Transcript Slide - Society for Economic Dynamics

Macroeconomic Effects from
Government Purchases
and Taxes
Robert J. Barro and Charles J. Redlick
Harvard University
Fiscal-Stimulus Packages a big issue.
Empirical evidence on response of real GDP and
other economic aggregates to added government
purchases and tax changes is thin. Key issue is
identification.
Present study uses long-term U.S. macroeconomic
data with focus on defense spending. Framework
could work for Canada, Australia, New Zealand—am
working on these.
• Ongoing research on effects of New Deal spending on
income/output across U.S. states (with Fishback).
• Kraay on effects on GDP from disbursements of World
Bank loans in many countries.
• Shoag on effects of varying returns on pension-fund
assets of U.S. state governments—effects on
government spending and state personal income.
• Other work on U.S. government earmarks and defense
contracts across U.S. states—Nakamura & Steinsson.
Present study: spending multipliers identified
primarily from variations in defense spending,
especially changes associated with buildups and
aftermaths of wars.
Ramey’s defense-news variable gauges changes in
expected future defense outlays; thereby
distinguishing temporary from permanent spending.
Tax effects estimated mainly from changes in
newly constructed time series on average
marginal income-tax rates (AMTR) from federal
and state income taxes and social-security payroll
tax. Corresponds to tax on labor—working on
measure for capital income.
Attempt to differentiate substitution effects due
to changes in tax rates from income effects due
to changes in tax revenue.
Figure 1
Defense and Non-Defense Purchases
.3
.2
.1
.0
-.1
-.2
-.3
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
change in defense purchases
change in non-defense purchases
Favorable aspects of major wars, notably WWII, for gauging
spending multiplier:
• Principal changes in defense spending plausibly exogenous
with respect to GDP.
• Changes large, include positive and negative.
• Unlike many countries that experienced sharp decreases in
GDP during WWII, U.S. did not have massive destruction of
physical capital and suffered only moderate loss of life.
Demand effects should be dominant.
• Because unemployment rate in 1940 was still high, 9.4%,
some information on how size of defense-spending multiplier
depends on amount of slack. (More info for Canada, etc.)
U.S. time series contains two other warrelated cases of major, short-term changes in
defense spending. In WWI, defense-spending
variable was 3.5% in 1917 and 14.9% in 1918,
-7.9% in 1919 and -8.2% in 1920. In Korean
War, 5.6% in 1951, 3.3% in 1952, and 0.5% in
1953, -2.1% in 1954.
Post-1954 features much more modest
variations in defense spending. Largest
values—1.2% in 1966 and 1.1% in 1967—
during early part of Vietnam War. After end of
Vietnam, largest are 0.4-0.5% from 1982 to
1985 during “Reagan defense buildup” and
0.3-0.4% in 2002-2004 during post-2001
conflicts.
Red graph in Figure 1 shows non-defense G.
Note 2.4% in 1934 and 2.5% in 1936,
associated with New Deal. Otherwise, only
clear pattern is tendency for non-defense G to
decline during major wars and rise in
aftermaths.
Hard to be optimistic about using macro
time series to isolate multipliers for
non-defense G. One problem is that
variations are small. More importantly,
changes endogenous with respect to
GDP.
As Ramey (2008) observes, outlays by state and
local governments dominant part of non-defense
G (since at least 1929). These expenditures-particularly education, public order,
transportation--likely respond to fluctuations in
state and local revenue caused by changes in
aggregate economic conditions. Whereas war
and peace is plausibly exogenous driver of
defense spending, lack similarly convincing
exogenous changes in non-defense G.
Figure 2 Defense-News Variable
1.6
1.2
0.8
0.4
0.0
-0.4
1920 1930 1940 1950 1960 1970 1980 1990 2000
Figure 2 on defense news: WWII stands out,
including run-up of 0.40 in 1940, 1.46 in 1941, 0.75
in 1942; wind-down of -0.07 in 1944, -0.19 in 1945.
Peak at start of Korean War (1.16 in 1950)
impressive, signaling concern about potential WWIII.
Peak for WWI comparatively mild, 0.20 for
1917-18, but lots of assumptions here. Ramey and
Gordon Liao and I working on this (and Canada, etc.).
