Findings

Unbudgeted

Kevin Lewis

March 23, 2020

21st Century Macro
Narayana Kocherlakota
NBER Working Paper, February 2020

Abstract:

In the 21st century, many key macroeconomic variables in the developed world have been persistently low, including inflation, output, growth, interest rates (both real and nominal), and labor share. I consider a class of standard representative agent rational expectations models in which fundamentals are deterministic and constant over time. I show that for any level of nominal frictions (no matter how small) and for any monetary policy rule (regardless of how active), there is a large set of stochastic equilibria that exhibit permanently low inflation, low output, low labor share, and low nominal interest rates. If the Phillips curve is sufficiently flat, then these equilibria also exhibit low growth and real interest rates. 


The Impact of Court-Ordered District Elections on City Finances
Richard Boylan
Journal of Law and Economics, November 2019, Pages 633-661

Abstract:

In 1972, the representation of blacks on city councils was only half of their share of the US population. Starting in 1975, courts sought to increase minority representation by ruling at-large city council elections unconstitutional in jurisdictions with a history of voter discrimination. Economic theory suggests that this court-induced shift toward district elections could lead to a common-pool problem and thus to greater government noninfrastructure spending. This paper provides empirical evidence that cities that adopt district elections increase noninfrastructure spending, thus providing empirical support for the common-pool problem. Since political institutions seldom change, the shift of US cities to district elections may be long-lasting, which suggests that the goals of equal representation and effective governance may be at odds.


Can Low Retirement Savings Be Rationalized?
Jason Scott et al.
NBER Working Paper, February 2020

Abstract:

Simple presentations of the life cycle model often suggest a constant level of real consumption in retirement. Similarly, financial planners commonly suggest that people save for retirement in such a way as to enable them to maintain a level retirement standard of living equal to their standard of living while working. However, constant consumption with age is only optimal under the precise and unlikely condition that the subjective rate of time preference is equal to the real interest rate. Most people exhibit a positive rate of pure time preference and additionally discount the future by both mortality and morbidity risks. In comparison, the real interest rate is roughly zero percent and the term structure of interest rates suggests that this condition is likely to persist. These considerations suggest that optimal consumption in the life cycle model declines with age. This finding has major implications for optimal retirement saving. For instance, we find that for many, perhaps most, people in the bottom half of the lifetime earnings distribution, it is optimal to spend out their retirement wealth well before death and to live on Social Security alone after that. Very low earners may find it optimal to not engage in retirement saving at all. 


The Macroeconomic Effects of the Tax Cuts and Jobs Act
Filippo Occhino
Federal Reserve Working Paper, December 2019

Abstract:

This paper studies the macroeconomic effects of seven key TCJA provisions, including the tax cuts for individuals and businesses, the bonus depreciation of equipment, the amortization of R&D expenses, and the limits on interest deductibility. I use a dynamic general equilibrium model with interest deductibility and accelerated depreciation. I find that, initially, the tax reform had a small positive impact on output and investment. In the medium term, however, the effect on output will diminish, and the effect on investment will turn negative. The tax reform will depress investment in R&D. Government debt will surge. 


Does Big Government Hurt Growth Less in High-Trust Countries?
Andreas Bergh & Christian Bjørnskov
Contemporary Economic Policy, forthcoming

Abstract:

Social trust is linked to both public sector size and to economic growth, thereby helping to explain how some countries combine high taxes with high levels of economic growth. This paper examines if social trust insulates countries against the negative effects of public sector size on growth, documented in several studies. We note that the effect is theoretically ambiguous. In panel data from 66 countries across 40 years, we find no robust evidence of insulation effects: when excluding countries with uncertain trust scores, our results suggest that big government hurts growth also in high‐trust countries, and that the mechanism is by lowering private investments. 


Stirrings of Revolt: Regressive Levies, the Pocketbook Squeeze, and the 1960s Roots of the 1970s Tax Revolt
Josh Mound
Journal of Policy History, April 2020, Pages 105-150

Abstract:

In most accounts, the modern American “tax revolt” begins with Proposition 13, passed by California voters in June 1978. In this telling, the revolt represents an antigovernment, antiliberal shift among white homeowners instrumental in the “rise of the right” and the fall of the “New Deal order” that culminated in Ronald Reagan’s election in 1980 and his subsequent tax cuts. This article challenges that account by demonstrating that the revolt began more than a decade before Prop 13 as approval rates for local levies and bonds reached all-time lows. This local revolt was not limited to whites, nor did it portend rising conservatism. Instead, it was rooted in lower- and middle-income Americans’ frustrations with steep rises in unfair, regressive taxes during the post–World War II decades. The Kennedy-Johnson “Growth Liberals,” who were busy cutting progressive federal taxes at the same time that regressive state and local taxes were soaring, missed this pocketbook squeeze, thereby setting the stage for later events like Prop 13. 


You Don't Always Get What You Want: The Effect of Financial Incentives on State Fiscal Health
Bruce McDonald, J.W. Decker & Brad Johnson
Public Administration Review, forthcoming

Abstract:

Governments frequently use financial incentives to encourage the creation, expansion, or relocation of businesses within their borders. Research on financial incentives gives little clarity as to what impact these incentives may have on governments. While incentives may draw in more economic growth, they also pull resources from government coffers, and they may commit governments to future funding for public services that benefit the incentivized businesses. The authors use a panel of 32 states and data from 1990 to 2015 to understand how incentives affect states’ fiscal health. They find that after controlling for the governmental, political, economic, and demographic characteristics of states, incentives draw resources away from states. Ultimately, the results show that financial incentives negatively affect the overall fiscal health of states. 


