do governors get what they want an alternative examination of the line item veto this paper reconsiders the impact of the governor s line item veto on the state budget process the governor s ability to obtain his or her most desired budget measures item veto effectiveness rather than a smaller expenditure budget the percentage difference between the final state budget and the governor s original budget request over fiscal years 1983 1989 is examined the empirical results indicate that under certain political situations the line item veto authority enhances the governor s ability to obtain his or her desired budget

income dynamics and life cycle inequality mechanisms and controversies this study focuses on the transmission of inequality over the working life a model of constrained intertemporal choice is used to provide structure to the distributional dynamics of wages earnings income and consumption the mechanisms used to insure labour market shocks are examined in a partial insurance setting where the manner and scope for insurance depends on the access to credit the information available to consumers and the durability of income shocks drawing on recent research family labour supply the credit market and the tax system are all shown to play a key role these mechanisms vary in importance across different points of the life cycle and the business cycle 2014 the author s the economic journal published by john wiley sons ltd on behalf of royal economic society

line item veto where is thy sting roponents of giving the president the authority to use a line item veto argue that the institutional change is needed to limit special interest legislation and restrain spending opponents respond that it would grant too much added power to the president thereby upsetting the delicate balance wisely crafted by the founding fathers this article focuses on the presumption evidently shared by both sides in the debate that adoption of item veto authority will have significant consequences in terms of budget outcomes and the distribution of power 1 curiously there presently exists little empirical support for the presumption that item veto authority is important most studies comparing states with various types of veto authority have failed to detect significant effects associated with item veto additional tests of our own are consistent with these results after reviewing the empirical evidence we reconsider the alleged effects of item veto authority by seating the popular depiction in an explicit model of the budgetary process formal modeling exposes logical inconsistencies contained in popular veto discourse further the model makes clear that the predicted consequences of item veto commonly projected as ubiquitous in fact arise only in select settings

tax reform and automatic stabilization an income tax provides implicit insurance by dampening the variability of disposable income and consumption using an empirical framework derived from the consumption insurance literature and data from the panel study of income dynamics we examine the effect of federal income tax reforms of the 1980 s on automatic stabilization of consumption overall erta and tra86 reduced consumption stability by about 50 percent recently increased eitc generosity restored or enhanced consumption insurance the welfare cost of moving to the post tra86 system is sizable for relatively risk averse households facing large income risk but is much more modest for the typical household jel h21

a time series analysis of representative agent models of consumption andleisure choice under uncertainty this paper investigates empirically a model of aggregate consumption and leisure decisions in which utility from goods and leisure is nontime separable the nonseparability of preferences accommodates intertemporal substitution or complementarity of leisure and thereby affects the comovements in aggregate compensation and hours worked these cross relations are examined empirically using postwar monthly u s data on quantities real wages and the real return on the one month treasury bill the estimated values of the parameters governing preferences differ significantly from the values assumed in several studies of real business models several possible explanations of these discrepancies are discussed

state responses to fiscal crises the effects of budgetary institutions and politics this paper explores the dynamics of state taxes and spending during the late 1980s when regional economic downturns and increased expenditure demands led to substantial state budget deficits more restrictive state fiscal institutions such as no deficit carryover rules and tax and expenditure limitations are correlated with more rapid fiscal adjustment to unexpected deficits political factors are also important when a single party controls the state house and the governorship deficit adjustment is much faster than when party control is divided in gubernatorial election years tax increases and spending cuts are both significantly smaller than at other times

assessing empirical approaches for analyzing taxes and labor supply recent surveys on the labor supply responses of men document a divergence in the estimates of substitution and income effects obtained using various estimation approaches generally studies accounting for nonlinear tax schedules in a static setting via a piecewise linear approach produce estimates that typically imply higher substitution and lower income responses than are suggested by empirical work applying other approaches this paper demonstrates that maximum likelihood estimation of a consumer choice problem with nonlinear budget sets implicitly relies on the satisfaction of inequality constraints that translate into behaviorally meaningful restrictions these constraints arise not as a consequence of economic theory but instead as a requirement to create a properly defined statistical model in the analysis of piecewise linear budget sets the implicit constraints required by maximum likelihood in estimation amount to imposition of slutsky conditions at all wage income combinations associated with kink points in the analysis of differentiable budget sets the tacit constraints invoked by maximum likelihood also involve inequality restrictions on slutsky terms the empirical work presented in this study supports the contention that these implicit constraints play a major role in explaining the discrepancies in estimates found in the literature on men s labor supply

party politics governors and economic policy in this article we evaluate the role of elections in governors state tax policy making does it matter for state taxes whether the governor is a democrat or republican and whether she is eligible for re election or faces a binding term limit using a regression discontinuity design and a panel of u s states we find that the manner in which governors of different parties implement different tax policies turns crucially on the incumbent s eligibility for re election re electable democratic governors increase income taxes relative to similarly situated republicans yielding divergence between party policy positions however governors facing a binding term limit exhibit the reverse policy difference resulting in a movement of policy back together

