Balance sheet
The Social Origins of the Texas Tax Club Movement, 1924-1925
Isaac William Martin
Journal of Policy History, July 2013, Pages 404-421
"On October 30, 1924, G. H. Colvin, vice president of the Farmers and Mechanics National Bank of Fort Worth, invited a group of fourteen local businessmen to a protest meeting against heavy taxes on the rich...With that, the first Texas tax club had formed. Within three months, there were more than two hundred such clubs in cities and small towns throughout the state, and within a year G. H. Colvin was the chairman of a statewide league of dues-paying Texas tax clubs with its own letterhead that was sending grassroots delegations to Washington, D.C., to lobby for the so-called Mellon Plan, which targeted tax cuts to the richest Americans. Both contemporary observers and subsequent scholars have credited the Texas tax clubs with swaying Congress, and Representatives William Green (R-Iowa) and John Nance Garner (D-Tex.) in particular, in favor of the Mellon Plan, and thereby bringing about the tax cuts in the Revenue Act of 1926 - which included the steepest cut in top marginal tax rates in American history...The tax club movement appears to present a sociological anomaly - a movement demanding collective benefits for people richer than themselves. Few of the activists could have expected to receive a tax cut if their demands were granted. Almost no one in Texas owed income tax at the top rates. The income of the United States was heavily concentrated in the cities of the industrialized Northeast, and generations of agrarian radicals had fought for the progressive income tax precisely because it favored the sectional interests of the rural South and West...The tax clubs were organized by mortgage bankers who saw income tax cuts as a way to deprive their competitors of capital. In particular, they reasoned that cutting the top rates of income tax would deprive the newest entrants into the farm mortgage market - the so-called land banks - of a valuable tax exemption."
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Monetary Policy and the Housing Market: A Structural Factor Analysis
Matteo Luciani
Journal of Applied Econometrics, forthcoming
Abstract:
This paper studies the role of the Federal Reserve's policy in the recent boom and bust of the housing market, and in the ensuing recession. By estimating a structural dynamic factor model on a panel of 109 US quarterly variables from 1982 to 2010, we find that, although the Federal Reserve's policy between 2002 and 2004 was slightly expansionary, its contribution to the recent housing cycle was negligible. We also show that a more restrictive policy would have smoothed the cycle but not prevented the recession. We thus find no role for the Federal Reserve in causing the recession.
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The Role of Automatic Stabilizers in the U.S. Business Cycle
Alisdair McKay & Ricardo Reis
NBER Working Paper, April 2013
Abstract:
Most countries have automatic rules in their tax-and-transfer systems that are partly intended to stabilize economic fluctuations. This paper measures how effective they are. We put forward a model that merges the standard incomplete-markets model of consumption and inequality with the new Keynesian model of nominal rigidities and business cycles, and that includes most of the main potential stabilizers in the U.S. data, as well as the theoretical channels by which they may work. We find that the conventional argument that stabilizing disposable income will stabilize aggregate demand plays a negligible role on the effectiveness of the stabilizers, whereas tax-and-transfer programs that affect inequality and social insurance can have a large effect on aggregate volatility. However, as currently designed, the set of stabilizers in place in the United States has barely had any effect on volatility. According to our model, expanding safety-net programs, like food stamps, has the largest potential to enhance the effectiveness of the stabilizers.
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Elected versus Appointed Policy Makers: Evidence from City Treasurers
Alexander Whalley
Journal of Law and Economics, February 2013, Pages 39-81
Abstract:
This paper investigates whether the method of selecting public officials affects policy making. I compare the policy choices of bureaucrat city treasurers and politician city treasurers, who are selected and held accountable in very different ways. The analysis draws on rich data from California to examine whether cities with appointed or elected city treasurers pay lower costs to borrow. The results demonstrate that having appointive treasurers reduces a city's cost of borrowing by 19-31 percent. Holding officials directly accountable to voters can result in lower levels of performance in complex policy areas.
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Saving the Banks: The Political Economy of Bailouts
Emiliano Grossman & Cornelia Woll
Comparative Political Studies, forthcoming
Abstract:
How much leeway did governments have in designing bank bailouts and deciding on the height of intervention during the 2007-2009 financial crisis? By analyzing the variety of bailouts in Europe and North America, we will show that the strategies governments use to cope with the instability of financial markets does not depend on economic conditions alone. Rather, they take root in the institutional and political setting of each country and vary in particular according to the different types of business-government relations banks were able to entertain with public decision makers. Still, "crony capitalism" accounts overstate the role of bank lobbying. With four case studies of the Irish, Danish, British, and French bank bailout, we show that countries with close one-on-one relationships between policy makers and bank management tended to develop unbalanced bailout packages, while countries where banks negotiated collectively developed solutions with a greater burden-sharing from private institutions.
