Kamin: IN GOOD TIMES AND BAD – DESIGNING LEGISLATION THAT RESPONDS TO FISCAL UNCERTAINTY

ABSTRACT:

Congress often moves slowly to change tax and spending laws when circumstances change, but there are ways to design legislation to anticipate and prevent the tendency towards “policy drift.” Enactment of major pieces of legislation tends to be followed by periods of legislative stasis, even when economic conditions change. Policies during the Great Recession are an example of this. The Great Recession proved significantly deeper than forecasters had predicted, when the American Recovery And Reinvestment Act was enacted, but as new information became available, Congress did little to alter the fiscal
stimulus in response, other than to continue some expiring provisions. There are ways to design legislation to anticipate and prevent the tendency towards “policy drift.” This paper
identifies four mechanisms: delegation of legislative authority to administrative agencies, triggers that either automatically adjust policy for changed circumstances or try to force an issue onto Congress’s agenda, expirations of legislation that sunset laws on a predetermined date, and indexing to adjust policy in discrete increments in response to changes in conditions.

Each has its advantages and disadvantages, but on balance, triggers that automatically adjust policy to new circumstances tend to be most effective in preventing policy drift, particularly for countercyclical policy and Social Security. When economic conditions deteriorate, triggers could be in place that would automatically adjust levels of aid to states and federal infrastructure spending, provide tax cuts, and adjust the length of eligibility for unemployment benefits. In order to maintain the solvency of Social Security, benefits and taxes could be indexed to changes in estimates of the program’s solvency over 75 years. When there is a projected shortfall or surplus, the law could trigger adjustments in benefits and taxes to compensate. With respect to Medicare, a combination of indexing on the revenue side, and increased delegation on the spending side is recommended. Medicare revenues would be indexed to health cost growth through a combination of payroll taxes and income taxes in order to maintain the current mixed financing system. To keep payments in check, mechanisms like the Independent Payment Advisory Board could be expanded and strengthened.

 

Available for download here.

Romer & Romer: TRANSFER PAYMENTS AND THE MACROECONOMY – THE EFFECTS OF SOCIAL SECURITY BENEFIT INCREASES, 1952–1991

ABSTRACT:

From the early 1950s to the early 1990s, increases in Social Security benefits in the
United States varied widely in size and timing, and were only rarely undertaken in
response to short-run macroeconomic developments. This paper uses these benefit
increases to investigate the macroeconomic effects of changes in transfer payments.
It finds a large, immediate, and statistically significant response of consumption to
permanent benefit increases. The response appears to decline after about six months,
however, and there is no clear evidence of effects on industrial production or
employment. These effects differ decidedly from the effects of relatively exogenous
tax changes: the impact of transfers is faster, but much less persistent and much
smaller overall. Finally, we find strong statistical and narrative evidence of a sharply
contractionary monetary policy response to permanent benefit increases that is not
present for tax changes. This may account for the lower persistence of the
consumption effects of transfers and their failure to spread to broader indicators of
economic activity.

 

Available for download here.

Awaworyi & Yew: Government Transfers and Growth – Is there Evidence of Genuine Effect?

ABSTRACT:

This paper investigates how government transfers affect economic growth. Using meta-analysis techniques, we systematically review 24 primary studies with 164 estimates that examine the effect of government transfers on economic growth. After addressing heterogeneity and issues of publication bias in the existing literature, we find a negative association between government transfers and growth. This negative growth impact of government transfers also holds for developed countries. Meta-regression results also reveal that the effect size of reported estimates largely depends on individual study characteristics. In particular, data time period, measure of government transfers, econometric specification and underlying theoretical models are important factors that explain the variations in the empirical results.

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Obinger & Petersen: Mass Warfare and the Welfare State – Causal Mechanisms and Effects

ABSTRACT:

The question whether and how warfare has influenced the development of advanced Western welfare states is contest- ed. So far, scholarly work either focused on the trade-off between military and social spending or on case studies of individual countries. What is missing, however, is a systematic comparative approach that is informed by an explicit consideration of the underlying causal mechanisms. This paper outlines an agenda for a comparative analysis of the warfare -welfare state nexus. By distinguishing between three different phases (war preparation, warfare, and post-war period) it provides a comprehensive analysis of possible causal mechanisms linking war and the welfare state and provides preliminary empirical evidence for war waging, occupied and neutral countries in the age of mass warfare stretching from ca. the 1860s to the 1960s.

 

Available for download here.

Vaughan-Whitehead: Is Europe Losing Its Soul? The European Social Model in Times of Crisis

From the Introduction (available here):

 