separation of powers and the budget process abstract we study budget formation in a model featuring separation of powers in our model the legislature designs a budget bill that can include a cap on total spending and earmarked allocations to designated public projects each project provides random benefits to one of many interest groups the legislature can delegate spending decisions to an executive agency that can observe the productivity of all projects before choosing which to fund however the ruling coalition in the legislature and the executive serve different constituencies so their interests are not perfectly aligned we consider settings that differ in terms of the breadth and overlap in the constituencies of the two branches and associate these with the political systems and circumstances under which they most naturally arise earmarks are more likely to occur when the executive serves broad interests while a binding budget cap arises when the executive s constituency is more narrow than that of the powerful legislators

decomposing trends in income volatility the wild ride at the top and bottom we use 2 year panels from the current population survey to provide a detailed accounting of family income volatility from 1980 to 2009 volatility doubled overall and the increase was most pronounced among the top 1 of the income distribution but in any given year the level of volatility among the bottom 10 exceeds that of the top the increased volatility comes from higher instability of head and spouse earnings other nonlabor income and from reduced covariance between these income sources with the tax system this suggests that current tax policy is less effective in mitigating income shocks than previous decades jel j31 i30

separation of powers and the tax level in the u s states we estimate a nonlinear and discontinuous relationship between the tax level and the degree of alignment between the legislature and the governor measured as the number of seats in the legislature that belong to the governor s party in the states with the line item veto the tax level jumps at the point where the government switches from divided to unified with a regression discontinuity design we show that this jump can be interpreted as a causal effect we propose a simple model to account for this nonlinear relationship the sequential nature of the budget bargaining game that is the legislature proposes and the governor cuts with the line item veto implies that the tax level is determined by the overlap between the supporters of the governor and the supporters of the legislative majority changes in the size of the overlap determine the tax level

the impact of rmb swap agreements on foreign exchange reserve demand this paper constructs panel data of 150 economies from 2001 to 2017 to study the impact of rmb renminbi swap agreements on foreign exchange reserve demand the empirical results show that the swa

food stamp caseloads over the business cycle 1 introduction the onset of the current economic downturn following the longest expansion in u s history has renewed interest in the role of automatic stabilizers designed to insure households against negative cyclical income shocks this system of income and consumption stabilizers includes among others the individual income tax and the panoply of social insurance programs such as unemployment insurance and the food stamp program while the income tax and unemployment insurance have received recent attention gruber 1997 auerbach and feenberg 2000 kniesner and ziliak 2002a b little is known about the role of food stamps as an automatic stabilizer even though the program served over 27 million americans at its peak in 1994 this gap in the literature is particularly acute in light of passage of the personal responsibility and work opportunity reconciliation act of 1996 welfare reform act which introduced new rules on cash assistance recipients and thus the nearly half of food stamp recipients who also receive cash welfare moreover the 1996 welfare reform also had a direct administrative effect on the food stamp program by ending the eligibility of some recipients reducing average benefit levels and requiring states to replace paper coupons with electronic benefit transfer cards importantly the welfare reform act also eliminated the entitlement status of the main cash welfare program aid to families with dependent children afdc thus positioning food stamps as a more prominent countercyclical consumption stabilizer a first task in assessing the possible stabilization role of food stamps in the era of welfare reform is to identify the cyclical sensitivity of food stamp caseloads if food stamp caseloads are acyclical then we would expect no role for food stamps in smoothing consumption over the business cycle if however food stamp caseloads are highly cyclical then food stamps may function as an important antirecessionary tool by the same token the new welfare policies may independently affect food stamp caseload movements and interact with the business cycle thereby altering the possible stabilization role of the program in this paper we specify a dynamic model of food stamp caseloads to estimate the responsiveness of the caseload to the business cycle to welfare policies and to interactions between the business cycle and welfare policies unlike cash welfare there has been scant research on the cyclicality of food stamp caseloads 1 wallace and blank 1999 are a recent exception in their use of both static annual and dynamic monthly food stamp caseload models based on state level panel data for the 1980 to 1998 federal fiscal years with annual data food stamp caseloads were strongly countercyclical and reform of afdc led to weak declines in total caseloads 2 specifically they attribute up to 44 of the 1994 to 1998 food stamp caseload decline to economic conditions and about 6 of the decline to welfare reform they reach broadly similar conclusions with monthly data however wallace and blank calculate that upward of 85 of the post 1996 decline in food stamp caseloads can be attributed to welfare reform if one is willing to ascribe all the unexplained residual to welfare reform which as the authors note is undoubtedly an overestimate of welfare reform s effect on food stamp caseloads p 85 in their static models figlio gundersen and ziliak 2000 reached conclusions similar to wallace and blank s estimates with annual level data in their preferred dynamic models they attribute about 35 of the 1994 to 1998 caseload decline to the macroeconomy and virtually nothing to welfare reform we improve on this previous research on food stamp caseloads along several dimensions first we not only follow other research in estimating the impact of afdc policy changes on food stamp caseloads but also examine the impact of policies that are focused directly on food stamps

