Glenn R. Follette

Fiscal Policy in the United States: Automatic Stabilizers, Discretionary Fiscal Policy Actions, and the Economy

We examine the effects of the economy on the government budget as well as the effects of the budget on the economy. First, we provide measures of the effects of automatic stabilizers on budget outcomes at the federal and state and local levels. For the federal government, the deficit increases about 0.35 percent of GDP for each 1 percentage point deviation of actual GDP relative to potential GDP. For state and local governments, the deficit increases by about 0.1 percent of GDP. We then examine the response of the economy to the automatic stabilizers using the FRB/US model by comparing the response to aggregate demand shocks under two scenarios: with the automatic stabilizers in place and without the automatic stabilizers. Second, we provide measures of discretionary fiscal policy actions at the federal and state and local levels. We find that federal policy actions are somewhat counter-cyclical while state and local policy actions have been somewhat pro-cyclical. Finally, we evaluate the impact of the budget, from both automatic stabilizers and discretionary actions, on economic activity in 2008 and 2009.

The Sustainability of Health Spending Growth

We evaluate the long-run sustainability of health spending growth. Under the criterion that non-health consumption does not fall, one percent excess cost growth appears to be an upper bound for the economy as a whole when the projection horizon extends over the century, although some groups would experience declines in non-health consumption. More generally, the increase in health spending as a share of income may lead to a significant expansion of public sector financing, as has been the case historically. Extrapolation of historical trends also suggests that higher health spending will lead to insurance contracts with lower out-of-pocket payment shares, putting further upward pressure on health care expenditures.

State and Local Finances and the Macroeconomy: The High–Employment Budget and Fiscal Impetus

We examine the interplay of the economy and state and local budgets by developing and examining two measures of fiscal policy: the high-employment budget and fiscal impetus. We find that a 1 percentage point increase in cyclical GDP results in a 0.1 percentage point increase in NIPA-based net saving through the automatic response of taxes and expenditures. State and local budget policies are found to be modestly pro-cyclical. Stimulus to aggregate demand is about 0.2 percentage point less following a business cycle peak than it is during the period before the business cycle peak.

Fiscal rules, what does the American experience tell us?

We examine the effect of balanced budget rules on budget outcomes in the U.S. from the mid-1980s through the present. Rules at both the federal level and the state level are considered. Given the relatively short duration of the federal rules and corresponding lack of data points, we adopt a narrative approach. Our examination fails to uncover evidence that the statutory rules at the federal level have influenced the size of deficits. The laboratory of the states provides more fertile ground for econometric testing of the influence of balanced budget rules. We test the hypothesis that the strength of a states balanced budget rule influences its response to unanticipated budget shocks. We conclude that rules at the state-level have had a significant influence on budget outcomes.

An Examination of Health-Spending Growth in the United States: Past Trends and Future Prospects

Follette and Sheiner focus on the determinants of the historical and prospective growth in health care spending in the United States. Income and aging had a large role in the past, and the rise in health insurance coverage had a dramatic effect on spending for health care of the elderly. The authors examine the implications for consumption of non-health goods and services of ever increasing expenditure on health care and argue that per capita expenditure persistently outpacing per capita income would not lead to the crowd-outing of non-health consumption. They study the distribution of health spending by income quintile and age group over the next seventy five years, projecting current spending and financing patterns and assuming a given excess growth of spending over income, and find unprecedented levels of private health spending by the lowest quintiles. Finally, Follette and Sheiner assess the implications for the federal budget of two alternatives that may capture the endogenous response by government in the past and they examine two scenarios where government support is reduced, which is inconsistent with past experience but consistent with proposals to scale back entitlement growth in the face of budget pressures.