Christian E. Weller

Prudent investors: the asset allocation of public pension plans

After 2000, the vast majority of defined benefit (DB) pension plans encountered a decrease in their funding ratios, largely due to a drop in asset prices. It is possible that public sector pension plans may have acted imprudently by chasing returns, once they encountered underfunding. We identify four indicators for DB plans imprudent investment behavior: no portfolio rebalancing, employer conflicts of interest, trustee conflicts of interest, and failure to implement best investment practices. To see if public sector pension plans rebalance their portfolios, we use data from the Federal Reserves Flow of Funds, dating from 1952 to 2007. To test for the remaining three hypotheses, we use data from the Census State and Local Government Employee Retirement Systems data base, where consistent data for state and local government plans are available from 1993 to 2005. Our results suggest that there is no evidence that public sector plans systematically engaged in imprudent investment behavior and that this did not systematically differ after 2000 from the earlier period.

Getting it Right: Empirical Evidence and Policy Implications from Research on Public-Sector Unionism and Collective Bargaining

The United States is in the throes of a public-policy debate about public-sector unionism and collective bargaining. The ostensible trigger of this debate is the fiscal crises that state and local governments have been experiencing since 2008. The debate largely centers on the extent to which public employee unions have contributed to this crisis through the pay and benefits they have negotiated for public employees. The role of government as employer is connected in this debate to the role of government as a taxing authority and provider of public services. These roles are often claimed to be in conflict with one another — that is, governments as employers are seen as not exercising the same due diligence in setting pay and benefits as private-sector employers. The research evidence indicates, however, that these claims about public employment are based on incomplete and in some cases inaccurate understanding.

Public Policy Options to Build Wealth for America's Middle Class

The financial crisis of 2007 and thereafter has taken a toll on family wealth. About

The Impact of Multinational Banks on Development Finance

15 trillion (in 2008 dollars) --22.8%--were lost in the first 18 months of the financial crisis which started in the spring of 2007. The loss of household wealth deserves public policy attention. Wealth serves critical economic security functions in an economy that relies heavily on individual initiative, such as the United States. It is a store of future income, in the case of retirement, unemployment, illness or injury which allows families to smooth consumption over their lifetime. Families with sufficient wealth also need not worry about the basic necessities of life and may focus on longer term economic opportunity. Christian Weller and Amy Helburn describe three goals for public policy to help families build stable and sustainable wealth: greater savings rates, lower costs of building wealth, and less risk exposure. In Working Paper, they highlight a few policy examples in each of these categories.

Can Progressive Taxation Contribute to Economic Development

Financial market recommendations for less industrialized economies, particularly in the wake of the recent financial crises, have included a push for more international financial competition. The entry of multinational banks (MNBs) into developing economies is supposed to create more market discipline for domestic banks, thus making them more efficient, and enhancing financial stability. Using data from the BIS and the IMF, we look at the impact of MNBs on credit supply and on financial stability in less industrialized economies. MNBs focus their activities predominantly on serving MNCs, and on providing services that domestic banks cannot offer to domestic corporations, and high net worth individual. This increased competition in certain low risk market segments entices domestic banks to lower their credit exposure in the early stages of international financial competition. However, as MNBs continue to operate and to grow their market shares in less industrialized economies, domestic banks become more confident with the new competitive situation, eventually increasing their loans, especially to the enterprise sector. Both consequences of increased international financial competition - early credit crunches, and later credit growth - can have real implications in the form of lowered business investment or financial instabilities, unless adequate regulatory and supervisory structures are installed.

Divergent Fortunes: Income Diversification, Rising Older Entrepreneurship and Falling Younger Entrepreneurship

Financial instability has increased for many economies in the face of greater capital mobility. Eliminating capital flows, especially portfolio investment flows, may reduce volatility, but it could also result in domestic capital constraints. To overcome this dilemma, policymakers may consider alternatives, such as progressive income taxation, that could raise domestic funds. In this paper, the authors combine several macroeconomic data sources to test the link between progressive taxation and economic stability, economic growth, inequality and fiscal policy. Based on data from 1981 to 2002, they find that progressive taxation provides policymakers with the ability to conduct countercyclical fiscal policies, which in turn contributes significantly to economic stability. They find no evidence that progressive taxation adversely affects economic stability by reducing growth. The authors do find that the possibility of raising progressivity is constrained by capital mobility and by the level of government spending. And policymakers, who may consider consumption taxes such as the value added taxes (VAT), when tax enforcement is ineffective, would see no additional gains in terms of economic stability from the implementation of a VAT in combination with progressive income taxation.

