Positive Economics
The Economic Records of the Presidents: Party Differences and Inherited Economic Conditions
James Campbell
The Forum: A Journal of Applied Research in Contemporary Politics, April 2011
Abstract:
Several studies of the post-war American political economy find that Democratic presidents have been more successful than Republicans. Most recently, Bartels (2008) found that economic growth had been greater and that unemployment and income inequality had been lower under Democratic presidents since 1948. If true, these findings combined with the frequent success of Republicans in presidential elections pose a challenge to theories of retrospective voting and responsible party government. This reexamination of these findings indicates that they are an artifact of specification error. Previous estimates did not properly take into account the lagged effects of the economy. Once lagged economic effects are taken into account, party differences in economic performance are shown to be the effects of economic conditions inherited from the previous president and not the consequence of real policy differences. Specifically, the economy was in recession when Republican presidents became responsible for the economy in each of the four post-1948 transitions from Democratic to Republican presidents. This was not the case for the transitions from Republicans to Democrats. When economic conditions leading into a year are taken into account, there are no presidential party differences with respect to growth, unemployment, or income inequality.
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Michael Baye & Joshua Wright
Journal of Law and Economics, February 2011, Pages 1-24
Abstract:
The recent increase in the demand for expert economic analysis in antitrust litigation has improved the welfare of economists; however, the law and economics literature is silent on the effects of economic complexity or judges' economic training on judicial decision making. We use a unique data set on antitrust litigation in federal district and administrative courts during 1996-2006 to examine whether economic complexity impacts antitrust decisions and provide a novel test of the hypothesis that antitrust analysis has become too complex for generalist judges. We also examine the impact of basic economic training on judges. We find that decisions involving the evaluation of complex economic evidence are significantly more likely to be appealed, and decisions of judges trained in basic economics are significantly less likely to be appealed than are decisions by their untrained counterparts. Our analysis supports the hypothesis that some antitrust cases are too complicated for generalist judges.
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National IQ and economic outcomes
Gerhard Meisenberg
Personality and Individual Differences, forthcoming
Abstract:
One of the most consequential parts of Richard Lynn's work is the establishment of a comprehensive data set of "national IQ" for nearly all countries in the world. The present contribution demonstrates the use of this database for the explanation of two economic outcomes: (1) economic growth and level of attained wealth at the country level; and (2) income distribution in countries as measured by the Gini index. The results show that high IQ is associated not only with high per-capita GDP and fast economic growth, but also with more equal income distribution. These outcomes are not mediated by educational exposure.
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Income Redistribution in a Federal System of Governments
Roger Gordon & Julie Berry Cullen
Journal of Public Economics, forthcoming
Abstract:
Though the traditional literature in fiscal federalism argues that the Federal government should have primary responsibility for income redistribution, U.S. states are in fact actively engaged in redistribution. This paper develops a positive model of the respective roles of state and Federal governments that can rationalize this observation. Redistribution by states creates positive horizontal fiscal externalities to other states due to migration, but negative vertical fiscal externalities to the national government due to changes in reported taxable income. We forecast that states will engage in at least some redistribution, though to a lesser degree the greater are mobility relative to taxable income elasticities. The Federal government can then choose the degree of Federal redistribution to assure that the net externalities are zero. Given such policies, we then estimate the welfare weights and migration elasticities for different income groups that would generate the effective net tax schedules observed in the U.S. The parameter estimates are broadly plausible, suggesting that the model can help explain the division of responsibilities for redistribution between state and Federal governments.
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Tax Expenditures, the Size and Efficiency of Government, and Implications for Budget Reform
Leonard Burman & Marvin Phaup
NBER Working Paper, August 2011
Abstract:
One possible explanation for the difficulty in controlling the budget is that a major component of spending - tax expenditures - receives privileged status. It is treated as tax cuts rather than spending. This paper explores the implications of that misclassification and illustrates how it can lead to higher taxes, larger government, and an inefficient mix of spending (too many tax expenditures). The paper then suggests options for reform to the budget process that would explicitly incorporate and properly measure tax expenditures. It concludes by considering ways to control tax expenditures (and other spending) and the special challenges presented by tax expenditures.
