On the Welfare Costs of Consumption Uncertainty

Satisfactory calculations of the welfare cost of aggregate consumption uncertainty require a framework that replicates major features of asset prices and returns, such as the high equity premium and low risk-free rate. A Lucas-tree model with rare but large disasters is such a framework. In a baseline simulation, the welfare cost of disaster risk is large -- society would be willing to lower real GDP by about 20% each year to eliminate all disaster risk, including wars. In contrast, the welfare cost from usual economic fluctuations is much smaller, though still important -- corresponding to lowering GDP by around 1.5% each year.

Quantity and Quality of Economic Growth

Most cross-country studies of economic performance have focused on narrow economic variables. The present study emphasizes instead some quality dimensions of economic development, including health, fertility, income distribution, political institutions, crime, and religion. The data reveal a regular pattern in which economic development goes along with higher life expectancy and reduced fertility. Improvements in the standard of living are also associated with expansions of democracy, increased maintenance of the rule of law, and reductions in official corruption. Despite the presence of a Kuznets curve, little of the variations in income inequality are explained by the overall level of economic development. Crime rates, proxied by murder rates, also bear little relation with the level of development but are more closely associated with income inequality. Finally, there is some support for the secularization hypothesis, in that economic development is typically accompanied by lower levels of church attendance and religious beliefs. However, religiosity is positively related to education, holding fixed other indicators of economic development.

Inflation and growth

Inflation (Finance)

On the Predictability of Tax-Rate Changes

Some previous analyses have suggested that the smoothing of tax rates over time would be a desirable guide for public debt management. One implication of this viewpoint is that future changes in tax rates would be unpredictable based on current information. This proposition is tested by examining the behavior of U.S. federal and total government tax (and "non-tax")receipts relative to GNP. The sample for the federal government goes back to1879, while that for total government starts in 1929. Some econometric problems with using time-averaged data are discussed. The main empirical results accord with the theoretical analysis -- in particular, there is first, little indication of drift in the tax rates; second, insignificant relations of tax-rate changes to the own history of changes; and third, little explanatory value for tax-rate changes from a vector of lagged variables, which include the behavior of government spending and real output. If the findings are sustained, they imply that the existing IJ.S. time series data do not isolate periods in which current overall tax rates would be perceived as high or low relative to expected future rates. Accordingly, it may be impossible to use these data to evaluate policies that entail intertemporal manipulation of aggregate tax rates.