Government Fiscal Policy Research Articles

Managing watershed resources

Watersheds, as integrated land and water systems, have proved difficult to manage successfully. This is in part due to the complexities of accommodating different groups of users and making use of multiple resources in spatially large areas. The paper argues, however, that watersheds have a natural physical and economic logic as a unit of analysis. As a bridge between microlevel analysis of individual farmers or economic units and a regional or sectoral approach, the watershed, when analyzed in an integrated, multi-disciplinary manner, yields useful policy results for improved management of land and water resources. Economic analysis plays a key role in this analysis. Integrated analysis, however, does not mean integrated implementation. Existing systems of social and government organization must be used to implement the chosen policies. This is a difficult, but essential step and may require the use of government fiscal and price policies to harmonize social and private goals.

Consumption Behavior and the Effects of Government Fiscal Policies

Consumption Behavior and the Effects of Government Fiscal Policies

Consumption Behavior and the Effects of Government Fiscal Policies.

In Consumption Behavior and the Effects of Government Fiscal Policies, Randall Mariger explores how people make decisions about how much to consume and save over their lifetimes. An understanding of these issues illuminates not only individual behavior but important properties of the macro economy as well. The most popular framework for analyzing consumption has been the life-cycle theory. Mariger tests two fundamental, and controversial, assumptions underlying the theory that there are no planned bequests and that human capital is marketable. To do this, he fits a structural consumption model that incorporates endogenous liquidity constraints (non-marketability of human capital), but no planned bequests, to data on a cross-section of U. S. families. This estimated model, in conjunction with estimates of alternative models, enables him to make inferences about the respective effects of liquidity constraints and social security wealth on consumption. This latter effect yields indirect evidence concerning planned bequests. Mariger also presents direct evidence concerning bequest behavior.Among his findings are that the model fits the data very well in spite of its tight theoretical structure; that liquidity constraints are prevalent and have important effects on consumption behavior; that planned bequests appear not to be common among families in the lower 99.1% of the wealth distribution; and that families in the upper 0.9% of the wealth distribution appear to plan substantial bequests. Mariger devotes the latter part of his book to studying the implications of his estimated consumption model for the effects of government fiscal policies. More specifically, he simulates the model to infer the effects of government tax/debt policy, as well as those of the social security system, on aggregate savings.

Consumption Behavior and the Effects of Government Fiscal Policies

Consumption Behavior and the Effects of Government Fiscal Policies

Consumption Behaviour and the Effects of Government Fiscal Policies

Consumption Behaviour and the Effects of Government Fiscal Policies

Tariffs, non-traded goods and fiscal policy

This paper considers the effects of tariffs in a framework that explicitly accounts for the intertemporal nature of the current account. In particular, the paper shows how tariffs alter the domestic real interest rate, thereby influencing the optimal paths of consumption, saving, and the current account. By emphasizing the distinction between home goods and traded goods for a small open economy, the analysis highlights the important role of the real exchange rate in determining macroeconomic equilibrium. This paper also demonstrates the crucial importance of assumptions about the type of government fiscal policies accompanying a tariff.

A more generalized planning model of Bangladesh: Some preliminary observations

With a simple model which is more generalized than the one used in planning in Bangladesh, it has been demonstrated that government's overall budgetary programmes (revenue expenditure and credit policy) do not conform with sectoral output projections. This lack of conformity might have been responsible for the ‘failure’ of planning in Bangladesh. For example, either macroeconomic policies (e.g., liberal credit policy) instead of raising output may have generated structural inflation or sectoral development and investment programmes may have fallen apart in the face of a rising price level. Since economic policies are directed at the macro level without due information about individual production sectors, certain government fiscal and monetary policy combinations may have increased demand for some output whose production could not be increased, at least in the short-run, because of structural bottlenecks. As a result, the ‘Keynesian multiplier’ may have occurred only in nominal terms.

Foundations of Supply-Side Economics

Foundations of Supply-Side Economics: Theory and Evidence is composed of a series of papers containing both theoretical and empirical analyses of a set of issues in government fiscal policy. The type of analysis employed in the book is standard neoclassical economics, and this analysis is used to study the macroeconomic incentive effects of taxation. The book contains contributions that cover the analysis of the effects of taxes imposed purely for generating revenues; the process of capital formation; and an attempt to integrate supply-side analysis into a traditional macroeconomic framework. Reports on the empirical evidence on taxation and economic activity and the estimation of a small macroeconomic model of the United States for the postwar period; description of a method of calculating effective marginal tax rates on factor incomes using available U.S. data; and the estimation of the effect of fiscal policy on private investment in plant and equipment are presented as well. Economists will find the book highly insightful.

