The macroeconomics of unbalanced growth and the expanding public sector: Some simple tests of a model of government growth

A now classic model of public sector growth is Baumol's (1967) ‘Macroeconomics of Unbalanced Growth’. That model implies that one cause of public sector expenditure growth is a low or zero rate of productivity growth in the public sector relative to the private sector. Previous studies have tested, and partially confirmed, the Baumol hypothesis by computing productivity indices for various public sector activities. In this paper I attempt to test that model in a more direct manner. The unbalanced growth model is used to predict growth rates of per capita government expenditures, government's share of GNP and the pattern of government expenditure growth. These predictions are compared with observed growth rates of aggregate government expenditures. The model predicts the growth rate aggregate government expenditures, the growth rate of government's share of GNP, and the pattern of government expenditure growth reasonably well, and the data tend to support the Baumol model.     

Specification and Estimation of ELES

The Extended Linear Expenditure System b reformulated to yield private per capita net worth as the basic explanatory variable. As a by-product the model implies that the marginal propensity to consume/save out of permanent income varies with the rate of interest. In the estimation, account is taken of inconsistencies in data compiled from different sources by explicity including the savings relationship in the system. Parameter estimates based on Australian data are presented.     

Explaining aggregate investment in Britain: The importance of Tobin's Q

This note reports on work done in testing Tobin's ‘Q’ theory of investment on British data. Investment by industrial and commercial companies over 1960–1977 was studied. Q was found to be both significant and important, outperforming other plausible variables.     

Food expenditures and household demographic composition in the US: a demand systems approach

Food expenditures and subsistence quantities of poverty status and non–poverty status US households are analysed within a Linear Expenditure System that postulates subsistence quantities to be linear combinations of demographic variables. Using the US Bureau of Labor Statistics' 1992 Consumer Expenditure Survey and Detailed Monthly Consumer Price Indices, this article obtains expenditure elasticities, own–price elasticities and subsistence quantities for each income group across nine broadly aggregated food commodity groups. Elasticity estimates and subsistence quantity estimates differ across income groups, supporting the premise that policies targeted at specific income groups should be based on the target group's elasticity estimates rather than average population elasticities. Parameter estimates are then used to simulate how subsistence quantities and own–price elasticities can be expected to vary according to the demographic composition of the household within a specific income group.     

The roles of relative prices,interest rates,and bequests in the consumption function

This paper investigates the roles of relative prices, interest rates, inflation expectations and bequests in the determination of consumer expenditures for four goods in the U.S. The framework employed is a life-cycle extension of the Linear Expenditure System, in which relative prices, wealth, labor income, the nominal interest rate, and anticipated rates of inflation for each good are major arguments. The results provide strong empirical support for the expenditure system employed and suggest a significant role for relative prices and for the bequest motive in shaping saving decisions. We also find that expenditure decisions respond to both interest rates and anticipated inflation in a “Fisherian” fashion, but that the interest elasticity of saving is quite low and of uncertain sign. Our model also provides an estimate of the consumer's “horizon,” defined in the sense of Friedman.     

Economies of scale and scope in petroleum refining

Despite evidence that aggregate consumption of complex carbohydrates has risen over the last decade, food consumption surveys suggest that fewer households are consuming less bread, pasta rice, potatoes and corn. This paper estimates systems of complex carbohydrae demand using cross-sectional data from 1977–78 and 1987–88 in order to explain this paradox. Changes in demand that are not explained by changes in prices or income are explained by variations in taste. Because tastes cannot be directly observed, the paper uses a multiple indicator and multiple cause (MIMIC) model to construct a suitable proxy variable. In the MIMIC approach, the ‘indicators’ are residuals from a household demand function that includes prices and incomes as explanatory variables, while household and demograhic proxies are ‘cause’ variables. The objectives in applying the MIMIC model are to determine the effect of consumer tastes on complex carbohydrate demand and, comparing cross-sectional survey data from two different periods, test the hypothesis that these tastes change over time. The data consist of US complex carbohydrate prices and expenditures, taken from the USDA Household Food Consumption Surveys in 1977–78 and 1987–88. The results show that structural changes in demand, or those that are not explained by changes in price, income, or the cause variables, led to an increase in complex carbohydrate demand of 5% from 1977–78 to 1987–88. However, changes in demand explained by the cause variables cause demand to fall by 9%.     