This book is the final result of a series of projects started in the early 2000s carried out by the ILO and the European Commission to ensure regular and systematic monitoring of social policies and industrial relations. From the EU accession of Central and Eastern European countries (with Cyprus and Malta) we started to question the future of the European Social Model (Vaughan-Whitehead 2003), and tried to forecast whether working conditions in the enlarged EU would diverge from or converge around the European Social Model (ILO-EC project 2004–2005). We monitored the world of work in the enlarged EU with a focus on the quality of employment and working conditions (ILOEC project 2006–2007). Then came the financial and economic crisis and we analysed its social outcome and identified how it challenged social cohesion within the EU and increased inequalities. In particular the most vulnerable workers were identified in the crisis (ILO-EC project 2008–2010). Among the categories most at risk, a particular group was identified in the second part of the crisis characterised by austerity packages, public sector employees, and we carried out a comparative study to identify the public sector shock and its short- and long-term effects (ILO-EC project 2011–2012). However, the extent of adjustments and reforms in the past few years induced us to enlarge this study to carry out a more comprehensive assessment of all the areas and elements of the European Social Model. Undoubtedly, there are elements of the European Social Model – such as pension systems – that may need to be reformed to make them more sustainable under demographic and new economic and social pressures. However, under the pressure of the financial crisis and following the introduction of austerity packages to reduce debt, we witnessed most European countries changing – often hastily – several elements of that model: social protection, pensions, public services, workers’ rights, job quality and working conditions and social dialogue. A paradox considering that it had taken EU countries more than 60 years, since the Treaty of Rome in 1956, to agree on common views and principles and to develop a coherent set of national and EU regulations and institutions concerning social issues. This social dimension, accompanying and even stimulating economic growth, undoubtedly represents the soul of the European Union, envied and copied by other regions and countries in the world.

Is Europe currently losing this legacy? And if so, what were the motivations behind these changes and what are the effects? On the social side, will it not lead to ever growing inequalities, social exclusion and poverty, and to increased social conflicts? On the economic side, is this not leading to unbalanced growth and thus also endangering the long-term sustainability of our economic model?

Glover, Heathcote, Krueger & Ríos-Rull: Intergenerational Redistribution in the Great Recession

ABSTRACT:

In this paper we construct a stochastic overlapping-generations general equilibrium model in which households are subject to aggregate shocks that affect both wages and asset prices. We use a calibrated version of the model to quantify how the welfare costs of severe recessions are distributed across different household age groups. The model predicts that younger cohorts fare better than older cohorts when the equilibrium decline in asset prices is large relative to the decline in wages, as observed in the data. Asset price declines hurt the old, who rely on asset sales to finance consumption, but they benefit the young, who purchase assets at depressed prices. In our preferred calibration, asset prices decline close to three times as much as wages, consistent with the experience of the U.S. economy in the Great Recession. A model recession is almost welfare-neutral for households in the 20-29 age group, but translates into a large welfare loss of around 10 percent of lifetime consumption for households aged 70 and over.

Available for download here.

Rhee: Race and Retirement Insecurity in the United States

From the Introduction:

American workers and families face a retirement crisis in which a majority of households are at risk for downward mobility in retirement, and a significant share face not being able to meet basic expenses in old age. In July 2013, the National Institute on Retirement Security (NIRS) released “The Retirement Savings Crisis: Is It Worse Than We Think?” The study found that private sector retirement access is near its lowest point since 1979, with only 52 percent of employees in jobs that offer retirement benefits. A critical finding of that report is that while households face a growing retirement savings burden, the typical US working-age household has only $3,000 saved in retirement accounts, according to 2010 data. The typical household nearing retirement has only $12,000.

This report serves as a companion to the July 2013 study. We examine racial disparities in retirement readiness among workers and households that are working-age, defined in this report as age 25-64. Findings are based on analyses of data from the U.S. Bureau of Labor Statistics’ Current Population Survey Annual Social and Economic Supplement (CPS ASEC) and the U.S. Federal Reserve’s 2010 Survey of Consumer Finances (SCF). Specifically, this paper analyzes:

• Workplace retirement coverage among white, Black, Latino, and Asian wage and salary employees between the ages of 25 and 64 (Section I).

• Retirement account ownership among working-age households, by race of head of household: white and nonwhite and, where adequate data is available, Black and Latino households (Section II).

• Retirement account balances among white, Black, and Latino households; and ratios of account balances to income among white and nonwhite households (Section III).

A key finding is that people of color face particularly severe challenges in preparing for retirement. Every racial group faces significant risks when it comes to retirement income. People of color, however, are less likely than whites to have access to a pension or 401(k) at work. The racial disparity in retirement savings is even greater. In fact, nearly two-thirds of households of color do not have any savings in a 401(k) or IRA type account, compared to slightly over one-third of white households. Three out of four households of color have retirement savings less than $10,000. Among households of color with retirement account assets, the median balance is $30,000 for near-retirees—grossly insufficient as an income source. Finally, the wide racial gap in retirement assets holds even after accounting for age and income.

 

Available for download here.

Sass: Social Security and Equities – Lessons from Railroad Retirement

 

From the Introduction:

Investing Social Security Trust Fund assets in equities has long been a controversial proposal. Equities have higher expected returns than government bonds, which are the only asset the Trust Fund currently holds. So investing a portion of these assets in stocks could reduce the program’s long-term financing shortfall. But critics see this step as crossing a red line in the government’s involvement in the private economy. They also see the greater risk inherent in equity investments as offsetting the higher expected returns.

The experience of the government’s Railroad Retirement program, which now invests in equities, provides lessons that address these concerns. Railroad Retirement and Social Security have long been closely connected. Congress created the Railroad Retirement program in 1934, one year before the enactment of Social Security, when it took over the rail industry’s tottering pension plans in the midst of the Great Depression. The two programs have the same pay-as-you-go social insurance structure, funded by a payroll tax on workers and employers. Both had relatively modest Trust Funds, with the assets invested solely in government bonds. In the 1990s, however, the use of equities became central to proposals to reform each program. Nothing was done in Social Security. But in 2001, Congress enacted legislation that introduced equities into the Railroad Retirement program. This brief, based on a recent study, reviews the experience of Railroad Retirement for lessons it might provide on the use of equities in Social Security.

 

Available for download here.