The Supply of Money and Reichsbank Financing of Government and Corporate Debt in Germany, 1919–1923

During the five years of inflation, price stability, and hyperinflation in Germany after World War I, three factors determined the growth of the money supply. First, the Reichsbank freely issued money in exchange for whatever government or corporate debt the private sector did not wish to hold at the official discount rate. Second, the government persistently ran large deficits. Political instability and the inflation itself prevented taxation adequate to pay for social programs, subsidies to the railroad and businesses, and reparations to the Allies. The third factor was expectations of inflation, which, as they became more pessimistic, led people to hold less and monetize more of the outstanding stock of debt. Thus, the money supply was partly endogenous and partly dependent on government fiscal policy. The monetary policy of the Reichsbank, although essential to the inflation process, was a constant and passive one until stabilization at the end of 1923.

Simulations of state government fiscal policy: The balanced budget multiplier

State governments are becoming increasingly aware that fiscal policy is a method of affecting the aggregate level of economic activity in the state. This study analyzes the economic effects of the balanced budget multiplier within the regional context. Using a simple model of a regional economy, the study shows that factor migration and state-federal tax interactions eliminate the possibility of a balanced budget multiplier for the region. In addition, the impact of policy on employment and disposable personal income, primary indications of regional welfare, may be assymetrical. A series of simulations employing an econometric model of Alaska illustrates the likely magnitude of effects upon a region.

Cyclical Behavior of Government Fiscal Policy

As everyone knows, total spending by U.S. federal, state, and local governments has risen enormously-from 7.7 percent of GNP in 1902 to 34.1 percent in 1970.1 From 1949 to 1980, however, almost all the increase has been in state and local spending, which rose from 7.6 percent of GNP in the 1949-1954 period to 14.2 percent of GNP in the 1975-1980 period.2 Furthermore, it must be emphasized that by far the largest single component of federal spending is military spending-which the most careful estimate puts at 13.2 percent of GNP for the entire period from 1949 to 1971.3 Aside from these well-known facts, most fiscal theories advocate or predict certain patterns of fiscal behavior over the business cycle. The different theories, however, frequently contradict each other as to what actual fiscal behavior is assumed. Therefore, an institutionalist analysis can contribute a great deal by beginning not with theoretical assumptions, but with a historical description of what government fiscal behavior actually is under capitalism over the course of the business cycle. All data is in real, quarterly terms, covering the six trough-to-trough

The social psychology of taxation

This paper outlines the overlap between social psychology, taxation and government spending; an area referred to as ‘fiscal psychology’. Attention is drawn to the tendency of many public economists to ignore the intervening variables between economic stimuli and economic response. These intervening variables are largely attitudinal and could be used to improve economic predictions, understanding of the effects of taxes on work effort, the tendency to evade taxes and more generally, the relationship between taxpayer and government. Fiscal psychology also incorporates familiar approaches in social psychology including equity, intergroup relations, and attribution theory, and debates about attitude structure and the attitudes/behaviour link. Comment is additionally made on the importance of assessing taxpayers' preferences for government spending, and their influence on government fiscal policy as well as their reaction to it. This is done in the light, here as elsewhere, of the discussion as to the ‘descriptive’ or ‘prescriptive’ nature of social psychology in the real world.

Asset Accumulation and Economic Activity

In this work James Tobin discusses two major issues of macroeconomics: the strength of automatic market forces in maintaining full employment equilibrium and the efficacy of government fiscal and monetary policies in stabilizing the economy.

Asset Accumulation and Economic Activity.

In this work James Tobin discusses two major issues of macroeconomics: the strength of automatic market forces in maintaining full employment equilibrium and the efficacy of government fiscal and monetary policies in stabilizing the economy.

Government financing decisions and asset returns

This paper presents an empirical investigation of the relation between government financing decisions and asset returns. In particular, the focus is on whether a substitution of debt financing for tax financing of a given level of expenditures is associated with an increase in interest rates. The paper brings a different perspective to empirical investigations of government fiscal policies by examining the response of asset prices in an efficient capital market to such policies rather than focusing on aggregate consumption behavior. The results are consistent with the idea that asset prices are unrelated to how the government finances its expenditures. The results, however, also indicate that the capital market is not indifferent with respect to the level of government expenditures as higher interest rates are associated with increases in government purchases.

