Iris J. Lav
This article tackles the issue of comprehensive state budget reform. With structural deficits rampant, reform is needed to maintain the current level of programs that states and localities now provide, but cannot support over time with current revenue policies. Recent “reforms” have mainly focused on cutting both spending and taxes. Nonetheless, it is believed that people want their services and will vote to pay for them, if given that option. The article notes that there have been very few successful state tax reforms in recent years. But modernization of tax systems is needed to alleviate structural deficits. Part of the problem is institutional myopia: improved multiyear budgeting can warn policymakers when proposed actions are likely to create budget problems over the long term.
Robert B. Ward
Over the last decade, observers of state and local finances have been alarmed over an emerging picture of long-term, structural imbalances. This article examines the concept of fiscal sustainability in several formulations and explains that it essentially means limiting expenditure commitments to those that can be met by available revenue streams. It investigates why fiscal sustainability in actual practice, however it might be measured in theory, has fallen into disrepair. The usual lineup of budget-busting culprits is next examined, with the proliferation of entitlement programs standing at the head of the line. Over the past four decades, state and local budget increases reflected the strength of the economy during an unprecedented run of prosperity. Meanwhile, the array of entitlement programs that drove spending was increasingly shaped by political, demographic, and institutional forces, each with its own clientele of beneficiaries. That has made adjustments more difficult when revenues do not keep pace with spending patterns.
This article first lays out the broad contours of state and local government capital spending and the precepts of the capital budgeting process. It then considers how capital spending levels and budgeting processes were affected by the Great Recession. State and local capital spending, which had grown rapidly before the downturn, was slowed considerably by the Great Recession's onset. Federal aid helped to cushion the blow, but capital spending began to decline as many jurisdictions exhausted their influx of federal funds. The Great Recession's effect on capital spending was found to be consistent with the impacts of past recessions, but its depressing effects will continue for several years. Thus, the Great Recession, when its aftershocks are played out, will likely result in unprecedented declines in state and local capital spending and an erosion of the public capital stock.
Kim Christian Priemel
The debate on how to rein in transnational corporate power has greatly intensified over the past decades. Following a series of scandals, conflicts, and crises, civil rights activists, lawyers, and heterodox economists have been promoting efforts to hold private business accountable for the social, economic, ecological, and political costs of its actions. National legal cultures, however, differ widely on that issue, in particular with an eye to corporate personhood and extraterritoriality. After centuries of not prosecuting corporations on grounds of their lack of mens rea, the pattern changed in the twentieth century as developments in different legal spheres intertwined. When competition law coalesced with tightened national corruption standards as well as the emergence of international war crimes prosecution, a path toward international corporate liability opened up. By now a patchwork set of approaches has emerged in which soft and hard law, statutory and treaty law, and national and international regulation converge on corporate liability.
Rudolph G. Penner
Fiscal relationships among the federal and state and local governments will change significantly in the future. This article documents that the federal government is saddled with unsustainable tax and spending policies, and the changes that are necessary to restore fiscal stability are far larger than anything that has been experienced since World War II. State and local governments, beset with their own structural issues, will have to adjust to and share in a new world of fiscal austerity. The deepest domestic federal spending problems lie with Social Security, Medicare, and Medicaid. All three entitlement programs are growing faster than the economy and tax revenues can provide.
The Governance of International Spaces and Earth Systems: Solving Collective Action Problems in the Absence of Public Authority
Oran R. Young
The absence of a government in the ordinary sense coupled with a low level of social solidarity poses serious obstacles for solving a variety of collective action problems in international society. Nowhere is this more apparent than in dealing with needs for governance relating to international spaces and Earth systems. Nevertheless, some efforts to develop regimes to deal with these needs do succeed. Drawing on examples relating to biodiversity beyond national jurisdiction, maritime commerce, climate change, and the depletion of stratospheric ozone, this chapter examines processes of regime formation and implementation, interactions among issue-specific regimes, and the evolution of regimes over time to identify conditions that determine success and failure in the development of governance systems for international spaces and Earth systems.
Leonardo Gambacorta and Paul Mizen
Central bank policy operates first through financial markets and then through banks as they adjust their interest rates. This chapter discusses the transmission of policy in this first step of the monetary transmission mechanism, known as interest-rate pass-through. Historically, the focus of attention has been the interest-rate channel. We show the origins of this channel via a microfounded model of interest-rate setting by deposit-taking institutions that are Cournot oligopolists facing adjustment costs. We then examine other channels such as the bank lending channel and the bank capital channel and the role of central bank communications, signaling, and forward guidance over future interest rates. Each is shown to influence the setting of current short-term interest rates. The chapter closes with some issues for the future of pass-through in the transmission process.
