deficits and debt speed of adjustment and overall debt burden the overall size of government ...
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Institutions and Fiscal Policy
Dimensions of Fiscal Policy
Deficits and debt Speed of adjustment and overall debt
burden The overall size of government General versus targeted
expenditures Redistribution
Deficits
Why might a benevolent dictator run deficits?
Deficits
Why might a benevolent dictator run deficits? Finance capital projects Smooth tax rates and expenditures over
time Keynesian management: Borrow during
recession to stimulate demand.
Political institutions and debt
A finding that emerged in the 1980s: Coalition government and deficits
Causal logic?
Coalition governments and debt
“Overfishing the common pool.” Each party in the coalition is not
internalizing the full costs of the expenditure demands it makes
Solutions to this problem? “War of attrition” and delayed
stabilization When adjustment is needed, each party
believes the other should bear the costs.
Instability and deficits
Expected probability of reelection might be important
If I expect to be in power in the next period, I face incentives not to generate excessive deficits
But if I expect to lose, take everything and externalize the costs on successor Tie the hands of successors to prevent
them from making undesirable expenditures
Electoral budget cycles
Taxes fall and expenditures increase in election years.
How should we interpret this? Are voters gullible?
Can voters ever punish fiscal indiscipline? Do they?
What is the role of credit markets?
The size of government
Proportional representation versus SMD: Persson, Roland, Tabellini (2007), “Electoral
common pool problem”: Voters can discriminate between the parties of a coalition at the polls, but they cannot discriminate between factions of a single party government. This creates electoral conflict, and a common pool problem, within a coalition government but not within a single-party government.
The size of government
Presidential vs. parliamentary: P/T: Concentration of power in parliamentary
systems, checks and balances in presidential▪ Weaker accountability yields higher rents and
higher expenditures under parliamentary P/T: A story about legislative cohesion, no
confidence procedure:▪ In parliamentary regime, stable majority of
incumbent legislators can benefit from spending while externalizing the costs onto “outsiders,” while there is competition to get into the winning coalition in presidential systems
The size of government
Evidence: Appear to be large effects on size of
government for both More recent work (PRT 2007): The effect
of electoral rules flows through the number of parties/coalitions
General versus targeted expenditures
District magnitude: P/T 2000: Assume two parties who can
commit to their platforms. Larger districts diffuse electoral competition, forcing parties to seek support from broad coalitions. Small districts induce focus on narrow geographic constituencies▪ Similar story with different modeling strategy in
Lizzeri and Persico (2001). Similar story with far more complex model in Milesi-Ferretti, Perotti, and Rostagno (2002). Better empirics?
General versus targeted expenditures
Presidential versus parliamentary PRT (2000): Incumbent legislators elected
by retrospective voters in different districts. ▪ In parliamentary system, stable majority of
legislators pursues joint interests of its voters. This yields broad social transfers, public goods.
▪ Presidential system: No party discipline, interests of different minorities pitted against one another. Fleeting coalitions of special interest groups, districts.
Critiques?
What is missing?
What is missing?
More sophisticated understanding of presidentialism outside the USA
Partisan composition of legislatures Sort out district structure versus
electoral rules Party lists, internal party procedures Decree powers
Causality?
Causality?
Matching Instruments
Year of adoption of constitution Hall and Jones (1999) instruments▪ Latitude, % English speaking, % European
native tongue