Figure 3
Average Marginal Income-Tax Rates
.5
.4
.3
.2
.1
.0
20
30
40
50
60
70
80
Total
Federal Income Tax
Social-Security Tax (FICA)
State Income Taxes
90
00
Use NBER’s TAXSIM program (Dan Feenberg) to update
Barro-Sahasakul data. Focus on average weighted by
concept of income close to labor income.
In overlap, 1966 to 1983, Barro-Sahasakul and NBER
series highly correlated in levels and changes.
Comfortable in using merged series 1912 to 2006.
New construct adds average marginal income-tax rates
from state income taxes.
Working on analogous construct for capital income-tax
rates (dividends, interest, corporate profits).
Many increases in federal AMTR on individual
income involve wartime: WWII (rise from
3.8% in 1939 to 25.7% in 1945), WWI (0.6% in
1914 to 5.4% in 1918), Korean War (17.5% in
1949 to 25.1% in 1952), Vietnam War (21.5%
in 1967 to 25.0% in 1969). Rate tended to fall
during war aftermaths: 25.7% in 1945 to
17.5% in 1949, 5.4% in 1918 to 2.8% in 1926,
25.1% in 1952 to 22.2% in 1954. No
reductions after Vietnam War.
Rising federal AMTR for 1971-78, from 22.7%
to 28.4%. Increase reflected shifting toward
higher rate brackets due to high inflation in
un-indexed system. Small tax-rate hikes
include Clinton, 21.7% in 1992 to 23.0% in
1994 (24.7% in 2000), George H.W. Bush,
21.7% in 1990 to 21.9% in 1991. Given hype
about Bush’s “read my lips, no new taxes,”
surprising that AMTR rose by only two-tenths
of percentage point in 1991.
Major cuts in AMTR under Reagan (25.9% in
1986 to 21.8% in 1988, 29.4% in 1981 to
25.6% in 1983), George W. Bush (24.7% in
2000 to 21.1% in 2003), Kennedy-Johnson
(24.7% in 1963 to 21.2% in 1965), and Nixon
(25.0% in 1969 to 22.7% in 1971).
One identifying assumption is that changes in
AMTR lagged one or more years can be
satisfactorily treated as pre-determined with
respect to GDP. One way to evaluate this
assumption is from tax-smoothing approach.
Romer-Romer Tax-Change Series
Romer and Romer (2008, 2010) use narrative
approach to assess all significant federal tax
legislation for 1945-2007. Gauge tax changes by
size and timing of intended effect on federal tax
revenue. In contrast to AMTR, focus on income
effects related to tax collections. High positive
correlation between Romer-Romer and change in
AMTR. (Reagan 1986 as counter-example.)
Romer-Romer avoid obvious simultaneity
between actual tax revenue and GDP. Main
endogeneity issue is politics; changes in tax law
related to current or anticipated economic
conditions. They use 4-bin approach; 2 regarded
as exogenous. One of the endogenous is about
G; really an omitted variable. Other categories
not so clear. We use Romer-Romer as instrument
for contemporaneous change in AMTR or total
federal revenue.
Theoretical Framework
• Barro and King (1984). Central features:
• Representative agent, time-separable preferences over
consumption and leisure.
• Consumption and leisure both normal goods.
• “Market clearing.”
• Baseline model has closed economy, absence of
durable goods, lump-sum taxes. Then add durables.
Framework for Empirical Analysis
(1)
(yt – yt-1)/yt-1 = β0 + β1∙(gt – gt-1)/yt-1
+ β2∙(gt*– gt-1*)/yt-1 + β3∙(τt – τt-1)
+ other variables.
yt : per capita real GDP, gt : per capita real government
purchases, gt*: expected future g (Ramey), τt : marginal
income-tax rate.
Other variables: lagged U (business-cycle dynamics) and
default spread for interest rates (money/credit).
• Given gt*, gt reflects temporary changes. Coefficient β1 is
multiplier for temporary change in g. Is it positive,
greater than 1, higher with more slack, gauged by Ut-1?
• Model predicts β2 > 0, β3 < 0. As approximation (given
Ramey construction), multiplier for permanent change in
g is β1 + 4*β2 .
• Timing for effects on yt from g and τ? Include lag of g
and focus on lag of τ.
In first regressions, instrument list has
contemporaneous change in defense spending.
Results similar when instrument list has change in
defense spending interacted with “war years.”