income volatility and household consumption the impact of food assistance programs the impact offood assistance programs food stamps in a period of rising income inequality in the united states is analyzed using 1978 92 psid data we assess to what extent food assistance can be viewed as an effective insurance to permanent shocks to income the results show that the program has a substantial consumption smoothing effect in the lowincome population the response of food consumption to a permanent income shock is a third lower after accounting for the monetary value of food stamps

incentives to cultivate favored minorities under alternative electoral systems a simple model is used to compare under different electoral systems the incentives for candidates to create inequalities among otherwise homogeneous voters by making campaign promises that favor small groups rather than appealing equally to all voters in this game model each candidate generates offers for voters independently out of a distribution that is chosen by the candidate subject only to the constraints that offers must be nonnegative and have mean 1 symmetric equilibria with sincere voting are analyzed for two candidate elections and for multicandidate elections under rank scoring rules approval voting and single transferable vote voting rules that can guarantee representation for minorities in multiseat elections generate in this model the most severely unequal campaign promises

do political parties matter evidence from u s cities are cities as politically polarized as states and countries no is the answer from our regression discontinuity design analysis which shows that whether the mayor is a democrat or a republican does not affect the size of city government the allocation of local public spending or crime rates however there is a substantial incumbent effect for mayors we investigate three mechanisms that could account for the striking lack of partisan impact at the local level and find the most support for tiebout competition among localities within metropolitan areas

does the choice of consumption measure matter an application to the permanent income hypothesis abstract food consumption in the panel study of income dynamics is used as a proxy for total consumption in many applications in economics including tests of the permanent income hypothesis tests of separability between consumption and leisure and tests of intergenerational altruism food however explains only a small fraction of the variation in total consumption i propose a measure of composite consumption based on predicted wealth and compare it both to food consumption and to skinner s 1987 measure of predicted consumption in a test of the permanent income hypothesis using a log linear intertemporal consumption function i find that food does not reject the permanent income hypothesis but both skinner s predicted consumption and the composite measure proposed here to reject the hypothesis

estimating labour supply responses using tax reforms the 1980 s tax reforms and the changing dispersion of wages offer one of the best opportunities yet to estimate labor supply effects nevertheless changing sample composition aggregate shocks the changing composition of the tax paying population and discontinuities in the tax system create serious identification and estimation problems we develop grouping estimators that address these issues our results reveal positive and moderately sized wage elasticities we also find negative income effects for women with children

divided government fiscal institutions and budget deficits evidence from the states does partisan control of american state government have systematic effects on state spending and taxing levels does divided control affect the government s ability to make hard decisions do institutional rules like legal deficit carryover restrictions matter using a formal model of fiscal policy to guide empirical analysis of data covering the american states from 1968 to 1987 we conclude that 1 aggregate state budget totals are driven by different factors under democrats and republicans the net result being that democrats target spending and taxes to higher shares of state level personal income 2 divided government is less able to react to revenue shocks that lead to budget deficits particularly where different parties control each chamber of the legislature and 3 unified party governments with restricted ability to carry deficits into the next fiscal year outside the south have sharper reactions to negative revenue shocks than those without restrictions

social insurance and the optimum piecewise linear income tax abstract this paper calculates optimal linear income taxes when differences in income are caused by random factors luck rather than by unobserved individual skills as assumed in the classical theory of income taxation as first shown by varian 1980 varian h r 1980 redistributive taxation as social insurance journal of public economics 14 49 68 in the former case income taxation acts as social insurance by introducing life uncertainty and precautionary behavior we find higher optimal marginal tax rates than those found by varian we also find that in the context of a piecewise two bracket linear tax schedule the second marginal tax is higher than the first a finding that contrasts with results recently obtained in the framework of classical income taxation theory which show a lower second marginal tax

effects of tax reform on labor supply investment and saving the u s tax system received two major overhauls during the 1980s the tax cuts of 1981 and the tax reform act of 1986 supporters of both reforms argued that major changes in tax policy could boost saving investment labor supply and entrepreneurship eventually it was argued such changes could reverse the slowdown in economic growth that began in the early 1970s and spur improvements in american living standards the aim of this paper is to assess whether the goals of increased labor supply and capital formation were achieved

the economic effects of constitutions replicating and extending persson and tabellini persson and tabellini the economic effects of constitutions the mit press cambridge 2003 show that presidential regimes and majoritarian election systems have important economic effects here the number of countries is expanded and more recent data is used in replicating and extending their analyses we find that the effect of presidential regimes vanishes almost entirely with regard to electoral systems the original results are largely confirmed majoritarian as opposed to proportional electoral systems lead to lower government expenditure lower levels of rent seeking but also lower output per worker the institutional details such as the proportion of candidates that are not elected on party lists and district size are particularly important

constitutional rules and fiscal policy outcomes we investigate the effect of electoral rules and forms of government on fiscal policy outcomes in a large sample of democracies we rely on different estimation methods to address prospective problems of statistical inference due to non random selection of these constitutional rules the findings are consistent with our theoretical priors presidential regimes induce smaller governments than parliamentary democracies while majoritarian elections lead to smaller governments and smaller welfare programs than proportional elections

