Government Spending and Regulation
Global effects of fiscal stimulus during the crisis
Charles Freedman, Michael Kumhof, Douglas Laxton, Dirk Muir & Susanna Mursula
Journal of Monetary Economics, forthcoming
Abstract:
The IMF's Global Integrated Monetary and Fiscal Model is used to compute short-run multipliers of fiscal stimulus measures and long-run crowding-out effects of higher debt. Multipliers of two-year stimulus range from 0.2 to 2.2 depending on the fiscal instrument, the extent of monetary accommodation and the presence of a financial accelerator mechanism. A permanent 10 percentage point increase in the U.S. debt to GDP ratio raises the U.S. tax burden and world real interest rates in the long run, thereby reducing U.S. and rest of the world output by 0.3 to 0.6 percent and 0.2 to 0.3 percent, respectively.
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Social Welfare Expenditures in the United States and the Nordic Countries: 1900-2003
Price Fishback
NBER Working Paper, May 2010
Abstract:
The extent of social expenditures in the U.S. and the Nordic Countries is compared in the early 1900s and again in the early 2000s. The common view that America spends much less on social welfare than the Nordic countries does not survive closer inspection when we consider the differences in the structures of social expenditures. The standard comparison examines gross social expenditures. After adjustments for direct and indirect taxes paid, the net social expenditures in the Nordic countries are much closer to American levels. Inclusion of mandatory and private social expenditures raises the American share of GDP devoted to social expenditures to rank among the middle of the Nordic countries. Per capita net public social expenditures in the U.S. rank behind only Sweden. Add in the private spending, and per capita spending in the U.S. is higher than in all of the Nordic countries. Finally, I document the enormous diversity across time and place in public social expenditures in the U.S. in the early 1900s and circa 1990.
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Frederic Pryor
Economic Systems, March 2010, Pages 91-104
Abstract:
This essay tests Milton Friedman's conjecture that capitalism is a necessary condition for political freedom. For the decade around 2000 indices of the degree of capitalism and the degree of political freedom are highly correlated and provide plausibility for Friedman's conjecture. In looking at changes over time in the nineteenth century, however, the analysis refutes Friedman's conjecture. These apparently contradictory results are reconciled by showing that both capitalism and freedom are related to such variables as the educational level of the population so that, although not causally tied, they are correlated in a cross-national comparison.
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Stefano Fiori
Constitutional Political Economy, June 2010, Pages 145-170
Abstract:
Herbert A. Simon acknowledged Friedrich A. Hayek as a founder of the notion of bounded rationality; yet Simon considered Hayek's perspective incomplete, and, more in general, their views on market mechanisms, planning, and organization exhibit considerable differences. The comparison between these authors sheds light on Simon's interpretation of planning, which emerges within his theory of organization (and not in traditional debates on socialism). Contrary to Hayek, he maintained that planning, in specific circumstances, is more advantageous than the market; and in both administration and organization, it involves a decentralized structure based on near independent sub-units. Decentralization of decisions also appears in social planning, which evolves through continuous interactions among planners (i.e., agents and institutions), and it is a process connoted by the absence of "fixed goals". Finally, Simon defined modern economies more in terms of "organizational economies" than in those of "market economies" and this highlights a further difference with respect to the Austrian economist. This leads to analysis of the nature of organizations as hierarchical and "near-decomposable" structures, which refers to Simon's theory of complexity and gives an epistemological explanation to the relation between centralization and decentralization.
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How to reduce unemployment: A new policy proposal
Roger Farmer
Journal of Monetary Economics, forthcoming
Abstract:
This paper uses a model with a continuum of equilibrium steady state unemployment rates to explore the effectiveness of fiscal policy. The existence of multiple steady state equilibria is explained by the presence of search and recruiting costs. I use the model to explain the current financial crisis as a shift to a high unemployment equilibrium, induced by the self-fulfilling beliefs of market participants about asset prices. I ask two questions. 1) Can fiscal policy help us out of the crisis? 2) Is there an alternative to fiscal policy that is less costly and more effective? The answer to both questions is yes.
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Estimating the Firm's Labor Supply Curve in a "New Monopsony" Framework: Schoolteachers in Missouri
Michael Ransom & David Sims
Journal of Labor Economics, April 2010, Pages 331-355
Abstract:
In the context of certain dynamic models, it is possible to infer the elasticity of labor supply to the firm from the elasticity of the quit rate with respect to the wage. Using this property, we estimate the average labor supply elasticity to public school districts in Missouri. We leverage the plausibly exogenous variation in prenegotiated district salary schedules to instrument for actual salary. These estimates imply a labor supply elasticity of about 3.7, suggesting that school districts possess significant market power. The presence of monopsony power in this teacher labor market may be partially explained by its institutional features.
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The Micro-geography of Tax Avoidance: Evidence from Littered Cigarette Packs in Chicago
David Merriman
American Economic Journal: Economic Policy, May 2010, Pages 61-84
Abstract:
The large tax differentials between Chicago and neighboring jurisdictions provide an incentive for cigarette tax avoidance. Data from a random sample of cigarette packs littered in Chicago reveals a startling degree of tax avoidance: three-quarters did not display a Chicago tax stamp. Also, the $2.68 difference between the tax in Chicago and surrounding counties decreases the probability of a local stamp by almost 60 percent, and a one mile increase in distance to the lower-tax state border increases the probability a pack of a local stamp by about one percent. These results are consistent with the predictions of economic theory.
