First, the major categories of US government spending have been shifting. Consider this graph showing federal spending divided into mandatory, discretionary, and net interest. The vertical axis measures spending as a share of GDP. As you can see, over the last half-century, the category of “mandatory” is way up, the category of “discretionary” is way down, and the category of “net interest,” while small, is at its highest level since the start of the CBO data in 1940.
What these categories? “Mandatory” spending arises when the level of spending was predetermined by earlier legislation. A little more than one-third of spending in this category is related to health care: Medicare, Medicaid, and subsidies to make health insurance more affordable. A little less than one-third is Social Security. Other large categories are income support programs like the earned income tax credit, the child tax credit, food stamps, and others. Other items in this category include retirement programs for government workers and supports for military veterans.
In contrast, CBO notes: “Discretionary spending includes most defense spending; spending for many nondefense activities, such as elementary and secondary education, housing assistance, international affairs, and the administration of justice; and outlays for certain transportation programs.”
A second long-term change involves a shift between “primary” and overall budget deficits. The “primary” budget deficit is just the overall deficit, with interest payments subtracted out. As the figure from CBO shows, the projected “primary” deficits for the US government don’t look especially high by historical standards. But notice two shifts. First, in the last 50 years the primary deficit would rise and fall, and occasionally dip into becoming a primary budget surplus. Looking ahead in the next decade, it’s all primary deficits. Second, the higher interest payments mean that the gap between the primary and overall deficits has widened. The danger here is what I’ve called the “interest payments treadmill,” where the annual deficits stay large because of the high interest payments on past borrowing, which raises total debt in a way that guarantees even larger interest payments in the future.
For awhile back around 2010, there was a lament among Democratic-leaning politicians and economists that they didn’t “go big” when raising spending in response to the Great Recession. When the pandemic recession hit, some of them were determined to “go big” this time. Personally, I think the government fiscal boost at the time of the Great Recession was about right, but the fiscal boost in response to the pandemic recession was too much. But whatever our judgements about the past, we now face the bills in the form of high interest payments.
A third substantial change is the projection that federal tax revenues as a share of GDP are going to remain fairly close to their historical levels during the last half-century, while federal spending is moving to a higher level.
The main reasons for the shift in spending have already been mentioned: the rise in spending on the elderly as the Baby Boomer generation retires, a steady rise in health care costs, and the higher interest bills from previous government borrowing. There are fundamental choices to be made here. One option is for federal spending overall to rise in response to the growing share of the elderly in the US population. If we don’t want federal spending as a share of GDP to rise, then either we need to cut back on benefits to the elderly, or cut back on other federal spending, or raise taxes. Given that cutting back on interest payments is not a good idea, the “other spending” that can be cut has already been a shrinking share of the US budget for a few decades. Raising taxes isn’t any fun, nor is an ever-growing federal debt.
When it comes to the federal budget, we are headed in the next decade or so for a situation where either we either make choices at times of our own choosing, or we have choices forced upon us quite likely at times not of our own choosing.
I have been the Managing Editor of the Journal of Economic Perspectives since the first issue in Summer 1987. The JEP is published by the American Economic Association, which decided more than a decade ago–to my delight–that the journal would be freely available online, from the current issue all the way back to the first issue. You can download individual articles or entire issues, and it is available in various e-reader formats, too. Here, I’ll start with the Table of Contents for the just-released Winter 2024 issue, which in the Taylor household is known as issue #147. Below that are abstracts and direct links for all of the papers. I will probably blog more specifically about some of the papers in the few weeks, as well.
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Symposium on the Global Market for Talent
“Skilled Immigrants, Firms, and the Global Geography of Innovation,” by Britta Glennon
This article begins with an overview of the policy environment in the United States and abroad for skilled immigration, with a particular focus on “supply-driven” versus “demand-driven” systems. The overview emphasizes that firms play a central role in the skilled immigration process in most countries. I then survey the ample evidence that skilled immigrants have a strong positive effect on firm outcomes, followed by a discussion of the many margins of adjustment that firms have when their access to skilled immigrants is affected by national immigration policy. Finally, given such margins of adjustment and the importance of skilled immigrants to firms, I consider how the policies that affect skilled migration shape the global geography and quality of innovation. I conclude by discussing policy implications and open questions. In particular, I emphasize that evaluations of the impact of skilled immigration should not be constrained within borders: immigration flows and national immigration policies affect the global geography of innovation and investment.
