Findings

Feeding the Leviathan

Kevin Lewis

October 16, 2009

"Congress should enact a value-added tax, the equivalent of a broad-based sales tax on all goods and services. It should take effect only after unemployment has fallen to a predetermined level or in, say, five years, whichever comes first. Congress should link revenue from the new tax and other sources directly to public health-care spending through a newly created health-care trust fund. The trust fund would pay for all federal health-care spending. This framework would mean that Americans would get the health care they are willing to pay for. If spending outpaces projections, Congress will have to choose between raising taxes and finding ways to slow the growth of spending...In the near term, it would also support and sustain the economic recovery. Consumers would be encouraged to buy now, before the tax takes effect. And by showing financial markets that Congress is determined to put our fiscal household in order, it would help keep interest rates low and encourage investment. The trust fund mechanism would strengthen incentives to institute reforms that will actually bend the health-care cost curve, because measures to slow the growth of health-care spending would avoid unpopular future tax increases that would otherwise be necessary." [Henry Aaron & Isabel Sawhill, The Washington Post, October 13, 2009]

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Consumption Taxes and Redistribution

Isabel Correia
American Economic Review, forthcoming

Abstract:
It is relatively well known that the introduction of consumption taxation as an alternative in the tax code, and as the main source of government revenues, leads to a more efficient tax system. However the conventional wisdom is that the change from the actual tax code, based on taxation of capital and labour income to this consumption-based system, has undesirable distributional consequences. In this work, a very simple method is developed to argue that the converse is the most reasonable outcome from that fundamental tax reform. The main difference in relation to the literature comes from the assumed source of household heterogeneity. Additionally, it is shown that the inclusion of a tax on consumption allows for redistributive policies with no costs in terms of efficiency.

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Regulation and Distrust

Philippe Aghion, Yann Algan, Pierre Cahuc & Andrei Shleifer
Quarterly Journal of Economics, forthcoming

Abstract:
In a cross-section of countries, government regulation is strongly negatively correlated with trust. We document this correlation, and present a model explaining it. In the model, distrust creates public demand for regulation, while regulation in turn discourages family civic education, leading to multiple equilibria. A key implication is that individuals in low trust countries want more government intervention even though the government is corrupt. We test this and other implications of the model using country and individual data on trust and beliefs' about government role, as well as changes in beliefs and in trust during the transition from socialism.

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Activist Fiscal Policy to Stabilize Economic Activity

Alan Auerbach & William Gale
NBER Working Paper, October 2009

Abstract:
We review the evidence on the practice and effects of discretionary fiscal policy, particularly in the context of recent efforts to stimulate the economy, reaching two main conclusions. First, policy interventions have increased in this decade, pre-dating the 2009 stimulus. Second, despite a large economic literature on the topic, the state of theory and evidence is not as "shovel ready" as one would like. Although consumption and investment clearly respond to tax incentives and structural vector autoregressions show that lower taxes and higher government purchases can boost output, it is difficult to apply the findings in the current context, in part because multipliers and policy lags are likely to vary with economic conditions. Dynamic stochastic general equilibrium models can be adapted to address extreme economic conditions, but yield an extremely wide range of predicted impacts. The experience from large downturns — the U.S. Great Depression and the Japanese Lost Decade — is illuminating, but provides little evidence about policy effectiveness because systematic and sustained fiscal interventions were not attempted in either case.

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Progressive Estate Taxation

Emmanuel Farhi & Ivan Werning
Quarterly Journal of Economics, forthcoming

Abstract:
We present a model with altruistic parents and heterogeneous productivity. We derive two key properties for optimal estate taxation. First, the estate tax should be progressive, so that parents leaving a higher bequest face a lower net return on bequests. Second, marginal estate taxes should be negative, so that all parents face a marginal subsidy on bequests. Both properties can be implemented with a simple nonlinear tax on bequests, levied separately from the income tax. These results apply to other intergenerational transfers, such as educational investments, and are robust to endogenous fertility choices. Both estate or inheritance taxes can implement the optimal allocation, but we show that the inheritance tax has some advantages. Finally, when we impose an ad hoc constraint requiring marginal estate taxes to be nonnegative, the optimum features a zero tax up to an exception level, and a progressive tax thereafter.