Fiscal Policy, Inflation and the Accumulation of Risky Capital

The effect of government policies on the level of investment and inflation has become a major concern of policy-makers in a number of industrial countries. Proposals to raise the level of business investment have included overall tax cuts, tax incentives to spur investment and a reduction in the level of government spending. This paper presents a theoretical apparatus to explore the relationships between fiscal policy, government debt, inflation and capital accumulation. It develops a one-sector growth model embodying a stochastic production function and government fiscal policy. Atomistic agents in the economy choose consumption levels and allocate their wealth between risky capital and risky government to maximize expected discounted utility over an infinite horizon. Fiscal policy, by affecting asset yields, affects the composition of portfolios, the price of government bonds and the accumulation of capital. The model is used to answer three general questions: (1) Does the level of government expenditure affect the rate of capital accumulation and inflation in steady state? (2) Does the mode of government finance, when the choice is between an income tax and deficit finance, affect these magnitudes? (3) What is the effect of uncertainty in the productivity of capital on growth? The analysis relates to several areas of literature: (1) the analysis of the relationship between capital accumulation and debt, (2) the theory of the demand for government debt, (3) considerations of the effect of income taxation on risk bearing, and (4) the analysis of capital accumulation under uncertainty. 1. The effects on output and the capital stock of the government's expenditure decision and its decision to finance its expenditure by taxation or issue are explored in two major bodies of economic theory. The literature on the burden of the debt as developed by Modigliani (1961), Diamond (1965), and Phelps and Shell (1969), for example, implies that policies which increase the value of outstanding government will tend to lower the level of the capital stock by displacing capital with public in private wealth. The theory of money and growth as represented by Tobin (1965) and Sidrauski (1967b) also implies that government displaces capital, but specifically recognizes the role of capital gains on government debt.

Revenue Alternatives for State and Local Governments: Crisis‐ridden Areas and Those Seeking Fiscal Equity and Stability Offered New Options

Abstract. State and local governments—those ridden by revenue crises and those committed to an effort to achieve fiscal equity and stability—have a variety of revenue alternatives open to them from recent research and accumulated knowledge in the discipline of public finance. These options are defined and explained in Financing and Managing State and Local Governments by two fiscal specialists, Richard W. Lindholm and Hartojo Wignjowijoto. Federal aid to the 47 largest cities has risen to a third of their total revenues without solving their fiscal problems. The authors show how tax reform emphasizing substitution of a land value tax for the taxes on improvements and personalty, and reform of public planning and management policies could orient government activity to maximizing society's goals instead of society's problems. The role of local government fiscal policy in the national economy is explained through a clear and concise description of macroeconomic model‐building.

Fiscal Policy and Consumer Behavior

In spite of the fact that the consumption relationship plays the central role in the Keynesian multiplier analysis of the effects of fiscal policy, economists are not in agreement about the effects government deficits have on consumer expenditures. In contrast to the popular economic policy descriptions, recent theoretical work indicates that, through adjustments in private intergenerational transfers, current government surpluses, which imply lower future tax liabilities, could have an expansionary effect on current private consumption demand. (See, for example, Barro, 1974.) In the 1968 experiment relating to this problem, the tax surcharge, which had little effect on consumption and aggregate demand, was interpreted as giving evidence in favor of the monetarists' position and against the traditional Keynesian view of policy prescriptions.-; The monetarists claimed victory based upon this experiment because national income rose with the rising money supply, and the fiscalists pleaded nolo contendere ex post since the tax surcharge was temporary in nature and, therefore, had little effect on permanent income and thus, little effect on aggregate consumption demand (Eisner, 1969). However, some macro theorists now would explain the rise in the aggregate marginal propensity to consume in this period as resulting from the lower future taxes caused by the higher current tax surcharge. Thus, rather than being evidence on the Keynes versus classical theories of the income determination controversy, the 1968 tax experiment may be evidence on the private sector's ability to perceive the effects on future tax liabilities of current fiscal actions. For, if consumers do foresee these effects, current tax increases or decreases (whether viewed by policy makers as being temporary or permanent) will have little effect on aggregate demand. As a consequence, and with the large volume of continuing discussion of the role of fiscal policy as a stabilizing tool, a closer examination of consumption expenditures in the context of changing government fiscal policies is required. II. Theoretical Issues Reviewed