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Adjusting Measures of Economic Output for Health: Is the Business Cycle Countercyclical?
Mark Egan, Casey Mulligan & Tomas Philipson
NBER Working Paper, May 2013
Abstract:
Many national accounts of economic output and prosperity, such as gross domestic product (GDP) or net domestic product (NDP), offer an incomplete picture by ignoring, for example, the value of leisure, home production, and the value of health. Discussed shortcomings have focused on how unobserved dimensions affect GDP levels but not their cyclicality, which affects the measurement of the business cycle. This paper proposes new measures of the business cycle that incorporate monetized changes in health of the population. In particular, we incorporate in GDP the dollar value of mortality, treating it as depreciation in human capital analogous to how NDP measures treat depreciation of physical capital. We examine the macroeconomic fluctuations in the United States and globally during the past 50 years, taking into account how depreciation in health affects the cycle. Because mortality tends to be pro-cyclical, fluctuations in standard GDP measures are offset by monetized changes in health; booms are not as valuable as traditionally measured because of increased mortality, and recessions are not as bad because of reduced mortality. Consequently, we find that U.S. business cycle fluctuations appear milder than commonly measured and may even be reversed for the majority of "recessions" after accounting for the cyclicality of health. We find that adjusting for mortality reduces the measured U.S. business cycle volatility during the past 50 years by about 37% in the United States and 46% internationally. We discuss future research directions for more fully incorporating the cyclicality of unobserved health capital into standard output measurement.
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Friedman's Monetary Economics in Practice
Edward Nelson
Journal of International Money and Finance, forthcoming
Abstract:
This paper views the policy response to the recent financial crisis from the perspective of Milton Friedman's monetary economics. Five major aspects of the policy response were: 1) discount window lending was provided broadly to the financial system, at rates that were low in relation to the market rates prevailing before the crisis; 2) the Federal Reserve's holdings of government securities were adjusted with the aim of putting downward pressure on the path of several important interest rates for a given path of short-term rates; 3) deposit insurance was extended, helping to insulate the money stock from credit market disruption; 4) the commercial banking system received assistance via a recapitalization program, while existing equity holders bore losses; and 5) an interest-on-reserves system was introduced. These five elements of the policy response were in keeping with those that would arise from Friedman's framework, while a number of the five departed appreciably from other prominent benchmarks (such as the Bagehot prescription for discount rate policy, and New Keynesian approaches to stabilization policy). One notable part of the policy response, the TALF initiative, drew largely on frameworks other than Friedman's. But, in important respects, the overall monetary and financial policy response to the crisis can be viewed as Friedman's monetary economics in practice.
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Should Sales Taxes be Imposed on E-Commerce?
Sami Dakhlia & Robert Strauss
Journal of Public Economic Theory, forthcoming
Abstract:
We study the impact of E-commerce across state lines in the U.S. on tax revenue, public good provision, and real income. In particular, in light of the unenforceable nature of interstate taxation, we evaluate the potential gains from coordinating sales and income state taxes among sovereign jurisdictions. We find that the revenue at risk is small and that the welfare gains or losses of any countervailing policy measures, in particular those associated with the Streamlined Sales Tax Project (SSTP), are even smaller.
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Nalitra Thaiprasert, Dagney Faulk & Michael Hicks
Public Finance Review, July 2013, Pages 446-472
Abstract:
We use a regional computable general equilibrium (CGE) model and Indiana data to examine both the short-run and the long-run effects of property tax rate limits and an increase in the sales tax rate. We find that the property tax caps and sales tax rate increase have a relatively small impact on aggregate economic measures in the short run and a positive effect in the long run. Higher-income households experience larger increases in income than lower-income households in terms of the dollar amount of the increase, but lower-income households experience larger gains as a percentage of labor income. The value of output (sales) increases in the long run with construction, certain manufacturing industries, and wholesale trade experiencing the largest increases.
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Can rational stubbornness explain forecast biases?
Bruno Deschamps & Christos Ioannidis
Journal of Economic Behavior & Organization, August 2013, Pages 141-151
Abstract:
This paper examines whether the rational jumpiness/stubbornness hypothesis can explain forecast biases. Using a dataset of professional GDP forecasts for the G7 countries over the period 1989-2010, we find evidence supporting the rational stubbornness hypothesis. Specifically, forecasters underreact more when large forecast revisions are highly indicative of low forecast ability. Underreaction is less likely when the size of forecast revisions is unrelated to ability. These findings are consistent with the hypothesis that forecasters choose to smooth GDP forecasts to maximize their perceived ability.