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Nonlinearities in Growth: From Evidence to Policy
Ethan Cohen-Cole, Steven Durlauf & Giacomo Rondina
Journal of Macroeconomics, forthcoming
Abstract:
This paper considers the question of how one can translate evidence of nonlinearities and threshold effects in growth into policy recommendations. We argue that the current evidence of these effects, while important in terms of scholarly debates, does not readily lend itself to policy evaluation. The reasons for this are two-fold. First, the existing evidence on nonlinearities is relatively difficult to integrate into a common coherent view. Different models of nonlinearity appear in different papers; these models are often nonnested and do not present a clear alternative to linear growth models. Second, we argue that the econometric evidence of nonlinearities is often developed in ways that do not allow one to examine explicitly the effects of alternative policies on growth. We describe some recent econometric methods that can address these problems. To illustrate the utility of these methods we then study the current debate on the efficacy of aid on growth in developing countries. We find that none of our methods suggests that aid should be given to countries with better policy quality. In fact, when considering robust policies, our results strongly reject the conclusion that aid should be allocated in higher amounts to countries where the policy quality is high.
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Optimal self-employment income tax enforcement
Saki Bigio & Eduardo Zilberman
Journal of Public Economics, October 2011, Pages 1021-1035
Abstract:
Most models of optimal income tax enforcement assume that income is either random or solely remunerates labor, neglecting that auditing strategies may depend on observable inputs. This paper outlines a model to optimally monitor self-employed entrepreneurs when, in addition to reported profits, the tax collection agency also observes the number of workers employed (or any other input variable) at each firm. We show that, by conditioning the monitoring strategy only on labor input, it is optimal for the IRS to audit firms in a way that generates some empirical regularities, like the missing middle. We also show that the optimal direct mechanism can be implemented by an indirect monitoring strategy that is consistent with actual IRS practices. In particular, the IRS calculates inputted income as function of labor. Whenever an entrepreneur reports profits that are lower than inputted income, she is randomly monitored. Finally, we formalize a model of optimal presumption taxation, in which inputted income is the tax base, to compare revenue collection across tax systems.
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Jeffrey Liebman & Erzo Luttmer
NBER Working Paper, August 2011
Abstract:
This paper presents the results of a field experiment in which a sample of older workers was randomized between a treatment group that was given information about key Social Security provisions and a control group that was not. The experiment was designed to examine whether it is possible to affect individual behavior using a relatively inexpensive informational intervention about the provisions of a public program and to explore the mechanisms underlying the behavior change. We find that our relatively mild intervention (sending an informational brochure and an invitation to a web-tutorial) increased labor force participation one year later by 4 percentage points relative to the control group mean of 74 percent and that this effect is driven by a 7.2 percentage point increase among female subjects. The information intervention increased the perceived returns to working longer, especially among female respondents, which suggests that the behavioral response can be attributed at least in part to updated information about Social Security.
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Heiner Rindermann
Personality and Individual Differences, forthcoming
Abstract:
Cognitive ability theory claims that peoples' competences are decisive for economic wealth. For a large number of countries Lynn and Vanhanen (2002) have published data on mean intelligence levels and compared them to wealth and productivity indicators. The correlation between intelligence and wealth was supported by studies done by different authors using different countries and controls. Based on their pioneering research two research questions were developed: does intelligence lead to wealth or does wealth lead to intelligence or are other determinants involved? If a nation's intelligence increases wealth, how does intelligence achieve this? To answer them we need longitudinal studies and theoretical attempts, investigating cognitive ability effects at the levels of individuals, institutions and societies and examining factors which lie between intelligence and growth. Two studies, using a cross-lagged panel design or latent variables and measuring economic liberty, shares of intellectual classes and indicators of scientific-technological accomplishment, show that cognitive ability leads to higher wealth and that for this process the achievement of high ability groups is important, stimulating growth through scientific-technological progress and by influencing the quality of economic institutions. In modernity, wealth depends on cognitive resources enabling the evolution of cognitive capitalism.
