Disagreement, Delay, and Deficits

“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.

Disagreement, Delay, and DeficitsJessica WallackGraduate School of International Relations and Pacific Studies

University of California, San Diego

Why are fiscal (and other) reforms delayed?

Distributional conflict …… but how does distributional conflict turn into delay?

• The accuracy, timeliness, and availability of 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.

Variance Effect

Opinions about cost of deficit

Inaccurate common information shifts average policymaker’s belief

Mean Effect

Opinions about cost of deficit

The presence of common information reduces variation in beliefs…… however, less accurate common information reduces variation less.

Consequences of Inaccurate Information:Mean Effect vs. Variance Effect

Findings

Countries with accurate economic statistics reduce high deficits faster than countries with less accurate economic statistics.

Executive-centered systemsalso reduce high deficits faster

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)

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)

Spearman CorrelationsInformation Quality, Political Institutions, Governance

Mon. Capcy

PWT Var.

WB Rating

Info Index Parl

Polarization # Chx

Democ LnGDP

Trans

Monitoring Capacity 1.000

PWT Variance 0.279 1.000

WB Rating 0.307 0.182 1.000

Info Index 0.716 0.378 0.819 1.000

Parliamentary 0.415 0.080 0.184 0.167 1.000

Polarization 0.342 0.334 0.405 0.280 0.286 1.000

# Checks 0.346 0.282 0.490 0.332 0.581 0.708 1.000

Democracy 0.460 0.299 0.347 0.292 0.587 0.603 0.746 1.00

Ln(GDPpc) 0.620 0.395 0.387 0.488 0.497 0.601 0.645 0.649 1.00

Transparency 0.564 0.290 0.271 0.167 0.487 0.518 0.473 0.602 0.650

Bur. Quality 0.657 0.275 0.198 0.277 0.550 0.479 0.572 0.557 0.699 0.757

Accuracy of Economic Statistics

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.

Summary StatisticsObservations Mean Standard

DeviationMinimum Maximum

Primary Deficit/GDP 2234 0.689 4.790 -23.800 46.272

Deficit/GDP 3239 3.214 5.224 -22.631 66.231

CCG Savings/GNDI 2750 -2.546 6.220 -38.316 46.307

Public Sector Deficit 804 4.171 4.889 -10.400 27.400

PWT Variance 5240 0.783 0.243 0.200 1.000

Monitor 4800 0.522 0.321 0.000 1.000

WB Rating 4960 0.466 0.231 0.000 0.875

Info Index 2960 2.604 1.000 0 4.932

Parliamentary 6760 0.769 0.835 0.000 2.000

Polarization 6720 0.339 0.569 0.000 2.000

# Checks 6760 2.430 1.388 1.000 7.333

Ln(GDPpc) 5021 8.200 1.047 5.639 10.692

Transparency 4720 3.345 1.389 0.107 6.000

Bur. Qual. 4720 3.206 1.505 0.893 6.000

Democ Index 5031 3.752 4.213 0 10

Democracy (>4, Polity Scale 5031 0.432 0.495 0 1

Basic Error Correction Model with Asymmetric Adjustment

Δdt = α +β1 (dj,t-1 – dj*) +β2 T*(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 (-)

Primary Deficit/GDP Deficit/GDP

Public Sector Deficit/GDP

CCG Savings/GNDI

Distance from

mean: 1 -0.474*** -0.380*** -0.370*** -0.261***

(0.078) (0.046) (0.069) (0.035)Distance from mean* Above

mean: 2 0.209** 0.156** 0.076 0.065(*)

(0.094) (0.075) (0.091) (0.040)

Observations 1871 2732 756 2367

Countries 88 104 46 113 R2 0.18 0.146 0.133 0.078

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

Significant Asymmetry

Political and Information Effects: Fixed Effects with Interaction

TermsΔdt = α

+β1(dj,t-1 – dj*)

+β2 Tj,t-1*(dj,t-1 – dj*)

+β3 Infoj*(dj,t-1 – dj*)

+β4 Infoj*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

Slow Adjustment, Below-Average Information Quality

Deficit Reduction Speed: -0.281Information Rating: 0.6

Medium Adjustment, Below Average Information Quality

Deficit Reduction Speed: - 0.417InformationRating: 0.60

Faster Adjustment, Better Information Quality

Deficit Reduction Speed: -0.596InformationRating: 0.8

Medium Adjustment, Best Information Quality

Deficit Reduction Speed: -0.468InformationRating: 1

Fast Adjustment, Best Information Quality

Deficit Reduction Speed: -1.070Information Rating: 1.00

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.

