State of being

Kevin Lewis

September 17, 2012

The Popular Origins of Neoliberalism in the Reagan Tax Cut of 1981

Monica Prasad
Journal of Policy History, Summer 2012, Pages 351-383

"While elements of the right have always criticized the income tax, in the 1950s and 1960s the mainstream of the Republican Party was committed to balanced budgets, even at the price of tax increases. As the Kennedy administration considered tax cuts, Barry Goldwater thundered: 'deficit spending is not now and never has been the answer to unemployment.'...Because Reagan arrived in office with a fully worked-out policy agenda in place, it is his prepresidential records that are most useful for a picture of the origins of the policy. This new material affirms the arguments that some scholars, such as Elliot Brownlee and Eugene Steuerle, make about the importance of rising popular opposition to taxes caused by rising inflation. But this new material contradicts arguments that other scholars, particularly Kimberly Phillips-Fein and David Harvey, make about the importance of business interests to the origins of neoliberalism. While intervening in this debate, I also bring to light several elements of the events that have been forgotten: most important, that even after the 1978 property tax revolts the course of the tax-cut proposals was uncertain in the Republican Party, partly because of the opposition of business to large tax cuts for individuals; and that the cuts stayed on the agenda, and eventually became policy, because in them Republicans found a solution that they could offer to the major problem of the time, stagflation...[Reagan's] pollster, Richard Wirthlin, taking some soundings, found that tax limitation was popular everywhere. In one set of polls, he made a particularly intriguing discovery. He asked respondents what they thought of unnamed candidates who combined particular qualities: wants to attack inflation plus chooses a female vice president, say, or favors military spending plus tax limits. One of the qualities being combined was the candidate's age, a sore spot for Reagan, who would be seventy soon after taking office. Wirthlin found that '[l]imiting taxes is much more effective than either strong defense or a woman Vice President; at the same time, being 70 years old is the weakest attribute of all (indeed, only when coupled with limiting taxes does the 70-year-old with 'Republican' economic beliefs achieve victory).'...As the general campaign unfolded over the summer of 1980, however, public opinion in favor of tax reduction waned, and the Reagan team knew this...But Reagan did not back down on the promise of tax cuts. One reason he did not is that opinion polls also showed consistent, unwavering, and strong support for fighting inflation, and without the tax cut Reagan had nothing to offer that would take on that concern...After the plan passed and the extent of the deficit quickly became clear, financial markets tumbled, the media communicated the pessimism, and Reagan's popularity began to slide...And soon the administration was launched on a battle to increase taxes in order to close the deficit - beginning with rollbacks of the business tax cuts. But the individual tax cuts, the cuts that businesses had opposed, remained inviolable, and they would remain the unshakable center of politics and policy for several decades...Some have suggested that the individual rate cuts were a 'Trojan horse' for what the administration really wanted: business tax cuts and cuts in top tax rates. This stems from a comment OMB director David Stockman made to a journalist. But as an internal memo noted, 'if the Reagan tax cut were really a 'Trojan horse' to cut taxes for the rich and businessmen...Reagan would have accepted the Democrats' compromise. [In the summer of 1981, during the negotiations, the] Democrats wanted to give the same tax cuts to the top personal brackets, but much smaller personal tax-rate cuts for everyone else; they also wanted to give a much larger share of the tax cut to big business than Reagan's final bill.' This was an attempt to keep down the size of the revenue loss. Republicans responded to this compromise proposal as if it were radioactive: 'What an anticlimax,' Kemp fulminated, 'What an embarrassment for Democrats who are concerned about the state of our economy...Perhaps [Rostenkowski] thinks that only the wealthy respond to incentives. They do; but so do all Americans.' Note the distance that Kemp had traveled: his Jobs Creation Act of 1974 had focused largely on business tax cuts and did not contain individual tax rate cuts for the middle classes. But now he was mortally off ended by the suggestion to cut taxes for business and the wealthy only...It is clear from the story above that the key actors did not know what they were doing and were groping for solutions to an economic crisis that seemed to demand bold change. As Arthur Laffer himself put it, in a phrase that accurately sums up the whole episode: 'There's more than a reasonable probability that I'm wrong, but...why not try something new?'"


Can't We All Be More Like Scandinavians?