the reaction of household consumption to predictable changes in social security taxes the key implication of rational expectations and the basic life cycle permanent income hypothesis that predictable changes in income have no effect on the growth rate of consumption expenditures is examined this implication is important for understanding the effectiveness and optimal timing of fiscal policy the causes and propagation of business cycles and the effects of income fluctuations on the growth rate of the economy using household level consumption data from the consumer expenditure survey whether expenditures on nondurable goods increase contemporaneously with predictable changes in social security tax withholding is tested it is found that households do change their consumption expenditures in response to the predictable fluctuations in income induced by the social security tax system

balanced budget redistribution as the outcome of political competition this paper models balanced budget redistribution between socio economic groups as the outcome of electoral competition between two political parties equilibrium is unique in the present model and a sufficient condition for existence is given requiring that there be enough stochastic heterogeneity with respect to party preferences in the electorate the validity of hotelling s principle of minimum differentiation and of director s law are examined under alternative hypotheses concerning administrative costs of redistributions and voter s possibilities both of abstaining from voting and of becoming campaign activists for one of the parties the policy strategy of expected plurality maximization is contrasted with the strategy of maximizing the probability of gaining a plurality incomes are fixed and known so lump sum taxation is feasible however constraints on tax transfer differentiation between individuals are permitted in the analysis

relative wage movements and the distribution of consumption we analyze how relative wage movements among birth cohorts and education groups affected the distribution of household consumption and economic welfare our empirical work draws on the best available cross sectional data sets to construct synthetic panel data on u s consumption labor supply and wages during the 1980s we find that low frequency movements in the cohort education structure of pretax hourly wages among men drove large changes in the distribution of household consumption the results constitute a spectacular failure of between group consumption insurance a failure not explained by existing theories of informationally constrained optimal consumption behavior a welfare analysis indicates that the cost of between group consumption variability is larger than the cost of aggregate consumption variability by two orders of magnitude

redistributive politics and economic efficiency the political process often compensates the losers from technical change or international competition in an economically inefficient way namely by subsidizing or protecting declining industries instead of encouraging the movement of resources to other more productive uses we find that a dynamic inconsistency in the game of redistributive politics contributes to this outcome to achieve economically efficient outcomes it is necessary that those making economically inefficient choices not be given offsetting transfers but the political process distributes income on the basis of political characteristics which are in general different from the economic characteristics that are rewarded by the market we identify circumstances in which the inefficient choosers have desirable political characteristics and are therefore immune from threats of having to face the economic consequences of their choices

income smoothing and consumption smoothing one way that risk averse households protect consumption levels is to borrow and use insurance mechanisms another way common in low income economies is to diversify economic activities and make conservative production and employment choices households thus tend toward limiting exposure only to shocks that can be handled with available credit and insurance typically both types of mechanisms are studied independently but much more can be learned by studying them together first we obtain a more complete picture of risks costs and insurance possibilities second it opens the way to considering biases in standard tests of credit and insurance

democrats republicans and taxes evidence that political parties matter i estimate the influence of political parties on state tax burdens over a forty 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 five years of democratic control of the legislature state government would be approximately 3 to 5 percent larger than if republicans controlled the legislature during that same period with the better specifications producing estimates in the higher end of this range

is consumption growth consistent with intertemporal optimization evidence from the consumer expenditure survey in this paper we show that some of the predictions of models of consumer intertemporal optimization are in line with the patterns of nondurable expenditure observed in u s household level data we propose a flexible specification of preferences that allows multiple commodities and yields empirically tractable equations we estimate preference parameters using the only u s micro data set with complete consumption information we show that previous rejections can be explained by the simplifying assumptions made in previous studies we also show that results obtained using good consumption or aggregate data can be misleading

risk pooling precautionary saving and consumption growth in this paper we model the evolution of income risk and consumption growth we decompose the time series innovation of the income process into its common and cohort specific components from these we compute conditional variances which are used as separate risk terms in a consumption growth equation using a long series of british household data we exploit the time series variation to identify precautionary saving effects and find strong evidence of their importance specifically after allowing for demographic and labour market status there is an independent role for income risk in explaining consumption growth rather than the component that is common across cohorts however it is the cohort specific element that is important in determining changes in consumption growth this result points to a failure of between cohort insurance mechanisms

optimal income taxation an example with a u shaped pattern of optimal marginal tax rates comment using the mirrlees optimal income tax model with quasi linear preferences the paper examines conditions for marginal tax rates to be rising at high income levels and declining in an interval containing the modal skill it examines conditions for the marginal tax rate to be higher at a low skill level than at the high skill level with the same density an argument only holding for skill levels above a cutoff where resources of a worker are marginally of the same value as resources of the government data on earnings rates are presented copyright 1998 by american economic association