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Andrew Ang, Vineer Bhansali & Yuhang Xing
NBER Working Paper, May 2010
Abstract:
Build America Bonds (BABs) are a new form of municipal financing introduced in 2009. Investors in BAB municipal bonds receive interest payments that are taxable, but issuers receive a subsidy from the U.S. Treasury. The BAB program has succeeded in lowering the cost of funding for state and local governments with BAB issuers obtaining finance 54 basis points lower, on average, compared to issuing regular municipal bonds. For institutional investors, BAB issue yields are 116 basis points higher than comparable Treasuries and 88 basis points higher than comparable highly rated corporate bonds. For individual investors, BABs represent poor deals compared to regular municipal bonds. Thus, on average the Federal government subsidy disadvantages individual U.S. taxpayers, who are the main holders of municipal bonds, and benefits new entrants in the municipal bond market.
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Public Provision of Private Goods and Nondistortionary Marginal Tax Rates
Sören Blomquist, Vidar Christiansen & Luca Micheletto
American Economic Journal: Economic Policy, May 2010, Pages 1-27
Abstract:
Using an optimal taxation model combined with a previously neglected scheme of public provision of private goods, we show that there is an efficiency gain if public provision of selected goods replaces market purchases and that efficiency requires marginal income tax rates to be higher than if the goods were purchased in the market. Part of the marginal tax serves the same role as a market price and conveys information about a real social cost of working more hours. It might be that economies with higher marginal tax rates have less severe distortions than economies with lower marginal tax rates.
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Will Governments Fix What Markets Cannot? Overconfidence and the Demand for Regulation
Patrick Warren & Daniel Wood
Clemson University Working Paper, May 2010
Abstract:
Market forces will sometimes "fix" consumer biases through competition that improves the welfare of biased consumers, and sometimes will not. Likewise, government regulation will sometimes fix consumer biases by making exploitative transactions difficult, and sometimes will not. We show that in the case of markets for goods with add-ons (Gabaix and Laibson, 2006) the instances where markets or government will fix biases (in our model, consumer overconfidence about add-on services such as overdraft fees) are correlated. In the same cases where markets are inefficient due to the prevalence of biased consumers, voters will not demand efficiency-enhancing regulations. This is because consumer biases have two effects: they produce deadweight losses, and they redistribute from biased consumers to less-biased consumers. These distributional consequences can both prevent equilibrium competition by firms from enhancing efficiency and prevent equilibrium policy choices by citizens from regulating away inefficient trade.
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"Unfunded liabilities" and uncertain fiscal financing
Troy Davig, Eric Leeper & Todd Walker
Journal of Monetary Economics, forthcoming
Abstract:
A rational expectations framework is developed to study the consequences of alternative means to resolve the "unfunded liabilities" problem - unsustainable exponential growth in federal Social Security, Medicare, and Medicaid spending with no plan to finance it. Resolution requires specifying a probability distribution for how and when monetary and fiscal policies will change as the economy evolves through the 21st century. Beliefs based on that distribution determine the existence of and the nature of equilibrium. We consider policies that in expectation combine reaching a fiscal limit, some distorting taxation, modest inflation, and some reneging on the government's promised transfers. In the equilibrium, inflation-targeting monetary policy cannot successfully anchor expected inflation. Expectational effects are always present, but need not have large impacts on inflation and interest rates in the short and medium runs.
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Trust and technology: The social foundations of aviation regulation
John Downer
British Journal of Sociology, March 2010, Pages 83-106
Abstract:
This paper looks at the dilemmas posed by 'expertise' in high-technology regulation by examining the US Federal Aviation Administration's (FAA) 'type-certification' process, through which they evaluate new designs of civil aircraft. It observes that the FAA delegates a large amount of this work to the manufacturers themselves, and discusses why they do this by invoking arguments from the sociology of science and technology. It suggests that - contrary to popular portrayal - regulators of high technologies face an inevitable epistemic barrier when making technological assessments, which forces them to delegate technical questions to people with more tacit knowledge, and hence to 'regulate' at a distance by evaluating 'trust' rather than 'technology'. It then unravels some of the implications of this and its relation to our theories of regulation and 'regulatory capture'.
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Valuing Incremental Highway Capacity in a Network
Allen Klaiber & Kerry Smith
NBER Working Paper, May 2010
Abstract:
The importance of increments to an existing highway system depends upon their contributions to the accessibility provided by the existing network. Nearly 40 years ago, Mohring [1965] suggested this logic for planning optimal highway investment programs. He argued it could be implemented by measuring the quasi-rents generated by specific additions to an existing roadway system. This paper uses a unique set of additions to a loop roadway in metropolitan Phoenix, together with detailed records of housing sales over the past decade, to meet this need. We find that estimated increases in capitalized housing values due to four segments added during this period range from 73 to over 273 million dollars per mile of the roadway addition.
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Consumption tax competition among governments: Evidence from the United States
Jan Jacobs, Jenny Ligthart & Hendrik Vrijburg
International Tax and Public Finance, June 2010, Pages 271-294
Abstract:
The paper contributes to a small but growing literature that estimates tax reaction functions of governments competing with other governments. We analyze consumption tax competition between US states, employing a panel of state-level data for 1977-2003. More specifically, we study the impact of a state's spatial characteristics (i.e., its size, geographic position, and border length) on the strategic interaction with its neighbors. For this purpose, we calculate for each state an average effective consumption tax rate, which covers both sales and excise taxes. In addition, we pay attention to dynamics by including lagged dependent variables in the tax reaction function. We find overwhelming evidence for strategic interaction among state governments, but only partial support for the effect of spatial characteristics on tax setting. Tax competition seems to have lessened in the 1990s compared to the early 1980s.