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MACROECONOMIC POLICIES VETO PLAYERS, CHAPTER 8

MACROECONOMIC POLICIES VETO PLAYERS, CHAPTER 8. Alessandro Magri February 1 2th 2013. Results shown in this chapter. The importance of the relation between policy stability and outcomes .

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MACROECONOMIC POLICIES VETO PLAYERS, CHAPTER 8

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  1. MACROECONOMIC POLICIESVETO PLAYERS, CHAPTER 8 Alessandro Magri February 12th 2013

  2. Results shown in this chapter • The importance of the relation between policy stability and outcomes. • The veto players theory enables research not only on single dimension phenomena, but also on multidimensional ones.

  3. Topics • Budget deficits. • Composition of budgets. • Effects of veto players on growth, taxation, inflation.

  4. 1. Budget deficits: collective action vs. inertia explanation • Why do some countries “stabilize” their policies and reduce their deficits faster than others?

  5. Collective action approach:the more parties participated in government, the higher the budget deficits Reasons: • Sharing of the cost of over-spending between all the ministries. • Incentives for each ministry to spend more. • n-person prisoners dilemma. Possible solution: • Completely centralized decision making authority.

  6. Collective action approach:the more parties participated in government, the higher the budget deficits Empirical support: • Kontopoulos and Perroti (2000). • Roubini and Sachs (1989). • Von Hagen and Harden (1995). • Hallerberg and von Hagen (1999).

  7. Policy inertia approach:more government partners find it more difficult to change (reduce) the size of the deficit and stabilize • No consensus to change the status quo. • Alesina and Drazen (1991): “war-of-attrition” model of delayed stabilization. • Spolaore (1993): “war-of-attrition” model extended to coalition governments.

  8. Policy inertia approach:more government partners find it more difficult to change (reduce) the size of the deficit and stabilize Empirical support: • Roubini and Sachs (1989). • Poterba (1994), Alt and Lowry (1994). • Krause (2000).

  9. Franzese’s analysis:an empirical contradiction to the collective action literature • Franzese (1999) presents different political economy theories: the government composition and the delayed stabilization theories (“influence theory” and “veto-actor” theories); the wealth and age distributions and the inter-/intra- generational transfer of debt; the electoral and partisan political budget cycles; the strategic manipulation of debt to alter future government policies; the multiple constituencies and distributive politics; the tax structure complexities and fiscally-alluded voters; the central bank autonomy and reduction of debt financing.

  10. Franzese’s analysis:an empirical contradiction to the collective action literature • Then he uses J-tests to compare their predictive power. • “The procedure for J-tests is the following: for two models Z=f(X,*) and Z=g(Y,*) one estimates first Z=f(X,*) and includes its predictions ̃ ^Z in the estimation of the second Z=g(Y, ^Z, *). If the coefficient of ^Z is non-significant, then the second hypothesis encompasses the first: there is no additional significant information covered by the first hypothesis. The procedure is repeated by reversing the two theories.” • Conclusion: “Tsebelis’ (1995) veto-actor conception of fractionalization and polarization clearly dominates the influence conception.”

  11. Franzese’s analysis:an empirical contradiction to the collective action literature • In the end, he studies the effects of fractionalization and polarization on the deficit, and he tests the size of the deficit as a function of the size of the debt. • Conclusion: multiple veto players delay changes to budget deficits regardless whether these deficits are high or low.

  12. 25% Debt as Percent of GDP seems to Be the threshold value Over 25% 1 more government party means more inaction, more deficit; Under 25% means more inaction less deficit

  13. 2. The structure of budgets Single dimension approaches: • Bawn: the German case between 1961 and 1989 • König and Tröger (2001) Multidimensional approach: • Tsebelis and Chang (2001)

  14. The structure of budgets:Tsebelis and Chang There are two different ways to alter budgets: • Deliberate • Automatic Control variables (needed to differentiate deliberate and automatic changes): • Inflation, unemployment, % of dependent population, rate of growth, country dummy variables.

  15. The structure of budgets:Tsebelis and Chang • Dependent variable: “changes in the structure of budgets in advanced industrialized countries”. • The budget of each country is conceptualized as a vector in a n-dimensional Euclidean issue space. It consists of a sequence of percentages allocated to different jurisdictions: (a1, a2,….., an). The difference between two budgets can be represented by the distance between the composition of the budgets of two successive years. • The dependent variable was derived from the Government Finance Statistics Yearbook of the IMF.

  16. The structure of budgets:Tsebelis and Chang • 2 dimensions: • Left – right. • “Pro friendly relations to USSR and anti” (Laver and Hunt, 1992). • Independent variables: ideological distance of the existing veto players (ID- average of the range of the coalitions in each dimension) and alternation (A- it can be calculated by the Pythagorean theorem). • Tsebelis and Chang tested whether the differences in the annual composition of the budget of each country were a decreasing function of ID and an increasing function of A. • They use the characteristics of the current governments.