the line item veto and public sector budgets evidence from the states abstract the paper examines the claim that gubernatorial line item veto power reduces state spending analysis of a rich set of state budget data indicates that long run budgets are not altered by an item veto and that in the short run the item veto s potency is contingent upon the political setting in certain circumstances governors with political incentives to use an item veto alter spending and revenues in a statistically significant and quantitatively important fashion these results suggest that state budgets have not been importantly altered as a result of the existence of the line item veto and shed doubt on the use of the line item veto to reduce federal government spending

risk sharing between and within families this paper uses the panel study of income dynamics to test whether risk sharing is complete between or within american families the tests accommodate a wide variety in the configuration and availability of family data the test results reject inter as well as intra family full risk sharing even assuming that leisure is endogenous or that leisure and consumption are nonseparable

income instability and fiscal progression we construct the ratio of the post fisc transitory income variance to the pre fisc transitory income variance of family incomes as a measure of fiscal progressivity in canada between 1993 and 2008 this ratio can be interpreted as measuring the extent to which the fiscal system attenuates personal income instability we find that the tax and transfer system has been less eective in stabilizing market incomes after 1998 compared to the previous years this is attributable to the provincial and federal tax reforms from 1999 2001 which particularly aected families headed by individuals with less than high school education while the reforms reduced the eective marginal tax rates faced across all educational groups the reduction is relatively larger among families with highly educated main earners moreover the group with less than high school education is distinct in that the average eective tax burden in this group increased changes to social assistance also appear to have played a role

a theory of divided government this paper extends the spatial theory of voting to an institutional structure in which policy choices depend upon not only the executive but also the composition of the legislature voters have incentives to be strategic since policy reflects the outcome of a simultaneous election of the legislature and the executive and since the legislature s impact on policy depends upon relative plurality to analyze equilibrium in this game between voters we apply coalition proof type refinements the model has several testable implications which are consistent with voting behavior in the united states for instance the model predicts a split tickets where some voters vote for one party for president and the other for congress b for some parameter values a divided government with different parties controlling the executive and the majority of the legislature and c the midterm electoral cycle with the party holding the presidency always losing votes in midterm congressional elections

party control of state government and the distribution of public expenditures this paper examines the effects of party control of state governments on the distribution of intergovernmental transfers across counties from 1957 to 1997 we find that the governing parties skew the distribution of funds in favor of areas that provide them with the strongest electoral support this is borne out in two ways i counties that traditionally give the highest vote share to the governing party receive larger shares of state transfers to local governments ii when control of the state government changes the distribution of funds shifts in the direction of the new governing party we find only weak evidence that parties reward electorally pivotal counties or counties in electorally pivotal legislative districts finally we find that increased spending in a county increases voter turnout in subsequent elections this suggests that parties have an electoral incentive to skew the distribution of funds to influence future election results and the mechanism through which this works is mobilization rather than conversion of voters in a fixed electorate

on testing for full insurance using consumer expenditure survey data in a recent issue of this journal mace 1991 presented empirical evidence in support of the hypothesis that u s households engage in full risk sharing the data used were taken from the u s consumer expenditure survey cex for the years 1980 84 full insurance implies that household level consumption should be perfectly correlated with aggregate consumption but uncorrelated with householdlevel changes in income mace s surprising result was that at least for one functional specification household level income changes whether measured directly by changes in reported income or proxied by employment change dummies seemed to have no statistically significant effect on consumption this comment demonstrates that this result was due to measurement error in key variables

a superior measure of consumption from the panel study of income dynamics abstract this paper provides a simple technique for assigning a measure of total consumption to households in the panel study of income dynamics psid using regressions from the consumer expenditure surveys of 1972 1973 and 1983 linear predictions of total consumption are estimated which are stable over time and explain up to 78 percent of the total variance in consumption

comparative politics and public finance we propose a model with micropolitical foundations to contrast different political regimes compared to a parliamentary regime the institutions of a presidential congressional regime produce fewer incentives for legislative cohesion but more separation of powers these differences are reflected in the size and composition of government spending a parliamentary regime has redistribution toward a majority less underprovision of public goods and more rents to politicians a presidential congressional regime has redistribution toward powerful minorities more underprovision of public goods but less rents to politicians the size of government is smaller under a presidential regime this last prediction is consistent with cross country data

public spending and the paradox of supermajority rule this article examines the paradox that a supermajority rule in a legislature promotes excessive government spending we propose a simple conjecture if rent seeking coalitions dominate legislative politics and if individual legislators demands for rent seeking activities are price inelastic a change of legislative rules from simple majority to a supermajority will lead to greater public spending other things equal using data from u s state legislatures 1970 to 2007 we find that the adoption of a supermajority rule has a robust positive impact on various types of tax revenues and government expenditures

testing for full insurance using exogenous information we strongly reject the full insurance hypothesis using testing variables that are not decision variables for the households under investigation we find that households are not insured against changes in the unemployment rate associated with the household head s occupational category using this exogenous information we also investigate the appropriateness of exogeneity assumptions on idiosyncratic variables that have been used as testing variables in the full insurance literature it is shown that several exogeneity assumptions made in the existing literature are potentially problematic