Daron Acemoglu, James Robinson & Thierry Verdier
MIT Working Paper, March 2012

In an interdependent world, could all countries adopt the same egalitarianism reward structures and institutions? To provide theoretical answers to this question, we develop a simple model of economic growth in a world in which all countries benefit and potentially contribute to advances in the world technology frontier. A greater gap of incomes between successful and unsuccessful entrepreneurs (thus greater inequality) increases entrepreneurial effort and hence a country's contributions to the world technology frontier. We show that, under plausible assumptions, the world equilibrium is necessarily asymmetric: some countries will opt for a type of "cutthroat" capitalism that generates greater inequality and more innovation and will become the technology leaders, while others will free-ride on the cutthroat incentives of the leaders and choose a more "cuddly" form of capitalism. Paradoxically, those with cuddly reward structures, though poorer, may have higher welfare than cutthroat capitalists -- but in the world equilibrium, it is not a best response for the cutthroat capitalists to switch to a more cuddly form of capitalism. We also show that domestic constraints from social democratic parties or unions may be beneficial for a country because they prevent cutthroat capitalism domestically, instead inducing other countries to play this role.


The Effect of Rising Income Inequality on Taxation and Public Expenditures: Evidence from US Municipalities and School Districts, 1970-2000

Leah Boustan et al.
Review of Economics and Statistics, forthcoming

The income distribution in many developed countries widened dramatically from 1970 to 2000. Some scholars argue that income inequality contributes to a host of social ills by undermining voters' willingness to support public expenditures. In contrast, we find that growing income inequality is associated with an expansion in government revenues and expenditures on a wide range of services in US municipalities and school districts. Results are robust to a number of model specifications, including instrumental variables that address endogeneity of the local income distribution. Our results are inconsistent with models predicting that heterogeneous societies provide lower levels of public goods.


The Tragedy of the Carrots: Economics and Politics in the Choice of Price Instruments

Brian Galle
Stanford Law Review, April 2012, Pages 797-850

Externalities are one of the most fundamental market failure justifications for government action, and Pigouvian taxes and subsidies are standard tools for correcting them. Even so, neither the legal nor the economic literature offers any comprehensive account of when policymakers should prefer taxes to subsidies or vice versa. This Article takes up that task. Prior efforts to distinguish between "carrots" and "sticks" have generally been limited to the context of pollution regulation, and I show here that even those efforts are incomplete. I also extend the analysis to the case of positive externalities, where there is little prior literature to speak of. Overall, I find that sticks are usually superior to carrots, but that there are some interesting exceptions. Nonetheless, carrots are rampant in modern lawmaking, especially carrots in the form of tax expenditures. I identify features of modern politics and law that contribute to the current inefficient overproduction of carrots. Among others, I find that federalism contributes to political preferences for carrots. That implies an until-now unrecognized reason to centralize certain forms of government regulation. Finally, I take issue with the claims of the environmental literature that carrots, even if the inferior policy choice, should be used when politics would be likely otherwise to frustrate any regulation. Using carrots in critical and closely contested situations only contributes to externality producers' incentives to raise the political stakes, either by cranking out more negative externalities or withholding benefits.


Democracy's Dignity

Josiah Ober
American Political Science Review, forthcoming

Dignity, as equal high standing characterized by nonhumiliation and noninfantilization, is democracy's third core value. Along with liberty and equality, it is a necessary condition for collective self-governance. Dignity enables robust exercise of liberty and equality while resisting both neglectful libertarianism and paternalistic egalitarianism. The civic dignity required for democracy is specified through a taxonomy of incompletely and fully moralized forms of dignity. Distinctive features of different regimes of dignity are modeled by simple games and illustrated by historical case studies. Unlike traditional meritocracy and universal human dignity, a civic dignity regime is theoretically stable in a population of self-interested social agents. It is real-world stable because citizens are predictably well motivated to defend those threatened with indignity and because they have resources for effective collective action against threats to dignity. Meritocracy and civic dignity are not inherently liberal, but may persist within a liberal democracy committed to universal human dignity.


Regulators and Redskins

Bentley Coffey, Patrick McLaughlin & Robert Tollison
Pubic Choice, October 2012, Pages 191-204

We examine the correlation between federal government activity and performance of the capital's National Football League team, the Washington Redskins. We find a positive, non-spurious, and robust correlation between the Redskins' winning percentage and bureaucratic output, measured by pages published in the Federal Register. Because the Redskins' performance is prototypically exogenous, we give this result a causal interpretation and provide a plausible, causal mechanism: bureaucrats must make "logrolling" deals to expand their regulatory power, and a winning football team offers a shared source of optimism to lubricate such negotiations. We do not find the same correlation when examining congressional activity.


