The Line Item Veto and Public Sector Budgets: Evidence from the States

Recent proposals assume that endowing the U.S. President with a line item veto will reduce spending. Analysis of a rich set of state budget data indicates that long run budgets are not altered by an item veto. In the short run, the item veto's potency is contingent upon the political setting. Governors with political incentives to use an item veto alter spending and revenues in a statistically significant and quantitatively important fashion. These results suggest that adoption of the line item veto, in general, is unlikely to reduce the size of the federal government.

Public Policy and Entrepreneurship

The image of the American entrepreneur retains an enduring fascination in the minds of the public and policy makers alike. For example, testifying several years ago at a congressional hearing on "the entrepreneurial spirit in America," Wisconsin's Senator Robert Kasten said of entrepreneurs: "They create new jobs. They provide new competition to existing businesses. They help to improve product quality, help to reduce prices, add new goods and services never before thought of, advance new technologies, America's competitive stance." His statement captures the view that entrepreneurial enterprises are valuable sources of technological advance, jobs, and dynamism, a trait commonly attributed to small business as a whole. Our national affection toward entrepreneurs also manifests itself in attitudes towards small business. "Start-up," "family," and other small-scale businesses carry an important weight in discussions of national policy. This durable affection stems in part from the perception that small business is the vehicle by which entrepreneurs provide needed vigor to the economy. In the newly established democracies of Eastern Europe a widely discussed challenge is the need to regenerate a vital entrepreneurial sector. The centralized regime pushed the mass production paradigm to its limit, at times concentrating the entire production of a good in a single factory. The dismal record of poor quality products and stagnant economic growth highlights the need for the competition and vigor provided by start-up enterprises. The national focus on small business is not merely talk. Many government policies are directed toward aiding small businesses. For example, the Revenue Reconciliation Act of 1993 (RRA93) permits the exclusion of 50 percent of capital gains on qualifying investments in start-ups and small businesses held for five or more years. This brief surveys the various notions of "small business," presents criteria that should underlie policies toward business, and reviews the case for public policies to stimulate entrepreneurship and small business. It concludes that it is surprisingly difficult to construct a case in favor of systematically favoring small businesses. Indeed, it is probably not useful to think of creating a "small business climate" through policies like targeted tax breaks, wage subsidies, loan guarantees or outright grants. Instead, policies should be devoted to developing an ehnvironment favorable to innovation, employment, and growth in the economy as a whole.

"Job-Lock: An Impediment to Labor Mobility? Is Health Insurance Crippling the Labor Market?"

Recent survey results and anecdotal evidence appear to indicate that workers sometimes sacrifice job opportunities by remaining in their current position in order to retain health benefits. If "job-lock" is real, the nation pays an economic price in terms of a misallocation of workersamong productive opportunities, higher relocation and training costs for workers who have stayed too long in their jobs, and the loss of innovation, employment, and competition associated with start-up ventures. Holtz-Eakin suggests that the incidence of job-lock may be overstated. Therefore, reform programs proposing to dismantle the current system of employer-provided insurance in order to improve labor mobility are misguided. Rather, policy should aim to improve access to health care, improve the efficiency of insurance operations, and guarantee the portability of insurance coverage and premium expenses.

"Is Health Insurance Crippling the Labor Market?"

While discussion about health care encompasses a wide array of issues-inadequate access, the growing share of national resources devoted to health care, the incidence of cost-shifting from the uninsured to the insured, and differences in premium costs between seemingly similar insured individuals-growing significance has been placed on how aspects of the current system may create distortions in the labor market. Some of these issues are addressed in this working paper, including the extent to which labor market mobility is hampered by the nonportability of employer-provided insurance.

Distortion Costs of Taxing Wealth Accumulation: Income Versus Estate Taxes

Recently, attention has focused on the estate tax. To date, however, the debate over estate taxes has been nearly devoid of standard considerations of deadweight loss. We develop a framework for computing the deadweight loss of a revenue-neutral switch from an estate tax to a capital income tax, focusing on the potential lifetime behavioral responses in anticipation of paying the estate tax, while requiring relatively few parameters to estimate. We conclude that eliminating the estate tax and replacing the revenue with that from a capital income tax will likely enhance economic efficiency. Specifically, using our baseline parameter estimates we estimate that the mean decrease in deadweight loss is $0.018 per dollar of wealth. There is, however, considerable heterogeneity in the estimated impact. Importantly, our estimates are based on data that do not contain the 'super-rich' who are most highly affected by the estate tax.

The Tax Reform Act of 1986: Simplicity, Equity, and Efficiency

The Tax Reform Act of 1986 (TRA86) has added another chapter to the already crowded tax history of the 1980\u27s. Since the election of Ronald Reagan in 1980, the nation has seen several major tax changes: The Economic Recovery Tax Act in 1981, The Tax Equity and Fiscal Responsibility Act in 1982, and TRA86. With tax reform now well down on the list of legislative priorities (at least until next year!) it seems a propitious time for a general assessment of the structure of the federal tax system. This paper reviews TRA86 with an eye toward these issues. The order of inquiry is as follows. Section I contains a brief summary of the salient features of TRA86. This is not a comprehensive presentation of the changes in tax provisions, but simply a listing of the major changes in the personal and corporate income tax codes, along with a preview of how they affect each of our criteria. Sections II through IV examine, in order, the impact on simplicity, equity, and efficiency. In each instance, basic principles are outlined and the specific impact of TRA86 is examined. The final section is a summary with some conclusions

"Public Infrastructure Investment: A Bridge to Productivity Growth? Public Capital and Economic Growth, ; New Federal Spending for Infrastructure: Should We Let This Genie Out of the Bottle?

This brief presents contrasting views on the effects of public infrastructure investment on private sector productivity. Aschauer states that the slower rate of productivity growth since the early 1970s--coupled with an aging population, the declining proportion of workers to the total population, and other demographic factors--poses a dilemma for policymakers interested in strengthening the long-term relative position of the United States in an increasingly competitive global economic environment. He considers public infrastructure to be a factor in production and the decline in public capital to be responsible for part of the productivity slowdown. In contrast, Holtz-Eakin dismisses the conventional arguments for a federal infrastructure program by asserting that a large-scale public infrastructure program has no appreciable effect on productivity growth; in the current fiscal climate of scarce federal resources, a federal infrastructure program is not consistent with the goal of deficit reduction; there are better infrastructure strategies than new spending and massive construction programs; and policies aimed at increasing private rather than public investment will have a more positive impact on U.S. competitiveness.

Inventory Fluctuations in the United States Since 1929

It has been known for a long time that inventory fluctuations are of great importance in business cycles. But inventory fluctuations are fundamentally a short-period phenomenon. Consequently, annual data may shed relatively little light on the nature of inventory fluctuations; most of the "action" may be played out within the year. For this reason, economists know precious little about inventory behavior before World War II. This paper seeks to lift this veil of ignorance in two ways. First,we create -- from some admittedly incomplete and imperfect data -- monthly time series on inventory holdings in manufacturing, durable manufacturing,and nondurable manufacturing. To our knowledge, these are the first such series ever made available.(The data are available on request.) Second,we apply to the prewar data certain statistical procedures and models that are in common use with postwar data. In this way, we can address the central issue of the paper: Has inventory behavior changed? While we do not wish to overstate the case, we were struck more by the similarities in inventory behavior between the prewar and postwar periods than by the differences. But the relevant stylized facts and regressing are displayed below, and each reader can make up his or her own mind.

Infrastructure in a Structural Model of Economic Growth

Researchers, commentators, and politicians have devoted steadily more attention to infrastructure in response to claims that inadequate accumulation of public capital has contributed to substandard U.S. economic growth. Despite this, the link between infrastructure and productivity growth remains controversial. In this regard, it is somewhat surprising that infrastructure research has developed in isolation from the large literature on economic growth. We develop a neoclassical growth model that explicitly incorporates infrastructure and is designed to provide a tractable framework within which to analyze the empirical importance of public capital accumulation to productivity growth. We find little support for claims of a dramatic productivity boost from increased infrastructure outlays. In a specification designed to provide an upper bound for the influence of infrastructure, we estimate that raising the rate of infrastructure investment would have had a negligible impact on annual productivity growth between 1971 and 1986.