Non-farm Income and Consumption Expenditures in Rural Bangladesh: Empirical Evidence from Multilevel Regression Modelling

This study examines the effects of non-farm income on household consumption expenditures in rural Bangladesh. A two-stage endogenous treatment effect model is built on data from a nationally representative Household Income Expenditure Survey (HIES) 2010 to control selection bias. The HIES follows a hierarchical data structure because the survey is based on two-stage stratified sampling. A multilevel mixed-effects linear regression model is used to capture the unobserved heterogeneity between clusters (PSUs) along with revealing important factors. Results reveal that non-farm income has a significant positive effect on household’s consumption expenditures and non-farm income recipient households spend about 29% more than their counterparts. In addition, higher level of per capita income, education, smaller family size and lower dependency ratio are found to be more effective in increasing consumption expenditures of rural households. Significant cluster-level variations are observed in the analyses. This study recommends that non-farm income generating activities should be encouraged among rural households as this would raise their consumption expenditures and hence, improve welfare and living standards among them.

     

The treatment of ‘quality’ in the cost of living index

This paper develops the implications of cost of living index theory for measuring the impact of changes in the availability and prices of goods on a household's welfare. It considers both the ‘goods approach’, which treats each variety as a separate entity, and two characteristics approaches: ‘L-characteristics’ and ‘H-characteristics’. L-characteristics are Lancaster's ‘linear and additive’ specification; H-characteristics are Houthakker's ‘heterogeneous’ specification in which the household consumes only a single variety of each product. The paper concludes by discussing the implications of the theory for actual index number construction and relating it to the literature on ‘quality’ and ‘hedonic indexes’.     

The intertemporal externality in the dynamic common property renewable resource problem

We develop a model in which agent i's ‘catch’ in time t affects his and all other agents' ‘catches’ in time t + 1. There is no static externality in this dynamic model of the common property, only an intertemporal externality. We demonstrate that common property regimes correspond to lower steady-state stocks and lower welfare as compared to the competitive solution with no externalities.     

Fiscal Policy,Monetary Policy and the Mechanics of Modern Clearing and Settlement Systems

Thomas Palley, Eric Tymoigne and Randall Wray recently debated neo-Chartalism in this journal. This article argues that the mechanics of modern clearing and settlement systems is important to understanding this debate. In the neo-Chartalist framework taxes and bond issuance function as part of monetary policy; it is an alternative method for draining reserves to obtain the overnight target rate. Abba Lerner’s Chartalist framework is much clearer on public finance, noting that the federal government can use alternative financing methods to pay for expenditures. Palley’s concerns with central bank ‘money financing’ and inflation are unpersuasive. The Old Keynesian ‘budget restraint– high-powered money relation’ offers limited insight into modern clearing and settlement systems. The article concludes that policymakers should embrace Lerner’s advice and view ‘money printing’ as a normal policy instrument to support functional finance.     

Dividend taxes,corporate investment,and ‘Q’

Taxes on corporate distributions have traditionally been regarded as a ‘double tax’ on corporate income. This view implies that while the total effective tax rate on corporate source income affects real economic decisions, the distribution of this tax burden between the shareholders and the corporation is irrelevant. Recent research has suggested an alternative to this traditional view. One explanation of why firms in the United States pay dividends in spite of the heavy tax liabilities associated with this form of distribution is that the stock market capitalizes the tax payments associated with corporate distributions. This capitalization leaves investors indifferent at the margin between a corporation's decision to pay out dividends or to retain earnings. This alternative view holds that while changes in the dividend tax rate will affect shareholder wealth, they will have no impact on corporate investment decisions.This paper develops econometric tests which distinguish between these two views of dividend taxation. By extending Tobin's ‘q’ theory of investment to incorporate taxes at both the corporate and personal levels, the implications of each view for corporate investment decisions can be derived. The competing views may be tested by comparing the performance of investment equations estimated under each theory's predictions. British time series data are particularly appropriate for testing hypotheses about dividend taxes because of the substantial postwar variation in effective tax rates on corporate distributions. The econometric results suggest that dividend taxes have important effects on investment decisions.     

A dynamic analysis of expenditure patterns in rural India

Recent generalisations of the Linear Expenditure System have concentrated on its restrictive assumption of separable preferences but underplayed its equally restrictive assumption of linearity in income, i.e., constant marginal budget shares. This reflects the data base which has usually been long time series of disaggregated consumer expenditure data. Such generalisations are inappropriated for developing countries which rely on highly aggregated commodity expenditure data from budget surveys with more variation in income responses is introduced, variation in prices. A general procedure for non-linearising income but rather limited applied to some recent LES generalisations to generate still further geenralisations and then used to analyse rural India's expenditure behaviour. The results decisively support the suggested generalisation and, also, provide evidence in favour of dynamic behaviour and habit persistence on budget data.     