the significance of federal taxes as automatic stabilizers using the taxsim model for the period 1962 95 we consider the federal tax system s impact as an automatic stabilizer despite the many changes in the tax system there has been relatively little change in its role as an automatic stabilizer we estimate that individual federal taxes offset perhaps as much as 8 percent of initial shocks to gdp we also suggest that the progressive income tax may help to stabilize output via its effect on the supply of labor an additional effect that may even be of similar magnitude to the more traditional path of stabilization through aggregate demand

budget institutions and political insulation why states adopt the item veto abstract forty three of the fifty states of the united states have granted item veto authority to their governors as part of state constitutions in this paper i test explanations of why and when a legislature would cede institutional power using data from 1865 to 1994 i show that these measures are most likely proposed by fiscal conservatives who fear the loss of power in the future in order to protect their interests for those periods when they will be in the minority they implement institutions such as the item veto which will limit future liberal legislatures the results therefore shed light on two important substantive areas first by showing how the choice of budgetary institutions is endogenous to the political process it clarifies that political factors must be considered in addition to social efficiency to understand the adoption of budget institutions second it provides evidence in support of theories that have posited that electorally weak groups will heavily insulate policies in periods in which they momentarily hold power e g moe 1989 de figueiredo 2002

ideology tactics and efficiency in redistributive politics we model the electoral politics of redistribution when voters and parties care about inequality in addition to their private concerns for consumption and votes respectively ideological concerns about income redistribution lead each party to adopt a general proportional income tax adjusted to appeal to the ideological leanings of high clout groups with disproportionately many swing voters which the parties also ply with pork barrel projects our results relate to director s law which says that redistributive politics favors middle classes at the expense of both rich and poor

the sensitivity of consumption to transitory income estimates from panel data on households we investigate the stochastic relation between income and consumption specifically consumption of food within a panel of about 2 000 households our major findings are 1 consumption responds much more strongly to permanent than to transitory movements of income 2 the response to transitory income is nonetheless clearly positive 3 a simple test independent of our model of consumption rejects a central implication of the pure life cycle permanent income hypothesis the observed covariation of income and consumption is compatible with pure life cycle permanent income behavior on the part of80 percent of families and simple proportionality of consumption and income among the remaining 20 percent as a general matter our findings support the view that families respond differently to different sources of income variations in particular temporary income tax policies have smaller effects on consumption than do other more permanent changes in income of the same magnitude this abstract was borrowed from another version of this item

full insurance in the presence of aggregate uncertainty this paper tests implications of full consumption insurance the object is to determine how much mileage can be obtained from a model with complete markets with such features as private information or liquidity constraints omitted the implication exploited is that individual consumption responds to aggregate risk but not to idiosyncratic risk the test involves regressing the change in household consumption onto the change in aggregate consumption and other right hand side variables such as the change in household income and change in employment status all variables other than the change in aggregate consumption are predicted to be insignificant in explaining the change in household consumption with observations on consumption and income for 10 695 households from the consumer expenditure survey the results are mixed the results for one specification exponential utility are mostly consistent with full consumption insurance the results for the other specification power utility are not

constitutions politics and economics a review essay on persson and tabellini s the economic effects of constitutions in this essay i review the new book by torsten persson and guido tabellini the economic effects of constitutions which investigates the policy and economic consequences of different forms of government and electoral rules i also take advantage of this opportunity to discuss the advantages and disadvantages of a number of popular empirical strategies in the newly emerging field of comparative political economy

household gasoline demand in the united states supported by the mit center for energy and environmental policy research the u s dept of energy and the national science foundation

estimating life cycle labor supply tax effects we present an econometrically tractable life cycle labor supply model for panel data including intertemporally progressive taxes on uncertai wage and nonwge incomes our two stage fixedeffects generalized method of moments approach first extimates intretemporal and then intertemporal preferences specification testing domonstrates the value of incorporating joint progressive taxation of labor and nonlabor incomes results for prime age men emphasize the roles played by hourly wage endogeneity worker specific effects the measure of the rate of pay and intemporal budget constaint nonseparability simulations indicate that recent tax reform while not self financing stimulated made labor supplied by about 3 percent and reduced deadweight loss about 16 percent

household choices in equilibrium this paper is an empirical investigation of equilibrium restrictions on household consumption and male labor supply it exploits a simple factor structure rationalized by two assumptions that household allocations are pareto optimal and that the labor market is competitive the paper estimates household preferences and tests how well this parsimonious factor structure represents panel data on married couples and time series data on asset returns most of the estimates are roughly comparable to those found in previous work no evidence against the simple factor representation is found and the intertemporal capital asset pricing model is not rejected copyright 1990 by the econometric society

a simple test of consumption insurance are consumers effectively insured against idiosyncratic shocks to income or wealth either by formal institutions such as charities private insurance and government programs or by informal mechanisms such as gifts and loans from relatives friends and neighbors under full insurance consumption growth should be cross sectionally independent of idiosyncratic variables that are exogenous to consumers this proposition is tested by cross sectional regressions of consumption growth on a variety of exogenous variables full insurance is rejected for long illness and involuntary job loss but not for spells of unemployment loss of work due to strike and an involuntary move

