Crunch time

Kevin Lewis

December 20, 2017

Unions, Parties, and the Politics of State Government Legacy Cost
Daniel DiSalvo & Jeffrey Kucik
Policy Studies Journal, forthcoming


Many American state governments have made extensive promises to pay for employees' health care and other benefits in retirement. Currently estimated at over $1 trillion in unfunded liabilities, these other postemployment benefits (OPEB) are creating a major fiscal problem for state governments. In this article, we examine the politics of OPEB. We seek to explain the variation in the generosity of OPEB across U.S. states. We argue that party competition theories do not adequately explain the outcomes we observe. Instead, we draw on the emerging Schattschneiderian approach to the politics of public policy to show that public union strength conditions a party's incentives to represent unions' interests. In states where public sector unions are strong, unions can find their way into either party's coalition. We find that Republicans are more responsive to public union interests than either their ideological brand or prior research would suggest. It is only in states where public employees are weak that Republicans can act unilaterally and enact their preference for less government spending. To test our theories, we carry out an empirical analysis using a newly assembled data set of per capita OPEB liabilities across 49 states.

The Games They Will Play: An Update on the Conference Committee Tax Bill
Reuven Avi-Yonah et al.
NYU Working Paper, December 2017


Earlier this month, we posted a report identifying key weaknesses in the Senate and House tax legislation, titled the Tax Cuts and Jobs Act (TCJA). Based on the conference bill released last week, this report updates our analysis describing some of the major games, legal roadblocks, and glitches in the legislation. This represents the continued work of a group of legal experts from across the country. Unfortunately, while the conference bill addressed some of the issues we described in our earlier report, others were made worse, and the bill introduces fundamental - and in our view insurmountable - structural problems to the income tax. Thus, the legislation is still likely to cost more than the current estimates of over $1 trillion, to advantage the well-advised (and their advisors) playing tax games in ways that are both deliberate and inadvertent, and to face legal roadblocks like WTO non-compliance that could undermine key components of the legislation. Finally, the bill still has glitches that could lead to haphazard and unexpected results that could arbitrarily favor or penalize taxpayers.

Did the American Recovery and Reinvestment Act Help Those Most in Need? A County-Level Analysis
Mario Crucini & Nam Vu
NBER Working Paper, December 2017


One of the statements of purpose of the American Recovery and Reinvestment Act (ARRA) was "to assist those most impacted by the recession." The ARRA is assessed along this dimension using theoretical concepts from the risk-sharing literature. We estimate a model of income dynamics using a county-level panel of wage income in order to isolate the innovation to income. We then regress these income shocks on ARRA transfers and find 13.1% of the shock is offset by the transfer. While this is a long way from complete risk-sharing, the impacts are economically and statistically significant. Surprisingly, there are large state-contingent effects in the second and third quartiles 25.6% and 15.7% versus a mere 8.5% in the first quartile. By this metric, the policy of helping those most in need was not achieved.

How Successful Was the New Deal? The Microeconomic Impact of New Deal Spending and Lending Policies in the 1930s
Price Fishback
Journal of Economic Literature, December 2017, Pages 1435-1485


The New Deal during the 1930s was arguably the largest peace-time expansion in federal government activity in American history. Until recently, there had been very little quantitative testing of the microeconomic impact of the wide variety of New Deal programs. Over the past decade scholars have developed new panel databases for counties, cities, and states and then used panel data methods on them to examine the impact of New Deal spending and lending policies for the major New Deal programs. In most cases, the identification of the effect comes from changes across time within the same geographic location after controlling for national shocks to the economy. Many of the studies also use instrumental variable methods to control for endogeneity. The studies find that public works and relief spending had state income multipliers of around one, increased consumption activity, attracted internal migration, reduced crime rates, and lowered several types of mortality. The farm programs typically aided large farm owners but eliminated opportunities for share croppers, tenants, and farm workers. The Home Owners' Loan Corporation's purchases and refinancing of troubled mortgages staved off drops in housing prices and home ownership rates at relatively low ex post cost to taxpayers. The Reconstruction Finance Corporation's loans to banks and railroads appear to have had little positive impact, although the banks were aided when the RFC took ownership stakes.

Government Spending Multipliers in Good Times and in Bad: Evidence from U.S. Historical Data
Valerie Ramey & Sarah Zubairy
Journal of Political Economy, forthcoming


We investigate whether U.S. government spending multipliers are higher during periods of economic slack or when interest rates are near the zero lower bound. Using new quarterly historical U.S. data covering multiple large wars and deep recessions, we estimate multipliers that are below unity irrespective of the amount of slack in the economy. These results are robust to two leading identification schemes, two different estimation methodologies, and many alternative specifications. In contrast, the results are more mixed for the zero lower bound state, with a few specifications implying multipliers as high as 1.5.

