Category: Political Science
Temporary vs. permanent increases in government spending
Not long ago Paul Krugman wrote:
To a first approximation, in other words, the effect of current fiscal policy — whether stimulus or austerity — an [on?] the actions of future governments is zero.
He makes further points at the link, although there is not a citation to the literature. I thought we should look at the evidence a little more closely. Some of it contradicts Krugman as read literally, though it is not all bad news for his larger point.
Here is an abstract from Brian Goff:
In spite of Peacock and Wiseman’s 1961 NBER study demonstrating the “displacement effect”, simplistic theoretical and empirical distinctions between temporary and permanent spending are common. In this paper, impulse response functions from ARMA models as well as Cochrane’s non-parametric method support Peacock and Wiseman’s conclusion by showing 1) government spending in the aggregate displays strong persistence to temporary shocks, 2) simple decomposition methods intended to yield a “temporary” spending series have a weak statistical foundation, and 3) persistence in spending has increased during this century. Also, as a basic “fact” of government spending behavior, the displacement effect lends support to interest group and bureaucracy models of government spending growth.
There is persistence to spending, although this study does not create a category for stimulus spending per se, however that concept might be defined. The work of Robert Higgs also provides a clear look at ratchet effects on government spending, control, and regulation, although Higgs focuses on war rather than spending. State governments also seem to exhibit a ratchet effect, whereby good times bring about permanently higher budgetary demands, if only through endowment effects, lock-in, and status quo bias.
That said, the federal debt/gdp ratio seems to show mean reversion, as does the measure of primary surplus. That would mean that fiscally troubled situations are followed by improvements, though not necessarily from spending decreases. In fact there has been considerable reliance on a “growth dividend.” And here is Henning Bohn from the QJE:
How do governments react to the accumulation of debt? Do they take corrective measures, or do they let the debt grow? Whereas standard time series tests cannot reject a unit root in the U. S. debt-GDP ratio, this paper provides evidence of corrective action: the U. S. primary surplus is an increasing function of the debt-GDP ratio. The debt-GDP ratio displays mean-reversion if one controls for war-time spending and for cyclical fluctuations. The positive response of the primary surplus to changes in debt also shows that U. S. fiscal policy is satisfying an intertemporal budget constraint.
In other words, we make up for first-temporary-then-permanent spending boosts by a mix of growth and higher taxes. Krugman might well be happy with that scenario, but the data do show intertemporal interdependence for budgetary decisions, with a mix of persistence on one variable (spending) and mean-reversion on another (debt-gdp ratio). And if you think a lot of government spending is inefficient, you should still be troubled by apparently “temporary” spending bursts.
As with much of macroeconomics, I would apply a good dose of agnosticism to these results (noting that agnosticism is not the same as assuming zero effect), but still the correlations are consistent with my intuitions more generally.
Pop Bonds
Pay on Performance Bonds incentivize private-sector creativity in the performance of public goals. One of the first Pop bonds (also called social improvement or social impact bonds, SIBs) was pioneered by the British government and the UK group Social Finance. The UK Pop bond is designed to reduce prisoner re-conviction rates. Social Finance raised about $8 million from investors to fund a variety of programs for released prisoners, helping them to find work, stay off alcohol and drugs, reintegrate with society and so forth. The programs are managed by a group of non-profits. The UK government has agreed to pay the investors a return but only if reconviction rates are 7.5% less than those of a control group. If reconviction rates fall below the target level, the investors will earn a good rate of return, 7.5-13%, depending on how far rates fall below the control, but they could also lose everything if rates do not fall. The Pop bond issued in 2010 and appears to be going well although no (potential) bond payments are scheduled until 2014.
A Pop bond puts little risk on governments, who pay nothing if the program does not work but who save money if the program does work. With less at risk government should be willing to experiment more and try new approaches to problems. By contracting out, the government also eliminates a public bureaucracy resistant to change. Most importantly, a Pop bond encourages creativity and innovation in social programs. Investors in a Pop bond have an incentive to monitor the groups implementing the programs and to ensure that they choose the very best, most cost-effective programs. The better the program works, the more the investors earn. If Pop bonds expand it may even pay investors to undertake their own experiments to see how best to maximize their returns.