Instrument list also has lagged change in AMTR and
lagged U.
Use Romer-Romer (exogenous part) as instrument
when assessing contemporaneous effect of change in
τ or total federal revenue. Also consider as
instrument change in τ computed from prior year’s
incomes.
Include lagged default spread on instrument list.
Empirical Results
Table shows 2SLS regressions with annual data
in form of eq. (1). Samples end 2006. Starting
year 1950 (include Korean War), 1939 (include
WWII), 1930 (include Great Depression), 1917
(include WWI and 1921 contraction). Also
consider 1954 and 1914.
Equations for GDP Growth
Various Samples
Starting
date
Δg: defense
Δg: defense
(-1)
Δg*: dfns
news
U(-1)
Δτ(-1)
Yield
spread
(1)
(2)
(3)
(4)
(5)
(6)
1950
1939
1930
1917
1954
0.68*
(0.27)
0.01
(0.28)
0.026
(0.016)
0.50**
(0.17)
-0.54**
(0.21)
-43.9*
(20.7)
0.44**
(0.06)
0.20**
(0.06)
0.039**
(0.011)
0.58**
(0.14)
-0.16
(0.16)
-37.8
(22.0)
0.46**
(0.08)
0.21*
(0.09)
0.034*
(0.015)
0.61**
(0.10)
-0.26
(0.22)
-101.5**
(12.8)
1930
(w/o 1949)
0.48**
(0.08)
0.25**
(0.08)
0.034*
(0.014)
0.58**
(0.10)
-0.52*
(0.23)
-103.4**
(12.4)
0.47**
(0.08)
0.16
(0.08)
0.034*
(0.017)
0.47**
(0.10)
-0.19
(0.25)
-73.6**
(12.2)
0.98
(0.65)
-0.54
(0.56)
-0.120
(0.112)
0.51**
(0.18)
-0.48*
(0.22)
-43.1*
(21.8)
• Samples with WWII, multiplier for temporary
defense spending 0.4-0.5 contemporaneously,
0.6-0.7 over 2 years.
• If change in defense spending “permanent”
(gauged by Ramey’s defense-news variable),
multipliers higher by 0.1-0.2.
• Multipliers all significantly less than 1 and
apply for given average marginal income-tax
rates.
• Positive versus negative values for change in g?
• Interaction term between g and U(-1) has
coefficient close to zero. Comparison with results
when g* omitted?
• Interaction between g and level of nominal
interest rates? (1934-46 and 2009-10 have levels
close to zero for 3-month T Bills.)
Post-1950 sample: coefficient of -0.54 (s.e.=0.21)
on Δτ(-1). Accords with micro estimates of laborsupply elasticities. Result corresponds to “tax
multiplier” around -1.1.
Samples that start earlier than 1950 show less
impact from Δτ(-1) on GDP. Effects from
command and control during wars? Mismatch of
1948 tax cut with 1949 recession. Omit 1949:
column 4.
• Effects of default spread negative in all
samples. Larger in magnitude for samples
that include Great Depression.
• Results on fiscal variables similar if defaultspread variable omitted.
Results seem to provide reliable estimates of
multipliers for defense spending: around 0.4-0.6 for
temporary, 0.15 higher for permanent.
To evaluate typical fiscal-stimulus packages, more
interested in multipliers for non-defense G. Hard to
estimate because observed movements likely
endogenous with respect to GDP.
Hence, important to know whether defense-spending
multiplier provides upper or lower bound for nondefense G.
Implications from Theory,
Defense versus Non-Defense G
• Temporary versus permanent changes in G.
• Command & control and rationing.
• Patriotic boost to labor supply (but threat to
future property rights?).
• Command & control and patriotism stressed
by Mulligan (1998). Think forces strong
enough so that defense multiplier upper
bound for non-defense—but conjecture.