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Anarchy and Development: An Application of the Theory of Second Best

Peter Leeson & Claudia Williamson
Law and Development Review, 2009

Abstract:
Could anarchy be a constrained optimum for weak and failing states? Although a limited government that protects citizens' property rights and provides public goods may be the first-best governance arrangement for economic development, among the poorest nations such "ideal political governance" is not an option. LDCs face a more sobering choice: "predatory political governance" or no government at all. Many predatory governments do more to damage their citizens' welfare than to enhance it. In light of this, we show that conditional on failure to satisfy a key institutional condition required for ideal political governance — constrained politics — citizens' welfare is maximized by departing from the other conditions required for this form of governance: state supplied law and courts, state-supplied police, and state-supplied public goods. Since departing from these conditions produces anarchy and fulfilling them when government is unconstrained producers predatory political governance, anarchy is a second best.

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When is the government spending multiplier large?

Lawrence Christiano, Martin Eichenbaum & Sergio Rebelo
NBER Working Paper, October 2009

Abstract:
When the nominal interest rate is constant.

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Denmark: Globalization and the Welfare State

Arthur Daemmrich & Benjamin Kramarz
Harvard Business School Case Study, July 2009

Abstract:
This case describes how Denmark has balanced the impacts of globalization, including outsourcing and movement of labor with its social welfare offerings. Reforms implemented during the past two decades drove down unemployment, promoted new company formation, and put the country at or near the top of international polls on the ease of doing business. The case describes how Danes forged a consensus that embraced international trade and outsourcing while supporting continuous upgrading of workplace skills. In April 2009, the new Prime Minister, Lars L kke Rasmussen, is balancing short-term responses to a global recession against longer-term planning for the Danish labor market and macroeconomy. Can Denmark keep its borders open to the free movement of goods, services, and labor while also sustaining the breadth of its welfare offerings?

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A Global Perspective on Railway Inefficiency and the Rise of State Ownership, 1880-1912

Dan Bogart
Explorations in Economic History, forthcoming

Abstract:
The rise of state ownership was one of the most significant policy changes in the railway sector in the early twentieth century. This paper estimates the cost inefficiency of railway sectors across countries using stochastic frontier models and examines whether the rise of state ownership affected inefficiency. The results show that the trends in inefficiency differed substantially across countries from the 1880s to 1912. They also show that inefficiency increased with greater nationalizations and decreased with greater state railway construction. A counterfactual analysis suggests that the rise of state ownership contributed to lower inefficiency in most countries, but the effects within countries varied depended on whether state ownership increased through nationalizations or new construction.

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Private capital, public credit and the decline of American railways in the mid-20th century

Jim Cohen
CUNY Working Paper, September 2009

Abstract:
From the mid-19th Century until the Great Depression, banks, insurance companies and other large institutional investors supplied railways with external capital that supported their rise to near hegemony over transport in the U.S. This regime ended in the 1930‟s, when widespread rail bankruptcies threatened broader credit markets. The federal government intervened via a powerful, new, public financial intermediary — the Reconstruction Finance Corporation — to socialize devalued rail debt, which largely removed private institutional investors from rail capital markets. At this defining moment, the Roosevelt Administration could have used its financial and political leverage to rationalize structural weaknesses in the rail industry. It did not. Thus by the time the Depression ended, railways were significantly weakened vis a vis their increasingly successful competitors in highway-based transport. Thus, the decline of American railways was caused more
by financial factors than, as existing historiography suggests, by either excessive government regulation or failures of railway management.

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How Well Does the U.S. Social Insurance System Provide Social Insurance?

Mark Huggett & Juan Carlos Parra
Journal of Political Economy, forthcoming

Abstract:
We analyze the insurance provided by the U.S. social security and income tax system within a model where agents receive idiosyncratic, wage-rate shocks that are privately observed. We consider two reforms: a piecemeal reform that optimally chooses the social security benefit function and a reform which eliminates the entire social insurance system and replaces it with an optimal tax on lifetime earnings. When the wage shocks match properties found in U.S. data, an optimal lifetime earnings tax produces a welfare gain equivalent to a 4.35 percent increase in consumption each period and an optimal reform of the social security benefit function leads to a gain worth a 1.15 percent increase.

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Optimal taxation in the presence of bailouts

Stavros Panageas
NBER Working Paper, October 2009

Abstract:
The termination of a representative financial firm due to excessive leverage may lead to substantial bankruptcy costs. A government in the tradition of Ramsey (1927) may be inclined to provide transfers to the firm so as to prevent its liquidation and the associated deadweight costs. It is shown that the optimal taxation policy to finance such transfers exhibits countercyclicality and history dependence, even in a complete market. These results are in contrast with pre-existing literature on optimal fiscal policy, and are driven by the endogeneity of the transfer payments that are required to salvage the financial firm.

