Disagreement, Delay, and Deficits

1. “In the face of this lack of knowledge [about the consequences of the deficit], there was not much agreement on how important it was to reduce the deficit or how fast it needed to be done.” -Rubin (2003), summarizing her extensive interviews with legislators and other policymakers about the U.S. budget making process.

2. Disagreement, Delay, and Deficits Jessica Wallack Graduate School of International Relations and Pacific Studies University of California, San Diego

3. Distributional conflict … … but how does distributional conflict turn into delay? Theaccuracy, timeliness, and availabilityof social and economic data varies widely across countries. When publicly available data is less timely and less accurate, policymakers rely more on heterogeneous private data or personal experience to determine the appropriate policy. Greater reliance on private information leads to greater variance of beliefs about the world - more disagreement. Disagreement among policymakers about the objective economic situation delays resolution of distributional conflict. Why are fiscal (and other) reforms delayed?

4. Consequences of Inaccurate Information: Mean Effect vs. Variance Effect Mean Effect Inaccurate common information shifts average policymaker’s belief Opinions about cost of deficit The presence of common information reduces variation in beliefs… … however, less accurate common information reduces variation less. Variance Effect Opinions about cost of deficit

5. Findings Countries with accurate economic statistics reduce high deficits faster than countries with less accurate economic statistics. Executive-centered systems also reduce high deficits faster

6. Measuring Information Quality • Ideal Measures: • Reputation of data among policymakers in each country • Objective size of error in data • Feasible Measures: • Variance of price level estimates (Penn World Tables) • Information Index: • First Principal Component of: • Penn World Tables Variance (0.284) • Ability to Monitor: external data reputation (0.535) • World Bank Rating: coverage, frequency, timeliness (0.588)

7. Third Variables and Other Influences: Political and Governance Culprits • Political Institutions (DPI) • Executive-centered (0) / Parliamentary (2) • # of veto players • Degree of polarization among veto players • Democracy (Polity IV Index) • Level of Development(log GDP per capita) • Transparency (ICRG, 0-6) • Quality of Bureaucracy (ICRG, 0-6) • Debt Burden(Lagged)

8. Spearman Correlations Information Quality, Political Institutions, Governance

9. Accuracy of Economic Statistics

10. Measuring Delay • Deficits: A panel of “policy stance” observations. • Various Measures: (1) Primary, (2) Central Government, (3) Consolidated CG, (4) Public Sector • All measures scaled: + deficit, - surplus • Error Correction Model: Estimates percent of above – (country) average deficit eliminated annually. • Allows for Asymmetric Adjustment • Controls for economic fluctuations.

11. Summary Statistics

12. Basic Error Correction Model with Asymmetric Adjustment Δdt = α +β1(dj,t-1 – dj*) +β2T*(dj,t-1 – dj*) +α1 Shocksj,t-1 +vjt β1 :Speed of deficit growth for relatively small deficits (-) β2:Incremental effect on adjustment speed for relatively large deficits (+) β1 + β2:Speed of deficit reduction for relatively large deficits (-)

13. Significant Asymmetry Control Variables: Growth Changes. Robust standard errors in parentheses *** Significant at 1%; ** Significant at 5%; * Significant at 10%. (*) Significant at 15%.

14. Political and Information Effects: Fixed Effects with Interaction Terms Δdt = α +β1(dj,t-1 – dj*) +β2 Tj,t-1*(dj,t-1 – dj*) +β3 Infoj*(dj,t-1 – dj*) +β4Infoj*Tj,t-1*(dj,t-1 – dj*) +β5k Poljk *(dj,t-1 – dj*) +β6k Poljk *Tj,t-1*(dj,t-1 – dj*) +α1Tj,t-1 + α2Tj,t-1*Infoj + α3kTj,t-1*Poljk + α4Shocksj,t-1 +μj+ɛjt Sum gives “Information Effect” on deficit reduction speed Sum gives “Political Effect” on deficit reduction speed

15. Slow Adjustment, Below-Average Information Quality Deficit Reduction Speed: -0.281 Information Rating: 0.6

16. Medium Adjustment, Below Average Information Quality Deficit Reduction Speed: - 0.417 Information Rating: 0.60

17. Faster Adjustment, Better Information Quality Deficit Reduction Speed: -0.596 Information Rating: 0.8

18. Medium Adjustment, Best Information Quality Deficit Reduction Speed: -0.468 Information Rating: 1

19. Fast Adjustment, Best Information Quality Deficit Reduction Speed: -1.070 Information Rating: 1.00

20. Findings • More accurate information associated with faster deficit reduction • Executive-Centered associated with faster deficit reduction than parliamentary government • Polarization, checks & balances, governance: no statistically significant effect.

21. Effect of Information Accuracy on Deficit Reduction Speed: (b3 + b4 ) Extra percentage points of above-average deficit reduced in a given year from having maximum (1) information quality instead of minimum (0).

22. Effect of Information Accuracy on Deficit Reduction Speed (Information Index) Extra percentage points of above-average deficit reduced in a given year from an increase of 1 standard deviation of information index.

23. Primary Deficit vs. Public Deficit(Low Information Quality)

24. Primary Deficit vs. Public Deficit(Higher Information Quality)

25. Effect of Political Institutions on Reduction Speed

26. Effect of Governance Quality on Reduction Speed

27. Information and Economic Outcomes • Demonstrated connection between information quality and speed of policy change • Implication: better data improves policymaking as well as policy. • credible economic and social data speeds reform • important to provide policymakers with information they perceive as relevant and useful.

28. New Avenues for Research • Why is more accurate economic information associated with faster reform? • Testing “variance effect” more directly: • Interaction with country institutions, specific reform settings • Interaction with underlying disagreement • Other questions to ask about data: • Bias of data providers • Timeliness • What factors lead to investment in better publicly available information?

29. “In the face of this lack of knowledge [about the consequences of the deficit], there was not much agreement on how important it was to reduce the deficit or how fast it needed to be done.” -Rubin (2003), summarizing her extensive interviews with legislators and other policymakers about the U.S. budget making process.

30. Significant Asymmetry Benchmark: Sustainable Deficit Control Variables: Growth Changes. Robust standard errors in parentheses *** Significant at 1%; ** Significant at 5%; * Significant at 10%. (*) Significant at 15%.

31. Effect of Information Accuracy on Deficit Reduction Speed: (b3 + b4 ) Benchmark: “Sustainable” Deficit Extra percentage points of above-average deficit reduced in a given year from having maximum (1) information quality instead of minimum (0).

32. Deficit Reduction Speeds:Individual Country Estimates

33. Adjustment Speed and Information Quality(OLS on Country Estimates) Robust standard errors in parentheses.

34. Adjustment Speed and Information Quality(OLS on Country Estimates) Robust standard errors in parentheses.