John T. Warner

Government Spending and Taxation: What Causes What?

In the past few years, as federal deficits have risen to high nominal levels, economists have argued about the effect that raising taxes, ostensibly to reduce deficits, might have on government spending. Some economists, including Milton Friedman, have argued that raising taxes will simply lead to more spending. Others, including James Buchanan and Richard Wagner, have said that the high deficits themselves have been responsible for the growth of federal spending and that if that spending had to be financed completely by direct taxes, people would demand that the federal government spend less. A third group, led by Robert Barro, says that increased taxes and borrowing are results of increased government spending. In section II we briefly review various hypotheses about the relationship between federal government spending and revenues. Section III describes the testing procedure used to discriminate between these hypotheses. The results of four tests are presented in section IV. Section V contains a summary and major conclusions. To foreshadow what follows, we find no evidence that higher real federal taxes today lead to either higher or lower federal spending tomorrow. On the other hand, we find strong evidence that higher spending now will lead to higher taxes later. Our results support a view of the world in which the political system somehow determines how much to spend and then looks for revenue sources to finance that level of spending, including direct taxation, borrowing, and money creation. We also find evidence that real federal revenues are positively affected by real Gross National Product (GNP). Real federal spending also rises with real GNP, but it appears to be independent of the rate of inflation.

The Fisher effect and the term structure of interest rates: Tests of cointegration

The literature on the Fisher effect has ignored the potential relationship between inflation and long-term interest rates. Using an expectations model of the term structure of interest rates, the authors establish the conditions under which innovations in short-term inflation will be transmitted to long-term as well as short-term interest rates. Cointegration tests find support for both the Fisher effect and the expectations theory of the term structure. Copyright 1993 by MIT Press.

The economics of military manpower

The USA and other countries spend a significant portion of their defense budgets on personnel. Effective management of military forces requires an understanding of the economics of military manpower. Over the past three decades economists have produced a substantial body of research about the subject. This chapter distills this literature for a general audience. Topics surveyed include the supply of personnel, personnel productivity and the demand for personnel, procurement by conscription versus voluntary means, the structure of pay, the use of women and reservists, and the civilian return to military training and experience. It also points to directions for future research.

A Theory of Compensation and Personnel Policy in Hierarchical Organizations with Application to the United States Military

A large literature attempts to explain compensation and personnel policies in large organizations. Three features of the U.S. military system—flat rank spreads in pay, a relatively generous pension, and heavy reliance on up‐or‐out promotions—are at variance with common practices in large civilian organizations. This article develops a model of individual decision making in a large, hierarchical organization and uses the model to explain these apparent puzzles. The lack of lateral entry and heterogeneity in entrants’ abilities and preferences for military service play key roles in the observed policies.

The economic theory of a military draft reconsidered

During the debate over conscription in the United States over 20 years ago, most economists argued that a volunteer force was unequivocally more efficient than a draft force. But Dwight Lee and Richard McKenzie recently demonstrated that under certain conditions conscription will be more efficient. However, Lee and McKenzie omitted some important determinants of the relative efficiency of a volunteer system from their analysis. Using their framework as a starting point, this paper develops a more comprehensive model of optimal military manpower procurement system choice. The key findings are that (1) productivity considerations tend to make the volunteer force the more efficient force and recent trends in technology have arguably accentuated this tendency but (2) the larger is the level, and the elasticity, of demand for defense, the more likely the draft is to be the optimal procurement method.

Explaining differences in state growth: Catching up versus Olson

4. Summary and conclusionsIn this paper we have tested various explanations for differences in rates of economic growth across states. We found no evidence consistent with Olsons hypothesis that differences in state age (a proxy for the strength of special interest groups) can explain differences in state growth. Furthermore, our results indicate that a regression containing only initial income explains most of the variation in the growth of state income. In sum, a good part of the more rapid growth of southern and other fast-growing states is simply a convergence to the national average. This convergence is an expected result of basic economic theory, given free trade in goods and factors. Our results are, however, not necessarily a rejection of the Olson hypothesis. It may well be that the hypothesis should only be applied to comparisons between nation-states, not to comparisons between political divisions of the same nation-state. The institutional and political similarities of the American states may swamp the differences and make the Olson hypothesis inapplicable. The tendencies cited by Olson may indeed be present in the American economy, but their differential effect is much too small to explain any of the variation in economic performance across states.

New Economics of Manpower in the Post-Cold War Era

Since the publication of Volume 1 of the Handbook of Defense Economics, key events have shaped the defense manpower research agenda and called for research to help policymakers deal with the challenges that these factors presented. One event was the end of the Cold War, which permitted drastic force reductions in the USA and elsewhere and enabled many NATO members to eliminate conscription. A second event was a rise in college attendance in the USA, which led to recruiting difficulties despite the reduction in accession demand. A third event was increased operational tempo of US forces abroad. Fourth is the rising cost of US military entitlements and a shift toward a greater share of military compensation being deferred. This chapter reviews the recent work that economists have supplied in response to these events. Studies have analyzed the dramatic trend toward volunteer forces in Europe, seeking to explain why some countries chose to end conscription while others did not. Studies of US enlistment supply have estimated the effect of rising college attendance on enlistment and evaluated strategies for mitigating its effect. Studies of operational tempo have provided new theoretical insights about the relationship between operational tempo and retention and empirical evidence about this linkage. Improvements have been made to models relating compensation to retention, and the models been used to address issues relating to the structure of compensation. This chapter reviews these studies and other new contributions to the defense manpower literature. Reserve force issues remain a neglected research area. Despite the heavy reliance on reserve forces in recent US operations abroad, little is known about how changes in activation expectations and activation duration affect reserve recruiting and retention. Such analysis is needed to guide reserve compensation and personnel policy, and this topic represents an important area for future research.

The military recruiting productivity slowdown: The roles of resources, opportunity cost and the tastes of youth*

After a decade of successful recruiting, the US military began experiencing recruiting difficulties in the 1990s. Cyclical factors as well as trend factors may have played a role. This paper uses monthly data by state over the period 1989-1997 to estimate models of enlistment and evaluate the various explanations for the recruiting slowdown. Estimates of the impact of economic variables - relative military pay and unemployment - and recruiting resource variables - recruiters and advertising - are similar to those in previous studies. Two trend factors, rising college attendance and declining adult veteran population (influencers), are found to be important factors explaining the decline in enlistment.

Evasion Costs and the Theory of Conscription

Many countries of Europe are moving from conscripted to volunteer military forces. This paper examines the current status of those conversions and interprets them in light of an economic model of the military manpower procurement system choice developed in Warner and Asch (1996). The theoretical model is expanded to include the social costs of individuals’ attempts to evade conscription and the governments cost of preventing it. Differences in evasion costs may be a significant factor in some European countries’ decisions to keep conscription and other countries’ decisions to end it.

Fed policy and presidential elections

Abstract In this paper, we test the hypothesis that the Federal Reserve attempts to stimulate the economy prior to a presidential election. Our data covers the Johnson, Nixon, and Carter administrations. While we cannot rule out that political pressure has been effectively brought to bear on the Fed prior to some elections, the data do not produce evidence of a systematic move to ease.