Chapter of Bankruptcy
Cheol-Sung Lee, Young-Bum Kim & Jae-Mahn Shim
American Sociological Review, February 2011, Pages 100-124
Abstract:
In this study, we investigate how structural economic changes constrain an equality project, the public-sector expansion strategy. First, we describe a three-stage process in which a growing productivity gap between the private-manufacturing and public-service sectors disrupts traditional class solidarity. We contend that emerging conflicts between private and public sectors due to public-sector expansion and a growing inter-sectoral productivity gap eventually lead to employment and budget crises, as well as the weakening of coordinated wage-setting institutions. Furthermore, political, institutional, and economic transformations originating from sectoral cleavages and imbalance lead to increased income inequality. We test this argument using an unbalanced panel dataset on 16 advanced industrial democracies from 1971 to 2003. We find that public-sector employment has a strong negative effect on income inequality when the productivity gap between sectors is low. In such situations, public-sector employment fulfills its promise of equality and full employment. However, as the inter-sectoral productivity gap increases, the negative effect of public-sector expansion on income inequality evaporates. The findings suggest that severely uneven productivity gaps due to different degrees of technological innovations significantly weaken and limit the effectiveness of left-wing governments' policy interventions through public-service expansion.
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Lessons from the Kibbutz on the Equality-Incentives Trade-Off
Ran Abramitzky
Journal of Economic Perspectives, Winter 2011, Pages 185-208
Abstract:
The first kibbutz was established southwest of the Sea of Galilee in 1910, but the vast majority of kibbutzim were established in the 1930s and 1940s, shortly before the creation of the state of Israel in 1948. Founders aimed to create a "new human being" who cared about the group more than about himself, a homo sociologicus who would challenge the selfish homo economicus. This idealistic view can explain many of the key features of kibbutzim: equal sharing in the distribution of income; no private property; a noncash economy; communal dining halls where members ate their meals together; high provision of local public goods for use by kibbutz members; separate communal residences for children outside their parents homes, which were supposed to free women from their traditional role in society and allow them to be treated equally with men; collective education to instill socialist and Zionist values; communal production, whereby kibbutz members worked inside their kibbutzim in agriculture or in one of the kibbutz plants; and no use of hired labor from outside kibbutzim-because hiring labor was considered "exploitation" under the reigning socialist ideology. To an economist, steeped in thinking about incentives that self-interested individuals face, there are three reasons why an equal-sharing arrangement of this sort seems unlikely to last. First, high-ability members have an incentive to exit equal-sharing arrangements to earn a wage premium - so-called "brain drain." Second, low-ability individuals have an incentive to enter equal-sharing arrangements so that they can be subsidized by more-able individuals - so-called adverse selection. Third, in context of equal sharing, shirking and free-riding are likely to be prevalent. However, kibbutzim have survived successfully for the past century and currently consist of 120,000 members living in 268 kibbutzim. In a number of ways, the kibbutzim offer an exceptional environment to examine the potential trade-off between equality and incentives.
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Health Care Spending Growth and the Future of U.S. Tax Rates
Katherine Baicker & Jonathan Skinner
NBER Working Paper, February 2011
Abstract:
The fraction of GDP devoted to health care in the United States is the highest in the world and rising rapidly. Recent economic studies have highlighted the growing value of health improvements, but less attention has been paid to the efficiency costs of tax-financed spending to pay for such improvements. This paper uses a life cycle model of labor supply, saving, and longevity improvement to measure the balanced-budget impact of continued growth in the Medicare and Medicaid programs. The model predicts that top marginal tax rates could rise to 70 percent by 2060, depending on the progressivity of future tax changes. The deadweight loss of the tax system is greater when the financing is more progressive. If the share of taxes paid by high-income taxpayers remains the same, the efficiency cost of raising the revenue needed to finance the additional health spending is $1.48 per dollar of revenue collected, and GDP declines (relative to trend) by 11 percent. A proportional payroll tax has a lower efficiency cost (41 cents per dollar of revenue averaged over all tax hikes, a 5 percent drop in GDP) but more than doubles the share of the tax burden borne by lower income taxpayers. Empirical support for the model comes from analysis of OECD country data showing that countries facing higher tax burdens in 1979 experienced slower health care spending growth in subsequent decades. The rising burden imposed by the public financing of health care expenditures may therefore serve as a brake on health care spending growth.
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Transfer Program Complexity and the Take-Up of Social Benefits
Henrik Jacobsen Kleven & Wojciech Kopczuk
American Economic Journal: Economic Policy, February 2011, Pages 54-90
Abstract:
We model complexity in social programs as a by-product of the screening process. While a more rigorous screening process may improve targeting efficiency, the associated complexity is costly to applicants and induces incomplete take-up. We integrate the study of take-up with the study of rejection (Type I) and award (Type II) errors, and characterize optimal programs when policy makers choose screening intensity (and complexity), an eligibility rule, and a benefit level. Consistent with many real-world programs, optimal programs feature high complexity, incomplete take-up, classification errors of both Type I and II and, in some cases, "excessive" benefits.
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The role of politics and economics in the allocation of federal stimulus spending
Roy Howsen & Stephen Lile
Applied Economics Letters, February 2011, Pages 263-266
Abstract:
This study identifies the political and economic variables that explain differences among US states in per capita funding resulting from the American Recovery and Reinvestment Act (ARRA) of 2009. We find a marginal statistically significant negative relationship between states that have been traditionally Democratic (Blue states) versus those that have traditionally been Republican (Red states). Additionally, we find a highly statistically significant negative relationship between states that were traditionally Republican but voted for President Obama in the 2008 election (Blue states) and traditionally Red states. Furthermore, our findings suggest that there is a statistically significant positive relationship between union representation for a state and per capita funding and between per capita electoral votes and per capita funding. With regard to economic variables, we find that a state's unemployment rate has a positive and statistically significant influence with regard to funding, but a state's poverty rate has no statistically significant impact on funding.
