Is it the economic policy,stupid? Economic policy,political parties & the gubernatorial incumbent advantage

Incumbent politicians have a well-known advantage in seeking re-election. Using the Economic Freedom of North America dataset, we examine how changes in economic policy during an incumbent governor's tenure influence the probability of losing their re-election bid. Put simply, does economic policy matter for the incumbent advantage? The results suggest that a decrease in economic freedom increases the probability of an incumbent loss, regardless of the governor's party. A decomposition analysis indicates that these results are primarily driven by the government spending sub-index. Furthermore, a more granular analysis suggests that: (1) increases in government consumption spending and government employment are associated with a lower probability of re-election among Democratic incumbent governors, but a higher probability among Republicans; (2) increases in transfer payments relative to personal income reduce the likelihood of re-election, regardless of party; and (3) among Republican incumbents, increases of income taxation and of top marginal tax rates are associated with a higher and lower, respectively, probability of losing re-election. Finally, controlling for a variety of demographic, political and socioeconomic factors, we find that high unemployment increases the probability that an incumbent loses re-election, while increasing net population migration reduces it.     

The company you keep: Satisfaction with life,economic freedom,and preference-policy mismatch

We examine the interaction between individual preferences for markets and state-level economic freedom as it relates to Satisfaction with Life (SWL). Fundamental tenets of economic freedom assert that societies free of excessive government involvement are wealthier and, ultimately, happier; individuals who are allowed to pursue self-interest are argued to be more motivated and more productive, and so society as a whole is better off. Though there is substantial empirical evidence that freer societies are wealthier, the evidence connecting economic freedom and happiness is less clear. We explore the relationship between economic freedom and SWL at the individual level. We examine differences between personal preferences for free markets and state policy and how this ‘preference-policy mismatch’ is related to SWL. We then briefly examine the relationship between preference-policy mismatches and individual self-reported voting behavior, including implications for Tiebout sorting. This study is the first to focus on individual economic ideology, i.e. individual level of support for free markets, and SWL in the United States. Combining individual and state level data we offer improvements to prior studies in a number of areas including an enhanced measure of life satisfaction, a richer basis for examining left-right differences than simple political identification, and an examination of the effect of preference-policy mismatches on satisfaction with life. We find significant relationships between SWL and individual support for markets, state-level economic freedom, and preference-policy mismatch. Further, preference-policy mismatch is positively associated with self-reported voting frequency. We find little support for Tiebout sorting.     

Democrats,republicans, and taxes: Evidence that political parties matter

I estimate the influence of political parties on state Tax Burdens over a 40-year period (1960–2000). Holding constant a large number of state and voter characteristic variables, I find that: (i) Tax Burdens are higher when Democrats control the state legislature compared to when Republicans are in control. (ii) The political party of the governor has little effect after controlling for partisan influences in the state legislature. I explain how both findings are consistent with median voter theory. My results suggest that after 5 years of Democratic control of the legislature, state government would be approximately 3–5% larger than if Republicans controlled the legislature during that same period, with the better specifications producing estimates in the higher end of this range.     

Choosing Among Regulatory Options in the United States Telecommunications Industry

We examine the determinants of the choice between rate-of-return regulation and incentive regulation in the United States telecommunications industry. We find that a state is more likely to select incentive regulation in any year: (1) when it has employed incentive regulation in the past; (2) when the Republican party controls both the executive and the legislative branches of the state government, but the Democratic party has controlled these branches historically; and (3) as the firms earnings under rate-of-return regulation increase toward the industry average. We also find that appointed regulators are more likely than their elected counterparts to revert to rate-of-return regulation.     

Authority versus freedom in Quesnay's thought

Although Quesnay is usually regarded alongside Adam Smith as one of the founders of economic liberalism, there are conflicting interpretations of the extent to which Quesnay was committed to the principle of economic freedom. This paper maintains that the source of ‘ambiguity’ in Quensay's thought can be traced to his instrumentalist logic, which accommodates government action and government restraint - not as ideological axioms, but as utilitarian means to a specified end. It therefore helps to bring into sharper relief the essential differences between Quesnay and Smith regarding the relative position of freedom versus authority in an ideal economy.     

Institutional environment,ownership and firm taxation

This paper examines how ownership type and institutional environment affect firm taxation. Using a sample of Chinese‐listed firms from 1999 to 2006, we find that private firms enjoy a lower effective tax rate than local state‐owned enterprises. In addition, the preferential taxation of private firms is associated with local government incentives to promote local economic growth. We find that private firms located in regions with a lower level of privatization receive preferential tax treatment. Our results also suggest that decentralization and interjurisdictional competition lead to financial interdependence between local governments and private firms.     

Institutional framework and economic development: international evidence

This paper examines the effect of ‘quality’ of the institutional framework on economic development. Our empirical results support the hypothesis that ‘good’ institutions improve efficiency and accelerate growth. The positive effect of institutional ‘quality’ is more pronounced with mutually reinforcing support of economic freedom. Our results also indicate that ‘good’ institutions help developing countries grow faster to achieve conditional convergence. We infer from the results that economic development requires not only physical and human capital formation, but also freedom to choose and institutional support.     