Evaluating State and Local Business Tax Incentives
Cailin Slattery & Owen Zidar
NBER Working Paper, January 2020

Abstract:

This essay describes and evaluates state and local business tax incentives in the United States. In 2014, states spent between $5 and $216 per capita on incentives for firms in the form of firm-specific subsidies and general tax credits, which mostly target investment, job creation, and research and development. Collectively, these incentives amounted to nearly 40% of state corporate tax revenues for the typical state, but some states' incentive spending exceeded their corporate tax revenues. States with higher per capita incentives tend to have higher state corporate tax rates. Recipients of firm-specific incentives are usually large establishments in manufacturing, technology, and high-skilled service industries, and the average discretionary subsidy is $178M for 1,500 promised jobs. Firms tend to accept subsidy deals from places that are richer, larger, and more urban than the average county, and poor places provide larger incentives and spend more per job. Comparing “winning” and runner-up locations for each deal in a bigger and more recent sample than in prior work, we find that average employment within the 3-digit industry of the deal increases by roughly 1,500 jobs. While we find some evidence of direct employment gains from attracting a firm, we do not find strong evidence that firm-specific tax incentives increase broader economic growth at the state and local level. Although these incentives are often intended to attract and retain high-spillover firms, the evidence on spillovers and productivity effects of incentives appears mixed. As subsidy-giving has become more prevalent, subsidies are no longer as closely tied to firm investment. If subsidy deals do not lead to high spillovers, justifying these incentives requires substantial equity gains, which are also unclear empirically. 


State Tax Policy, Municipal Choice, and Local Economic Development Outcomes: A Structural Equation Modeling Approach to Performance Assessment
Jeremy Hall & David Kanaan
Public Administration Review, forthcoming

Abstract:

Do state policies that allow municipal governments to levy economic development taxes stimulate economic development? Texas allows municipal‐level economic development corporation dedicated local option sales taxes (LOST), effectively diverting revenue from general fund purposes exclusively toward local economic development efforts. Drawing from a performance management framework focused on policy outcomes, the authors use a structural equation model to estimate the effects of local tax choices on economic development performance. The results reveal that municipalities implementing the 4a LOST tax choice (traditional industry‐related efforts) experienced a significant and positive effect on economic development as measured through a latent construct assessing five years of growth in population, property value, and new home construction. The observed impact of tax choice, though weaker than preexisting municipal economic capacity, suggests that states and municipalities can influence economic development activity by permitting municipal choice in the allocation of tax revenues dedicated to economic development. 


Unintended Consequences of Nevada’s Ninety-Percent Prevailing Wage Rule
Kevin Duncan & Jeffrey Waddoups
Labor Studies Journal, forthcoming

Abstract:

In 2015, the State of Nevada reduced prevailing wage rates on education-related construction to 90 percent of the applicable rate for other state-funded construction. The examination of projects built for Clark County School District between 2009 and 2108 indicates that Nevada’s wage policy has no statistically significant effect on school construction costs or bid competition, taking into consideration bids placed before and after the 2015 policy change. However, prevailing wage reductions on education projects motivated union contractors to pursue other opportunities as Nevada’s building industry expanded after 2015. Reduced participation in district bidding by union contractors contributed to a 25-percent overall decrease in bid competition and a 20-percent increase in bid costs following the 2015 policy change. While the goal of the 90-percent prevailing wage rule was to reduce the cost of building public schools, unforeseen consequences contributed to decreased bid competition and increased construction costs.


Take the Q Train: Value Capture of Public Infrastructure Projects
Arpit Gupta, Stijn Van Nieuwerburgh & Constantine Kontokosta
NBER Working Paper, February 2020

Abstract:

Transit infrastructure is a critical asset for economic activity yet costly to build in dense urban environments. We measure the benefit of the Second Avenue Subway extension in New York City by analyzing local real estate prices which capitalize the benefits of transit spillovers. We find that price increase by 10%, creating $7 billion in new property value. Using cell phone ping data, we document substantial reductions in commuting time especially among subway users, offering a plausible mechanism for the price gains. Higher prices reflect both higher rents and lower risk. Infrastructure improvements thus lower the riskiness of real estate investments. Only 30% of the private value created by the subway is captured by local government through higher property tax revenue, and is insufficient to cover the cost of the subway. Targeted property tax increases may help capture more of the value created, and serve as a useful funding tool. 


The Impact of Open Data on Public Procurement
Raphael Duguay, Thomas Rauter & Delphine Samuels
MIT Working Paper, November 2019

Abstract:

We examine how the increased accessibility of public purchasing data affects competition, prices, contract allocations, and contract performance in government procurement. The European Union recently made its already public but difficult-to-access information about the process and outcomes of procurement awards available for bulk download in a user-friendly format. Comparing government contracts above EU publication thresholds with contracts that are not, we find that increasing the public accessibility of procurement data raises the likelihood of competitive bidding processes, increases the number of bids per contract, and facilitates market entry by new vendors. Following the open data initiative, procurement prices decrease and EU government agencies are more likely to award contracts to the lowest bidder. However, the increased competition comes at a cost ─ firms execute government contracts with more delays and ex-post price renegotiations. These effects are stronger for new vendors, complex procurement projects, and contracts awarded solely based on price. Overall, our results suggest that open procurement data facilitates competition and lowers ex-ante procurement prices but does not necessarily increase allocative efficiency in government contracting.


Sign-in to your National Affairs subscriber account.


Already a subscriber? Activate your account.


subscribe

Unlimited access to intelligent essays on the nation’s affairs.

SUBSCRIBE
Subscribe to National Affairs.