The political economy of transportation investment
Edward Glaeser & Giacomo Ponzetto
Economics of Transportation, forthcoming


Will politics lead to over-building or under-building of transportation projects? In this paper, we develop a model of infrastructure policy in which politicians overdo things that have hidden costs and underperform tasks whose costs voters readily perceive. Consequently, national funding of transportation leads to overspending, since voters more readily perceive the upside of new projects than the future taxes that will be paid for distant highways. Yet when local voters are well-informed, the highly salient nuisances of local construction, including land taking and noise, lead to under-building. This framework explains the decline of urban mega-projects in the US (Altshuler and Luberoff, 2003) as the result of increasingly educated and organized urban voters. Our framework also predicts more per capita transportation spending in low-density and less educated areas, which seems to be empirically correct.

The Local Economic Impacts of Military Personnel Contractions
Ben Zou
Journal of Labor Economics, forthcoming


I evaluate the local economic impacts of contractions in the U.S. military personnel between 1988 and 2000. I propose a novel empirical strategy combining the synthetic control and instrumental variables methods and estimate the causal effects on the equilibrium quantities and prices of local labor, housing, and product markets. Contractions in military personnel substantially reduced local civilian employment; however, local populations adjusted quickly, mainly through reduced in-migration, resulting in small changes in wages and large declines in rental prices. Relating these empirical findings to a simple spatial equilibrium model, I show that the welfare cost for workers is small.

Taxation and Executive Compensation: Evidence from Stock Options
Andrew Bird
Journal of Financial Economics, forthcoming


Understanding the effects of taxes on executive compensation provides insight into the process determining this compensation and is a key input to top income tax rate policy. A 2010 tax reform in Canada, which greatly increased the effective tax rate on stock option compensation for a subset of firms, provides a natural experiment with which to address this issue. Difference-in-differences estimates suggest that this tax increase resulted in an immediate reduction in both stock option grants and the fraction of total compensation made up of stock options with limited, if any, substitution towards other components of compensation.

The Economics of Managerial Taxes and Corporate Risk-Taking
Chris Armstrong et al.
University of Pennsylvania Working Paper, July 2017


We examine the relation between managers' personal income tax rates and their corporate investment decisions. Using plausibly exogenous variation in federal and state tax rates, we find a positive relation between managers' personal tax rates and their corporate risk-taking. Moreover - and consistent with our theoretical predictions - we find that this relation is stronger among firms with investment opportunities that have a relatively high rate of return per unit of risk, and stronger among CEOs who have a relatively low marginal disutility of risk. Importantly, our results are unique to senior managers' tax rates - we do not find similar relations for middle-income tax rates. We also find that the tax-induced risk-taking relates to idiosyncratic rather than systematic risk, suggesting that it will not be priced by well-diversified shareholders. Collectively, our findings provide evidence that managers' personal income taxes influence their corporate risk-taking.

The Impact of Broadband on U.S. Agriculture: An Evaluation of the USDA Broadband Loan Program
Amy Kandilov et al.
Applied Economic Perspectives and Policy, December 2017, Pages 635-661


We evaluate the impact that the USDA's low-cost broadband loan programs have on the U.S. agricultural sector. The broadband loan programs increase access to high-speed Internet in recipient communities, which can raise farm sales by increasing both farm output and prices received by producers. Further, high-speed Internet may drive down costs by providing information on cheaper inputs and better management practices, leading to an overall improvement in farm profits. Using U.S. county-level data on farm sales and expenditures in 2000 and 2007, we employ an inverse probability weighting technique to control for endogenous selection in an econometric model that also accounts for spatial dependence. We find that the two USDA broadband loan programs have had positive causal impacts on farm sales, expenditures, and profits in a subset of rural counties - those adjacent to metropolitan counties - but not in other types of counties.

Strategic interaction and economic development incentives policy: Evidence from U.S. States
Jia Wang
Regional Science and Urban Economics, January 2018, Pages 249-259


This paper examines Economic Development Incentives (EDI) used by states. In particular, it examines if states engage in strategic interaction when making decisions about the total value of EDI offered in a given year. The goal is to better understand if competition among states for jobs and private investment is a contributing factor to the increase in EDI spending programs. Taking advantage of a national search engine, spatial econometric techniques are applied to state-level panel data and different metrics of neighborliness are considered to better identify patterns of EDI competition. Results from 48 states during the period 2007 to 2012 suggest the presence of strategic interaction: states increase their EDI spending when their neighbors do so. Estimates are robust to numerous specification checks, including an alternative source of EDI spending data. Notably, states compete more intensively over out-of-pocket incentives than those in the form of forgone revenue.


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