Raymond C. Scheppach and W. Bartley Hildreth
History will write the two-year period of 2009 to 2010 as a watershed in the federal-state-local fiscal relationship. The outpouring of aid helped states to avoid cutting spending and increasing taxes in the depths of the Great Recession. Federal grants dramatically increased as a percentage of total state revenues, from 26 percent to 35 percent. The fiscal relief packages were harbingers for the future, because 70 percent of the federal grants were devoted to health and education. But the relief supplied by the federal stimulus was short-lived. The expected “new normal” revenue path means that states will continue to downsize and streamline along all fronts. Health-care spending holds the key. Existing health programs and the new Affordable Care Act, if is fully implemented, will mean that 130 million individuals will look to the states to help meet or, at least, control health-care costs. That is the difficult and expensive mission confronting the states in the future.
Robert D. Ebel, John E. Petersen, and Ha T. T. Vu
Significant developments of US state and local finance are converging in a manner that will newly frame the practices of state and local governance in the next decade and beyond. These trends can move from low-priority “problems to be addressed” to becoming urgent, high-priority concerns when the governments face economic and political shocks that are beyond their direct control—for example, the Great Recession (2007–2009). In this context, this article offers to bring together in the book the existing knowledge on the principles and practices of state and local finance. It takes an explicit look at how the issues proposed to be addressed fit into the broader framework of the practice of US intergovernmental relations (fiscal decentralization). The organization of the book is explained.
Carlos Elizondo and Javier Santiso
In Brazil and Mexico, as well as for the region as a whole, there are definitely more social needs than resources to attend to them. This is in part a result of the brutal adjustments in social spending imposed to face the debt crisis of the 1980s. The fiscal adjustments of recent years, however, were not implemented at the expense of social expenditure; in fact, social expenditure per capita increased by 50 percent in the course of the 1990s and remained constant in 1998–2002. This article aims to understand the reasons underlying the paradox of two such similar countries with such different revenue structures and highlights a few implications for public policies. The starting assumption is that the very poor quality of public spending in both countries has made it difficult to use expenditure as a true instrument of justice and development and, in the case of Mexico, to justify greater tax collection. The core problem is the region's fiscal violence, and Brazil's and Mexico's in particular.
Sylvester Eijffinger, Ronald Mahieu, and Louis Raes
In this chapter we suggest to use Bayesian ideal point estimation to analyze voting in monetary policy committees. Using data from the Riksbank we demonstrate what this entails and we compare ideal point estimates with the results from traditional approaches. We end by suggesting possible extensions.
This article describes how the presence of uncertainty limits the effectiveness of monetary policy and, as a result, its implementation. The article is organized as follows. Section 2 reviews the recent contributions to the literature so as to identify the influence of uncertainty on monetary policy. Section 3 analyzes how uncertainty affects policymaking, particularly in emerging economies, while Section 4 examines the implications of uncertainty for monetary policymaking.
Donato Masciandaro and Davide Romelli
This chapter investigates the endogenous evolution of central bank institutional design over the past four decades. From a theoretical perspective, it employs a stylized political economy model to highlight some key determinants of the level of central bank independence as a function of macroeconomic shocks and political economy characteristics of countries. It then employs recently developed dynamic indices of central bank design to describe the evolution of central bank independence over the period 1972–2014. In a sample of sixty-five countries, it shows that the increasing trend in central bank independence during 1972–2007 has been reversing after the 2008 financial crisis, mainly due to significant changes to the roles of central banks in banking supervision. The authors find that this evolution can be related to several macroeconomic shocks, such as inflationary, fiscal, and exchange-rate shocks.
Andrés Velasco and Eric Parrado
This article discusses first, in some detail, Chile's fiscal policies and how they were applied. Much thinking and design went into this approach—some of it local, some of it adapted from successful experiences such as that of Norway. It also examines the economic results of the shift in fiscal policy. The effects on fiscal variables were large: a sharp drop in public debt and record fiscal surpluses in years of high copper prices. This fiscal prudence also mattered for some key macro variables, among them the real exchange rate and the volatility of output growth. The basic message is simple: shifting from a procyclical to a mildly countercyclical fiscal stance helped stabilize both relative prices and economic activity. The article then considers the political economy of the problem. What political failures existed and how did the rule help alleviate them? It addresses these questions with the help of a simple model, which is used to organize and motivate the discussion of Chile's budget politics.