Inflation-Induced Distortions in Government and Private Saving Statistics

PROBABLY the single most important statistic measuring the impact of government fiscal policy on the economy is the magnitude of the government surplus or deficit. Justifiably or not, this single figure has taken on such importance that the Congressional Budget and Impoundment Control Act of 1974 established a process whereby the Congress is forced to consider overall receipts and outlays and commit itself under a binding resolution to these totals. Because of the importance of the budget figure, economists have continually sought to modify the raw data to better assess the impact of the government on aggregate demand. A major breakthrough was the concept of the FullEmployment Surplus, which was popularized by the Council of Economic Advisers in their 1962 report, although its roots go back to World War II. I This concept recognized that due to the endogeneity of expenditures and particularly tax receipts, the actual budget deficit or surplus, uncorrected for the level of output, gives a biased indication of the stance of fiscal policy. Although the concept of the full employment surplus was an improvement, dissatisfaction with the single summary statistic remained. Several economists have experimented with different weights on the components of taxes and spending, recognizing the differential spending propensities out of the different sources of income.2 This approach has not been successful due to the difficulty of reaching a consensus on a weighting scheme. Another problem with the full employment surplus was the failure to adjust for changing price levels or rates of inflation. Fixed nominal income tax brackets, specific taxes, and taxes on nominal interest and capital gains all suggest that the impact of the budget should allow for the behavior of price level variables.3 Although standardization to an exogenous level of potential output seems plausible (given growth or frictional unemployment), there is no normal price level associated with any given level of output. Furthermore, with the breakdown of the Phillip's Curve relationship in recent years, there appears to be no rate of inflation associated with a full employment level of output. This paper attempts to demonstrate that price level changes are important for measuring fiscal impact apart from any attempt to determine what price level behavior would exist at full employment. Since the deficit is equivalent to the amount of government bonds sold to the public,4 analysis of the impact of the supply of bonds is incomplete without allowing for changes in the real value of the debt caused by inflation or deflation. Real value accrual accounting, which is making considerable headway in private sector accounts, can also be employed in the public sector.5 A redefinition of the deficit along these lines can be integrated easily with the full employment surplus or any variant definition to yield a better measure of fiscal impact. Section II of this paper presents a brief theoretical discussion of real value accrual accounting. Section III Received for publication April 4, 1977. Revision accepted for publication April 28, 1978. * University of Pennsylvania. I would like to thank Milton Friedman, Ben McCallum, and the members of the University of Chicago's and University of Virginia's Money and Banking Workshops for their helpful comments on earlier versions of this work. Steve Thompson provided valuable research assistance and computer programming. 1 Initial references to the concept were Ruml and Sonne (1944), Committee for Economic Development (1947), and Friedman (1948). For an excellent discussion of the concept, see Okun and Teeters (1970). 2 In particular see Gramlich (1966), Musgrave (1964), Okun and Teeters (1970), and Hymans and Wernette (1970). Warren Smith in Okun and Teeters (1970) gives yet another impact statistic. 3 See Committee for Economic Development (1947), Gramlich (1968) and Okun and Teeters (1970) for attempts at price level standardization. 4 For simplicity it is assumed throughout this paper that the money supply is held constant. One can alternatively regard the profits (seigniorage) from steady-state monetary expansion as tax revenue, so that monetary financing is considered only as an inflationary tax on real cash balances. 5 For an excellent summary of purchasing-power accrual accounting as applied to the corporate sector, see Shoven and Bulow (1975, 1976).

The Impact of Government Policies on the Distribution of Income in Canada: A Review

In order to bring about a distribution of income which society sees as more satisfactory than the one generated without government policy, governments rely upon regulations and various fiscal policies. Such policies are also used to achieve other objectives. This paper examines the need for income redistribution and evaluates the redistributive intention of several programs. The paper also reviews in a critical manner, studies which have been undertaken to measure the redistributive impact of government fiscal policies in Canada and Ontario. The distribution of income has not, it appears, altered noticeably in face of the many public policies directed at redistribution and the author offers reasons for this outcome. In addition suggestions are made for future research in this area.