Rainy day politics. An instrumental variables approach to the effect of parties on political outcomes

Scholars have grappled with the question of how parties affect policy. Here I propose and test an instrumental variable approach using rainfall. In Norwegian municipal elections, potential left wing voters are likely to abstain from voting with election day rain, whereas the opposite holds for right-wingers. Then rainfall provides an exogenous source of variation, and hence an instrument, for the party composition of the municipal council. A strengthening of the right wing parties due to rainfall shifts expenditures toward education, but reduces total spending. This also shows that political competition does not drive party platforms to converge.     

Fiscal policy and economic activity in South Asia

This paper analyzes whether fiscal policy in South Asia amplifies or smoothens business cycle fluctuations. It estimates several econometric models to explore the cyclicality of government spending and tax buoyancy. In South Asia, tax revenue increases less than one to one with changes in gross domestic product (GDP), but public spending increases more than proportionally. For each percentage point change in GDP growth, government expenditure changes by 1.3 percentage points. While changes in tax revenue have no significant impact on economic activity, the government spending multiplier is positive and significant: each additional US dollar (USD) of spending leads to an immediate increase in GDP of 0.2 USD and to an increase of 0.4 USD in the medium run. The impact of public spending on economic activity is entirely due to capital expenditure, which is also more procyclical. Procyclical public spending and a positive expenditure multiplier imply that fiscal policy in South Asia amplifies boom‐and‐bust cycles. These results are in line with those of other emerging markets and developing economies and robust to different model specifications and estimation strategies.     

Generational conflict and education politics: Implications for growth and welfare

This study considers the politics of public education and its impact on economic growth and welfare across generations. We employ probabilistic voting to demonstrate the generational conflict regarding taxes and spending and show that aging shifts the tax burden from the retired to the working generation, reduces public education spending, and ultimately slows economic growth. We subsequently consider a legal constraint that aims to boost education spending: a spending floor for education. This constraint stimulates economic growth but creates a trade-off between current and future generations’ welfare. Finally, the quantitative implications of our results are explored by calibrating the model to the Japanese economy.     

Old‐age Social Security versus Forward Intergenerational Public Goods Provision

This paper introduces an overlapping‐generations model with earnings heterogeneity and borrowing constraints. The labour income tax and the allocation of tax revenue between social security and forward intergenerational public goods are determined in a bidimensional majoritarian voting game played by successive generations. The political equilibrium is characterized by an ends‐against‐the‐middle equilibrium where low‐income and high‐income individuals form a coalition in favour of a lower tax rate and less social security while middle‐income individuals favour a higher tax rate and greater social security. Government spending then shifts from social security to public goods provision if higher wage inequality is associated with a borrowing constraint and a high elasticity of marginal utility of youth consumption.     

On the Geometry of Constant Returns

Imports are modeled as a fixed proportion of spending rather than as a function of total or disposable income. With this formulation, the import component of spending shifts must be netted out in order to predict the initial autonomous change in domestic spending. In addition, the formulation should provide a clearer understanding than current formulations of how leakages influence the multiplier process.     

Endogenous business cycles and systematic stabilization policy*

We study the effects of fiscal policy rules on the determinacy of rational expectations equilibrium in a perfectly competitive monetary model with constant returns. Government spending implies a distortion of the monetary steady state due to the implied taxation. We show that policy rules that let the GNP share of government spending depend sufficiently negatively on increases in GNP stabilize the economy with respect to endogenous fluctuations for arbitrarily little distortion of the steady state at which stabilization occurs. The rules do not involve lump‐sum taxation, negative income taxation, or exact knowledge of the economy's laissez‐faire steady state.     