“Migration and Innovation: Learning from Patent and Inventor Data,” by Francesco Lissoni and Ernest Miguelez
Research on international migration and innovation relies heavily on inventor and patent data, with “migrant inventors” attracting a great deal of attention, especially for what concerns their role in easing the international transfer of knowledge. This hides the fact that many of them move to their host country before starting their inventive career or even before completing their education. We discuss the conceptual and practical difficulties that stand in the way of investigating other likely channels of influence of inventor’s migration on innovation, namely the easing of skill shortages and the increase of variety in inventive teams, firms, and location.
“Tax Equity in Low- and Middle-Income Countries,” by Pierre Bachas ⓡ Anders Jensen ⓡ Lucie Gadenne
Income inequality is high and persistent in developing countries. In this paper, we ask what role taxation can or might play in reducing inequality in low and middle-income countries. Drawing on the recent literature, three findings emerge. Due to both structural factors and limited enforcement capacity, the effective distributional impacts of taxes often deviate from their ‘statutory’ objectives, in ways that are hard to predict based on evidence from high-income countries. Moreover, administrative reforms which are meant to be distributionally neutral end up having significant equity impacts because of the practical realities of implementation. Finally, the global challenges which tax authorities face to tax the very top of the income distribution appear to be even more pronounced in developing countries. We conclude by offering thoughts on future research and emphasize the need to carefully study equity characteristics of taxes at each stage of a country’s development path.
“How Can Lower-Income Countries Collect More Taxes? The Role of Technology, Tax Agents, and Politics,” by Oyebola Okunogbe and Gabriel Tourek
Increasing tax revenues is a major policy goal in many low- and lower-middle-income countries. While economic growth is an important determinant of taxation, available evidence indicates that it does not automatically increase taxation. Rather, countries must make targeted investments in their tax capacity. In this paper, we examine the rapidly growing body of evidence on different interventions to improve tax capacity and increase tax revenues in lower income countries, with a focus on two key inputs: information technology and tax officials. We examine the role and limitations of digitization for identifying taxable entities, verifying tax liabilities, and ensuring collection of tax owed. We also consider how the deployment and incentives of tax officials shape their performance, and the interplay between them and technology tools. Lastly, we emphasize the importance of political incentives and consider the conditions under which governments choose to invest in tax capacity and expand tax collection.
“Does the Value-Added Tax Add Value? Lessons Using Administrative Data from a Diverse Set of Countries,” by Anne Brockmeyer ⓡ Giulia Mascagni ⓡ Vedanth Nair ⓡ Mazhar Waseem ⓡ Miguel Almunia
The value-added tax (VAT) is a cornerstone of the modern tax system. It has many desirable properties in theory: it does not distort firms’ production decisions, it is difficult to evade, and it generates a substantial amount of revenue. Yet, in many countries there are discrepancies between the textbook model of the VAT and its practical implementation. Where the VAT implementation diverges from its textbook model, the tax may lose its desirable properties. We draw on firm-level administrative VAT records from 11 countries at different income levels to examine the functioning of real-world VAT systems. We document four stylized facts that capture departures from the textbook VAT model which are particularly pronounced in lower-income countries. We discuss the effects on VAT performance and simulate a counterfactual retail sales tax and a turnover tax. Despite its shortcomings, we conclude that the real-world VAT is superior to the alternatives.
“The Failure of Silicon Valley Bank and the Panic of 2023,” by Andrew Metrick
The failure of Silicon Valley Bank on March 10, 2023 brought attention to significant weaknesses across the banking system, leading to a panic that spread to other vulnerable banks. With subsequent failures of Signature Bank and First Republic Bank, the United States had three of the four largest bank failures in its history occur over a two-month period. Several features of the Silicon Valley Bank failure make it an ideal teaching case for explaining the underlying economics of banking (in general) and banking crises (specifically). This paper tries to do that.
