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  2. ASSA Annual Meeting
  3. 2021
  4. Preliminary Program
  5. Fiscal Policy in Disaster, War, and their Aftermath
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Fiscal Policy in Disaster, War, and their Aftermath

Paper Session

Sunday, Jan. 3, 2021 12:15 PM - 2:15 PM (EST)

Hosted By: American Economic Association
  • Chair: Ethan Ilzetzki, London School of Economics

Disasters Everywhere: The Costs of Business Cycles Reconsidered

Òscar Jordà
,
Federal Reserve Bank of San Francisco and University of California-Davis
Moritz Schularick
,
University of Bonn and CEPR
Alan M. Taylor
,
University of California-Davis and CEPR

Abstract

Business cycles are costlier and stabilization policies more beneficial than widely thought. This paper shows that all business cycles are asymmetric and resemble mini “disasters”. By this we mean that growth is pervasively fat-tailed and non-Gaussian. Using long-run historical data, we show empirically that this is true for all advanced economies since 1870. Focusing on the
peacetime sample, we develop a tractable local projection framework to estimate consumption
growth paths for normal and financial-crisis recessions. Using random coefficient local projections we get an easy and transparent mapping from the estimates to the calibrated simulation model. Simulations show that substantial welfare costs arise not just from the large rare disasters, but also from the smaller but more frequent mini-disasters in every cycle. In postwar America, households would sacrifice more than 10 percent of consumption to avoid such cyclical fluctuations.

Fiscal Multipliers in the COVID19 Recession

Alan Auerbach
,
University of California-Berkeley and NBER
Yuriy Gorodnichenko
,
University of California-Berkeley and NBER
Peter B. McCrory
,
University of California-Berkeley
Daniel Murphy
,
University of Virginia

Abstract

In response to the record-breaking COVID19 recession, many governments have adopted unprecedented fiscal stimuli. While countercyclical fiscal policy is effective in fighting conventional recessions, little is known about the effectiveness of fiscal policy in the current environment with widespread shelter-in-place (“lockdown”) policies and the associated considerable limits on economic activity. Using detailed regional variation in economic conditions, lockdown policies, and U.S. government spending, we document that the effects of government spending were stronger during the peak of the pandemic recession, but only in cities that were not subject to strong stay-at-home orders. We examine mechanisms that can account for our evidence and place our findings in the context of other recent evidence from microdata.

Government Purchases and Plant-Level Productivity: Evidence from World War II

Ethan Ilzetzki
,
London School of Economics

Abstract

This paper studies the relationship between fiscal policy, productivity, and capacity utilization. It does so in the context of US World War II munition production, where many plants saw productivity growth in the face of substantial capacity constraints. Using archival data on the airframe industry, I show that increases in government purchases raise total factor productivity measured in quantity units (TFPQ) at the plant level. While low capacity utilization plants respond to new government purchases with relative increases in utilization, more constrained plants increase production through TFPQ growth. Increases in TFP are associated with more outsourcing of production. Shifts in military strategy provide an instrument for demand shifts across plants specializing in different aircraft types. The study uses detailed data on production, productivity, and capacity utilization collected by the US War Production Board and Army Air Force.

Public Pension Reforms and Fiscal Foresight: Narrative Evidence and Aggregate Implications

Huixin Bi
,
Federal Reserve Bank of Kansas City
Sarah Zubairy
,
Texas A&M University

Abstract

The fiscal response to the COVID-19 crisis will saddle governments worldwide with enormous public debts for years to come. Historically, pension reform has been a common way for governments to consolidate their public debts. We explore the evolution of pension policy across various countries and investigate the macroeconomic impact of pension structural reforms in recent decades, in particular those with implementation delays. For these purposes, we document chronological changes in pension policy for 10 OECD countries between 1962 and 2017. The new data set reveals that changes in pension policy come in waves, with a rapid expansion of pension systems between 1960s and 80s followed by a wave of retrenchments since 1990s. Structural pension reforms, which are motivated by long-run sustainability concerns, often come with prolonged phase-in periods, close to 10 years on average. We find that in response to structural pension retrenchments implemented without delay, people close to retirement stay in the work force longer, potentially to compensate for expected lower pensions, leading to a decline in old-age pension spending. News about future pension retrenchment, however, is more likely to lead this marginal group of population to exit the labor market prior to the reform being implemented. A fiscal foresight channel prevails over the income effect in this case. The decline in the labor force participation rate of the marginal group is particularly pronounced for pension reforms that change the fundamental aspects of pension systems and ones that come with longer implementation delays, which point towards amplification from associated uncertainty. Old-age pension spending subsequently increases, rather than decreases, over the medium term.
Discussant(s)
Kilian Huber
,
University of Chicago
Adrien Auclert
,
Stanford University
Gabriel Chodorow-Reich
,
Harvard University
Alan Auerbach
,
University of California-Berkeley
JEL Classifications
  • E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
  • H3 - Fiscal Policies and Behavior of Economic Agents