Prices or Politics? The Influence of Markets and Political Party Changes on Oil and Gas Development in the United States

Karen Maguire
Energy Economics, forthcoming

This paper analyzes the influence of state and federal political party changes and market factors on the number of state oil and natural gas drilling permits issued. The findings, using a first-differenced empirical model for two samples, a 26-state sample, from 1990-2007, and a 19-state sample, from 1977-2007, indicate that the influence of political party changes are trumped by economic factors. Oil and natural gas prices are the main drivers of permitting changes, while the state and federal political party changes for the legislatures' and executive offices are consistently not significant.


Government spending, political cycles, and the cross section of stock returns

Frederico Belo, Vito Gala & Jun Li
Journal of Financial Economics, forthcoming

Using a novel measure of industry exposure to government spending, we show predictable variation in cash flows and stock returns over political cycles. During Democratic presidencies, firms with high government exposure experience higher cash flows and stock returns, while the opposite pattern holds true during Republican presidencies. Business cycles, firm characteristics, and standard risk factors do not account for the pattern in returns across presidencies. An investment strategy that exploits the presidential cycle predictability generates abnormal returns as large as 6.9% per annum. Our results suggest market underreaction to predictable variation in the effect of government spending policies.


Violence and property rights

Nils-Petter Lagerlöf
Journal of Economic Dynamics and Control, forthcoming

Since the middle ages, when Europe was still at a Malthusian stage of development, interpersonal violence has been in steady decline, and institutions and norms limiting violence - in particular property rights - have expanded. Here we put forward a Malthusian model of violence where these trends can be interpreted as a response to easing population pressure, following an acceleration in technological progress. The idea is that agents rationally risk dying in violent resource competition in order to make more of their children survive starvation. Violence carries a positive externality, because those who die free up resources for survivors. This generates a socially optimal level of violence, which can be implemented with the right amount of property rights protection. It is shown that faster technological progress can lead to a decline in violence and improved property rights protection, similar to the path followed by Europe.


Evolving Righteousness in a Corrupt World

Edgar Duéñez-Guzmán & Suzanne Sadedin
PLoS ONE, September 2012

Punishment offers a powerful mechanism for the maintenance of cooperation in human and animal societies, but the maintenance of costly punishment itself remains problematic. Game theory has shown that corruption, where punishers can defect without being punished themselves, may sustain cooperation. However, in many human societies and some insect ones, high levels of cooperation coexist with low levels of corruption, and such societies show greater wellbeing than societies with high corruption. Here we show that small payments from cooperators to punishers can destabilize corrupt societies and lead to the spread of punishment without corruption (righteousness). Righteousness can prevail even in the face of persistent power inequalities. The resultant righteous societies are highly stable and have higher wellbeing than corrupt ones. This result may help to explain the persistence of costly punishing behavior, and indicates that corruption is a sub-optimal tool for maintaining cooperation in human societies.


Continuity, change, and priorities: The quality and use of regulatory analysis across US administrations

Jerry Ellig, Patrick McLaughlin & John Morrall
Regulation & Governance, forthcoming

This paper compares the quality and use of regulatory analysis accompanying economically significant regulations proposed by US executive branch agencies in 2008, 2009, and 2010. We find that the quality of regulatory analysis is generally low, but varies widely. Budget regulations, which define how the federal government will spend money or collect revenues, have much lower-quality analysis than other regulations. The Bush administration's "midnight" regulations finalized between Election Day and Inauguration Day, along with other regulations left for the Obama administration to finalize, tended to have lower-quality analysis. Most differences between the Bush and Obama administrations depend on agencies' policy preferences. More conservative agencies tended to produce better analysis in the Obama administration, and more liberal agencies tended to do so in the Bush administration. This suggests that agencies more central to an administration's policy priorities do not have to produce as good an analysis to get their regulations promulgated.


Consensus building on the FOMC: An analysis of end of tenure policy preferences

Eric Johnson, Michael Ellis & Diana Kotenko
Economics Letters, October 2012, Pages 368-371

We document a behavioral idiosyncrasy in which Federal Reserve Bank presidents prefer tighter monetary policy at the end of their tenures. This suggests that consensus building on the Federal Open Market Committee occurs by moderating the policy preferences expressed by the presidents, rather than convincing them the consensus policy is superior.