Countries around the world are enacting pay transparency policies to combat pay discrimination. Since 2000, 71 percent of OECD countries have done so. Most are enacting transparency horizontally, revealing pay between coworkers doing similar work within a firm. While these policies have narrowed coworker wage gaps, they have also led to counterproductive peer comparisons and caused employers to bargain more aggressively, lowering average wages. Other pay transparency policies, without directly targeting discrimination, have benefited workers by addressing broader information frictions in the labor market. Vertical pay transparency policies reveal to workers pay differences across different levels of seniority. Empirical evidence suggests these policies can lead to more accurate and more optimistic beliefs about earnings potential, increasing employee motivation and productivity. Cross-firm pay transparency policies reveal wage differences across employers. These policies have encouraged workers to seek jobs at higher paying firms, negotiate higher pay, and sharpened wage competition between employers. We discuss the evidence on effects of pay transparency, and open questions.
“Immigration and Crime: An International Perspective,” by Olivier Marie and Paolo Pinotti
The association between immigration and crime has long been a subject of debate, and only recently have we encountered systematic empirical evidence on this issue. Data shows that immigrants, often younger, male, and less educated compared to natives, are disproportionately represented among offenders in numerous host countries. However, existing research, inclusive of our analysis of new international data, consistently indicates that immigration does not significantly impact local crime rates in these countries. Furthermore, recent studies underscore that obtaining legal status diminishes immigrants’ involvement in criminal activities. Finally, we discuss potential explanations for the apparent incongruity between immigrants’ overrepresentation among offenders and the null effect of immigration on crime rates.
“Care Provision and the Boundaries of Production,” by Nancy Folbre
Whether or not they provide subjective satisfaction to providers, unpaid services and non-market transfers typically contribute positively to total output, living standards, and the social climate. This essay describes some quantitative dimensions of care provision and reviews their implications for the measurement of economic growth and the explanation of relative earnings, including the gender wage differential. It also calls attention to under-explored aspects of collective conflict over legal rules and public policies that shape the distribution of the net costs of care provision.
“Job Training and Job Search Assistance Policies in Developing Countries,” by Eliana Carranza and David McKenzie
Governments around the developing world face pressure to intervene actively to help jobseekers find employment. Two of the most common policies used are job training, based on the idea that many of those seeking jobs lack the skills employers want, and job search assistance, based on the possibility that even if workers have the skills demanded, search and matching frictions make it difficult for workers to be hired in the jobs that need these skills. However, reviews of the first generation of evaluations of these programs found typical impacts to be small, casting doubt on the usefulness and cost-effectiveness of these programs. This paper re-examines the arguments for whether, when, and how, developing country governments should undertake job training and job search assistance policies. We use our experience with policy implementation, and evidence from recent impact evaluations, to argue that there is still a role for governments in using these programs. However, success depends critically on program design and delivery elements that can be difficult to scale effectively, and in many cases the binding constraint may be a lack of firms with job openings, rather than a lack of workers with the skills to fill these openings.
There’s a stereotypical hero in any number of movies and books, who is standing alone against the big project that is going to ruin the environment, ruin the community, or both. (In a slightly alternative version, the big project has already started to ruin the environment or the neighborhood.) If the hero is not already a lawyer or a journalist, they often ally with a lawyer or journalist in exposing the truth, before it’s too late. My point here is that the hero is blocking something from happening, and the US legal and regulatory system is decentralized in a way that creates multiple potential blocking points: multiple regulatory agencies, multiple levels of courts, multiple options for media communication.
But what happens if the storyline requires a hero who can get something built? For example, someone who can build a dramatic expansion of solar and wind-power, or electrical transmission lines, or housing that is more dense and affordable, or a mass transit system? A US-based hero of this story will now be pinned down and tormented by multiple blocking points.
