Finding political capital for monetary tightening: Unemployment insurance and partisan monetary cycles

How do governments find the political capital to raise interest rates in pursuit of inflation stabilisation? Against common wisdom, this article shows that the ability of governments to exercise tight monetary policy largely depends on the level of unemployment insurance. Unemployment insurance is particularly useful to social democratic parties since their core constituency – labour – is the hardest hit by economic downturns. Empirical evidence from 17 OECD countries over thirty years demonstrates that high levels of unemployment insurance present a strong incentive for social democratic governments to respond more aggressively to positive changes in inflation. These findings resolve the puzzle of why partisan monetary cycles are not often observed in the literature and have important policy implications, given continued calls for scaling down social insurance.     

Municipal Debt Issues in Foreign Markets: Managing Currency and Interest Rate Risk

Since the mid-1980s, there has been an acceleration of state and local government interest in the taxable bond market as a source of capital. This has resulted from, among other factors, restrictions imposed on economic and industrial development loan programs resulting from the passage of the Tax Reform Act of 1986. Increased state and local government involvement in the taxable bond markets has increased competition for such capital between the public and the private sectors. In turn, the developing capital competition has expanded into overseas securities markets. Private sector corporations have frequently accessed foreign capital markets to take advantage of lower interest rates and reduced financing costs. By contrast, state and local governments have accessed such markets only recently. This article discusses the policy issues considered by a state or local government entity when it decides to borrow funds in foreign markets and discusses the issues involved in managing currency and interest rate risk when issuing municipal bonds in foreign markets. It includes a review of the hedging techniques used by the Kentucky Development Finance Authority (KDFA) to protect against changes in the Yen/Dollar exchange relationship on a recent Samurai bond issue sold by KDFA as an example of such a transaction.     

Federal Intervention in the Municipal Bond Market: The Effectiveness of the Build America Bond Program and Its Implications on Federal and Subnational Budgeting

The American Recovery and Reinvestment Act of 2009 (ARRA) included several new federal programs intended ostensibly to “unfreeze” the credit markets as a result of the global financial crisis. One such program, the Build America Bond (BAB) program, aimed to lower the borrowing costs for state and local governments by increasing their access to capital and providing a more generous federal subsidy than the traditional indirect tax exemption subsidy. BABs are taxable bonds sold by subnational governments, which carry a 35 percent direct federal payment subsidy to the borrower. In creating this program, the federal government hoped that the large direct federal subsidy along with greater potential investor interest in taxable securities would result in lower borrowing costs for state and local governments vis‐à‐vis traditional tax‐exempt bonds. This research study examines the relative effectiveness of the BAB program and details the various quantitative and qualitative implications on federal and subnational budgeting by moving from an indirect to a direct federal subsidy approach in facilitating state and local government capital raising.     

THE MARKET PROVISION OF MANDATORY SOCIAL SECURITY: Protecting the Public Interest in Perpetuity

Pressures to introduce market reforms to public social security system emerged as a reaction to state welfare paternalism, drawing strength from the spirit of liberalism and emphasizing the virtues of the marketplace. Market reform advocates seek to shift the prevailing social security paradigm away from community solidarity to individual responsibility, with a view to divesting government of some of its statutory social security responsibilities. Market reform of public social security provision redefines the public‐private boundary, making socio‐political governance more a process of co‐ordination, steering, influencing, and balancing pluralist interactions, with the civil service increasingly expected to act as trustee of the public interest. What, however, the public interest is and how it differs from private interest is problematic and it should reflect the shared values that create social bonds and identity within a society. The daunting twin challenges facing governments are to design a set of regulatory arrangements that can protect the public interest in perpetuity, and to resist calls for government subsidies to support the economic rent expectations of privatized providers. To meet these challenges the “hollowed‐out” state must become a “smart” state.     

A General Pricing Model for a Mortgage Insurance Contract Considering the Effects of Multivariate Random Variables on Termination Probabilities and Loss Rate

This article describes the derivation of a general closed-form formula for determining a fair premium for both Federal Housing Administration (FHA) and private mortgage insurance (MI). Our model incorporates the regulations appearing in MI contracts, the changes in economic situations, the termination hazard rates (i.e., prepayment and default), and the loss rate given default. We then give an example to show how one uses our model to calculate an MI premium with FHA regulations by using real mortgage data. Our pricing formula can also be used to calculate the implied default hazard rates given the FHA's current MI. The comparison of this implied rate with the actual rate should help mortgage insurers decide whether the current MI premium should be adjusted. Further analysis shows how sensitive MI premiums are to changes in the model parameters, such as the volatility of the interest rate and the house price appreciation rate. Our pricing formula should make it easier for mortgage insurers to determine fair MI premiums and employ sophisticated risk-management procedures.     

