Show Me the (Stimulus) Money

Kevin Lewis

September 30, 2009

The new, stimulated look:


A better budget rule

Michael Dothan & Fred Thompson
Journal of Policy Analysis and Management, Summer 2009, Pages 463-478

Debt limits, interest coverage ratios, one-off balanced budget requirements, pay-as-you-go rules, and tax and expenditure limits are among the most important fiscal rules for constraining intertemporal transfers. There is considerable evidence that the least costly and most effective of such rules are those that focus directly on the rate of spending growth, even with their seemingly ad hoc nature and possibilities for circumvention. In this paper, we use optimal control theory and martingale methods to justify a transparent, nonarbitrary rule governing maximum sustainable rate of spending growth, treating the revenue structure of a jurisdiction as a given continuous-time stochastic process. Our results can be used to determine whether a proposed rate of spending growth is sustainable or not.


Understanding the Economic Consequences of Shifting Trends in Population Health

Pierre-Carl Michaud, Dana Goldman, Darius Lakdawalla, Yuhui Zheng & Adam Gailey
NBER Working Paper, August 2009

The public economic burden of shifting trends in population health remains uncertain. Sustained increases in obesity, diabetes, and other diseases could reduce life expectancy - with a concomitant decrease in the public-sector's annuity burden - but these savings may be offset by worsening functional status, which increases health care spending, reduces labor supply, and increases public assistance. Using a microsimulation approach, we quantify the competing public-finance consequences of shifting trends in population health for medical care costs, labor supply, earnings, wealth, tax revenues, and government expenditures (including Social Security and income assistance). Together, the reduction in smoking and the rise in obesity have increased net public-sector liabilities by $430bn, or approximately 4% of the current debt burden. Larger effects are observed for specific public programs: annual spending is 10% higher in the Medicaid program, and 7% higher for Medicare.


Does Presidential Primary and Caucus Order Affect Policy? Evidence from Federal Procurement Spending

Andrew Taylor
Political Research Quarterly, forthcoming

This article examines the contention that states with early presidential primaries or caucuses receive disproportionate distributive policy benefits. The basic theory is that presidential candidates pledge more federal spending per capita to these states because doing well in their contests is critical to capturing the nomination. Candidates then deliver on these promises if they win the White House. Using by-state procurement per capita data from 1984 to 2004, four conditional hypotheses derived from this thinking are tested. The results show that primary or caucus order matters only during competitive nominations when the ultimately victorious presidential candidate won the state's contest.


Americans' Social Policy Preferences in the Era of Rising Inequality

Leslie McCall & Lane Kenworthy
Perspectives on Politics, September 2009, Pages 459-484

Rising income inequality has been a defining trend of the past generation, yet we know little about its impact on social policy formation. We evaluate two dominant views about public opinion on rising inequality: that Americans do not care much about inequality of outcomes, and that a rise in inequality will lead to an increase in demand for government redistribution. Using time series data on views about income inequality and social policy preferences in the 1980s and 1990s from the General Social Survey, we find little support for these views. Instead, Americans do tend to object to inequality and increasingly believe government should act to redress it, but not via traditional redistributive programs. We examine several alternative possibilities and provide a broad analytical framework for reinterpreting social policy preferences in the era of rising inequality. Our evidence suggests that Americans may be unsure or uninformed about how to address rising inequality and thus swayed by contemporaneous debates. However, we also find that Americans favor expanding education spending in response to their increasing concerns about inequality. This suggests that equal opportunity may be more germane than income redistribution to our understanding of the politics of inequality.


Wages, welfare benefits and migration

John Kennan & James Walker
Journal of Econometrics, forthcoming

Differences in economic opportunities give rise to strong migration incentives, across regions within countries, and across countries. In this paper we focus on responses to differences in welfare benefits across States. We apply the model developed in Kennan and Walker (2008), which emphasizes that migration decisions are often reversed, and that many alternative locations must be considered. We model individual decisions to migrate as a job search problem. A worker starts the life-cycle in some home location and must determine the optimal sequence of moves before settling down. The model is sparsely parameterized. We estimate the model using data from the National Longitudinal Survey of Youth (1979). Our main finding is that income differences do help explain the migration decisions of young welfare-eligible women, but large differences in benefit levels provide surprisingly weak migration incentives.