Non-Defense Government Purchases and Transfers
Starting date
1950
1930
1950
1930
1950
1950
Yield spread
squared
Δg: nondefense
Δ(transfers)
0.89**
(0.27)
-0.13
(0.27)
0.040**
(0.016)
0.64**
(0.17)
-0.45*
(0.20)
-31.2
(20.0)
2.65**
(0.93)
--
0.46**
(0.08)
0.21*
(0.09)
0.036*
(0.016)
0.60**
(0.11)
-0.25
(0.23)
-100.9**
(13.3)
0.12
(0.63)
--
0.34
(0.32)
0.08
(0.28)
0.028
(0.016)
0.43*
(0.18)
-0.56**
(0.21)
-28.4
(25.4)
--
0.51**
(0.10)
0.18*
(0.09)
0.033*
(0.015)
0.62**
(0.10)
-0.25
(0.22)
-102.3**
(13.0)
--
0.84**
(0.24)
-0.36
(0.25)
0.014
(0.013)
0.26*
(0.16)
-0.26
(0.19)
-38.9*
(18.1)
--
0.46
(0.26)
0.02
(0.26)
0.016
(0.014)
0.55**
(0.16)
-0.38
(0.20)
-21.6
(20.5)
---
--
--
0.64
(0.68)
--
--
Δ(GM sales)
-1.53
(0.92)
--
--
Δ(GE sales)
--
--
--
--
3.66**
(0.86)
--
R2
0.54
0.75
0.51
0.75
0.63
0.57
σ
0.017
0.027
0.017
0.027
0.015
0.016
Δg: defense
Δg: defense (1)
Δg*: defense
news
U(-1)
Δτ(-1)
17.6**
(4.7)
• Results for non-defense G in various samples.
Different results with WWII and Great
Depression because cyclical pattern of nondefense G different from post-1950.
• Results for GM and GE “multipliers” illustrate
problems of endogeneity with respect to GDP.
Effects on Components of GDP
Dependent
variable:
Δg: defense
Δg: defense (-1)
Δg*: defense
news
U(-1)
Δτ(-1)
Yield spread
squared
Δ(c: non-dur.)
0.005
(0.093)
0.179
(0.095)
-0.0035
(0.0053)
0.112
(0.058)
-0.184**
(0.071)
-5.4
(7.0)
Sample: 1950-2006
Δ(c: dur.)
Δ(invest)
-0.171*
(0.073)
0.147*
(0.075)
0.0106**
(0.0041)
0.145**
(0.045)
-0.145**
(0.056)
-3.5
(5.5)
-0.083
(0.185)
-0.142
(0.189)
0.0377**
(0.0105)
0.382**
(0.115)
-0.300*
(0.142)
-22.7
(13.9)
Δ(g: non-def.)
Δ(x-m)
-0.081
(0.041)
0.055
(0.042)
-0.0055*
(0.0023)
-0.053*
(0.026)
-0.033
(0.032)
-4.8
(3.1)
0.004
(0.079)
-0.231**
(0.080)
-0.0135**
(0.0044)
-0.095
(0.049)
0.122*
(0.060)
-6.7
(5.0)
-0.009
(0.011)
-0.011
(0.011)
-0.0082**
(0.0021)
-0.030
(0.027)
-0.105**
(0.030)
-6.5
(4.1)
-0.071**
(0.021)
-0.027
(0.022)
-0.0023
(0.0039)
-0.002
(0.051)
0.114*
(0.058)
-8.0
(7.8)
Sample: 1939-2006
Δg: defense
Δg: defense (-1)
Δg*: defense
news
U(-1)
Δτ(-1)
Yield spread
squared
-0.011
(0.022)
0.107**
(0.022)
0.0044
(0.0040)
0.101
(0.052)
-0.008
(0.059)
1.1
(8.0)
-0.115**
(0.016)
0.038*
(0.016)
0.0116**
(0.0030)
0.094*
(0.038)
-0.103*
(0.043)
-3.1
(5.9)
-0.356**
(0.045)
0.096*
(0.046)
0.0341**
(0.0084)
0.401**
(0.109)
-0.067
(0.124)
-20.3
(16.8)
Effects on Components of GDP
1939 sample, estimates for effects on GDP in Table 2 were 0.44 for
g and 0.039 for g*. Corresponding effects on components of GDP in
Table 5 add to -0.56 for g (crowding out) and 0.039 for g*.
Correspondence between empirical and theory for investment.
Coefficients for g negative: -0.12 (s.e.=0.02) for durable C
and -0.36 (0.04) for I; for g* positive: 0.012 (0.003), 0.034 (0.008).