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Generational Risk - Is It a Big Deal?: Simulating an 80-Period OLG Model with Aggregate Shocks
Jasmina Hasanhodzic & Laurence Kotlikoff
NBER Working Paper, June 2013
Abstract:
The theoretical literature on generational risk assumes that this risk is large and that the government can effectively share it. To assess these assumptions, this paper calibrates and simulates 80-period, 40-period, and 20-period overlapping generations (OLG) life-cycle models with aggregate productivity shocks. Previous solution methods could not handle large-scale OLG models such as ours due to the well-known curse of dimensionality. The prior state of the art uses sparse-grid methods to handle 10 to 30 periods depending on the model's realism. Other methods used to solve large-scale, multi- period life-cycle models rely on either local approximations or summary statistics of state variables. We employ and extend a recent algorithm by Judd, Maliar, and Maliar (2009, 2011), which restricts the state space to the model's ergodic set. This limits the required computation and effectively banishes the dimensionality curse in models like ours. We find that intrinsic generational risk is quite small, that government policies can produce generational risk, and that bond markets can help share generational risk. We also show that a bond market can mitigate risk-inducing government policy. Our simulations produce very small equity premia for three reasons. First, there is relatively little intrinsic generational risk. Second, aggregate shocks hit both the young and the old in similar ways. And third, artificially inducing risk between the young and the old via government policy elicits more net supply as well as more net demand for bonds, by the young and the old respectively, leaving the risk premium essentially unchanged. Our results hold even in the presence of rare disasters, very high risk aversion, persistent productivity shocks, and stochastic depreciation. They echo other findings in the literature suggesting that macroeconomic fluctuations are too small to have major microeconomic consequences.
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Does Output Gap, Labour's Share or Unemployment Rate Drive Inflation?
Markku Lanne & Jani Luoto
Oxford Bulletin of Economics and Statistics, forthcoming
Abstract:
We propose a new methodology for ranking in probability the commonly proposed drivers of inflation in the new Keynesian model. The approach is based on Bayesian model selection among restricted vector autoregressive (VAR) models, each of which embodies only one or none of the candidate variables as the driver. Simulation experiments suggest that our procedure is superior to the previously used conventional pairwise Granger causality tests in detecting the true driver. Empirical results lend little support to labour share, output gap or unemployment rate as the driver of US inflation.
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Is Economic Recovery a Myth? Robust Estimation of Impulse Responses
Coen Teulings & Nikolay Zubanov
Journal of Applied Econometrics, forthcoming
Abstract:
We estimate the impulse response function (IRF) of GDP to a banking crisis using an extension of the local projections method. We demonstrate that, though robust to misspecifications of the data-generating process, this method suffers from a hitherto unnoticed bias which increases with the forecast horizon. We propose a correction to this bias and show through simulations that it works well. Applying our corrected local projections estimator to the data from a panel of 99 countries observed between 1974 and 2001, we find that an average banking crisis yields a GDP loss of just under 10% in 10 years, with little sign of recovery. Like the original local projections method, our extension of it is widely applicable.
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Fiscal Discriminations in Three Wars
George Hall & Thomas Sargent
NBER Working Paper, May 2013
Abstract:
In 1790, a U.S. paper dollar was widely held in disrepute (something shoddy was not ‘worth a Continental'). By 1879, a U.S. paper dollar had become ‘as good as gold.' These outcomes emerged from how the U.S. federal government financed three wars: the American Revolution, the War of 1812, and the Civil War. In the beginning, the U.S. government discriminated greatly in the returns it paid to different classes of creditors; but that pattern of discrimination diminished over time in ways that eventually rehabilitated the reputation of federal paper money as a store of value.
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Alexa Bankert & Helmut Norpoth
Electoral Studies, forthcoming
Abstract:
The intrusion of war is likely to alter the standard economic voting calculus. A wartime economy is not expected to deliver the same political benefits or costs, in terms of presidential approval or votes in an election, as does a peacetime economy. The Roosevelt presidency presents a perfect target to examine economic voting in wartime. Using monthly polling data on presidential approval from late 1937 to 1945, we demonstrate that the American public suspended standard economic-voting logic during World War II. One explanation for this suspension is the enormous size of U.S. military spending. Using data on government spending from 1929 to 1950, we show that military spending had a huge effect on unemployment while the effect of non-military spending proves negligible and non-significant. It was military spending triggered by war, not the New Deal, that vanquished the Great Depression.
