Guido Tabellini

Political and monetary institutions and public financial policies in the industrial countries

Institutions and policies Vittorio Grilli, Donato Masciandaro and Guido Tabellini Why do countries as similar as the industrialized OECD countries go through such different experience in terms of public deficits and debts or in terms of inflation? The answer cannot come from macroeconomic policy responses to different disturbances, nor from the principles of optimal taxation, but rather from politics. This article focuses on the role that particular institutions exert in providing constraints and incentives which shape the actions of policymakers. The electoral process and political traditions affect the ability of governments to deal with deficits and mounting debts. What seems to matter most, it is found, is the effect of the durability of governments. Governments with short horizons act myopically and never quite tackle the hard choices. Such governments typically exist in countries with an electoral system favouring many small political parties. Central bank independence promotes low inflation with no apparent costs in terms of real economic performance, irrespective of the political institutions. In fact there is no link between monetary and fiscal discipline. These findings carry powerful implications for countries facing high indebtedness or stubborn inflation, but also for the construction of the European Economic and Monetary Union.

A Positive Theory of Fiscal Deficits and Government Debt

This paper considers an economy in which policymakers with different preferences alternate in office as a result of elections. Government debt is used strategically by each policymaker to influence the choices of his successors. If different policymakers disagree about the desired composition of government spending between two public goods, the economy exhibits a deficits bias; that is, debt accumulation is higher than it would be with a social planner. The equilibrium level of debt is larger the larger is the degree of polarization between alternating governments and the less likely it is that the current government will be re-elected.

Unemployment, growth and taxation in industrial countries

To the layperson, the upward trend in European unemployment is related to the slowdown in economic growth. We argue that the layperson’s view is correct. The increase in European unemployment and the slowdown in economic growth are related because they stem from a common cause: an excessively high cost of labour. In Europe, labour costs have gone up for many reasons, but one is particularly easy to identify: higher taxes on labour. If wages are set by strong and centralized trade unions, an increase in labour taxes is shifted onto higher real wages. This has two effects. First, it reduces labour demand, and thus creates unemployment. Second, as firms substitute capital for labour, the marginal product of capital falls; over long periods of time, this in turn diminishes the incentive to accumulate and thus to grow. Thus high unemployment is associated with low growth rates. The model also predicts that the effect of labour taxation differs sharply in countries with different labour market institutions. We test these predictions on data for 14 industrial countries between 1965 and 1991, and find striking support for them. In particular, labour taxes have a strong positive effect on unemployment only in Europe and not in other industrial countries. The observed rise of about 9 percentage points in labour tax rates can account for a reduction of the EU growth rate of about 0.4 percentage points a year, about one-third of the observed reduction in growth between 1965–75 and 1976–91, and a rise in unemployment of about 4 percentage points.

The Size and Scope of Government: Comparative Politics with Rational Politicians

We try to demonstrate how economists may engage in research on comparative politics, relating the size and composition of government spending to the political system. A Downsian model of electoral competition and forward-looking voting indicates that majoritarian—as opposed to proportional—elections increase competition between parties by focusing it into some key marginal districts. This leads to less public goods, less rents for politicians, more redistribution and larger government. A model of legislative bargaining and backward-looking voting indicates that presidential—as opposed to parliamentary—regimes increase competition between both politicians and voters. This leads to less public goods, less rents for politicians, less redistribution, and smaller government. We confront these predictions with cross-country data from around 1990, controlling for economic and social determinants of government spending. We …nd strong and robust support for the prediction that the size of government is smaller under presidential regimes, and weaker support for the prediction that majoritarian elections are associated with less public goods.

Comparative Politics and Public Finance

This paper presents a model of electoral accountability to compare the public finance outcomes under a presidential-congressional and a parliamentary system. In a presidential-congressional system, contrary to a parliamentary system, there are no endogenous incentives for legislative cohesion, but this allows for a clearer separation of powers. These features lead to clear differences in the public finance performance of the two systems. A parliamentary system has redistribution towards a majority, less underprovision of public goods, more waste and a higher burden of taxation, whereas a presidential-congressional system has redistribution towards a minority, more underprovision of public goods, but less waste and a smaller size of government.

Designing institutions for monetary stability

Abstract Lack of credibility or political feasibility are typically cited as serious obstacles to achieving monetary stability. We ask what kind of institutional reforms may help resolve such incentive problems in monetary policy, by help of the new theory of information, contracts and regulatory design. Credibility problems can be resolved by a remarkably simple performance contract that imposes a linear penalty for inflation on the central bank. Results extend when contracts cannot be conditioned on the state of the economy, in which case central bank announcements become important. When only incomplete and simple contracts can be embodied in the central banking institution, a tradeoff between incentives and information emerges; however, optimum institution design may circumvent the tradeoff between credibility and flexibility that has been stressed in the literature.

Political Economics and Macroeconomic Policy

This paper surveys the recent literature on the theory of macroeconomic policy. We study the effect of various incentive constraints on the policy making process, such as lack of credibility, political opportunism, political ideology, and divided government. The survey is organized in three parts. Part I deals with monetary policy in a simply Phillips curve model: it covers credibility issues, political business cycles, and optimal design of monetary institutions. Part II deals with fiscal policy in a dynamic general equilibrium set up: the main topics here are credibility of tax policy, and political determinants of budget deficits. Part III studies economic growth in models with endogenous fiscal policy.

Institutions and Culture

How and why does distant political and economic history shape the functioning of current institutions? This paper argues that individual values and convictions about the scope of application of norms of good conduct provide the missing link. Evidence from a variety of sources points to two main findings. First, individual values consistent with generalized (as opposed to limited) morality are widespread in societies that were ruled by non-despotic political institutions in the distant past. Second, well functioning institutions are often observed in countries or regions where individual values are consistent with generalized morality, and under different identifying assumptions this suggests a causal effect from values to institutional outcomes. The paper ends with a discussion of the implications for future research.

Democratic Capital: The Nexus of Political and Economic Change

We study the joint dynamics of economic and political change. Predictions of the simple model that we formulate in the paper get considerable support in a panel of data on political regimes and GDP per capita for about 150 countries over 150 years. Democratic capital -- measured by a nations historical experience with democracy and by the incidence of democracy in its neighborhood -- reduces the exit rate from democracy and raises the exit rate from autocracy. In democracies, a higher stock of democratic capital stimulates growth in an indirect way by decreasing the probability of a successful coup. Our results suggest a virtuous circle, where the accumulation of physical and democratic capital reinforce each other, promoting economic development jointly with the consolidation of democracy.

Constitutional Rules and Fiscal Policy Outcomes

We investigate the effect of electoral rules and forms of government on fiscal policy outcomes in a large sample of democracies. We rely on different estimation methods to address prospective problems of statistical inference, due to nonrandom selection of these constitutional rules. The findings are consistent with our theoretical priors: presidential regimes induce smaller governments than parliamentary democracies, while majoritarian elections lead to smaller governments and smaller welfare programs than proportional elections.