THE DISTRIBUTIONAL CONSEQUENCES OF GOVERNMENT SPENDING AND TAXATION IN THE U.S., 1989 AND 2000

We assess the effects of government expenditures and taxation on household economic well-being in the United States in 1989 and 2000. Net government expenditure is estimated as the difference between government expenditures incurred on behalf of the household sector—transfers and public consumption—and the taxes paid by that sector. We incorporate the estimates of net government expenditures into a wealth-adjusted measure of income. We find that overall inequality in our income measure is considerably reduced by net government expenditures. Results from decomposition analysis show that the inequality-reducing effect of net government expenditures owed more to expenditures than to taxes.     

Growth effects of government expenditure and taxation in rich countries: A comment

Fölster and Henrekson (European Economic Review 45 (2001), 1501-1520) argue that “...the more the econometric problems that are addressed, the more robust the relationship between government size and economic growth appears”. But in failing to control for simultaneity and in ignoring issues of sample-selection bias, the regressions reported by Fölster/Henrekson are flawed. Using theoretically valid instruments, we find that the estimated partial correlation between size of the public sector and economic growth is statistically insignificant and highly unstable across specifications. Moreover, since instruments are weak, all hypothesis tests are unreliable. We conclude that cross-country growth regressions are unlikely to come up with a reliable answer to the question of the growth effects of government spending and taxation.     

Economic Freedom and the Quality of Life: An Empirical Analysis

Previous empirical research on the social and economic impact of freedom has tended to focus on the link between freedom and economic growth rates. Only a few studies have looked at freedom's effect on the quality of life, and these generally focused on the effect of political freedom. Here, we attempt to bridge this gap by analyzing the effect of economic freedom on the quality of life. Taking advantage of newly developed measures of economic freedom, we analyze the impact of economic freedom on life expectancy and literacy rates. We find that greater economic freedom enhances the quality of life both across nations and increases the improvements in the quality of life over time.     

Measuring economic freedom: an alternative functional specification and subsequent ranking

ABSTRACT

The widely cited Economic Freedom of the World index is an aggregate measure of economic freedom calculated by using a simple arithmetic mean of scores over five sub-dimensions: (1) size of government, (2) legal structure and security of property rights, (3) access to sound money, (4) freedom to trade internationally and (5) regulation of credit, labour and business. The use of a simple arithmetic mean implicitly assumes that the different sub-dimensions are ‘perfect substitutes’. To explore the implications of this assumption, we compute an aggregate economic freedom score and ordinal ranking of countries, by taking a geometric mean of the five sub-dimensions. For this alternative specification, the marginal impact of each sub-dimension on the aggregate score is no longer independent of the other sub-dimension scores. Consequently, countries with inconsistent levels of economic freedom across sub-dimensions are ‘punished’ to a greater degree than are countries with less variability across sub-dimensions. Our alternative specification results in considerable movement in terms of country rankings. The geometric mean measure does not appear to explain economic growth as well as the arithmetic mean measure.     

VOTER PREFERENCES,INSTITUTIONS, AND ECONOMIC FREEDOM

The enormous impact that economic freedom can have on economic outcomes makes an understanding of the factors or forces affecting its level paramount. To what extent do citizen preferences regarding the role of government in the economy drive the level of or changes in economic freedom? We explore this question using a new index of voting in the U.S. Congress constructed consistent with the Fraser Institute indices of economic freedom. We use voting on national legislation to examine state‐level economic freedom to clearly separate the measurement of preferences from policies that at least partly reflect these preferences. We find that Congressional votes, both from the House and Senate, are related to increases in state economic freedom, and that the result is generally statistically and economically significant, and robust to inclusion of a variety of socioeconomic control variables. (JEL D72, H10, H50)     

ECONOMIC FREEDOM VERSUS POLITICAL FREEDOM: CROSS‐COUNTRY INFLUENCES ON CORRUPTION*

Using a well‐known index of corruption, this paper examines the determinants of corruption for a large sample of countries. Specifically, the present study brings empirical evidence to bear on the question of whether economic freedom or political freedom serves as a deterrent to corrupt activity. In particular, does greater economic freedom or greater political freedom yield a more ‘clean’ society? Our results show that greater economic freedom seems to matter more in this regard. Examining different components of economic freedom, we find that not all these components are equally effective in reducing corruption. For instance, monetary policy seems to have a stronger influence on the level of corrupt activity in a country than fiscal policy. Robustness of these findings is checked and policy implications are discussed.     

Politics,partisanship and the power to veto: does gubernatorial line-item veto power affect state budgets?

How does line-item veto (LIV) power affect a governor’s ability to structure the state budget? Is LIV power only relevant as a partisan tool? Is it still relevant when the state legislature can override the veto? We use a rich disaggregated data set to test the effect of the gubernatorial LIV on state budgets, controlling for political factors such as party affiliation of the governor and legislature, minority status of the governor, and the legislature’s ability to override a LIV. Our results suggest that LIV power has very weak influence, if any, on governors’ ability to influence state budgets.     