Municipal Bond Insurance: Trends and Prospects

Privately sold bond insurance is the most common form of credit enhancement for municipal bonds. Research generally finds that bond insurance reduces interest costs for lower rated, long–term debt issues. Researchers have concluded that these results are consistent with presumed investor risk aversion, as well as more "rational" risk management behaviors, and with theories concerning the efficiency–enhancing properties of financial intermediation in imperfect markets. We propose a research agenda based both on traditional theories and on additional hypotheses that seek to account for the observed use of bond insurance where net savings would not normally be predicted.     

Local government grants and income tax revenue: Redistributive politics in Norway 1900–1990

An important aspect of the welfare state is public provision of private goods, primarily education and health care. In Norway the provision of these services has been organized through the local public sector. The development of the welfare state has to a large extent been the development of welfare communes. The important revenue sources of the local and county governments, grants and income tax revenue, have been controlled nationally, and the paper addresses the determinants of these revenues during 1900–1990. The approach combines a demand model of local public services emphasizing price and income-elasticities with a political economy model of central government ideology and strength. The decision making is understood as bargaining between the government and interest groups, and the political structure consequently is of importance for the policy outcome. The analysis shows how politics matter, and the results indicate that a minority coalition government implies 30% more grant and income tax revenue to local and county governments than one party majority in the long run.     

The State of American Federalism, 2002-2003: Division Replaces Unity

The national unity formed last year in response to terrorismsoon vanished as more typical political infighting returned.Although overshadowed by the buildup to and the conduct of asecond war against Iraq, political issues grounded in the nation'sfederal character contributed to a rise in divisiveness. Themid-term elections of 2002 and redistricting battles in severalstates drove partisanship to new heights. The continued sluggishnessof the nation's economy also exacerbated interparty bickering.Republicans controlled the White House and both houses of Congress,yet some of the president's policy initiatives encountered moreserious resistance in his own party than from the opposition.Many of the feuds within the majority party rested on stateand regional interests typical of federalism politics. Stateand local governments remained trapped in the third year ofa fiscal crisis, and even large reductions in expenditures didnot extricate these governments from the financial fix. Despitetheir pleas, state and local officials were unable to obtainany significant relief from the federal government. Federal-staterelations, as a consequence, exhibited more contentiousnessthan cooperation.     

The effects of state policy design features on take-up and crowd-out rates for the State Children's Health Insurance Program.

We evaluate the effects of state policy design features on SCHIP take-up rates and on the degree to which SCHIP benefits crowd out private benefits. The results indicate overall program take-up rates of approximately 10 percent. However, there is considerable heterogeneity across states, suggesting a potential role of inter-state variation in policy design. We find that several design mechanisms have significant and substantial positive effects on take-up. For example, eliminating asset tests, offering continuous coverage, simplifying the application and renewal processes, and extending benefits to parents all have sizable and positive effects on take-up rates. Mandatory waiting periods, on the other hand, consistently reduce take-up rates. In all, inter-state differences in outreach and anti-crowd-out efforts explain roughly one-quarter of the cross-state variation in take-up rates. Concerning the crowding out of private health insurance benefits, we find that between one-quarter and one-third of the increase in public health insurance coverage for SCHIP-eligible children is offset by a decline in private health coverage. We find little evidence that the policy-induced variation in take-up is associated with a significant degree of crowd out, and no evidence that the negative effect on private coverage caused by state policy choices is any greater than the overall crowding-out effect. This suggests that states are not augmenting take-up rates by enrolling children that are relatively more likely to have private health insurance benefits.     

The Politics of Fiscal Responses to the Crisis of 2008–2009

The national fiscal responses to the economic crisis of 2008/2009 varied considerably. Some countries reacted with a strong demand stimulus, others intended to slash public expenditures, while a third group pursued mildly expansionary policies. There are strong reasons for governments to pursue a mildly expansionary policy. If governments depart from this default strategy in favor of a significant counter‐cyclical policy, they must be able to swiftly make decisions. Therefore, effective use of counter‐cyclical policy will be unlikely in cases where lengthy negotiations or significant compromises between governing parties with different views on economic and fiscal policy are likely. Therefore, a major determinant of the expansionary strategy is a unified government, usually in form of a one‐party government. If governments opt for pro‐cyclical policy in a major economic crisis, they do so because they have few other viable options. In this situation they tend to shift blame to international organizations.     

Bankrolling Repression? Modeling Third‐Party Influence on Protests and Repression

Ukraine's anti‐government protests in 2013–2014, and the ensuing removal of President Yanukovich, raised much speculation about Russia's role in the outcome of the crisis, as well as more general questions related to third‐party influence on domestic protests and repression. Does third‐party assistance to the government increase the level of government repression or deter protesters? Does the leader removal indicate that foreign involvement was a failure? Or can a third party gain from involvement, even if its protégé leader is removed from power? We model external influence on the onset of protests and repression as a game between the government, the protesters, and a third party that supports the government. The main finding is that a third party may “bankroll” repression against the protesters, even at the risk of the removal of their protégé leader, with the goal of deterring future protests within its sphere of interest.     

Testing the Effects of Sale Method Restrictions in Municipal Bond Issuance: The Case of New Jersey

Can state governments save money by restricting the practice of selling tax‐exempt bonds through negotiation, or do such regulations impose additional costs? Circumstances in New Jersey recently created a natural experiment to test this proposition. This study finds significant cost savings for those issues sold through competition both before and after such restrictions were put in place. All else equal, issues sold competitively after the policy change did not have significantly higher interest costs, despite a shift in volume toward competitive sales, suggesting that there exists room for increased use of competitive sales without incurring a cost penalty.     

Tackling unemployment in China: state capacity and governance issues

Abstract

This paper considers China's state capacity and changing governance as revealed through its policies to tackle unemployment. Despite high levels of growth, economic restructuring has resulted in rising unemployment over the last decade. The Chinese state has been able to manage job losses from state enterprises, demonstrating some state capacity in relation to this sector and some persistent command economy governance mechanisms. However both design and implementation of policies to compensate and assist particular groups among the unemployed have been shaped by weak state capacity in several other areas. First, capacity to gather accurate employment data is limited, meaning local and central governments do not have a good understanding of the extent and nature of unemployment. Second, the sustainability of supposedly mandatory unemployment insurance schemes is threatened by poor capacity to enforce participation. Third, poor central state capacity to ensure local governments implement policies effectively leads to poor unemployment insurance fund capacity, resulting in provision for only a narrow segment of the unemployed and low quality employment services. Although the adoption of unemployment insurance (and its extension to employers and employees in the private sector), the introduction of a Labour Contract Law in 2007, and the delivery of employment services by private businesses indicate a shift towards the use of new governance mechanisms based on entitlement, contract and private sector delivery of public-sector goods, that shift is undermined by poor state capacity in relation to some of these new mechanisms.     

The government behind insurance governance: Lessons for ransomware

The insurance as governance literature focuses on the ability of private enterprises to collectively regulate, pool, and distribute risks. This paper analyzes how governments support insurance markets to maintain insurability and limit risks to society. We propose a new conceptual framework grouping government interventions into three dimensions: regulation of risky activity, public investment in risk reduction, and co-insurance. We apply this framework to six case studies, describing insurance markets' reliance on public support in more analytically precise terms. We analyze how mature insurance markets overcame insurability challenges akin to those currently presented by extortive cybercrime. Private governance struggled when markets grew too big for informal coordination or when (tail) risks escalated. Government interventions vary widely. Some governments prioritize supporting economic activity while others concentrate on containing risks. Governments also choose between risk reduction and ex post socialization of losses. We apply these insights to the market for ransomware insurance, discussing the merits and potential hazards of current proposals for government intervention.     

The Growing Importance of Issue Competition: The Changing Nature of Party Competition in Western Europe

Changes in Western European political parties in general have attracted considerable scholarly interest, whereas changes in party competition have been almost overlooked in an otherwise extensive literature. Using the party manifesto data set, this article documents that party competition in Western Europe is increasingly characterised by issue competition, i.e. competition for the content of the party political agenda. What should be the most salient issues for voters: unemployment, the environment, refugees and immigrants, law and order, the welfare state or foreign policy? This change is crucial because it raises a question about the factors determining the outcome of issue competition. Is it the structure of party competition itself or more unpredictable factors, such as media attention, focusing events or skilful political communication? The two answers to this question have very different implications for the understanding of the role of political parties in today's Western European democracies.     