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Targeted Transfers and the Fiscal Response to the Great Recession
Hyunseung Oh & Ricardo Reis
NBER Working Paper, February 2011
Abstract:
Between 2007 and 2009, government expenditures increased rapidly across the OECD countries. While economic research on the impact of government purchases has flourished, in the data, about three quarters of the increase in expenditures in the United States (and more in other countries) was in government transfers. We document this fact, and show that the increase in U.S. spending on retirement, disability, and medical care has been as high as the increase in government purchases. We argue that future research should focus on the positive impact of transfers. Towards this, we present a model in which there is no representative agent and Ricardian equivalence does not hold because of uncertainty, imperfect credit markets, and nominal rigidities. Targeted lump-sum transfers are expansionary both because of a neoclassical wealth effect and because of a Keynesian aggregate demand effect.
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Pensions and Household Wealth Accumulation
Gary Engelhardt & Anil Kumar
Journal of Human Resources, January 2011, Pages 203-236
Abstract:
Economists have long suggested that higher private pension benefits "crowd out" other sources of household wealth accumulation. We exploit detailed information on pensions and lifetime earnings for older workers in the 1992 wave of the Health and Retirement Study and employ an instrumental-variable (IV) identification strategy to estimate crowd-out. The IV estimates suggest statistically significant crowd-out: each dollar of pension wealth is associated with a 53-67 cent decline in nonpension wealth. With less precision, we use an instrumental-variable quantile regression estimator and find that most of the effect is concentrated in the upper quantiles of the wealth distribution.
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U.S. Consumer Demand for Prize-Linked Savings: New Evidence on a New Product
Peter Tufano, Jan-Emmanuel De Neve & Nick Maynard
Economics Letters, forthcoming
Abstract:
We report on the potential American demand for prize-linked savings, a savings account that also awards prizes. Our survey data suggests significant interest among individuals with little actual savings, without regular saving habits, who play lotteries extensively, and are optimistic.
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Earmarking and the business cycle: The case of state spending on higher education
Rachana Bhatt, Jonathan Rork & Mary Beth Walker
Regional Science and Urban Economics, forthcoming
Abstract:
Recent economic events have created severe budget problems for state governments, and one area seemingly affected by this fiscal crisis is state funding for higher education. State governments have the ability to alter funding to higher education mostly through general fund contributions and earmarked revenue. This paper examines trends in state higher education appropriations, with a specific focus on the relationship between these two funding sources. We find that on average, total appropriations have actually increased over the past decade, and moreover, earmarked revenue has constituted an increasing share of higher education funding, while general fund contributions have been declining. Our regression analysis suggests the magnitude of the fungibility between the two sources is substantial, but somewhat surprisingly, does not differ across recessions and expansions.
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Net Fiscal Stimulus During the Great Recession
Joshua Aizenman & Gurnain Kaur Pasricha
NBER Working Paper, February 2011
Abstract:
This paper studies the patterns of fiscal stimuli in the OECD countries propagated by the global crisis. Overall, we find that the USA net fiscal stimulus was modest relative to peers, despite it being the epicenter of the crisis, and having access to relatively cheap funding of its twin deficits. The USA is ranked at the bottom third in terms of the rate of expansion of the consolidated government consumption and investment of the 28 countries in sample. Contrary to historical experience, emerging markets had strongly countercyclical policy during the period immediately preceding the Great Recession and the Great Recession. Many developed OECD countries had procyclical fiscal policy stance in the same periods. Federal unions, emerging markets and countries with very high GDP growth during the pre-recession period saw larger net fiscal stimulus on average than their counterparts. We also find that greater net fiscal stimulus was associated with lower flow costs of general government debt in the same or subsequent period.
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Property Value Assessment Growth Limits, Tax Base Erosion, and Regional In-Migration
Mark Skidmore & Mehmet Tosun
Public Finance Review, March 2011, Pages 256-287
Abstract:
In 1994, a limit on the growth of property values for tax purposes was imposed in Michigan. One consequence of the newly imposed assessment growth cap was an emerging differential in tax prices between potential new property owners and long-time property owners. The purpose this article is to examine the impact of this growing tax price differential on migration patterns. Using county level data on migration activity over the 1994-2006 period, the authors present evidence that differential tax prices resulting from the assessment growth cap have reduced in-migration.
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The Continuing Incidence of Natural Decrease in American Counties
Kenneth Johnson
Rural Sociology, forthcoming
Abstract:
In 2002, more American counties (985) experienced natural decrease than at any time in the nation's history. The incidence of natural decrease has diminished since then, but remains near record levels. It is most common in rural areas remote from metropolitan centers. Spatial concentrations exist in the Great Plains, Corn Belt, and East Texas, with scattered pockets in the Ozark-Ouachita Uplands, Upper Great Lakes, and Florida. A multivariate spatial-error regression model demonstrates that natural decrease is a consequence of the complex interaction between fertility, mortality, and migration over a protracted period and is symptomatic of fundamental changes in the demographic structure of an area. Age-structure changes resulting from protracted, age-specific migration are a primary cause of natural decrease. Temporal variations in fertility also have a significant impact, but counties experiencing natural decrease do not have fertility levels below the national average.