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The insurance value of state Tax-and-Transfer programs
Hilary Hoynes & Erzo Luttmer
Journal of Public Economics, forthcoming
Abstract:
This paper estimates the total value that individuals derive from their state's tax-and-transfer program, and shows how this value varies by income. The paper decomposes this total value into two components: redistributive value, which is due to predictable changes in income (and family circumstances), and insurance value, which occurs when taxes and transfers compensate for unexpected income shocks. Our approach is a forward-looking one, where we examine income and transfers net of taxes over a 10-year period. We model state taxes (personal income taxes, the EITC, and sales taxes) and state means-tested transfers (AFDC/TANF and Medicaid/SCHIP). The calculations are made using the Panel Study of Income Dynamics and allow for analysis of the role of changes in tax-and-transfer programs, demographics, and income in the value of state net benefits over a period of more than 30 years. We find that the redistributive value of state tax-and-transfer programs sharply declines with income, but that the insurance value is increasing in income. The resulting total value still declines with income, but not nearly as sharply as the redistributive value. Hence, the insurance value mitigates the incentives for obility that would "undo" state redistributive spending.
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Economic Preparation for Retirement
Michael Hurd & Susann Rohwedder
NBER Working Paper, July 2011
Abstract:
We define and estimate measures of economic preparation for retirement based on a complete inventory of economic resources while taking into account the risk of living to advanced old age and the risk of high out-of-pocket spending for health care services. We ask whether, in a sample of 66-69 year-olds, observed economic resources could support with high probability a life-cycle consumption path anchored at the initial level of consumption until the end of life. We account for taxes, widowing, differential mortality and out-of-pocket health spending risk. We find that 71% of persons in our target age group are adequately prepared according to our definitions, but there is substantial variation by observable characteristics: 80% of married persons are adequately prepared compared with just 55% of single persons. We estimate that a reduction in Social Security benefits of 30 percent would reduce the fraction adequately prepared by 7.8 percentage points among married persons and by as much as 10.7 percentage points among single persons.
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The Budgetary and Welfare Effects of Tax-Deferred Retirement Saving Accounts
Shinichi Nishiyama
Journal of Public Economics, forthcoming
Abstract:
The present paper analyzes the budgetary, macroeconomic, and welfare effects of tax-deferred retirement saving accounts, similar to the U.S. 401(k) plans, in a dynamic general-equilibrium overlapping generations economy with idiosyncratic wage shocks. The budgetary cost of tax-deferred accounts is much higher in the short run than in the long run. Thus, a budget-neutral introduction of tax-deferred accounts would make the current households worse off, although the policy change would increase national wealth and total output significantly in the long run. If the government spread the transition cost to future households by increasing its debt, however, the policy change could make all age cohorts, on average, almost as better off as the baseline economy. Yet, national wealth and total output would decrease in the long run due to the future tax increase and the increased government debt. The net saving effect of tax-deferred accounts is much smaller than the estimates in the previous empirical literature, and it is possibly negative. This policy implication is fairly robust and will not change qualitatively even in the economy with myopic households of hyperbolic discounting.
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Jed Kolko
Journal of Urban Economics, forthcoming
Abstract:
I find a positive relationship between broadband expansion and local economic growth. This relationship is stronger in industries that rely more on information technology and in areas with lower population densities. Instrumenting for broadband expansion with slope of terrain leans in the direction of a causal relationship, though not definitively. The economic benefits of broadband expansion for local residents appear to be limited. Broadband expansion is associated with population growth as well as employment growth, and both the average wage and the employment rate - the share of working-age adults that is employed - are unaffected by broadband expansion. Furthermore, expanding broadband availability does not change the prevalence of telecommuting or other home-based work. Like other place-based policies, expanding broadband availability could raise property values and the local tax base, but without more direct benefits for residents in the form of higher wages or improved access to jobs. The analysis relies on the uneven diffusion of broadband throughout the United States, allowing comparisons between areas with greater and less growth in broadband availability. I combine broadband data from the Federal Communications Commission, employment data from the National Establishment Time-Series database, and other economic data from the U.S. Census and BLS to examine broadband availability and economic activity in the U.S. between 1999 and 2006.