An experimental study of democracy breakdown,income and inequality

Many empirical studies investigate the relationships between economic development, inequality, and democracy survival; however, establishing causal links with naturally occurring cross-country data is problematic. We address this question in a laboratory experiment, where in democracy citizens can invest in profitable projects and vote on income taxation. In the alternative regime—autocracy—efficient investment levels and equitable redistribution are implemented exogenously, but there is a risk of resources being partially expropriated. Citizens can voluntarily switch from democracy to autocracy by a majority vote, which mimics recent historical examples, where voters voluntarily delegate political powers to an autocrat in exchange for a promise of high taxation and redistribution. We find that the likelihood of democracy breakdown increases with the degree of inequality but does not vary with productivity. The link between productivity and democracy survival depends critically on the degree of sophistication of the median voter.     

Investment scaling up and the role of government

This article studies the fiscal and welfare implications of a scaling up of public investment when the government is subject to inefficiencies on the spending and on the tax collection side. In our simulations, the scaling up of public investments results in higher long-run output and consumption levels but requires a fiscal stabilization package in order to preserve fiscal sustainability. The effects on consumers’ welfare after the fiscal adjustment are nontrivial. Our welfare analysis shows that consumers’ welfare is increased when the government smooths the fiscal adjustment via higher borrowing and not through an increase in taxation. Moreover, the comparison between several stabilization packages via tax adjustment shows that higher welfare is achieved when the government relies mostly on taxation of capital as this allows higher levels of consumption. Lower fiscal costs that do not undermine fiscal sustainability can however be achieved if the government manages to reduce inefficiency in tax collection. Finally, we consider a change in the trade regime that causes a decline in revenues. We find that the higher fiscal burden required to preserve fiscal sustainability would completely wipe out the welfare gain of higher public investments.     

On indeterminacy and growth under progressive taxation and productive government spending

We examine the theoretical interrelations between equilibrium (in)determinacy and economic growth in a one‐sector representative‐agent model of endogenous growth with progressive taxation of income and productive flow of public spending. We analytically show that, if the demand‐side effect of government purchases is weaker, the economy exhibits an indeterminate balanced‐growth equilibrium and belief‐driven growth fluctuations when the tax schedule is sufficiently progressive or regressive. If the supply‐side effect of public expenditures is weaker, indeterminacy and sunspots arise under progressive income taxation. In sharp contrast to traditional Keynesian‐type stabilization policies, our analysis finds that raising the tax progressivity may destabilize an endogenously growing economy with fluctuations driven by agents’ self‐fulfilling expectations.     

Party-bosses vs. party-primaries: Quality of legislature under different selectorates

We compare the legislature quality under an exclusive, centralized selectorate (such as a party-principal) with that under an inclusive, decentralized selectorate (such as a party-primary). In our model, two parties compete over three districts: two are home districts of each party while the third is a battleground district characterized by weaker and uncertain policy preferences. We find that when home districts are “safe,” and the parties' candidate pools are of comparable quality, an equilibrium legislature under party-primaries is always of higher quality than an equilibrium legislature under party-principals. When we extend the model to include a general number of districts with candidates of only high or low quality, we show that, as long as there are not too few nor too many highest-quality candidates, party-primaries still perform better than party-principals.     

Are semi-presidential constitutions bad for democratic performance?

Many countries since 1990 have adopted semi-presidential constitutions, which are often considered to be problematic, primarily because of the potential for conflict between the assembly-supported government and the popularly elected president. Such conflicts are said to lead to unstable governments, policy paralysis and the eventual undermining of the democratic regime. Using data for all parliamentary and semi-presidential democracies between 1946 and 2006, we examine the effect of semi-presidential constitutions on the duration of prime ministers’ tenure in office, government accountability with respect to economic outcomes, and democratic survival. We also examine (for a smaller sample of post-communist countries) the impact of these constitutions on the progress of structural reforms. We find that the observed higher instability of prime ministers in semi-presidential democracies is more due to the electoral system than to the presence of a popularly elected president. We also find that semi-presidential constitutions have little impact on the government’s accountability to economic outcomes and on the survival of democratic regimes. Finally, we find that neither a weak president nor a weak government is optimal for the progress of economic reforms in post-communist countries. Regarding economic reforms, the optimal allocation of constitutional powers between the president and the government grants both significant powers.     

Entrepreneurship,fear of failure,and economic policy

The previous literature finds that self-reported ‘fear of failure’ has a significant negative effect on individuals’ choice to become entrepreneurs. We hypothesize this effect is lessened in economies with a larger number of additional, alternative, entrepreneurial opportunities to pursue if a failure occurs. Prior literature also concludes the number of entrepreneurial opportunities is enhanced significantly by having policies and institutions consistent with higher levels of economic freedom. We therefore test and confirm that fear of failure hurts the entrepreneurial process less when levels of economic freedom are higher as there are more additional chances for failed entrepreneurs to pursue.