Corporate Tax Reform, Finally, After 100 Years

George Yin
University of Virginia Working Paper, September 2009

Future increases to the top income tax rates for individuals and reductions to the corporate tax rate will invite the widespread use of C corporations as tax shelter vehicles, an old problem that has never been addressed successfully. The changes could even resurrect the need for the collapsible-corporation provision, described by the ALI as "characterized by a pathological degree of complexity, vagueness and uncertainty." This short essay, to be included with a group of submissions for the Volcker Tax Reform panel, urges that the corporate tax be limited to public firms, with all non-public firms taxed under a passthrough tax system. In addition to preventing the tax shelter problem, the change would improve equity and efficiency by taxing the owners of all closely held firms in a more similar fashion, and allow for simplification and reform of the corporate tax. The proposed change would reverse a policy decision made exactly 100 years ago when the income taxation of the owners of corporations was impermissible. Although Congress may soon be forced to adopt income tax rates reminiscent of years prior to 1986, it need not and should not bring with that change the same impenetrable problems and failed solutions of that bygone era.


Taxing Deficits to Restrain Government Spending

Nikolai Stähler
Journal of Public Economic Theory, February 2009, Pages 159-176

In a dynamic model of fiscal policy, social polarization provokes a deficit bias. Policy advisors have recently proposed that governments running a deficit should be forced to generate additional tax revenue. We show that this deficit taxation reduces each group's spending bias today because it decreases the fear that the financial resource will not be available tomorrow due to the other groups' spending behavior. This effect adds to the literature as previous findings focused mainly on the fact that deficit taxation reduces excessive spending because it increases the likelihood of politicians being voted out of office as the private sector dislikes taxation. In the present setup, the effect is driven solely by internalizing the externality exerted on tomorrow's spending potential.


Does the Gubernatorial Term Limit Type Affect State Government Expenditures?

Monica Escaleras & Peter Calcagno
Public Finance Review, September 2009, Pages 572-595

Political institutions within a society often serve to create the rules governing economic actions, to establish norms of economic behavior, and ultimately to help explain the relative economic performance of society. Institutions like budgetary constraints, party ideology, term limits, and voting methods have been analyzed with emphasis on the interplay of politics and economics. Within this field, we believe that the study of term limits is of particular importance. Hence, this article empirically investigates the link between the different types of gubernatorial term limits and state expenditures, after controlling for political institutions. Using panel data from thirty-seven U.S. states between 1971 and 2005, we find that all three types of term limits (weak, moderate, and strong) have a positive impact on gubernatorial spending. However, only weak and moderate term limits are statistically significant, suggesting that the more lenient is the constraint on the governor the greater is the impetus to spend.


Do Leaders Affect Government Spending Priorities?

Adi Brender & Allan Drazen
NBER Working Paper, September 2009

Since a key function of competitive elections is to allow voters to express their policy preferences, one might take it for granted that when leadership changes, policy change follows. Using a dataset we created on the composition of central government expenditures in a panel of 71 democracies over 1972-2003, we test whether changes in leadership induce significant changes in spending composition, as well as looking at the effect of other political and economic variables. We find that the replacement of a leader tends to have no significant effect on expenditure composition in the short-run. This remains true after controlling for a host of political and economic variables. However, over the medium-term leadership changes are associated with larger changes in expenditure composition, mostly in developed countries. We also find that in established democracies, election years are associated with larger changes in expenditure composition while new democracies, which were found by Brender and Drazen (2005) to raise their overall level of expenditures in election years, tend not to have such changes.


The Political Manipulation of U.S. State Rainy Day Funds Under Rules Versus Discretion

Shanna Rose
State Politics & Policy Quarterly, Summer 2008, Pages 150-165

Anecdotal evidence suggests that U.S. state politicians manipulate rainy day funds for political purposes, but such claims remain untested in the literature. This article finds that lawmakers withdraw nearly three times more funds in response to a deficit shock of a given size if it occurs in an election year rather than in a non-election year; this occurs despite the fact that the magnitude of shocks does not vary over the electoral cycle. This effect is stronger when incumbents are eligible for re-election than when they are term-limited. When it comes to preventing political manipulation of funds, rainy day fund rules that increase the number of veto players who must approve of withdrawals seem to be more effective than rules that specify the economic conditions under which funds may be withdrawn.


Optimal Income Taxation and Public Good Provision with Endogenous Interest Groups

Felix Bierbrauer
Journal of Public Economic Theory, April 2009, Pages 311-342

This paper studies public goods provision when agents differ in earning abilities as well as preferences. Heterogeneity in skills makes redistribution desirable and generates an equity-efficiency trade-off. If tax revenues are devoted to a public good, this trade-off is affected in such a way that income transfers are less desirable. High-skilled individuals thus have an incentive to exaggerate their preferences for public goods. Analogously, low-skilled individuals lobby against public good provision. A requirement of collective incentive compatibility eliminates these biases. It implies that income transfers are increased whenever a public good is provided and are decreased otherwise.

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