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Article

Francine J. Lipman

Since 2010, Congress has significantly cut the annual budget of the Internal Revenue Service (IRS) while requiring the IRS to manage more responsibilities, including last-minute comprehensive tax reform, health care, broad-based antipoverty relief, and a variety of economic stimulus provisions. As a result, the IRS has sustained across-the-board decreases in staffing, with the most significant decreases in tax enforcement personnel. The IRS has fewer auditors than at any time since World War II, despite an explosion of concentrated income and wealth. Predictably, the tax gap, the difference between what taxpayers owe and what taxpayers pay, has skyrocketed to almost $1 trillion a year. Economists have estimated that funding the IRS will pay for itself severalfold, raising more than a trillion dollars of uncollected tax revenues over a decade. Despite evidence that funding will remedy budget shortfalls severalfold, Congress continues to defund the IRS. While the bulk of the tax gap is due to unreported income by high-income individuals, the audit rate of these households has dropped precipitously. By comparison, the lowest income wage earners are being audited five times more often than all other taxpayers. Given centuries of racist policies in the United States, households of color are disproportionately impoverished and white households are disproportionately wealthy. Accordingly, lower income working families of color, especially in the South, are audited at rates higher than their white northern counterparts. Moreover, because these households and the IRS have limited resources, many of these audits result in taxpayers losing antipoverty benefits that they have properly claimed. This discriminatory treatment is counter to Congressional intent to support these families and exacerbates existing racial income and wealth gaps. With President Biden’s 2021 executive order on advancing racial equity and support for underserved communities through the federal government, the U.S. Treasury, IRS, and Congress have been charged to “recognize and work to redress inequities in their policies and programs that serve as barriers to equal opportunity.” Properly funding the IRS is a necessary step to advancing racial equity.

Article

Governments around the world are increasingly investing resources for young children, and universal provision of early childhood education and care (ECEC) has become widespread. Children’s development is affected by the investments they receive both within and outside the household. A simple theoretical framework predicts that the provision of public childcare will improve children’s development if it offers more stimulation than the care it replaces. Generally, carefully designed studies show that the provision of early childcare is beneficial, especially for children from disadvantaged backgrounds. This is in line with expectations that the alternative care experienced by children from less affluent, less educated, and immigrant backgrounds is likely to be of lower quality. Interestingly, however, studies show that the children who would benefit the most are least likely to receive care, providing a challenge for policy makers. Some programs, such as the $5-per-day childcare in Quebec, have negative effects and therefore may be of poor quality. However, comparing results across programs that vary in several dimensions makes it difficult to separate out the ingredients that are most important for success. Studies that focus on identifying the factors in ECEC that lead to the greatest benefit indicate that some standard measures such as staff qualifications are weakly linked to children’s outcomes, whereas larger staff–child ratios and researcher-measured process quality are beneficial. Spending more time in high-quality childcare from around age 3 has proved to be beneficial, whereas the effect of an increase in childcare for younger children is particularly sensitive to each program’s features and context.

Article

Dania V. Francis and Christian E. Weller

U.S. workers need to save substantial amounts to supplement Social Security, a near-universal but basic public retirement benefit. Yet wealth inequality is widespread by race and ethnicity, so that households of color often have less wealth than White households. This wealth inequality is reflected in a massive retirement savings gap by race and ethnicity, so that households of color often have less wealth than White households. In 2016 Black households had a median retirement savings account balance of $23,000, compared to $67,000 for White households. Many people of color will face substantial and potentially harmful cuts to their retirement spending. They may, for example, find it more difficult to pay for housing or healthcare. This retirement gap is the result of several factors. Households of color, especially Black and Latino households, are less likely to receive large financial gifts and inheritances from their families. They have less wealth decades and often centuries of discrimination and exploitation in society. They thus have to save more for retirement on their own. Yet Black, Latino, and many Asian American workers face greater obstacles in saving for retirement than is the case for White workers. These obstacles are especially pronounced in retirement savings accounts. People of color have less access to these retirement benefits through their employers, contribute less due to greater concurrent economic risks, and build less wealth over time due to less stable earnings and more career disruptions. As a result, people of color often use home equity as a form of retirement savings, but they also face more financial risks associated with homeownership. In addition, many people of color face higher costs during retirement, especially higher healthcare costs and more widespread caregiving and financial responsibilities for family members. The coronavirus pandemic has exacerbated many of the obstacles and risks associated with retirement saving for people of color, who experienced sharper increases in unemployment and more widespread healthcare challenges due to greater exposure to the virus. Many Black, Latino, and Asian families had to rely more heavily on their own savings during the pandemic than was the case for White households. A range of public policies have been proposed or implemented, especially at the state level, to address some of the obstacles that people of color face in saving for retirement. Retirement researchers will need to investigate whether and how the pandemic has affected racial differences in retirement security as well as analyze how new policy efforts could shrink the racial differences in retirement wealth.