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Hayek's Slippery Slope, the Stability of the Mixed Economy and the Dynamics of Rent Seeking
André Azevedo Alves & John Meadowcroft
Political Studies, forthcoming
Abstract:
F. A. Hayek's The Road to Serfdom continues to provoke intense scholarly debate focused on the validity of Hayek's central claim that a mixed economy is inherently unstable and economic intervention will inexorably lead to totalitarianism if pursued for a sustained period. This article presents empirical evidence which shows conclusively that it is the mixed economy that has proved remarkably stable, whereas laissez-faire and totalitarian regimes have proved inherently unstable. It is argued that this empirical outcome can be explained by the dynamics of rent seeking and Hayek's failure to anticipate that the state could control more than half of national income without requiring a totalitarian apparatus to control and direct production and consumption. The implications of the failure of Hayek's argument for our conceptualisation of freedom and power in the context of the modern democratic state and our understanding of the relationship between economic and political freedom are considered.
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The Effectiveness and Valuation of Political Tax Minimization
Matthew Hill et al.
Journal of Banking & Finance, August 2013, Pages 2836-2849
Abstract:
We find evidence suggesting that corporate lobbying for tax purposes over the period 1999-2009 is one method by which firms managed corporate taxes. Furthermore, tax management strategies employed by these politically active firms were valued by shareholders. Firms lobbying on tax issues have lower book effective taxes and greater discretionary permanent differences in GAAP and IRS taxable income. Investors place a premium on lobbying activities for tax purposes unless the firm already has a low effective tax rate or very high book-tax differences. We conclude that lobbying political officials is one method by which firms manage risks attendant an aggressive tax strategy.
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Richard Cebula
American Journal of Economics and Sociology, July 2013, Pages 701-731
Abstract:
Using the most current data available, this study seeks to identify any new as well as traditional determinants of personal income tax evasion. A variety of empirical estimates find that income tax rates, the IRS audit rate and IRS penalty interest rates, and the unemployment rate all influence tax evasion. In addition, rarely investigated variables including the tax-free interest rate, the public's job approval rating of the president, and the public's dissatisfaction with government, along with previously unstudied variables, namely, the real interest rate yield on Moody's Baa-rated long-term corporate bonds and the real interest rate yield on three-year Treasury notes, also affect income tax evasion.
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State Unemployment Insurance Trust Solvency and Benefit Generosity
Daniel Smith & Jeffrey Wenger
Journal of Policy Analysis and Management, Summer 2013, Pages 536-553
Abstract:
This paper employs panel estimators with data on the 50 American states for the years 1963 to 2006 to test the relationship between Unemployment Insurance (UI) trust fund solvency and UI benefit generosity. We find that both average and maximum weekly UI benefit amounts, as ratios to the average weekly wage, are higher in states and in years with more highly solvent trust funds. This result holds after controlling for state-level unemployment rate, gross domestic product, population growth, legislative political ideology, partisan control of the executive and legislative branches, and gubernatorial election year across multiple specifications, including fixed-effects and dynamic panel estimators. We propose a theory of moderate coupling as the causal mechanism, whereby UI program benefits and financing are directly related but are not as tightly linked as in other social insurance programs, such as Medicaid. The findings have important policy implications for the funding of states' UI systems. As a consequence of moderate coupling, the countercyclicality of the UI program is dampened.
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Jingjing Chai et al.
NBER Working Paper, May 2013
Abstract:
Social Security benefits are currently provided as a lifelong benefit stream, though some workers would be willing to trade a portion of their annuity streams in exchange for a lump sum amount. This paper explores whether allowing people to receive a lump sum as a payment for delayed retirement rather than as an addition to their lifetime Social Security benefits might induce them to work longer. We model the factors that influence how people trade off a Social Security stream for a lump sum, and we also examine the consequences of such tradeoffs for work, retirement, and life cycle wellbeing. Our base case indicates that workers given the chance to receive their delayed retirement credit as a lump sum payment would boost their average retirement age by 1.5-2 years. This will interest policymakers seeking to reform the Social Security system without raising costs or cutting benefits, while enhancing the incentives to delay retirement.
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Jeffrey Brown & Scott Weisbenner
Journal of Public Economics, forthcoming
Abstract:
We examine individual choices between a defined contribution (DC) and a defined benefit (DB) retirement plan at a large public employer. We find sensible patterns with regard to standard economic and demographic factors: the probability of choosing the DC plan decreases with the relative financial generosity of the DB plans versus the DC plan and rises with education and income. Using a survey of participants, we find that the ability to control for beliefs, preferences, and other variables not easily obtainable from administrative or standard household surveys increases the explanatory power over seven-fold. Among the important factors in the DB/DC pension choice are respondent attitudes about risk/return tradeoffs, financial literacy, return expectations, and political risk. We also find that individuals make sensible choices based on what they believe to be true about the plans, but that these beliefs about plan parameters are often wrong, thus leading to possibly sub-optimal decisions. Finally, we provide evidence that individuals' preferences over plan attributes (e.g., the degree of control provided) are even more important determinants of the DB/DC decision than expected outcomes (e.g., the relative generosity of the plans).