The Fulfillment of Parties’ Election Pledges: A Comparative Study on the Impact of Power Sharing

Why are some parties more likely than others to keep the promises they made during previous election campaigns? This study provides the first large‐scale comparative analysis of pledge fulfillment with common definitions. We study the fulfillment of over 20,000 pledges made in 57 election campaigns in 12 countries, and our findings challenge the common view of parties as promise breakers. Many parties that enter government executives are highly likely to fulfill their pledges, and significantly more so than parties that do not enter government executives. We explain variation in the fulfillment of governing parties’ pledges by the extent to which parties share power in government. Parties in single‐party executives, both with and without legislative majorities, have the highest fulfillment rates. Within coalition governments, the likelihood of pledge fulfillment is highest when the party receives the chief executive post and when another governing party made a similar pledge.     

The political affiliation effect on state credit risk

Past research largely has ignored the effects of political parties on states’ default risks. This paper addresses that question by analyzing the response of credit spreads to weekly polling data from 17 gubernatorial elections between 2009 and 2012, during the 6 months prior to Election Day. The findings are that political affiliation has a significant effect on states’ default risks. The estimated effect of electing a Republican governor is a 6% reduction in the credit spread of the state. The effect prevails regardless of the party in control of the state legislature, and it is larger when gubernatorial elections are contested closely. Set in the context of case law, the paper links higher tax levels to greater credit risk. Moreover, an analysis of the candidates’ campaign promises suggests that stronger positions against tax increases are associated with less default risks. The results of the paper are therefore consistent with the empirical evidence suggesting that Republicans prefer lower taxes.     

Preserving the Public Interest in Highway Public–Private Partnerships: A Case Study of the State of Texas

Faced with existing revenues sources that are insufficient to finance highway maintenance and construction needs, some state and local governments are using or considering highway public–private partnerships. These partnerships may be attractive as a way for a government to obtain upfront revenues from the long‐term lease of a road and to shift some of the construction and operations risks to a private firm. However, with these benefits, comes the need to preserve the public interest. This paper discusses issues related to preserving the public interest in highway public–private partnerships and presents a case study of the State of Texas. The case study focuses on an analysis of the strengths and limitations of Texas’ policies and procedures to protect the public interest in the use of long‐term leases for the financing, construction, and operation of new toll roads. The case study also discusses what other governments may be able to learn from Texas’ experiences.     

The Influence of Political Parties on Policy Coordination

Despite an increasing interest in party‐state relations, the functions political parties as organizations fulfill in the government apparatus are rarely theorized or empirically examined. Instead of focusing on citizen demands toward parties, this article focuses on the demands of government. It argues that party organizational linkages help integrate an increasingly complex government apparatus. To substantiate this claim, it analyzes the impact of party linkages on policy coordination within and across subnational governments in the United States, Canada, and Switzerland. The analysis shows that: (1) the extent to which processes within different policy fields are connected—policy integration—is shaped by the relative strength of party organizational linkages rather than being a mere reflection of institutional divisions and (2) depending on the party configurations predominantly governing at the subnational level, policy integration within subnational governments either facilitates intergovernmental policy coordination or accelerates cross‐jurisdictional conflict between them.     

Development of the Natural Resources of the Moon and Other Celestial Bodies: Economic and Legal Aspects

The path of gradual commercialization of current space applications, such as launch services, satellite communication services, direct broadcasting services, satellite remote sensing and navigation services, and satellite weather monitoring services, will most likely be followed by future activities of use of space resources. Ventures, like mining the natural resources of the Moon and asteroids, are likely to become technologically feasible in the near future. The question is what would be the most appropriate approach to address the future needs of exploitation of space resources: should it remain the exclusive province of state governments; should the private sector take over such space activities; or should a public-private partnership type of venture be encouraged? As state governments are becoming constrained by budget deficits, an increased reliance on private sector involvement in space activities involving the extraction and use of space resources is to be expected. When deciding whether to invest in commercial ventures of resource use exploitation, any potential private investor will be faced with the issues of economic costs, risks, and perceived regulatory barriers. This study argues that the perceived regulatory barriers, i.e., the licensing requirement, the “common heritage of mankind” principle of international space law, and protection of intellectual property rights, are not obstacles to economic development. Governments should provide both policy and regulatory incentives for private sector participation in the area of space natural resource use by funding basic research and development and by sponsoring liability insurance for private ventures among other incentives.