SOCIAL STATUS,EDUCATION AND GOVERNMENT SPENDING IN A TWO‐SECTOR MODEL OF ENDOGENOUS GROWTH*

This paper extends the relative wealth specification of status preference to the two‐sector Uzawa (1965 )– Lucas (1988 ) model and examines the effectiveness of government spending on economic growth. It is found that the desire for relative wealth‐induced social status and/or the education component of relative wealth‐induced social status are important ingredients in determining the growth rate effects of government spending. Provided that the agent is concerned with his or her relative social position, the education‐induced social status plays a more important role than the physical‐asset‐induced social status in determining the validity of public spending on growth. If individuals do not care about their education‐driven social rewards, then an increase in government spending has no effect on the balanced growth rate regardless of the presence of the physical‐asset‐induced social status. A rise in government spending reduces the long‐run growth rate if the education‐induced social status is present.     

Does right or left matter? Cabinets, credibility and fiscal adjustments

This paper tests the widely held assumption that left-wing cabinets favor higher public spending and examines whether cabinet ideology affects the persistence of major fiscal adjustments. In a panel of large fiscal adjustments in OECD countries during the last 40 years, we find evidence that left-wing and right-wing cabinets are partisan: the left tends to reduce the deficit by raising tax revenues while the right relies mostly on spending cuts. Our testable hypothesis is that cabinets can signal commitment by undertaking fiscal adjustments in ways that are not favored by their constituencies. In other words, the left gains credibility when it cuts spending while the right becomes more credible when it increases tax revenues. Probit estimates of the determinants of persistence in fiscal adjustments confirm that spending cuts by the left and tax increases by the right are associated with persistent adjustments. The effect is significant for cuts in public spending, public consumption (wage or nonwage), increases in total revenues, direct taxes on businesses and other taxes. We test for the role of several other determinants of persistence, confirming that coalition and majority cabinets are associated with less persistence while periods of high or rising levels of indebtedness favor persistence. The estimates of the impact of ideology and other variables on GDP and its components show that it is the size of the spending cut rather than cabinet ideology that is most important.     

Government‐spending multipliers and the zero lower bound in an open economy

This paper assesses the size of the government‐spending multiplier in an open economy when the zero lower bound (ZLB) on the nominal interest rate is binding. In a theoretical framework, in a closed economy, other authors have shown that when the nominal interest rate is binding the government‐spending multiplier can be very large (close to four). Their theory helps illuminate the government‐spending multiplier in the ZLB, but it is difficult to match that theory with the data. We argue that, in an open economy, another channel exists for the crowding‐out effect via the real exchange rate. For an open economy, the government‐spending multiplier is not large owing to the appreciation of the real exchange rate, induced by the appreciation of aggregate demand that follows the increases in government spending. To test the robustness of our open economic model, we conduct the same analysis in a corresponding closed economy model. The result from our closed economy model confirms the result obtained in the other work. Our theoretical results are consistent with the results obtained in the empirical literature, which uses the vector autoregressive method and the structural vector autoregressive approach to measure the impact of government‐spending shock on the real gross domestic product and revealed that the government‐spending multiplier tends to be lower in open economy.     

Why Do Small States Receive More Federal Money? U.S. Senate Representation and the Allocation of Federal Budget

Empirical research on the geographic distribution of U.S. federal spending shows that small states receive disproportionately more dollars per capita. This evidence, often regarded as the consequence of Senate malapportionment, in reality conflates the effects of state population size with that of state population growth. Analyzing outlays for the period 1978–2002, this study shows that properly controlling for population dynamics provides more reasonable estimates of small‐state advantage and solves a number of puzzling peculiarities of previous research. We also show that states with fast‐growing population loose federal spending to the advantage of slow‐growing ones independently of whether they are large or small. The two population effects vary substantially across spending programs. Small states enjoy some advantage in defense spending, whereas fast‐growing ones are penalized in the allocation of federal grants, particularly those administered by formulas limiting budgetary adjustments. Hence, a large part of the inverse relationship between spending and population appears to be driven by mechanisms of budgetary inertia, which are compatible with incrementalist theories of budget allocation.     