In 1921, the U.S. Department of Commerce, under its then-Secretary Herbert Hoover, supported the formation of an Advisory Committee on Zoning. The Advisory Committee’s charge included aiding communities interested in the “promotion of the public welfare and the protection of property values” … The Committee published two documents in 1922: A Zoning Primer (Primer) and A Standard State Zoning Enabling Act, Under Which Municipalities May Adopt Zoning Regulations (Enabling Act; U.S. Dept of Commerce, Advisory Committee on Zoning, 1922). … Fischel states, “Before 1910, there was not a single zoning ordinance in the United States. By 1930, it had spread to all sections of the country” (2015: 170). Zoning ordinances had been adopted in 8 cities by the end of 1916, another 68 cities by 1926, and an additional 1,246 municipalities by 1936, constituting 70 percent of the U.S. population (Fischel, 2015: 171).
The phrase that Hoover’s commission wanted to act in support of “promotion of the public welfare and the protection of property values” is of course thought-provoking, because it does not seem to acknowledge that there may be cases where these goals could conflict. Most of the symposium involves papers with a US focus about housing regulation. But I found myself especially interested in the final essay by Paul Cheshire, “An International Perspective on the U.S. Zoning System.” Here’s the overall perspective:
Zoning (or planning) has important functions. Markets play a fundamental role in efficiently allocating urban land (Bertaud, 2018), but there are endemic problems of market failure. There are also conflicts of interest in land use—between owners of undeveloped and developed land and between local interests and the wider society. If ‘rule-based,’ planning can also reduce uncertainty and development risks. In planning systems, the level to which decisions are rule-based, discretionary, or reflect local or wider societal interests varies globally. Internationally, the U.S. system is among the most locally controlled but significantly rule-based because of the use of zoning. In contrast, in the United Kingdom and a range of other countries, local politicians largely decide on development on a case-by-case basis. More local control and discretionary decisions increase the power of the “not in my backyard,” or NIMBY, interest because development costs are highly localized, but benefits range over a wide area, even a whole country. This process tends to end with generally restricted development, resulting in higher housing and land costs. This problem is increasingly visible on both U.S. coasts. Local control also enables zoning systems to protect the interests of insiders and exclude those below the poverty line, for example, by applying extravagant minimum lot sizes or zoning for single-family housing. More recently, attempts have been made to use planning to reduce carbon emissions or force mixed communities. The evidence suggests that zoning is unsuited for achieving either objective. …
The planning system common to Continental Europe, the Master Planning system, is more clearly rule-based, prescriptive, and detailed than the U.S. zoning system. Uses for every parcel are planned, and permission to develop is virtually automatic if the plan and any other relevant regulations are followed. In countries such as Germany, France, or the Netherlands, plan formulation and decision control has an important element, which is national, or at least regional. The U.S. and U.K. systems are at the local end of the spectrum—the U.S. system by design and legal foundation and the U.K. system because an elected committee of the lowest tier of government, the Local Authority Planning Committee (LAPC), is the primary decision-making body. A national policy framework and often local plans exist, but the reality is that enforcement is weak to absent, so any local decision not flagrantly in breach of national policies is likely to stick.
These differences in zoning regulations, and the degree to which they are rule-based or discretionary, and local or national, will be reflected in the cities that emerge. Cheshire offered this interesting comparison of skyscraper heights:
Lake Michigan may constrain Chicago on one side, but a rigid growth boundary and height restrictions have constrained London wholly since at least 1955. Per head of population, however, there were nearly seven times as many skyscrapers—buildings more than 100 meters—in Chicago than in London. Even Paris has significantly more skyscrapers per capita than London. The only tall-building league London tops is the proportion of its skyscrapers designed by Trophy Architects (TA), architects who have won one of the internationally recognized lifetime achievement awards in architecture. Of London’s skyscrapers, 25 percent were TA-designed compared with 3 percent in Chicago and zero in flexibly regulated and rule-based Brussels.
Careful analysis demonstrates that although Chicago may have been the birthplace of great modern architecture, any competent architect can get permission to build a skyscraper there if it meets the zoning regulations and building standards (Cheshire and Dericks, 2020). With London’s discretionary planning, employing a TA seems to help developers generate a powerful signal of design quality, providing a passport to political approval and a bigger building. In London, TA-designed buildings are 17 stories taller than non-TA-designed buildings, increasing a representative site value by 144 percent. Also, buildings designed by an architect after winning a lifetime achievement award increased between 13 to 17 floors (depending on model specification) compared with those the same architect had designed before receiving the award. In Chicago, an architect gaining TA status did not affect the height of their buildings.
