduction ($9.51 billion), the exclusion of net imputed rental income ($134.82 billion), and the partial exclusion of housing-related capital gains ($53.52 billion). Large metropolitan areas and neighborhoods with high housing prices receive subsidies in excess of the cost of funding homeowner tax preferences, while the burden of homeowner tax preferences falls heavily on rural areas. If federal income tax law reverted to what existed just prior to the 2017 Tax Cuts and Jobs Act, these geographic disparities would be exacerbated.


Externalities of residential property flipping
Lingxiao Li, Abdullah Yavas & Bing Zhu
Real Estate Economics, forthcoming 

Abstract:

This study investigates whether flipping activities impose an externality on the transaction prices of the neighboring nonflipped properties. Using a data set of residential property transactions in Clark County, Nevada for the period 2003-2013, we find that flippers impose a significant positive impact on the price of neighboring nonflipped properties in an up market, but a significant negative effect in a down market. This procyclical impact of flipping activity contributes to the volatility of housing prices, hence magnifying boom and bust cycles and increasing the likelihood of a mortgage crisis.


Taxes and the Labor Supply of the Stars
Daniel Keniston & Abigail Allison Peralta
NBER Working Paper, December 2022 

Abstract:

Do high taxes cause superstars to work less? We test this hypothesis using complete data on Hollywood movie stars' labor supply from 1927 to 2014. Changes to marginal tax rates in high tax brackets have no significant effect on the number of films a movie star makes each year. However, in years with high taxes, stars produce more highly rated movies with award-winning directors, potentially substituting prestigious films for pecuniary gains.


Watch What They Do, Not What They Say: Estimating Regulatory Costs from Revealed Preferences
Adrien Alvero, Sakai Ando & Kairong Xiao
Review of Financial Studies, forthcoming 

Abstract:

We show that distortion in the size distribution of banks around regulatory thresholds can be used to identify costs of bank regulation. We build a structural model in which banks can strategically bunch their assets below regulatory thresholds to avoid regulations. The resultant distortion in the size distribution of banks reveals the magnitude of regulatory costs. Using U.S. bank data, we estimate the regulatory costs imposed by the Dodd-Frank Act. Although the estimated regulatory costs are substantial, they are significantly lower than banks' self-reported estimates.


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