AEAweb: JEP: Contents: Summer 2000

Journal of Economic Perspectives
Vol. 14, No. 3, Summer 2000

Contents

The Political Economy of the Budget Surplus in the United States
Alberto Alesina      3-19

Reassessing Discretionary Fiscal Policy
John B. Taylor      21-36

The Significance of Federal Taxes as Automatic Stabilizers
Alan J. Auerbach and Daniel Feenberg      37-56

Should America Save for its Old Age? Fiscal Policy, Population Aging, and National saving
Douglas W. Elmendorf and Louise M. Sheiner      57-74

The Sports Business as a Labor Market Laboratory
Lawrence M. Kahn      75-94

The Economics of Sports Facilities and Their Communities
John Siegfried and Andrew Zimbalist      95-114

Economic Analysis of Social Interactions
Charles F. Manski      115-136

Collective Action and the Evolution of Social Norms
Elinor Ostrom      137-158

Fairness and Retaliation: The Economics of Reciprocity
Ernst Fehr and Simon Gächter      159-181

Vickrey Auctions in Practice: From Nineteenth-Century Philately to Twenty-First-Century E-Commerce
David Lucking-Reiley      183-192

In Honor of Kevin M. Murphy: Winner of the John Bates Clark Medal
Finis Welch      193-204

Policy Watch: The Tyranny of Budget Forecasts
J.D. Foster and James C. Miller III      205-215

History Lessons: Institutions, Factor Endowments, and Paths of Development in the New World
Kenneth L. Sokoloff and Stanley L. Engerman      217-232

Features:
Recommendations for Further Reading      225-232
Correspondence      233-239
Notes      241-244

Current surpluses in the U.S. have been achieved by a combination of a strong economy, low interest rates, and sharp cuts in defense spending. These surpluses follow a period (the 1980s) of rather exceptional budget deficit. This paper investigates the origin, size, and expected future patterns of the U.S. budget balance. It discusses how different political forces may generate alternative fiscal scenarios for the U.S. in the next decade.

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Recent changes in policy research and in policy-making call for a reassessment of countercyclical fiscal policy. Such a reassessment indicates that countercyclical fiscal policy should focus on automatic stabilizers rather than discretionary actions. Monetary policy has been reacting more systematically to output and inflation; long expansions in the 1980s and 1990s demonstrate policy effectiveness. It is unlikely that discretionary countercyclical fiscal policy could improve things, even with less uncertainty about fiscal impacts. A discretionary countercyclical fiscal policy could make monetary policy-making more difficult. Discretionary fiscal policy should focus on long-run issues, such as tax reform and social security reform.

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Using the TAXSIM model for the period 1962-95, we consider the federal tax system's impact as an automatic stabilizer. Despite the many changes in the tax system, there has been relatively little change in its role as an automatic stabilizer. We estimate that individual federal taxes offset perhaps as much as 8 percent of initial shocks to GDP. We also suggest that the progressive income tax may help to stabilize output via its effect on the supply of labor, an additional effect that may even be of similar magnitude to the more traditional path of stabilization through aggregate demand.

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We examine whether the aging of the U.S. population adds force to traditional arguments for boosting national saving and conclude - perhaps surprisingly - that it may not. Aging boosts the demands on future resources, but it also changes the rate of return the U.S. economy can expect from saving. We find that the net effect on desired saving is small: some specifications imply that present consumption should fall by a fraction of 1 percent; others imply that consumption should actually increase. Thus, it is optimal to allow future cohorts to bear much/all of the burden of population aging.

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With superior data on compensation and productivity, as well as the occurrence of abrupt, dramatic market structure and player allocation rules changes, sports labor markets offer an excellent setting in which to test economic hypotheses. This paper reviews evidence from sports in four areas: employer monopsony, discrimination, the Coase Theorem, and incentive contracts, supervision and performance. There is considerable evidence of monopsony as well as for the existence of some forms of discrimination against minority athletes. Incentive contracts have strong effects on player performance and behavior, and there is mixed evidence on the predictions of the Coase Theorem.

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Since the 1950s, taxpayers have been the primary investors in stadia built for the use of privately-owned professional sports teams. Team owners have argued that sports facilities boost local economic activity; however, economic reasoning and empirical evidence suggest the opposite. Public support for stadia is also driven by demand for community image, and owners of sports teams supply a scarce input into image enhancement--participation in the major league--for which they have been able to extract monopoly rents from dispersed taxpayers. We suggest reforms to dissipate the monopoly sports leagues exercise when negotiating with host communities for their teams.

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Economics is broadening its scope from analysis of markets to study of general social interactions. Developments in game theory, the economics of the family, and endogenous growth theory have led the way. Economists have also performed new empirical research using observational data on social interactions, but with much less to show. The fundamental problem is that observable outcomes may be generated by many different interaction processes, so empirical findings are open to a wide variety of interpretations. To make sustained progress, empirical research will need richer data, including experiments in controlled environments and subjective data on preferences and expectations.

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I assume multiple types of players-"rational egoists," as well as "conditional cooperators" and "willing punishers"-in models of nonmarket behavior. I use an indirect evolutionary approach to explain how multiple types of players could survive and flourish in social dilemma situations. Contextual variables that enhance knowledge about past behavior assist in explaining the origin of collective action. Among the important contextual variables are types of goods, types of groups, and rules that groups use to provide and allocate goods. Finally, I reexamine a series of design principles that were derived earlier from an examination of extensive case materials.

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Fairness and Retaliation: The Economics of Reciprocity
Ernst Fehr and Simon Gächter      159-181

This paper shows that reciprocity has powerful implications for many economic domains. It is an important determinant in the enforcement of contracts and social norms and enhances the possibilities of collective action greatly. Reciprocity may render the provision of explicit incentive inefficient because the incentives may crowd out voluntary co-operation. It strongly limits the effects of competition in markets with incomplete contracts and gives rise to noncompetitive wage differences. Finally, reciprocity it is also a strong force contributing to the existence of incomplete contracts.

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William Vickrey (1961) proposed an auction mechanism in which bidders submit sealed bids, and the highest bidder wins the good in return for payment of the second-highest bid amount. For decades, economists have credited Vickrey with inventing this auction format, and have believed that the Vickrey auction is rarely used in practice. This paper presents evidence that Vickrey auctions have long been the predominant auction format for mail sales of collectible postage stamps. Stamp auctioneers developed this auction format on their own, as early as 1893, even before Vickrey was born.

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No abstract available.

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Policy Watch: The Tyranny of Budget Forecasts
J.D. Foster and James C. Miller III      205-215

The evolving federal budget process has placed increasing demands on, and given unique powers to, the economic forecasters at OMB, Treasury, CBO, and the Joint Tax Committee of Congress. On the whole, the forecasters have been highly professional in their work, but differences in estimating techniques and, especially, constraints imposed on their analysis by elected officials have limited their credibility. Both the Administration and Congress "game" the system and even ignore the budget rules when convenient. Thus, a sophisticated budget process can help, but cannot assure, sound fiscal policy in the absence of political will to make hard decisions.

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The explanations offered for the contrasting records of long-run growth and development among the societies of North and South America most often focus on institutions. The traditional explanations for the sources of these differences in institutions, typically highlight the significance of national heritage or religion. We, in contrast, argue that a hemispheric perspective across the wide range of colonies established in the New World by the Europeans suggests that although there were many influences, factor endowments or initial conditions had profound and enduring effects on the long-run paths of institutional and economic development followed by the respective economies.

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Features (view in pdf format):
Recommendations for Further Reading (AEA members only)
Correction (AEA members only)
Notes      

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