This analysis might not seem to be important, but it represents a serious, albeit difficult to observe, deadweight economic cost—estimated as £59 million ($75 million) for a representative site in the City of London—an extra cost symptomatic of an unpredictable planning system that injects opportunities for gaming the system (rent-seeking) and additional risk into the development process.
Of course, what we would all prefer is a perfect process by which any and all building projects can be clearly divided into the desirable and the undesirable, and our zoning rules will sort them out accurately. But back here on planet Earth, the practical questions involve a generalized willingness to block or to allow changes, when in many cases there is unlikely ever to be a consensus about desirability. In the US context, the question is whether we are ready–at least in some cases–to give up the narrative that the blockers of projects are necessarily also the heros.
I see a lot more fire engines than I do fires, but as an economist, I trust statistics more than my own two eyes. The National Fire Protection Association collects the relevant data. Shelby Hall authored the most recent version of “Fire Loss in the United States” (November 1, 2023). The author notes: “On average, a fire department responded to a fire somewhere in the US every 21 seconds in 2022. A civilian was fatally injured in a fire every two hours and 19 minutes. Every 40 minutes, a civilian suffered a non-fatal fire injury.”
However, longer-term trend of fires (based on fires reported to local fire departments) has generally been downward–although with a definite upward bump in 2022. Here are some basics:
Despite the fall in fires over time, the number of firefighters has climbed along with the general rise in population, so that the rate of firefighters per 1,000 people has remained the same. This data is from a different report from the National Fire Protection Association by Rita Fahy, Ben Evarts and Gary P. Stein, called “US Fire Department Profile 2020” (September 2022).
With fires and fire deaths down by half since 1980, what are the firefighters doing? Many fire departments have for a long time included health-related events, not just fires, in their basic mission. But as the number of fire-related responses by fire departments has declined, the number of health-related responses has risen substantially. Here’s the data from Fahy, Everts, and Stein (the provide annual data, but here, I’m just comparing 1980 and 2020):
As you can see from the above figure, the number of career fire-fighters has expanded by about 50% over the last 40 years (from about 240,000 to 360,000). In that time, the number of fire department calls has more than tripled (from about 11 million to over 36 million). However, the number of calls related to fires has dropped by more than half, reflecting the decline in number of fires. Medical aid or rescue was already a more common fire department activity back in 1980, but it has expanded quite rapidly. Fire department also end up involved in a number of other situations like downed power lines, disaster relief, or even bomb threats. What it means to “be a fire-fighter” has been evolving over time.
The euro technically started in 1999, when the 11 founding European members of the currency agreed to keep their exchange rates fixed and to hand over monetary policy to the European Central Bank. The euro then became the actual currency that people and firms used in 2002. I confess that, back in the early 1990s, I did not expect the euro ever to happen. My logic was simple: I reasoned that the euro would not take off without Germany, and Germany would not surrender the deutschmark. I was wrong.
As the authors note, “the euro effectively sailed on with an incomplete constitution.” That is, when the euro began it had the European Central Bank, a promise from the member countries that they wouldn’t run overly large budget deficits, and a “no bailout” pledge if they did. But the consequences of violating these promises and pledges were unclear. It wasn’t clear to what extent the new monetary order would be enforced from above, or would bubble up from below. It wasn’t clear what would happen in a debt or financial crisis. It was not clear if there would be a “safe asset,” similar to US Treasury bonds, with the full backing of the euro area, or just separate bonds from different countries. There was no centralized European budget.
But there was a sense that if the European Union was to be an economic success, with free movement of workers, goods and services, and capital across national borders, the euro was part of the solution. Indeed, Europeans had for some decades had various agreements to limit or block movements in their exchange rates, so to at least some, the euro just seemed to formalize earlier arrangements and make them permanent. And indeed, for the first 10 years or so, the euro worked remarkably well. It was “the 2% decade,” with the economies of the euro-zone countries on average grew about 2% per year, with annual inflation staying low at about 2%, and average government budget deficits across the euro area at about 2%.