Identifying fiscal policy (in)effectiveness from the differential counter‐cyclicality of government spending in the interwar period

Differences across decades in the counter‐cyclical stance of fiscal policy can identify whether the growth in government spending affects output growth and so speeds recovery from a recession. We study government‐spending reaction functions from the 1920s and 1930s for twenty countries. There are two main findings. First, surprisingly, government spending was less counter‐cyclical in the 1930s than in the 1920s. Second, the growth of government spending did not have a significant effect on output growth, so that there is little evidence that this feature of fiscal policy played a stabilizing role in the interwar period.     

INTERNATIONAL CREDIT CHANNEL OF MONETARY POLICY: AN EMPIRICAL NOTE

A longstanding macroeconomic issue is how monetary policy affects the real economy. There are economists placing an emphasis on the role of bank lending in monetary transmission. Their view, called the credit view, is that a monetary tightening shifts the supply schedule of bank loans left, thereby forcing bank‐dependent borrowers to cut back on expenditures. In the literature, the credit view is typically studied in a closed‐economy context. In reality, however, banks make international loans through their overseas branches and subsidiaries. This suggests that the credit view should be studied in an open‐economy context. This paper proposes the international credit view: a monetary‐policy shock originated in one country propagates to another through banks’ reallocation of funds between the two countries. For testing the hypothesis, Australia and New Zealand provide an excellent case to study. This is because Australian‐owned banks dominate the banking market in New Zealand. This paper aims to test the international credit view within a framework of vector auto‐regression models. A significant and robust finding is that the supply schedule of loans shifts left in New Zealand after a monetary tightening in Australia.     

Putting It Off for Later: Procrastination and End of Fiscal Year Spending Spikes

Many governments around the world exhibit heightened spending at the end of the fiscal year. These end of fiscal year spending spikes often concern policy makers due to their tendency to result in lower quality spending. This paper uses UK data to offer evidence against the precautionary savings explanation for spending spikes. An alternative explanation is offered with procrastination driving heightened end of fiscal year spending. A new technique of time‐variant budgetary taxes is calibrated to the model, and it is shown to be effective for smoothing spending and improving spending efficiency throughout the fiscal year.     

Government Spending and Welfare with Returns to Specialization

We explore a novel channel through which government spending can stimulate consumption and welfare through its effects on aggregate productivity, without directly affecting either utility or production possibilities. In the presence of monopolistic competition and increasing returns to specialization, it is shown that government spending can partly alleviate the inefficiencies of monopolistic competition. This is because government spending generates an endogenous increase in total factor productivity by increasing the variety of intermediate goods. If the degree of increasing returns to variety is large enough, a rise in such wasteful government spending may increase consumption levels enough to increase welfare.
JEL classification : E 60     

STATE DRUG CONTROL SPENDING AND ILLICIT DRUG PARTICIPATION

The purpose of this article is to estimate the effect of state criminal justice expenditures and state public health expenditures on deterring illicit drug use. The empirics are based on a demand-and-supply model of drug markets. The effect of a given expenditure on criminal justice or public health programs is dependent on the magnitude of the resulting shifts in the two functions and the demand price elasticity. A reduced form of the demand-and-supply model is also estimated. The data employed come from the 1990 and 1991 National Household Surveys on Drug Abuse (NHSDA). Data on state and local spending for drug-related criminal justice and drug-related public health programs were merged with the NHSDA. The main findings from the regression results are that drug control spending reduces drug use. However, the results suggest that for marijuana users, the marginal cost of drug control exceeds the social benefits of drug control. This may not be the case for users of other illicit drugs. Spending for drug enforcement by police and drug treatment is found most effective in deterring drug use. However, spending for correctional facilities is never significant, which suggests that a more efficient method of reducing drug use might be to reduce correctional facilities spending and increase spending on treatment.     

MILITARY SPENDING,THREATS AND STOCHASTIC GROWTH

This paper analyses the impact of home military spending and foreign military threat on economic growth in a stochastic endogenous growth model involving the supply‐side and demand‐side effects produced by military spending. The paper states that an increase in home military spending affects economic growth through three channels, including the crowding‐out effect, the spin‐off effect, and the resource mobilization effect. The net effect which depends on these three channels is ambiguous. Hence, we demonstrate that there exists an optimal defence burden that maximizes the economic growth rate. Furthermore, the optimal defence burden depends on the degree of risk preference. Namely, the optimal defence burden of the risk‐loving agent is more than that of the risk‐neutral agent, and in turn is more than that of the risk‐averse agent. At the same time, we prove that the relationship between the volatility in military spending and economic growth also depends on the degree of risk preference. In addition, we show that greater volatility in foreign military spending leads to a decrease in home aggregate consumption, and hence speeds up economic growth in the home country.     

New Evidence on Intra‐Household Allocation of Resources in Japanese Households

This paper examines intra‐household allocation of resources to gain insight into family relationships and gender bias in Japanese households. We take the Engel curve approach to examine how adult consumption is affected by the presence of a child, either a boy or a girl, in the family. Empowered by diary‐based high quality spending data from the Family Income and Expenditure Survey, our empirical results show that adult consumption is significantly reduced in households with children; furthermore, gender bias is not observed in total adult expenditures, while responses of adult clothing expenses to the presence of a child are significantly different between a boy and a girl: spending on a father's clothing is reduced when the child is a school‐aged daughter, while spending on a mother's clothing decreases when a school‐aged son is in the home. Our analysis also shows that after the early 2000s girls receive a larger share of spending for children's clothing as well as for high school education than boys.     

Health spending,savings and fertility in a lifecycle‐dynastic model with longevity externalities

We investigate health spending, savings, fertility and policy implications in a lifecycle‐dynastic model with longevity externalities in annuity returns. We show that such externalities engender not only excessive health spending but also under‐saving and excessive fertility. Social security and health subsidization increase health spending and savings but reduce fertility from laissez‐faire levels. A publicly funded universal health system under labour‐income taxation raises fertility. Taxing health spending or using social security and public health together can obtain socially optimal health spending, savings, longevity and fertility. Numerical results based on US observations suggest substantial variations among these cases, especially in old‐age health spending.     

Transparency and Economic Policy

We provide a two period model of political competition in which voters imperfectly observe the electoral promises made to other voters. Imperfect observability generates an incentive for candidates to offer excessive transfers even if voters are homogeneous and taxation is distortionary. Government spending is larger than in a world of perfect observability. Transfers are partly financed through government debt, and the size of the debt is higher in less transparent political systems. The model provides an explanation of fiscal churning; it also predicts that groups whose transfers are less visible to others receive higher transfers, and that imperfect transparency of transfers may lead to underprovision of public goods. From the policy perspective, the main novelty of our analysis is a separate evaluation of the transparency of spending and the transparency of revenues. We show that the transparency of the political system does not unambiguously improve efficiency: transparency of spending is beneficial, but transparency of revenues can be counterproductive because it endogenously leads to increased wasteful spending.     

THE TWO‐WAY RELATIONSHIP BETWEEN GOVERNMENT SPENDING AND CORRUPTION AND ITS EFFECTS ON ECONOMIC GROWTH

The existing empirical evidence suggests that in low‐income economies, an increase in government spending leads to a reduction of growth. This article aims to explain this empirical fact by considering a growth model that incorporates a two‐way relationship between corruption and government spending. That is, government spending gives rise to corruption and rent seeking, which feeds back by distorting the structure and size of government spending. In addition, the cost of corruption depends on the wage rate. Therefore, in low‐income economies, increases in government spending tend to generate larger social losses caused by a higher level of rent dissipation and a concomitant rise in corruption and government inefficiency. Consequently, in such economies, an increase in government spending is more likely to result in a decline of economic growth. (JEL H3, O11, O41)