For Pop bonds to work it is critical that outcomes be measured and marked to an appropriate, randomized, control group. If not carefully monitored, the private sector will also excel at innovative and creative gaming at the public expense (see the comments for some suggestions).
More Pop bonds are being planned in the UK and the idea is also catching on in the United States. The Department of Justice and the Department of Labor both have pilot programs in the works and Massachusetts has issued a request for proposals. By the way, Pop bonds are said to be a new idea but the U.S. bounty hunter and bail bond system which works very well is a clear precursor as is the system of privateering.
Pop bonds have the potential to produce public goods with private innovation; they are an idea worth watching.
Warn people about two things
One problem with disclosure regulation is that people grow accustomed to the warnings and caveats and their eyes glaze over. They stop paying attention.
So let’s say you are the Über-regulator. You get to warn people about two things. Once.
Of course they may not listen to you at all, but let’s assume you have enough credibility from your political post to be given half an hour on network TV and subsequent extensive coverage and commentary on blogs and Twitter. That said, especially useful warnings, such as “You’re not as smart as you think” are perhaps especially likely to be ignored. “Honor They Superior!” is perhaps also a non-starter, though you may try it if you wish.
Which two things do you pick for your warning?
“Driving is dangerous”
“Fight nuclear proliferation.”
“Don’t let your kid near a bucket.”
“Politics isn’t about policy.”
“Beware the Ides of March!”
“Some people out there suck!”
The correct answer is not obvious. And what does this imply about regulation more generally?
I thank Bryan Caplan for a useful conversation on this topic.
The French election campaign continues
Sarkozy struck a strident new tone in a Sunday rally.
He threatened to pull France out of the Schengen open borders agreement and demanded the European Union adopt measures to fight cheap imports, warning that France might otherwise pass a unilateral “Buy French” law.
“I want a Europe that protects its citizens. I no longer want this savage competition,” he declared to a cheering crowd. “I have lost none of my will to act, my will to make things change, my belief in the genius of France.”
The story is here.
Syrian arbitrage markets in everything
…insurgent commanders say most of their weapons come from the very army they’re fighting, either seized or purchased in a thriving illicit trade. Intermediaries such as a merchant known as Abu Hussein arrange arms deals between the two sides.
Abu Hussein described how the rebels will shoot a few times at a government checkpoint, giving soldiers the cover to fire off their weapons. If the troops expend 200 bullets, Abu Hussein said, they may tell their superiors that 400 bullets were fired. The remaining 200 bullets will be sold to the rebels, typically for 150 Syrian pounds (about $2.50) per bullet.
The full story is here, and I thank Daniel Lippman for the pointer.
American public opinion toward the space program
From Alexis Madrigal, this was news to me:
In thinking about the recent battles over NASA’s budget, it seems like the problem is simply citizen support. People don’t care that much about space, so space doesn’t get funded. Back in the Apollo days, people loved the space program! Except, as this Space Policy paper pointed out, they didn’t. A majority of Americans opposed the government funding human trips to the moon both before (July 1967) and after (April 1970) Neil Armstrong took a giant leap for mankind. It was only in the months surrounding Apollo 11 that support for funding the program ever reached above 50 percent.
The public choice of higher French tax rates
Remember last week when Hollande and the Socialists proposed a top marginal rate of 75% and enjoyed a boost in the polls? Suddenly the idea is meeting with greater public resistance:
Even though the vast majority of earners in France wouldn’t be liable, Hollande’s tax has been a headline-grabber in the presidential campaign, partly because football is proving to be among the most vocal of its critics. Only income above 1 million euros ($1.31 million) would face the top whack of 75 percent. The first million earned would be taxed at lower rates. Just 3,000 of the highest-earning taxpayers in France are likely to be affected.
From French league president Frederic Thiriez down, the refrain is often the same: top players will flee to countries with lower taxes, leaving France — the 1998 World Cup champion — with second-rate football. Thiriez estimates 120-150 players — about one-quarter of those in France’s top division — earn enough to make them liable for Hollande’s tax. In Italy, Germany, England and Spain, which have Europe’s strongest leagues and clubs, top income tax rates range from 43 to 52 percent. The current top rate in France is 41 percent.