Then it went sideways. The European Union was first hit by the Great Recession of 2008-9, with many EU countries having their own versions of credit and housing bubbles and financial crisis. But for a time, global credit markets were pricing debt from all EU countries at very similar levels: that is, countries that seemed to have worse problems with credit bubbles, bank failures, and government debt were paying pretty much the same fairly low euro-based interest rates as everyone else. As a result, these higher risk countries (Greece, Portugal, Spain, Italy, Ireland, others) just kept dramatically over-borrowing.
Around 2010, the EU powers-that-be made clear that the neither the EU nor the European Central Bank was standing behind such loans. The interest rates for the most debt-ridden EU economies spiked. A decade followed of debt rescheduling, bankruptcies, emergency loan packages, and uncertainty. For the decade from 2009 to 2019, the annual GDP growth rate for the euro-area countries was only 0.8%–which implies that a number of countries had growth rates of zero or less during this period.
Corsetti and Buti go over the many, many summits and announcements and policy proposals through this difficult decade for the euro. Looking back on it now, I would emphasize that the problem wasn’t just slow growth and a sense of slow-motion crisis in the euro area, but a sense that the countries within the euro area were diverging. The author provide this useful figure, comparing the “interquartile range” of unemployment rates across US state and the EU-15 countries: that is, it’s the range of unemployment rates from the state or country at the 25th percentile up to the state or country at the 75th percentile.
Notice that the interquartile range for US states is comparatively small. The range across the EU countries looks as if it’s getting smaller for the first decade of the euro, but then appears to be getting much bigger from about 2012-2015. The gap then declines to a smaller, but comparatively still large, levels.
But by 2020, as the EU was having some success in gradually building institutional structures to deal with sovereign debt issues and to support the euro and the European Central Market, the pandemic hit. From the standpoint of the euro, the pandemic had two big effects: one clearly positive and one potentially negative.
The positive effect was that the pandemic offered a crystal-clear case for economic coordination and support, along with additional institution-building, across the countries of the EU. The negative effect was that fiscal deficits across the euro-area countries spiked as they sought to reduce the economic shock of the pandemic, and together with supply-chain problems, the reality of too much spending power chasing too few goods led to the euro’s first experience with widespread inflation, averaging 7% in 2002-2003. As Corsetti and Buti point out, the euro-area seems to innovate only in times of crisis:
[A]gainst all odds, EMU has proven to be resilient … The political drive underlying its creation, which seemingly withers away in normal times, resurfaces powerfully, especially when crises threaten the survival of the common currency. Indeed, historical records confirm the leitmotiv in the EU narrative: the ‘true reaction function’ of Europeans emerges only in conditions of extreme distress. But the same records also show that steps forward only come at higher-than-necessary and social costs. Looking forward, to keep counting on the idea that the right decisions are (eventually) made only under distress is risky. At 25, the key challenge for the euro area is to learn to design and implement the necessary reforms in ‘normal times’.
Some steps are happening. For example, during the pandemic the EU issued bonds backed by the European Union as a whole, not by individual countries, with the proceeds used to support economies and labor markets. Thus, countries could be less tempted to run huge budget deficits on their own. There is also discussion of European-wide funding of European public goods, like certain kinds of infrastructure or reductions in carbon emissions. The EU is working on a “banking union,” where there will be a common set of rules and supervision across all EU banks. (And yes, the euro was launched without a common set of bank rules or euro-wide banks supervisors.) A more general “capital markets union” is under discussion. It’s now clear that the European Central Bank will play a role in addressing financial crises. (And no, that wasn’t clear when the ECB was created.)
The euro was an incomplete work-in-progress when it started, which is part of why skeptics like me could barely believe it. But while the push toward further European integration has its pauses and jolts, the forward momentum continues, which means that the institutions surrounding the euro continue to evolve, as well.
For those who would like to dig more deeply into these issues, farther than the Corsetti-Buti discussion will take you, I can recommend a couple of symposium from the Journal of Economic Perspectives, where I work as Managing Editor. The Spring 2021 issue included a four-paper Symposium on the European Union:
