Appropriate Fiscal Policy over the Business Cycle: Proper Stimulus Policies Can Work

Fiscal policy has become quite controversial in the post-Keynesian era, the debate over the Obama stimulus package being a contentious recent example. Some pundits go so far as to take the position that macroeconomic theory has failed to meaningfully progress in terms of providing useful recommendations for policy-makers, particularly in times of recession. Others take the laissez-faire view that policy reactions to the business cycle do not help in a rational expectations world and indeed do harm by increasing uncertainty. Still others, while not necessarily viewing themselves as in any sense “Keynesian,” have a nagging feeling that sometimes doing nothing must be worse than doing something…but what to do? Sensible guidance is provided here on how governments should spend taxpayer dollars and on how that spending should change under varying economic conditions. The nature of public goods, namely whether they are complements, substitutes, or neutral to private goods, is seen to be critical to such decisions.fiscal policy, business cycles, public goods, recessions, boomtimes

Benefit-Cost Analysis of Environmental Projects: A Plethora of Systematic Biases

There are many reasons to suspect that benefit-cost analysis applied to environmental policies will result in policy decisions that will reject those environmental policies. The important question, of course, is whether those rejections are based on proper science. The present paper explores sources of bias in the methods used to evaluate environmental policy in the United States, although most of the arguments translate immediately to decision-making in other countries. There are some “big picture” considerations that have gone unrecognized, and there are numerous more minor, yet cumulatively important, technical details that point to potentially large biases against acceptance on benefit-cost grounds of environmental policies that have true marginal benefits greater than true marginal costs, both in net present value terms. It is hoped that the issues raised here will improve future conduct of benefit-cost analyses of environmental policies.benefit-cost analysis, environmental policy, decision making, choice behavior, public goods, willingness-to-pay, willingness-to-accept, precautionary principle, hedonic methods, sum of specific damages, health effects model, environmental perceptions

A Note on the Design of Experiments Involving Public Goods

Concern about potential free riding in the provision of public goods has a long history. More recently, experimental economists have turned their attention to the conditions under which free riding would be expected to occur. A model of free riding is provided here which demonstrates that existing experimental approaches fail to explore a potentially important real-world dimension of free riding. In a cash-in-advance economy, free riding becomes a two-stage problem, while existing experiments only address the second stage. That is, one would expect households with high demands for public goods relative to private goods to generate less income than households preferring ordinary private goods, because the former are unable to individually increment the public good and leisure is valuable. Existing experiments start with a given number of “tokens” for each decision-maker, effectively only addressing the second stage of the free riding problem, namely, under what conditions free riding becomes a problem out of a given income. A recommended solution to this problem is to incorporate the potential to generate income prior to (or simultaneously with) the decision of how to allocate that income between private and public goods.decision making, choice behavior, public goods, experimental economics, altruism, fairness, conditional reciprocity

Morbidity and pollution: model specification analysis for time-series data on hospital admissions

Time-series analysis of effects of pollutants on emergency hospital admissions indicates important synergistic interactions among pollutants and to a lesser degree nonlinearities in effects of single pollutants. Comparisons of alternative econometric specifications are made to determine the appropriateness of incorporating nonuniform pollution impacts. The data substantially support the existence of synergisms among pollutants with high levels of sulfur dioxide, SO, (particulates), increasing the impact of particulates (SO,) on emergency hospital admissions. Marginal effects of either pollutant are, however, small at current ambient air quality levels. These results indicate that damage estimates were likely to be understated during the 1960’s when pollution levels were high, while, at current levels of those pollutants considered here, marginal damages are lower than would be estimated in studies failing to incorporate synergistic and nonlinear impacts.time series; hospital admissions; pollution and human health; synergisms; nonlinearities; econometric model specification

Benefit-cost analysis of environmental projects: A plethora of systematic biases

There are many reasons to suspect that benefit-cost analysis applied to environmental policies will result in policy decisions that will reject those environmental policies. The important question, of course, is whether those rejections are based on proper science. The present paper explores sources of bias in the methods used to evaluate environmental policy in the United States, although most of the arguments translate immediately to decision-making in other countries. There are some 'big picture' considerations that have gone unrecognized, and there are numerous more minor, yet cumulatively important, technical details that point to potentially large biases against acceptance on benefit-cost grounds of environmental policies that have true marginal benefits greater than true marginal costs, both in net present value terms. It is hoped that the issues raised here will improve future conduct of benefit-cost analyses of environmental policies

Appropriate fiscal policy over the business cycle: Proper stimulus policies can work

Fiscal policy has become quite controversial in the post-Keynesian era, the debate over the Obama stimulus package being a contentious recent example. Some pundits go so far as to take the position that macroeconomic theory has failed to meaningfully progress in terms of providing useful recommendations for policy-makers, particularly in times of recession. Others take the laissez-faire view that policy reactions to the business cycle do not help in a rational expectations world and indeed do harm by increasing uncertainty. Still others, while not necessarily viewing themselves as in any sense 'Keynesian,' have a nagging feeling that sometimes doing nothing must be worse than doing something...but what to do? Sensible guidance is provided here on how governments should spend taxpayer dollars and on how that spending should change under varying economic conditions. The nature of public goods, namely whether they are complements, substitutes, or neutral to private goods, is seen to be critical to such decisions

The velocity of money: evidence for the U.K. 1911-1966.

This paper presents secular evidence on the income velocity of money balances. Under a variety of specifications and statistical techniques, employed on both traditional and non-traditional variables, the Friedman assertion that money is a superior good is found to lack empirical support. Indeed, income elasticities of demand for M2 balances of .3 to .45 are observed, elasticities much smaller than previously thought.Money demand; velocity of money; income elasticity of money balances

New evidence on income and the velocity of money

Time series and cross-country empirical results suggest that cash holding as a percentage of income rises, or alternatively that velocity falls, as income increases. Numerous cross-sectional findings at many points in time, in several countries conclude oppositely. It is argued here that the former findings suffer from omitted variable bias by ignoring socio-demographic variables affecting the demand for cash balances. When one incorporates such demand shifters into the analysis the time series and cross-country are seen as consistent with the critically reexamined result that velocity increases with income.Money demand; velocity of money; time series; cross-country; cross-sectional