“It would be the death of French football,” Thiriez told sports newspaper L’Equipe. To RMC radio, he spoke of a “catastrophe” and of France relegated to “play in the second division of Europe, along with Slovenia or countries like that.”
Michel Seydoux, president of current French champion, Lille, said Hollande’s tax would produce “an impoverished spectacle.”
Still, there is pushback:
He’s thrown back the criticism from football, suggesting it is living too well. Specifically, he cited the multimillion euro salary the Qatari owners of Paris Saint-Germain reportedly pay their Italian manager, Carlo Ancelotti.
“Football administrators need to clean house a bit,” Hollande said. “Does the level of our league justify such astronomic salaries?”
…”When you see their cars in the garage here, it makes you sick,” said Thomas Mascheretti, a fan who approved of Hollande’s proposal.
File under: Ideas have Consequences.
The article is here, and for the pointer I thank Fred Smalkin.
The hangover from a dishonest election
That is the Russian stock index. The decline may well be noise, but a fall of over 3 percent is nonetheless worth a ponder.
Democracy, wealth, and local stimulus spending
Paul Krugman asked a good question yesterday: “…if states and localities can borrow freely, how do you explain the drastic fall in their spending I have been documenting?”
This is maybe too literal an answer to address his macroeconomic concerns, but I view state and local government spending as falling because voters wanted it to, either directly or indirectly. Inflation-adjusted net worth per capita is still below the level of the late 1990s, and not returning any time quickly (an important point), and so voters/spenders wanted to cut back somewhere. Local government is the target they chose, and not just in the Red states. My point is not that the median voter is all-wise, but rather the Austerians are the guy next door. Voters apparently don’t see marginal local government activity as having the same value as cash in their pockets. There still may be a role for a federal fiscal bridge to ease the transition, but in democratic systems some expenditure declines are in the cards, just as the rollicking revenues of earlier years led to big boosts in state and local spending. We are not as wealthy as we thought we were, and greater federal borrowing can blunt this reality only to some extent. The notion of a voter ideal point ought to somewhere enter the analysis.
A few months ago I saw a tweet — I forget from whom — noting that the economy would be (would have been) booming if only not for the state and local cutbacks. I differ from that perspective, and I would rephrase it as the (not false) claim that the economy would be booming if only we were wealthier.
I’ve yet to see a good analysis of how freely state and local governments can borrow at the margin, especially in response to a decline in tax revenues. Many bloggers have attacked this piece by John Taylor (pdf), as Taylor argued that the stimulus aid led to a corresponding reduction in state and local borrowing. We still don’t know if this is true, but do we know that it is false? The arguments against Taylor consist of little more than saying he cannot be right. Check out the graph on Taylor’s p.5, noting that inverse correlation is not the same as causality. It’s striking nonetheless, as state and local borrowing goes down as receipts from the federal government go up. Constitutional balanced budget requirements may or may not bind, as many state and local governments can “borrow” quite readily by adjusting contributions to their pension funds, among other moves.
A related question is how voters understand the ability of their state and local governments to spend more by “borrowing” against pension funds, or changing accounting, or in other words what they saw as the opportunity cost of continuing previous levels of public spending at the state and local levels.
My view in 2009 was that federal aid to state and local governments was the one part of the stimulus bill which made sense. It is easier to preserve old jobs than to create new ones. Still, when it comes to analyzing the state and local cutbacks, and the effectiveness of federal aid, we don’t have a lot of clear answers.
Conspiracy theory bleg
People in other countries, including the elites, often believe quite bizarre conspiracy theories about the United States and its government, even when those theories contradict each other. Do you know of good social science research trying to explain the (general) content of what they believe, why they believe it, and how they ever — if indeed they ever — come to a more reasoned understanding?
I thank you all in advance for your suggestions.