The Hated Property Tax: Salience, Tax Rates, and Tax Revolts

Marika Cabral & Caroline Hoxby
Stanford Working Paper, April 2012

Because of the manner in which it is normally paid, the property tax is almost certainly the most salient major tax in the U.S. The property tax is also the least popular tax and the only major tax whose revenues have declined as a share of income. We hypothesize that high salience explains the unpopularity of the property tax, the level of the property tax, and prevalence of property tax revolts. To identify variation in the salience of the property tax over local jurisdictions and over time, we exploit conditionally random variation in tax escrow. Tax escrow is a method of paying the property tax that makes it much less salient -- as we demonstrate using survey evidence. We find that areas in which the property tax is less salient are areas in which property taxes are higher and property tax revolts are less likely to occur.


The Dynamic Effects of Personal and Corporate Income Tax Changes in the United States

Karel Mertens & Morten Ravn
American Economic Review, forthcoming

This paper estimates the dynamic effects of changes in taxes in the United States. We distinguish between the effects of changes in personal and corporate income taxes using a new narrative account of federal tax liability changes in these two tax components. We develop an estimator in which narratively identified tax changes are used as proxies for structural tax shocks and apply it to quarterly post WWII US data. We find that short run output effects of tax shocks are large and that it is important to distinguish between different types of taxes when considering their impact on the labor market and the major expenditure components.


The logic of strategic ignorance

Linsey McGoey
British Journal of Sociology, September 2012, Pages 533-576

Ignorance and knowledge are often thought of as opposite phenomena. Knowledge is seen as a source of power, and ignorance as a barrier to consolidating authority in political and corporate arenas. This article disputes this, exploring the ways that ignorance serves as a productive asset, helping individuals and institutions to command resources, deny liability in the aftermath of crises, and to assert expertise in the face of unpredictable outcomes. Through a focus on the Food and Drug Administration's licensing of Ketek, an antibiotic drug manufactured by Sanofi-Aventis and linked to liver failure, I suggest that in drug regulation, different actors, from physicians to regulators to manufacturers, often battle over who can attest to the least knowledge of the efficacy and safety of different drugs - a finding that raises new insights about the value of ignorance as an organizational resource.


Government ownership of banks, job creation opportunities and employment growth

Nurullah Gur
Economics Letters, November 2012, Pages 509-512

In this paper, we investigate the effect of government ownership of banks on employment growth. Our empirical results show that government ownership of banks reduces employment growth in industries with higher job creation opportunities.


What Happens in Vegas: Hunter S. Thompson's Political Philosophy

Jason Vredenburg
Journal of American Studies, forthcoming

In the forty years since its publication, Hunter S. Thompson's most famous work, Fear and Loathing in Las Vegas, has received relatively little attention from scholars, in spite of its continuing popularity and acknowledged influence. Because the narrative is so thoroughly rooted in what Thompson called "this foul year of Our Lord, 1971," the novel is generally approached (when it is discussed at all) as a historical artifact, a gonzo first draft of history, with its fortunes rising and falling with the counterculture of the 1960s. This article argues that Fear and Loathing in Las Vegas, far from being merely an epitaph for the 1960s, actually anticipates the more recent work of political theorists Giorgio Agamben, Michael Hardt, and Antonio Negri. Thompson's work, like Agamben's, concerns the emergence of the state of exception and the homo sacer as new paradigms for the relationship between citizen and state; and, like Hardt and Negri, Fear and Loathing in Las Vegas attempts to formulate a response to the emergence of global empire.


Worlds of Welfare Capitalism and Wellbeing: A Multilevel Analysis

Chris Deeming & David Hayes
Journal of Social Policy, October 2012, Pages 811-829

Social scientists in the comparative policy tradition have long argued that welfare systems in modern capitalist societies can be broken down into ideal types. The idea of different worlds of welfare capitalism has an enduring appeal and growing practical policy relevance as governments seek to enhance population wellbeing. In this paper, we explore the worlds of welfare theory from the perspective of happiness. Drawing on data from the World Values Survey, we examine how welfare regimes may contribute to wellbeing and we consider the significance of our findings for the development of social policy. By using multilevel models, it is possible to separate out effects due to observed and unobserved, as well as both individual-level and country-level, welfare state characteristics and we can make inferences to the distribution of social wellbeing across welfare typologies. We find that respondents living in liberal and conservative countries experience at least twice the odds of unhappiness of those living in social democracies, after controlling for individual- and country-level explanatory variables. The observed differences between the worlds of welfare were found to be highly statistically significant.


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