permanent income current income and consumption evidence from two panel data sets in this article i estimate euler equations that is the first order conditions of the consumers maximization problem using data from two data sets consumption data are taken from the consumer expenditure survey income data are taken from the panel study of income dynamics because the data for the estimation come from two samples i use a generalization of the instrumental variables estimator the two sample instrumental variables estimator i find evidence that consumption is excessively sensitive to predictable income growth the estimates of the coefficient of excess sensitivity for three consumption measures range from 2 to 5

estimates of year to year volatility in earnings and in household incomes from administrative survey and matched data abstract we document trends in the volatility in earnings and household incomes between 1985 and 2005 in three different data sources administrative earnings records the survey of income and program participation sipp matched to administrative earnings records and sipp survey data in all data sources we find a substantial amount of year to year volatility in workers earnings and household incomes in the data sources that contain administrative earnings we find that volatility has been roughly constant and has even declined slightly since the mid 1980s these findings differ from what is found using survey data and what has been reported in previous studies

the effects of pensions on household wealth a reevaluation of theory and evidence this paper examines the extent to which households offset pension wealth with reductions in other wealth systematic econometric biases imply that the estimated offsets in previous empirical studies are smaller than the true offset and may even have the wrong sign new empirical estimates that do not correct for the biases generate little offset between pensions and other wealth estimates that correct for the biases show substantially more offset a smaller impact of pensions on overall saving than in most previous studies the estimates also indicate that the effects of pensions on wealth vary significantly across households

the effect of income taxation on consumption and labor supply we estimate the incentive effects of income taxation in a life cycle model of consumption and labor supply without intratemporal strong separability we find that consumption and hours worked are direct complements in utility both increase with a compensated increase in the net wage the compensated net wage elasticity is about 0 3 nearly double estimates for u s men from a linear labor supply specification estimated intertemporal elasticities indicate significant intertemporal smoothing of utility the estimated marginal welfare cost of government revenue is 6 20 which is about half the estimated welfare cost when additivity between consumption and leisure is incorrectly imposed

social insurance and consumption an empirical inquiry the main stated purposes of social insurance programs have been the maintenance of consumption by people suffering from misfortunes and the stabilization of employment despite this most recent research on unemployment insurance ui and old age insurance has focused on secondary labor market effects with only a few studies looking at stabilization and none considering effects on consumption in this study we examine how ui will affect the consumption of recipients for some individuals ui will help remove the constraints on consumption during periods of reduced income that arise from insufficient savings and imperfect capital markets while for others the ui benefits merely augment the entire lifetime consumption stream the model enables us to estimate what fractions of the population fall into these two categories if individuals are also constrained in the allocation of their reduction consumption consumption propensities out of ui will differ from those out of nonrecipients income the model is tested on aggregate time series data covering 41 consumption categories for 1959 1978 ii and on over 14 000 individuals from the 1972 73 consumer expenditure survey in both data sets we find no more than half of ui benefits are consumed as if the recipients consumption were constrained during times of unemployment in both samples spending out of ui benefits is disproportionately on luxuries though ui recipients spend greater shares of their income on necessities the results imply that a large part of social insurance payments does not go to prevent serious imbalances in individuals lifetime consumption profiles this abstract was borrowed from another version of this item

the effect of the term auction facility on the london interbank offered rate abstract the term auction facility taf the first auction based liquidity initiative by the federal reserve during the global financial crisis was aimed at improving conditions in the dollar money market and bringing down the significantly elevated london interbank offered rate libor the effectiveness of this innovative policy tool is crucial for understanding the role of the central bank in financial stability but academic studies disagree on the empirical evidence of the taf effect on libor we show that the disagreement arises from mis specifications of econometric models regressions using the daily level of the libor ois spread as the dependent variable miss either the permanent or temporary taf effect depending on whether the dummy variable indicates the events of the taf or the regimes before and after an taf event those regressions also suffer from the unit root problem and produce unreliable test statistics by contrast regressions using the daily change in the libor ois spread are robust to the persistence of the taf effect and the unit root problem consistently producing reliable evidence that the downward shifts of the libor ois spread were associated with the taf the evidence indicates the efficacy of the taf in helping the interbank market to relieve liquidity strains

efficient estimation with panel data when instruments are predetermined an empirical comparison of moment condition estimators i examine the empirical performance of instrumental variables estimators with predetermined instruments in an application to life cycle labor supply under uncertainty the estimators studied are two stage least squares generalized method of moments gmm forward filter independently weighted gmm and split sample instrumental variables i compare the bias efficiency trade off for the estimators using bootstrap algorithms suggested by freedman and by brown and newey results indicate that the downward bias in gmm is quite severe as the number of moment conditions expands outweighing the gains in efficiency the forward filter estimator however has lower bias and is more efficient than two stage least squares

