Fiscal austerity and public investment: Is the possible the enemy of the necessary?

In most rich democracies one finds a tendency for the share in public finance that is available for discretionary spending to shrink. This is because tax revenues do not keep pace with simultaneous increases in fixed expenditures and growing pressures for fiscal consolidation. The present paper assesses the capacity of governments under conditions of fiscal austerity to shift financial resources within the shrinking share of discretionary expenditure from old to new purposes, and thereby fund future-oriented investment aimed at making societies more equitable and efficient. For this reason an indicator for soft public investment is developed, which includes public spending on education, R&D, family support, and active labor market policy. We present data for Germany, Sweden, and the United States for the years 1981 to 2007 in order to explore the general dynamics of consolidation policies under the expectation that far more ambitious consolidation attempts will be made in the coming decade. Our results suggest that the capacity of governments to shift resources towards soft public investment decreases as pressures for fiscal consolidation increase. -- In den meisten reichen Demokratien lässt sich die Tendenz ausmachen, dass der Anteil diskretionärer Ausgaben an den öffentlichen Haushalten zurückgeht. Ursächlich dafür ist, dass die Steuereinnahmen nicht hoch genug sind, um die parallele Zunahme gebundener Ausgaben sowie den gestiegenen Konsolidierungsdruck auffangen zu können. Das Papier untersucht, inwiefern Regierungen unter den Bedingungen fiskalischer Austerität in der Lage sind, finanzielle Mittel innerhalb des diskretionären Ausgabenanteils von alten zu neuen Aufgaben zu verschieben. Dies betrifft insbesondere die Finanzierung zukunftsorientierter Investitionen, die darauf abzielen, Gesellschaften gerechter und effizienter zu gestalten. Zu diesem Zweck wird ein Indikator für 'weiche' öffentliche Investitionen entworfen, der Ausgaben für Bildung, Forschung und Entwicklung, Familienunterstützung und aktive Arbeitsmarktpolitik enthält. Angesichts der Erwartung weit ambitionierterer Konsolidierungsversuche im kommenden Jahrzehnt werden auf der Basis von Daten für Deutschland, Schweden und den Vereinigten Staaten für die Jahre 1981 bis 2007 allgemeine Dynamiken der Konsolidierungspolitik herausgearbeitet. Die Ergebnisse weisen darauf hin, dass die Fähigkeit von Regierungen, mehr Ressourcen für 'weiche' Investitionen bereitzustellen, in dem Maße abnimmt, wie der Konsolidierungsdruck zunimmt.

The Impossibility of a Perfectly Competitive Labor Market

Using the institutional theory of transaction cost, I demonstrate that the assumptions of the competitive labor market model are internally contradictory and lead to the conclusion that on purely theoretical grounds a perfectly competitive labor market is a logical impossibility. By extension, the familiar diagram of wage determination by supply and demand is also a logical impossibility and the neoclassical labor demand curve is not a well-defined construct. The reason is that the perfectly competitive market model presumes zero transaction cost and with zero transaction cost all labor is hired as independent contractors, implying multi-person firms, the employment relationship, and labor market disappear. With positive transaction cost, on the other hand, employment contracts are incomplete and the labor supply curve to the firm is upward sloping, again causing the labor demand curve to be ill-defined. As a result, theory suggests that wage rates are always and everywhere an amalgam of an administered and bargained price. Working Paper 06-0

The Coevolution of Finance and Property Rights: Evidence from Transition Economies

The transition from communism to capitalism was necessarily accompanied by a sudden and abrupt increase in the financialization of society. This increase occurred in an environment that, even now, still has little experience with or expertise in financialization. Given that financialization occurred simultaneously with the growth and evolution of other political and economic institutions, the question arises: What was the effect on these other nascent institutions like property rights? This article empirically analyzes the relationship between financialization and property rights in transition countries. Using a unique monthly database of twenty transition countries over a period from 1989 to 2012, this article finds that the influence of financialization depends on which definition of “financialization” is used. In particular, increases in basic financial intermediation improved property rights. However, higher-order “financialization,” proxied here by the size of capital markets and the wages in the financial sector, appeared to have a negative impact on the development of broad-based property rights in transition

The Critical Juncture Concept’s Evolving Capacity to Explain Policy Change

This article examines the evolution of our understanding of the critical junctures concept. The concept finds its origins in historical intuitionalism, being employed in the context of path dependence to account for sudden and jarring institutional or policy changes. We argue that the concept and the literature surrounding it—now incorporating ideas, discourse, and agency—have gradually become more comprehensive and nuanced as historical institutionalism was followed by ideational historical institutionalism and constructivist and discursive institutionalism. The prime position of contingency has been supplanted by the role of ideas and agency in explaining critical junctures and other instances of less than transformative change. Consequently, the concept is now capable of providing more comprehensive explanations for policy change