Compensating Whom For What? Reconsidering the Composition of Public Spending

Abstract

This paper reports the preliminary work under way to analyse the composition of public spending in response to increased economic openness in the advanced industrial societies over recent decades. The compensation hypothesis predicts that public spending will rise in response to greater openness, especially trade competition. The globalization hypothesis predicts that public spending will be constrained by increased capital market openness. Our research design distinguishes between four aspects of public spending. First it considers spending targeted at producer as opposed to labour market interests. It further distinguishes between short-term transfer spending and longer-term investment spending, all of which have aspects of compensation spending to them. The principal focus of the research project is to analyse to what degree left-right partisanship makes a difference to spending effort, and to what degree the patterns vary between different varieties of capitalism. Drawing mainly on OECD data for the period since 1980, the modelling and analysis, using pooled time-series cross-sectional data with an error correction model, is as yet at a relatively early stage. Preliminary results suggest that neither trade nor capital market openness is associated with increase spending efforts in the manner anticipated by the compensation hypothesis. A number of lines of further inquiry are identified.