Article

The political economy of protection is a field within economics, but it has significant overlap with its sister discipline, political science. For a political economy of protection, one needs at a minimum two types of economic agents: political decision makers who provide protection, and economic agents who are protected or even actively seek protection. The typical political economy scenario leads to an economic outcome that is not Pareto-optimal: From a general welfare perspective, the political interaction is not desirable. An important task of political economy research is to explain why and how political interaction takes place. For the first part of the question, it appears clear that if protection is actively sought, the protection seeker intends to benefit from his activities. However, if the policymakers were truly interested in Pareto optimality and welfare maximization, they would refuse to protect. Hence a crucial assumption in the political economy literature is that the politicians’ objective function differs from the general welfare function. For the second part of the question, theoretical political economy models consider either the election campaign phase when politicians are eager to win a majority of votes (preelection models) or the phase when the politicians have been elected and may benefit from the spoils associated with holding office (postelection models). Whereas in the election phase, politicians have an incentive to cater to the interests of that part of the electorate that is considered pivotal for the election outcome, in the postelection phase they may be open to, for example, special interest group (SIG) influences from which they derive utility. A first wave of theoretical political economy models originates from the 1980s. Building on these early advances, more elaborate models have been proposed. The most prominent one is the Grossman–Helpman protection for sale (PfS) model. It delivers a postelection general equilibrium framework of trade policy determination. In this common agency model, industry interest groups act as principals and offer the government a menu of contracts of campaign contributions in exchange for trade policy. The PfS model predicts that industries that lobby for protection will obtain trade protection in equilibrium, whereas nonlobbying industries will face import subsidies. Numerous papers have evaluated the PfS model empirically and found that the implied weight on contributions in the governmental welfare function and the implied share of the population represented by lobbies are both very high. Remedies for this surprising result exist, but it has also been argued that the found empirical regularities may be spurious. At the beginning of the 21st century, the majority of political economy literature is still theoretical, but better data availability increasingly offers the opportunity to empirically test theoretical results. A number of challenges remain for the political economy literature, however. In particular, more work is required to better understand policymaker interests. Moreover, an incorporation of political economy aspects into the new trade theory models that allow for intra-industry trade and firm diversity appears to be a promising avenue for future research.

Article

Across the United States, charter schools—publicly funded and regulated, but privately run schools—appear to perform, on average, at about the same level as their district counterparts. The broadest studies of charter school effectiveness use observational methods, which may not fully account for selection of students into charter schools. However, this finding is confirmed by lottery-based evidence from a few broad samples that again presents a varied picture of charter impact and little average difference across sectors. Underlying the similarity in performance across sectors is one of the most consistent findings from both observational and lottery-based evidence of charter schools’ impact on student achievement: Charters located in urban areas boost student test scores, particularly for Black, Latinx, and students from lower-income households. The test score gains appear to be largest in urban charters that employ “No Excuses” practices. Attending some urban charter schools also increases college enrollment and voting and reduces risky behavior. However, evidence on such long-term outcomes is limited to a few samples, and evidence on college graduation and adult earnings is even rarer, making it difficult to draw conclusions beyond test scores about the overall effectiveness of the charter sector. Research on the mechanisms underlying charter successes, when they occur, is growing. No Excuses charter schools—which employ high expectations, strict disciplinary codes, and intense academic focus—generate consistent test score gains, but their controversial disciplinary practices are not necessarily a condition for academic success. Charter school teachers tend to be less qualified and more likely to leave the profession than traditional public school teachers, though the impact of these challenges for the labor market is understudied. Similarly, the influence of charter authorizers and related accountability structures is limited and would benefit from examination using more rigorous methodologies. The competitive impact of charter schools on traditional public schools typically suggests a small, beneficial influence on neighboring schools’ student achievement, though there is variation across contexts. Additionally, while some local analyses suggest charters reduce funding in nearby districts, at least in the short term, a larger scale study finds charter entry generates more revenue per pupil for district schools. There is competing evidence on charters’ contribution to school racial segregation, and little evidence on the impact of newer, intentionally diverse school models. In all, more research, in more contexts, is needed to further understand where, for whom, and why charters are most effective.