Not a joke
…as far as I can tell. From a quite reputable newspaper, here goes:
For 150 years, no country has expressed interest in adopting the Canadian dollar — the poor cousin to the coveted greenback.
But now tiny Iceland, still reeling from the aftershocks of the devastating collapse of its banks in 2008, is looking longingly to the loonie as the salvation from wild economic gyrations and suffocating capital controls.
And for the first time, the Canadian government says it’s open to discussing the idea.
In brief remarks to be delivered Saturday in Reykjavik, Canadian ambassador Alan Bones will tell Icelanders that if they truly want the Canadian dollar, Canada is ready to talk.
But he will warn Icelanders that unilaterally adopting the loonie comes with significant risk, including complete loss of control over their monetary policy because the Bank of Canada makes decisions only for Canadians and the Canadian economy.
Kudos to all of you who had been predicting that.
For the pointer I thank M Kaan, maybe someone is playing an elaborate joke on Bob Mundell here.
True or false?
As commodities prices fall, the rights of women rise.
James Q. Wilson has passed away at 80
He was one of America’s leading social scientists, here is one appreciation. Here is his Wikipedia page. Here is a 1995 interview with Reason magazine. Here is Wilson on scholar.google.com. Here is his address on the moral sense (pdf). Here is one of his famous essays on police behavior. Here are some remarks in praise of Wilson. Here are many more links.
I think of him as one of the few people who had a truly famous and memorable middle initial.
Arab dictators’ wives
Via Mark Koyama, I found this Guardian article fascinating, here is one excerpt, concerning Syria:
The pinnacle of Asma’s international media charm offensive was a gushing piece in last March’s American Vogue, just before the Syrian uprising began and was met with a crackdown. The article has now mysteriously disappeared from the magazine’s website. Described as a “rose in the desert”, “the freshest and most magnetic of first ladies”, Asma, dressed in jeans, heels and a T-shirt with “Happiness” emblazoned on the back, describes how her home, a triplex apartment, is run “on wildly democratic principles” – seemingly far from the brutal one-party state oppression going on outside.
Looking at her three children, she says: “We all vote on what we want, and where.” Pointing to the dining room chandelier, which is constructed from cut-out comic books, she says: “They outvoted us three to two on that.” Against a backdrop of designer bags, private jets and SUVs, Asma tells Vogue her “central mission” is “to change the mind-set of 6 million Syrians under 18”, encourage them to engage in what she calls “active citizenship.”
The value of diversification, Haitian style
The confirmation that senior Haitian officials hold foreign nationality lends growing credence to a leading senator’s charge that Haitian President Michel Martelly is a U.S. citizen and hence illegally in power.
Two weeks ago, Sen. Moïse Jean Charles submitted what he called “irrefutable” evidence to a special Senate Select Committee that Martelly and 38 other high government officials hold dual, and sometimes triple, nationalities.
On Jan. 24, Sen. Joseph Lambert, the Commission’s president, announced in a press conference that the Commission has confirmed dual nationality for two of the 10 cases it has investigated to date. However, Lambert has so far refused to release the names of dual citizenship officials, saying his commission would proceed “impartially” and “without emotion.” He said arrangements have been made to continue the nationality investigations overseas.
The Senate inquiry threatens to create a political crisis which may force President Martelly, his Prime Minister Garry Conille, and other ministers to step down. If the charges against him prove true, it means that candidate Martelly lied to election officials about holding dual citizenship, which current Haitian law explicitly forbids for a high elected official.
Here is more. There is the small matter of the Haitian constitution:
Commission member Sen. Steven Irvenson Benoît said that Haiti’s 1987 Constitution prohibits any foreign national not only from becoming president or prime minister, but also from acting as a minister or secretary of state. The Constitution’s Article 56 stipulates: “An alien may be expelled from the territory of the Republic if he becomes involved in the political life of the country, or in cases determined by law.“
Michel Martelly (“Sweet Mickey”) spent so much time in the United States, often giving concerts, that for years I simply assumed he held dual citizenship. Until recently, I had not known about this provision of the Haitian constitution. What is the old Haitian saying?:
“The constitution is paper, the bayonet is steel.”
Or something like that.