This article focuses on the way in which the peculiarities of politics in Latin America affect fiscal policy, as a result of both the common pool problem of public spending and electoral budget cycles. The article is organized as follows. Section 2 discusses the implications of the common pool problem of fiscal policy, including the different dimensions of political fragmentation that lead to overspending, as well as how budget institutions can alleviate their effect. Section 3 presents the recent literature on political budget cycles, with special emphasis on the case of young democracies. Section 4 focuses on features common to both debates.
Christine R. Martell and Adam Greenwade
This article provides a profile of the structure and diversity of local government finance. Nearly ninety thousand local governments in the United States provide most public services. It is such a diverse subsector that no one set of political or fiscal arrangements can be said to be standard. This scale and complexity make the local governments in the United States unique among the world's nation-states. The main revenue sources for local governments are own-source revenues that they raise within their jurisdictions (including revenue from property taxes, sales taxes, personal income taxes, and user fees and charges) and from transfers they receive from the state and federal governments. Local government own-source revenue options are determined by each respective state, although local jurisdictions typically have some power to set rates and exemptions.
Carolyn Bourdeaux and W. Bartley Hildreth
This article analyzes the challenge of state budgeting during periods of dramatic and unplanned declines in state revenue collections. Most public finance textbooks describe the budget process as an orderly cycle of preparation, approval, execution, and evaluation. When governments are experiencing a steady growth or only marginal declines in revenues such as during the past two decades (1989–2009), it's easy to see how state budget officials can become accustomed to a predictable, “regular rhythm.” Thus, when the Great Recession hit, a series of month-after-month and quarter-after-quarter revenue shortfalls affected nearly all state budgets. The result was that with little warning and preparation, policymakers faced midyear budget deficits. This article takes on the topic of managing midyear budget adjustments. Beginning with a review of the institutional tools available to governors and legislatures (e.g., allotments, apportionment, budgeting, impoundments, special fund transfers, fund withholdings, furloughs), the article carries out a study of how five states went about balancing their budgets in 2009–2010 and how the lessons from these state responses can inform those dealing with the next fiscal crisis.
This article poses three questions: Where did the forecasting models go wrong? Who's to blame for the forecast errors? and How can [state and local] revenue estimation improve? To answer all three, the article starts out with a look at just how severe the 2007–2009 recession was, and then empirically examines how five common features of revenue-estimating models were affected by the second longest business-cycle contraction of the past eighty years. The Great Recession (eighteen months, peak to trough) was the most severe decline of any recession since the Great Depression of 1929–1933 (which lasted forty-three months). The article carefully works through each of the key indicators that a state revenue estimator watches, and it demonstrates that not only was the Great Recession dramatically deep (the last time all six major indicators contracted was 1948–1949, and even that was of shorter duration) but also that it has been very different than prior recessions.
Sebastián Nieto-Parra and Javier Santiso
This article revisits the impact of elections on fiscal policy in Latin American countries and poses the following questions: To what extent do Latin American governments expand fiscal expenditures around elections to attract voters? And especially significantly in the current political context, do different types of electoral systems have different kinds of impact on fiscal policies around elections? Behind these questions, of course, lies a basic issue: fiscal responsibility during elections. The article is organized as follows. Section 2 provides a review of the literature on the impact of elections on fiscal policy. Section 3 presents the most important facts and analyzes the results of the econometric model gauging the impact of elections on fiscal policy. Finally, Section 4 outlines the major policy implications of this research.
Michael Alexeev and Shlomo Weber
This chapter briefly reviews the advantages and disadvantages of fiscal decentralization in general and the current federal structure and the post-1992 development of fiscal federalism in Russia, including substantial reforms of the early 2000s. The creation of federal districts and the elimination of elections of regional governors clearly signified a substantial rise of political centralization in the new millennium. However, using various qualitative considerations and quantitative measures, we show that there has not been a clear trend toward fiscal centralization, although the preponderance of the evidence suggests that fiscal independence of the regions has eroded since the late 1990s. Finally, we briefly address the issue of intraregional fiscal relations.