Article

Shaun M. Dougherty and Walter G. Ecton

As long as formal education has existed, there has been a clear connection between education and preparation for employment. In much of the world, formal educational systems have come to include vocational education and training (VET) as part of secondary education. In these spaces, individuals can receive continued training in general skills related to reading, writing, and mathematics while also pursuing specific skills in prescribed vocational or technical programs (e.g., skilled trades, culinary arts, information technology, health services). Across all countries and associated educational systems, a tension exists between whether to invest educational dollars in general versus specific skill development. On the one hand, general skills allow for transferability and likely support adaptability across workplace settings and in response to changes in employment conditions. On the other hand, secondary school completion is not universal, even in rich countries, and there are often large penalties or social costs to not completing secondary education. Furthermore, across countries of varying GDP levels, the question about how to best prepare individuals for entry into and success in the workforce is a persistent one. Evidence suggests that the payoff to investments in VET vary considerably, and that context and the characteristics of participants likely inform the expected returns to such investments. For instance, there is strong evidence across contexts that male participants in VET are likely to benefit in the short- to medium-term with respect to employment and earnings, and possibly also engage in less crime. Unresolved, however, is whether these payoffs persist in the longer term. In contrast, for women the estimated returns appear to be more context dependent. Some research shows reduced fertility and greater financial independence of women participating in VET programs in less-developed countries, but evidence is mixed in other settings. All evidence underscores that the payoff to VET is likely tied to the extent to which it adapts to contemporary economic needs, including extending the amount of total formal education that participants might otherwise receive.

Article

Johanna Catherine Maclean, Justine Mallatt, Christopher J. Ruhm, and Kosali Simon

The United States has experienced an unprecedented crisis related to the misuse of and addiction to opioids. As of 2018, 128 Americans die each day of an opioid overdose, and total economic costs associated with opioid misuse are estimated to be more than $500 billion annually. The crisis evolved in three phases, starting in the 1990s and continuing through 2010 with a massive increase in use of prescribed opioids associated with lax prescribing regulations and aggressive marketing efforts by the pharmaceutical industry. A second phase included tightening restrictions on prescribed opioids, reformulation of some commonly misused prescription medications, and a shift to heroin consumption over the period 2010 to 2013. Since 2013, the third phase of the crisis has included a movement toward synthetic opioids, especially fentanyl, and a continued tightening of opioid prescribing regulations, along with the growth of both harm reduction and addiction treatment access policies, including a possible 2021 relaxation of buprenorphine prescribing regulations. Economic research, using innovative frameworks, causal methods, and rich data, has added to our understanding of the causes and consequences of the crisis. This body of research identifies intended and unintended impacts of policies designed to address the crisis. Although there is general agreement that the causes of the crisis include a combination of supply- and demand-side factors, and interactions between them, there is less consensus regarding the relative importance of each. Studies show that regulations can reduce opioid prescribing but may have less impact on root causes of the crisis and, in some cases, have spillover effects resulting in greater use of more harmful substances obtained in illicit markets, where regulation is less possible. There are effective opioid use disorder treatments available, but access, stigma, and cost hurdles have stifled utilization, resulting in a large degree of under-treatment in the United States. How challenges brought about by the COVID-19 pandemic may intersect with the opioid crisis is unclear. Emerging areas for future research include understanding how societal and health care systems disruptions affect opioid use, as well as which regulations and policies most effectively reduce potentially inappropriate prescription opioid use and illicit opioid sources without unintended negative consequences.