Schumpeter and the theory of capitalist economic development

This paper gives a centenary appreciation of the contributions to economic thought of Joseph A. Schumpeter, with special focus on his work, The Theory of Economic Development (TED) it proceeds, first, by providing (in section 1) an overview of Schumpeter's life and works; second, by giving an interpretative exposition of the main themes of TED (in section 2) and Schumpeter's broader ‘economic sociology’ (in section 3) in terms of the place of these ideas in the history of economic thought; third, by examining the reception to TED and the impact of it and Schumpeter's dynamic methodology on the discipline (in section 4).     

The Impact of the German Child Benefit on Household Expenditures and Consumption

The German Child Benefit (‘Kindergeld’) is paid to legal guardians of children as a cash benefit. The benefit does not depend on household income or other household characteristics. I use exogenous variations in the amount of child benefit received by households in the German Socio‐Economic Panel to estimate the impact of a given change in the child benefit on food expenditures of households, the probability of owning a home, rent per square meter, measures of the size of the home, as well as parents’ smoking behavior and parents’ alcohol consumption. Households primarily increase per capita food expenditures in response to increases in child benefit, and they also improve housing conditions. The effect of child benefit on per capita food expenditures is larger for low‐income households compared to high‐income households. I do not find a significant effect of child benefit on parents’ smoking or drinking.     

Social Security Income and Health Care Spending: Evidence from the Social Security Notch

In this paper, I exploit Social Security legislation changes to identify the causal effect of Social Security income on out‐of‐pocket medical expenditures of the elderly. Using the 1986–1994 Consumer Expenditure Survey and an instrumental variables strategy, the empirical results show that health care expenditures are responsive to changes in Social Security income for elderly individuals with less than a high‐school education. The estimated income elasticities are between 1.41 and 3.47, depending on the outcome measures, and are statistically significant at conventional levels. The findings are in contrast to existing studies that find a small income elasticity at the individual/household level.     

Candidate reputations and the ‘incumbency effect’

A major shortcoming of the classical median voter model is that its central prediction — convergence of platforms to the median voter's ideal — is seldom observed. One reason is that the classical model neglects the importance of voter expectations as a determinant of votes. Here we associate voters' expectations about candidates with past as well as current candidate pronouncements, and assume that incumbents whose actions are consistent with their ‘reputations’ are perceived as less risky than challengers. In equilibrium candidates choose distinct platforms. Typically neither adopts the median voter's ideal point. Either candidate may win depending on how well the incumbent's reputation reflects current voter tastes and how relatively ‘risky’ the electorate perceives the challenger to be.     

Firm turnover,restructuring and labour productivity in transition: the case of Poland

Many studies have found strong and positive relationship between per capita income and health care expenditure. These studies usually adopt the assumptions that (1) the relationships among the variables are constant; and/or (2) the supply-side market for health care could be treated by using standard demand functions models. To take into account of the supply side of health care, we use the demand and supply approach with the cointegration model to re-examine this issue. By using Taiwan health care expenditure data, our results show that the real income elasticity is smaller than unity and the health care expenditures are primarily for ‘curing’ rather than ‘caring’.     

Tobacco and alcohol: complements or substitutes?

The question of whether alcohol and tobacco are consumed as complements or substitutes is crucial for determining the side-effects of anti-smoking policies. Numerous papers have empirically addressed this issue by estimating demand systems for alcohol and tobacco, and subsequently calculating cross-price effects. However, this traditional approach is often seriously hampered by insufficient price variation observed in survey data. We, therefore, suggest an alternative instrumental variables approach that statistically mimics an experimental study and does not rely on prices as explanatory variables. This approach is applied by means of German survey data. Our estimation results suggest that a reduction in tobacco consumption results in a moderate reduction in alcohol consumption. It is demonstrated that this implies that alcohol and tobacco are complements. Hence, we conclude that successful anti-smoking policies will not result in the unintended side-effect of an increased (ab)use of alcohol.     

Combining Household Income and Expenditure Data in Policy Simulations

The analysis of the distributional impact of fiscal policy proposals often requires information on household expenditures and incomes. It is unusual to have one data source with information on both and this problem is generally overcome with statistical matching of independent data sources. In this paper Grade Correspondence Analysis (GCA) is investigated as a tool to improve the matching process. GCA draws out the relationships between the common variables to enable the sample to be partitioned into more homogeneous groups, prior to matching. An evaluation is conducted using the UK Family Expenditure Survey, which is unusual in containing both income and expenditure at a detailed level of disaggregation. Imputed expenditures are compared with actual expenditures through the use of indirect tax simulations. The most successful methods are then employed to enhance data from the Family Resources Survey and the synthetic dataset is used as a microsimulation model database.