dollar illiquidity and central bank swap arrangements during the global financial crisis abstract while the global financial crisis was centered in the united states it led to a surprising appreciation in the dollar suggesting global dollar illiquidity in response the federal reserve partnered with other central banks to inject dollars into the international financial system empirical studies of the success of these efforts have yielded mixed results in part because their timing is likely to be endogenous in this paper we examine the cross sectional impact of these interventions theory consistent with dollar appreciation in the crisis suggests that their impact should be greater for countries that have greater exposure to the united states through trade and financial channels less transparent holdings of dollar assets and greater illiquidity difficulties we examine these predictions for observed cross sectional changes in cds spreads using a new proxy for innovations in perceived changes in sovereign risk based upon google search data we find robust evidence that auctions of dollar assets by foreign central banks disproportionately benefited countries that were more exposed to the united states through either trade linkages or asset exposure we obtain weaker results for differences in asset transparency or illiquidity however several of the important announcements concerning the international swap programs disproportionately benefited countries exhibiting greater asset opaqueness

insuring consumption against illness one of the most sizable and least predictable shocks to economic opportunities in developing countries is major illness we investigate the extent to which families are able to insure consumption against major illness using a unique panel data set from indonesia that combines excellent measures of health status with consumption information we find that there are significant economic costs associated with major illness and that there is very imperfect insurance of consumption over illness episodes these estimates suggest that public disability insurance or subsidies for medical care may improve welfare by providing consumption insurance

from turmoil to crisis dislocations in the fx swap market before and after the failure of lehman brothers abstract this paper investigates dislocations in the foreign exchange fx swap market between the us dollar and three major european currencies after the failure of lehman brothers in september 2008 deviations from covered interest parity cip were negatively associated with the creditworthiness of us financial institutions as well as that of european institutions consistent with the deepening of a dollar liquidity problem into a global phenomenon us dollar term funding auctions by the ecb snb and boe as well as the us federal reserve commitment to provide unlimited dollar swap lines are found to have ameliorated the fx swap market dislocations

the role of food stamps in consumption stabilization although the food stamp program is the largest universal entitlement program in the social safety net little is known about its stabilizing role in household income and consumption using data from the panel study of income dynamics spanning 1980 99 we estimate the volatility of income with and without food stamps coupled with a variance decomposition of consumption among families at high ex ante risk of food stamp participation food stamps reduced income volatility by about 12 percent and food consumption volatility by about 14 percent there was however a marked decline in consumption smoothing benefits of the program in the early 1990s relative to the 1980s

does welfare inhibit success the long term effects of removing low income youth from the disability rolls i estimate the effects of removing low income youth with disabilities from supplemental security income ssi on their earnings and income in adulthood using a regression discontinuity design based on a 1996 policy change in age 18 medical reviews i find that youth who are removed from ssi at age 18 recover one third of the lost ssi cash income in earnings ssi youth who are removed and stay off ssi earn on average 4 400 annually and they lose 76 000 in present discounted observed income over the 16 years following removal relative to those who do not receive a review jel i30 i38 j14 supporters of welfare programs defend them as vital lifelines for those who face barriers to work while critics charge that these programs create perverse incentives to qualify and perpetuate dependency encapsulating this debate is the controversy over the us supplemental security income ssi program a program that provides cash payments and medicaid eligibility to low income children and adults with disabilities and the aged elderly after three decades of rapid expansion ssi is now the largest nonwork based cash welfare program in the united states paying about 50 billion each year to 8 million recipients including 1 3 million children 1 ssi has been singled out by policymakers and the media for potential perverse incentives

the permanent income hypothesis and consumption durability analysis based on japanese panel data the permanent income hypothesis with durability of commodities is tested on a panel of about 2 000 japanese households for several commodity groups under static expectations about real interest rates and for some class of utility functions consumption which is a distributed lag function of current and past expenditure follows a martingale main empirical results are i the durability of commodities usually classified as services is substantial ii the hypothesis applies to about 85 percent of the population consisting of wage earners and iii income changes explain only a small fraction of the movements in expenditure

financial instability reserves and central bank swap lines in the panic of 2008 in this paper we connect the events of the last twelve months the panic of 2008 as it has been called to the demand for international reserves in previous work we have shown that international reserve demand can be rationalized by a central bank s desire to backstop the broad money supply to avert the possibility of an internal external double drain a bank run combined with capital flight thus simply looking at trade or short term debt as motivations for reserve holdings is insufficient one must also consider the size of the banking system m2 here we show that a country s reserve holdings just before the current crisis relative to their predicted holdings based on these financial motives can significantly predict exchange rate movements of both emerging and advanced countries in 2008 countries with large war chests did not depreciate and some appreciated meanwhile those who held insufficient reserves based on our metric were likely to depreciate current account balances and short term debt levels are not statistically significant predictors of depreciation once reserve levels are taken into account our model s typically high predicted reserve levels provide important context for the unprecedented u s dollar swap lines recently provided to many countries by the federal reserve this abstract was borrowed from another version of this item