  17. Negative effects of IDs on the change of budgets TABLE 8.1 Estimated Results on Budget Structure in 19 OECD Countries, 1973-1995 (simple model estimated by multiplicative heteroskedastic regression). MODEL 1 MODEL 2 Dependent Variable: The Expected Value of Budget Distance Constant .2746*** .2820*** (.0198) (.0201) Lagged BD .1503*** .1360*** (.0349) (.0351) Ideol. Distance -.0189 (.0168) Dependent Variable: The Error Term of Budget Distance Constant -2.5671*** -2.524*** (.0776) (.0769) Ideol. Distance -.2087*** (.0883) N 338 338 Prob > ? 2 0.000 0.000 Note: Standard errors in parenthesis. * significant at 10%; ** significant at 5%; *** significant at 1%, all tests are one-tailed.

  18. Introduction of control variables Table 8.2 Estimated Results on Budget Structure in 19 OECD Countries, 1973-1995 (Complete Model Estimated by Fixed-Effect Cross-Sectional Time-Series Model with Panel Correction Standard Errors). MODEL 1 Coefficient MODEL 1 Stand. Coefficient MODEL 2 Lagged BD 0.0588 (0.0483) 0.0890 (0.0731) 0.0628 (0.0474)* Ideol. Distance -0.0615 (0.0277)** -0.1838 (0.0828)** -0.0620 (0.0278)** Alternation 0.0472 (0.0158)*** 0.1755 (0.0587)*** 0.0477 (0.0158)*** ? unemployment 0.0304 (0.0204)* 0.0849 (0.0570)* 0.0307 (0.0204)* ? age>65 0.0227 (0.1360) 0.0101 (0.0605) ?GROWTH 0.0018 (0.0042) 0.0261 (0.0609) ? INF 0.0060 (0.0067) 0.0416 (0.0465) Belgium 0.2615 (0.0884)*** 0.2871 (0.0838)*** Denmark 0.2783 (0.0514)*** 0.2934 (0.0473)*** Finland 0.2906 (0.0764)*** 0.3085 (0.0710)*** France 0.2053 (0.0971)** 0.2151 (0.0929)** German 0.1345 (0.0509)*** 0.1505 (0.0374)*** Ireland 0.1656 (0.0460)*** 0.1794 (0.0440)*** Italy 0.4881 (0.0904)*** 0.5102 (0.0807)*** Netherlands 0.2109 (0.0738)*** 0.2239 (0.0698)*** Portugal 0.5030 (0.1032)*** 0.5315 (0.0975)*** Spain 0.4638 (0.1912)*** 0.4751 (0.1883)*** Sweden 0.2515 (0.0607)*** 0.2731 (0.0512)*** UK 0.1397 (0.0602)*** 0.1572 (0.0566)*** N 336 336 336 R2 65.32% 65.32% 65.21% * significant at 10%; ** significant at 5%; *** significant at 1%, all tests are one-tailed.

  19. How the ID and A affect budget structure in a disaggregated level TABLE 8.3 Estimated Results for Each Budget Category BUDGET CATEGORY IDEOLOGICAL DISTANCE ALTERNATION General Public Services -.0895 (.0526)** .0118 (.0334) Defense -.0157 (.0245) .0176 (.0136)* Education -.1242 (.0735)** .0433 (.0320)* Health -.2550 (.1076)*** .1566 (.0584)*** Social Security and Welfare -.2915 (.1082)*** .0965 (.0724)* Housing and C. Amenities .0224 (.0468) -.0193 (.0399) Other C. and S. Services -.0125 (.0130) .0044 (.0060) Economic Services -.1574 (.1301)* .0602 (.0528) Others -.2156 (.1728)* .0883 (.1014) Note: Estimated coefficients for country dummies, change in unemployment rate and lagged dependent variable are surpassed to facilitate the presentation. Panel-correction standard errors are in parentheses. * p<0.1, ** p<0.05, *** p<0.01; all tests are one-tailed.

  20. The two-dimensional model outperforms the one-dimensional model

  21. 3. Other macroeconomic outcomes • Veto players theory: significant changes of outcome will be associated only with few and ideologically congruent VPs.

  22. Other macroeconomic outcomes:federalism and inflation • Treisman (2000) compared three different kind of theories about the relation between federalism and inflation: • Commitment: lower inflation is expected in decentralized countries. • Collective action: higher inflation is expected in federal countries. • Continuity: it’s the veto players theory. Lower changes in inflation are expected in federal countries (where, ceteris paribus, there is an increased number of VPs). • Conclusions: there is a “strong support for the continuity hypothesis”.

  23. Other macroeconomic outcomes:taxation and veto players • Hallerberg and Basinger (1998) tried to identify the cause of the reduction of taxes for both the highest income individuals and the enterprises (in OECD countries, during the 80s). • They tested variables: • From the economic literature: capital mobility, trade dependence, inflation, economic growth. • From the political science literature: veto players, partisanship. • Conclusions: the only two variables producing consistent results for both tax reduction were veto players and real growth.

  24. Other macroeconomic outcomes:growth and Veto Players • On the one hand, many veto players create a high level of commitment. This should encourage the growth. • On the other, a high number of veto players leads to the inability for political response. This could “lock” the system to a bad status quo and discourage the growth. • Hence, the relation between growth and veto players is not clear.

  25. Conclusions • The more veto players and/or the more distant they are, the more difficult is the departure from the status quo. • This indicates a high stability of outcomes. • The multidimensional analysis presented in this chapter produced better results than the one-dimensional analysis.

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