Article

Jeanet Sinding Bentzen

Economics of religion is the application of economic methods to the study of causes and consequences of religion. Ever since Max Weber set forth his theory of the Protestant ethic, social scientists have compared socioeconomic differences across Protestants and Catholics, Muslims, and Christians, and more recently across different intensities of religiosity. Religiosity refers to an individual’s degree of religious attendance and strength of beliefs. Religiosity rises with a growing demand for religion resulting from adversity and insecurity or a surging supply of religion stemming from increasing numbers of religious organizations, for instance. Religiosity has fallen in some Western countries since the mid-20th century, but has strengthened in several other societies around the world. Religion is a multidimensional concept, and religiosity has multiple impacts on socioeconomic outcomes, depending on the dimension observed. Religion covers public religious activities such as church attendance, which involves exposure to religious doctrines and to fellow believers, potentially strengthening social capital and trust among believers. Religious doctrines teach belief in supernatural beings, but also social views on hard work, refraining from deviant activities, and adherence to traditional norms. These norms and social views are sometimes orthogonal to the general tendency of modernization, and religion may contribute to the rising polarization on social issues regarding abortion, LGBT rights, women, and immigration. These norms and social views are again potentially in conflict with science and innovation, incentivizing some religious authorities to curb scientific progress. Further, religion encompasses private religious activities such as prayer and the particular religious beliefs, which may provide comfort and buffering against stressful events. At the same time, rulers may exploit the existence of belief in higher powers for political purposes. Empirical research supports these predictions. Consequences of higher religiosity include more emphasis on traditional values such as traditional gender norms and attitudes against homosexuality, lower rates of technical education, restrictions on science and democracy, rising polarization and conflict, and lower average incomes. Positive consequences of religiosity include improved health and depression rates, crime reduction, increased happiness, higher prosociality among believers, and consumption and well-being levels that are less sensitive to shocks.

Article

Despite the common view that innovation requires academically educated workers, some countries that strongly emphasize vocational education and training (VET) in their education systems—such as Switzerland and Germany—are highly competitive internationally in terms of innovation. These countries have dual VET programs, that is, upper-secondary-level apprenticeship programs, that combine about three quarters of workplace training with about one quarter of vocational schooling, and design them in such a way that their graduates (i.e., dual apprenticeship-graduates) play crucial roles in innovation processes. Regular updates of VET curricula incorporate the latest technological developments into these curricula, thereby ensuring that dual apprenticeship-graduates possess up-to-date, high-level skills in their chosen occupation. This process allows these graduates to contribute to innovation in firms. Moreover, these graduates acquire broad sets of technical and soft skills that enhance their job mobility and flexibility. Therefore, conventional wisdom notwithstanding, dual apprenticeship-graduates in such countries not only have broad skill sets that accelerate innovation in firms, but also willingly participate in innovation because of their high flexibility and employability. Moreover, Switzerland and Germany have tertiary-level VET institutions that foster innovation. These are universities of applied sciences (UASs), which teach and conduct applied research, thereby helping build a bridge between different types of knowledge (vocational and academic). UAS students have prior vocational knowledge through their dual apprenticeship and acquire applied research skills from UAS professors who usually have both work experience and a doctoral degree from an academic university. Thus UAS graduates combine sound occupational knowledge with applied research knowledge inspired by input from the academic research frontier and from practical research and development (R & D) in firms. Firms employ UAS graduates with their knowledge combination as an important input for R & D. Consequently, regions with a UAS have higher levels of innovation than regions without one. This effect is particularly strong for regions outside major innovation centers and for regions with larger percentages of smaller firms.

Article

Subhasish M. Chowdhury

Conflicts are a ubiquitous part of our life. One of the main reasons behind the initiation and escalation of conflict is the identity, or the sense of self, of the engaged parties. It is hence not surprising that there is a consistent area of academic literature that focuses on identity, conflict, and their interaction. This area models conflicts as contests and focuses on the theoretical, experimental, and empirical literature from economics, political science, and psychology. The theoretical literature investigates the behavioral aspects—such as preference and beliefs—to explain the reasons for and the effects of identity on human behavior. The theoretical literature also analyzes issues such as identity-dependent externality, endogenous choice of joining a group, and so on. The applied literature consists of laboratory and field experiments as well as empirical studies from the field. The experimental studies find that the salience of an identity can increase conflict in a field setting. Laboratory experiments show that whereas real identity indeed increases conflict, a mere classification does not do so. It is also observed that priming a majority–minority identity affects the conflict behavior of the majority, but not of the minority. Further investigations explain these results in terms of parochial altruism. The empirical literature in this area focuses on the various measures of identity, identity distribution, and other economic variables on conflict behavior. Religious polarization can explain conflict behavior better than linguistic differences. Moreover, polarization is a more significant determinants of conflict when the winners of the conflict enjoy a public good reward; but fractionalization is a better determinant when the winners enjoy a private good reward. As a whole, this area of literature is still emerging, and the theoretical literature can be extended to various avenues such as sabotage, affirmative action, intra-group conflict, and endogenous group formation. For empirical and experimental research, exploring new conflict resolution mechanisms, endogeneity between identity and conflict, and evaluating biological mechanisms for identity-related conflict will be of interest.