Theory predicted negative effects on consumption, but estimates
for non-durable C insignificant. Non-defense G (consumption?),
effect from g insignificant but g* negative, -0.008 (0.002). Net
exports, effect from g negative, -0.07 (0.02), g* insignificant. During
major wars, changes in g and g* tend to go along with changes in
other countries.
More Results on Taxes, 1950-2006
Δg:
defense
Δg: def
(-1)
Δg*: def
news
U(-1)
Δτ(-1)
Δτ
Romer
Δtax (-1)
Romer
Δtax
Δ(fed rev)
(-1)
Δ(fed rev)
Yield
spread
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
0.67*
(0.28)
0.01
(0.28)
0.025
(0.015)
0.51**
(0.17)
-0.53**
(0.21)
--
0.53
(0.27)
-0.23
(0.28)
0.029
(0.016)
0.51**
(0.18)
--
0.71*
(0.30)
-0.21
(0.28)
0.016
(0.017)
0.49**
(0.18)
--
--
--
0.72*
(0.29)
-0.03
(0.29)
0.021
(0.017)
0.49**
(0.18)
-0.45
(0.24)
--
0.49
(0.31)
0.10
(0.26)
0.015
(0.018)
0.43*
(0.17)
-0.52**
(0.18)
--
--
-0.56
(0.62)
--
--
--
--
--
--
--
--
--
--
-1.08
(0.58)
-0.03
(0.55)
--
--
--
-1.08
(0.57)
--
0.61
(0.35)
0.05
(0.32)
0.023
(0.018)
0.50**
(0.17)
-0.58*
(0.28)
0.12
(0.47)
--
0.53
(0.28)
-0.23
(0.28)
0.029
(0.016)
0.51**
(0.18)
--
--
0.66*
(0.28)
-0.05
(0.29)
0.027
(0.016)
0.48**
(0.17)
-0.43
(0.24)
--
--
--
--
--
-0.17
(0.30)
--
--
--
-0.46
(0.27)
--
-47.2*
(20.2)
-43.4*
( 21.7)
-41.8*
(21.2)
-44.4*
(21.9)
-42.9
(21.9)
-64.9**
(20.7)
-52.5*
(21.3)
--
0.46
(0.53)
-37.4
(21.0)
Tax Rates and Tax Revenue
• Changes in AMTR, lags and contemporaneous
(Romer-Romer as instrument).
• Romer-Romer exogenous tax-change variable,
lags and contemporaneous.
• Lagged AMTR and Romer-Romer jointly.
• Change in total federal revenue with RomerRomer as instrument.
• Substitutions effects from tax rates matter;
income effects?
Extensions
• Instruments for non-defense G? Political
variables in context of cross-state New Deal
spending?
• Apply to other countries? For defense G, need
cases like U.S. with large wartime variations in G
but without massive destruction of capital and
life. Promising cases are Canada, Australia, New
Zealand. (Lots of progress on data for New
Zealand.)
Canada: Change in Defense
Purchases (relative to GDP)
.15
.10
.05
.00
-.05
-.10
-.15
-.20
-.25
1920 1930 1940 1950 1960 1970 1980 1990 2000
Australia: Change in Defense
Purchases (relative to GDP)
.15
.10
.05
.00
-.05
-.10
-.15
1920 1930 1940 1950 1960 1970 1980 1990 2000
Change in Actual Defense Purchases, New Zealand
0.300
0.250
0.200
0.150
0.100
0.050
1912
1914
1916
1918
1920
1922
1924
1926
1928
1930
1932
1934
1936
1938
1940
1942
1944
1946
1948
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
0.000
-0.050
-0.100
-0.150
Change in defense purchases expressed as a ratio to previous year’s GDP
(gt - gt-1 ) / yt-1
1.2
New Zealand Defense News Shock (Expected Change in Defense
Purchase)
1
0.8
0.6
0.4
0.2
0
1912
1913
1914
1915
1916
1917
1918
1919
1920
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
1941
1942
1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
-0.2
Year
The present value of expected change in future nominal defense spending, expressed as a ratio to the prior year’s nominal GDP
(g - g*t-1 ) / yt-1
*
t
1907
1909
1911
1913
1915
1917
1919
1921
1923
1925
1927
1929
1931
1933
1935
1937
1939
1941
1943
1945
1947
1949
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
0.5
Average Marginal Tax Rates for New Zealand, 1907 - 2009
0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0