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Rights Variation within a Federalist System: The Importance of Mobility

John Francis & Leslie Francis
Political Research Quarterly, forthcoming

Abstract:
Cosmopolitanism at the international level-the recognition of an international human rights regime-has been much defended of late. Little attention has been paid, however, to the federalist analogue: should there be insistence on a national rights regime? Or should variation in the recognition of rights be tolerated at the subnational level, as a necessary concession to moral disagreement, as an effort to contain problematic experiments, or as a way to generate progress about rights? This article argues that subnational variation in the recognition of rights represents a second-best solution to the problem of deep moral disagreement about rights. However, federalism provides a second-best solution only on the condition that citizens are able to move from one subnational jurisdiction to another. To the extent that citizens are able to move to rights regimes that are more favorable to them, intranational variation in the recognition of rights may have advantages over international variation, where national borders may pose barriers to migration. However, in the United States, despite the privileges and immunities of national citizenship, there remain impressive legal barriers to such mobility in the case of contested rights. Given these barriers, federalism as it exists in the United States today does not fully realize the advantages of a second-best solution to deep moral disagreements about rights.

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Confronting Government After Welfare Reform: Moralists, Reformers, and Narratives of (Ir)responsibility at Administrative Fair Hearings

Vicki Lens
Law & Society Review, September 2009, Pages 563-592

Abstract:
Almost 40 years ago, the Supreme Court, in the landmark case Goldberg v. Kelly (1970), provided welfare participants with a potentially potent tool for challenging the government welfare bureaucracy by requiring pre-termination hearings before welfare benefits were discontinued or reduced. In 1996, with the passage of the Personal Responsibility Work Opportunity Reconciliation Act (PRWORA), the rights talk of Kelly was officially replaced with the discourse of individual responsibility. Using observational data of administrative hearings and interviews with administrative law judges and appellants, this study explores how fair hearings have been affected by this official reconceptualization of rights. I find that hearings are not a panacea for challenging the more punitive aspects of welfare reform, but nor are they devoid of the possibility of justice. While hearings can replicate in style and substance the inequities, rigid adherence to rules, and moral judgments that characterize welfare relationships under the PRWORA, they can also be used as a mechanism for creating counternarratives to the dominant discourse about welfare. This study identifies two types of judges — moralist judges and reformer judges — and examines how their differing approaches determine which narrative emerges in the hearing room.

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The Aging of the State Government Workforce: Trends and Implications

Gregory Lewis & Yoon Jik Cho
Georgia State University Working Paper, August 2009

Abstract:
The aging of the Baby Boom generation, combined with the success of the New Public Management in downsizing the federal government, has led to a rapidly aging federal service, a reduced flow of new blood with creativity and updated skills (Lane, Wolf, and Woodard, 2003), and a looming "tsunami" of retirements that is forcing the federal service to reconsider many of its human resource practices. The difficulty of obtaining good data has severely restricted our ability to measure the extent of the problem in the state government workforce. We examine the changing age distribution of that workforce using the 1980, 1990, and 2000 Census 5% Public Use Microdata Samples and the 2001-07 American Community Surveys, and find that state workforces are even older and have aged more than the federal civil service, suggesting that they may experience the retirement tsunami sooner. We also examine the effects of this aging on institutional memory, race/ethnicity/gender diversity, and educational qualifications.

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State Welfare Rules, TANF Exits, and Geographic Context: Does Place Matter?

Shelley Irving
Rural Sociology, December 2008, Pages 605-630

Abstract:
This research compares the likelihood of exiting TANF with and without employment and the effects of important state TANF rules on welfare exits in more disadvantaged (large Rustbelt cities and poor southern nonmetro) and less disadvantaged (other metro and other nonmetro) areas during the 1996-2003 post-welfare reform period. Hierarchical competing risk models using individual-level data from the 1996-99 and 2001-03 Panels of the Survey of Income and Program Participation merged with state-level data from various sources show that female TANF participants in poor southern nonmetro areas are the least likely to exit TANF with work, and participants in large Rustbelt cities are less likely to exit TANF with work than those in other metro areas. Non-work TANF exits are more likely to occur in other nonmetro areas than in other metro areas. Importantly, the effects of state welfare rules on TANF exits differ across places of residence. For example, stringent time limit policies promote work exits in large Rustbelt cities but promote non-work exits in poor southern nonmetro areas. More lenient earned income disregards are significantly related to remaining on TANF in poor southern nonmetro areas but promote work exits in all other places. Findings from this paper imply that states should not take a "one-size-fits-all approach" to reduce welfare caseloads.


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