Push or Pull: What Explains Growing Entrepreneurship Among Older Households?

Entrepreneurship has declined among younger households, those headed by somebody less than 50 years old, while it has increased among older households over the past two decades. We explore whether this divergence in entrepreneurial activity could be linked to different experiences with income diversification from capital income and retirement and annuity income. Using descriptive and instrumental variable regressions based on data from the Federal Reserve’s triennial Survey of Consumer Finances (SCF), we conclude that older households’ entrepreneurial activity has become more responsive to income diversification while younger households’ has become less responsive over time. In further examinations, we rule out three potential alternative explanations – changes in economic pressures, in liquidity constraints and in nonpecuniary rewards – for the divergent entrepreneurship trends. Our results suggest that more access to income unrelated to risky business income, especially among younger households, could support more entrepreneurship in the future.

Boon or Bane?: 401(K) Loans and Loan Provisions

Older households need to save more money for retirement, possibly by working longer. But, the same labor market pressures that have made it harder for people to save, such as increasingly unstable labor markets, have also made it more difficult for people to work longer as wage and salary employees. Self-employment hence may have become an increasingly attractive alternative option for older households. Entrepreneurship among older households has indeed grown faster than wage and salary employment, especially since the late 1990s. But, this growth, rather than reflecting rising economic pressures, may have been the result of growing financial strengths – fewer financial constraints and more access to income diversification through capital income from rising wealth. Our empirical analysis finds little support for the hypothesis that growing economic pressures have contributed to increasing entrepreneurship. Instead, our results suggest that the growth of older entrepreneurship is coincident with increasing access to income diversification, especially from dividend and interest income. We also find some tentative evidence that access to Social Security and other annuity benefits increasingly correlate with self-employment. Greater access to interest and dividend income follows in part from more wealth and improved access to Social Security may reflect relatively strong labor market experience in the past.

On Uneven Ground: How Corporate Governance Prioritizes Short-Term SpeculativeInvestments, Impedes Productive Investments, and Jeopardizes Productivity Growth

Traditional life-cycle models unambiguously predict that having the ability to borrow from defined contribution (DC) plans is utility enhancing since lower liquidity constraints will increase contemporaneous contributions. Behavioral finance, on the other hand, indicates that workers with dynamically inconsistent preferences may enjoy higher lifetime consumption than otherwise if they have no loan option. The lack of loan option acts as a commitment device to preserve savings for future consumption. Absent the commitment device contributions may be lower than otherwise. We study DC plan contributions for those with standard and with dynamically inconsistent preferences and find that a loan option raises current savings, but does so more for households with standard discounting than for those with dynamically inconsistent preferences. The effects on lifetime savings may differ, depending on the actual loans taken out and when the loan option exists. We simulate retirement account balances, using our parameter estimates for contributions and loan amounts, for households with standard and dynamically inconsistent preferences. The simulations show that the net effect is positive for standard discounters, but not necessarily for dynamically inconsistent discounters, depending on the impact of the borrowing option on employee contribution rates to DC plans.

Financial Stress and Asymmetric Financial Decisions

The economic recovery after the Great Recession highlighted a continuous divergence between soaring profits and lagging investment. These trends are related at the corporate level, where corporate managers have stronger incentives to pursue short-term profit-seeking activities than to invest in longer-term productive activities, such as hiring and training people and investment in physical infrastructure. This prioritization results because the corporate governance system is biased towards the short run. The policy goals that we discuss aim to find a better economic balance between short-run and long-run goals by defining long-term performance measures and finding a better balance in the incentives of short-run and long-run oriented corporate stakeholders.