Effect of Information Accuracy on Deficit Reduction Speed: (

Extra percentage points of above-average deficit reduced in a given year from having maximum (1) information quality instead of minimum (0).

Info. Var./+ Control Var.

Primary Deficit/GDP

CG Deficit / GDP

Public Sector Deficit/GDP

CCG Dissavings/GNDI

PWT Variance -0.031 -0.144 -0.091 -0.241***

+ Parliament -0.124(*) -0.262* -0.010 -0.334***

+ Polarization -0.251*** -0.311* 0.006 -0.364***

+ # Checks -0.194*** -0.230* -0.031 -0.365***

+ Ln(GDPpc) 0.017 -0.068 -0.081 -0.395***

+ Bur. Qual. -0.218** -0.212* 0.039 -0.442***

+ Transparency -0.140* -0.193** 0.003 -0.394***

+ Democracy -0.171** -0.238* -0.073 -0.378***

+ Lagged Debt -0.362** -0.407*** -0.029 -0.294***

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.

Info. Var./+ Control Var

Primary Deficit/GDP

CG Deficit / GDP

Public Sector Deficit/GDP

CCG Dissavings/GNDI

Info Index 0.086 0.013 -0.095(*) -0.038***

+ Parliament 0.091(*) 0.011 -0.098(*) -0.040**

+ Polarization 0.119** 0.009 -0.108(*) -0.021

+ # Checks 0.086 0.002 -0.099(*) -0.018

+ Ln(GDPpc) 0.121(*) 0.006 -0.088 -0.042(*)

+ Bur. Qual. 0.092(*) 0.009 -0.072* -0.091***

+ Transparency 0.091(*) 0.018 -0.064(*) -0.056**

+ Democracy 0.085 0.008 -0.111* -0.032(*)

+ Lagged Debt -0.003 0.050 0.006 -0.101(*)

Primary Deficit vs. Public Deficit(Low Information Quality)

Primary Deficit vs. Public Deficit(Higher Information Quality)

Effect of Political Institutions on Reduction Speed

Pol Var/Info. Var Prim Deficit/GDP

CG Deficit/ GDP

PS Deficit/GDP

CCG Dissavings/GNDI

Parliamentary

PWT Var 0.119*** 0.003 0.112*** 0.066*

Info Index 0.122*** 0.025 0.101 0.048

Polarization

PWT Var 0.071** 0.035 0.028 0.001

Info Index 0.434 0.039 0.087 -0.142

Checks

PWT Var 0.033 -0.016(*) 0.063** 0.001

Info Index 0.004 0.032 0.048 -0.041

Democracy

PWT Var 0.006 -0.037*** 0.022 -0.009

Info Index 0.008 0.008 0.02 -0.007

Effect of Governance Quality on Reduction Speed

Governance Var./Info. Var

Prim Deficit/GDP

CG Deficit/ GDP

PS Deficit/GDP

CCG Dissavings/GNDI

Level of Development

PWT Var 0.002 -0.065 0.003 0.048*

Info Index -0.149(*) 0.017 -0.028 0.011

Bureaucratic Quality

PWT Var 0.064* -0.016 0.021 0.038(*)

Info Index 0.088 0.121(*) -0.105 0.118***

Transparency

PWT Var -0.003 -0.023 0.031*** 0.013

Info Index -0.061 0.046(*) -0.167 0.064

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.

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 settingsInteraction with underlying disagreement

• Other questions to ask about data: Bias of data providersTimeliness

• What factors lead to investment in better publicly available information?

“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.

Primary Deficit/GDP Deficit/GDP

Public Sector Deficit/GDP

CCG Savings/GNDI

Distance from

mean: 1 -0.411*** -0.130(*) -0.103 -0.084*

(0.089) (0.086) (0.096) (0.051)Distance from mean* Above

mean: 2 0.135 -0.176 -0.101 0.059**

(0.125) (0.135) (0.088) (0.026)

Observations 739 1000 221 802

Countries 43 58 23 57 R2 0.245 0.16 0.072 0.074

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

Significant AsymmetryBenchmark: Sustainable Deficit

Effect of Information Accuracy on Deficit Reduction Speed: (

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).

Info. Var./+ Control Var.

Primary Deficit/GDP

CG Deficit / GDP

Public Sector Deficit/GDP

CCG Dissavings/GNDI

PWT Variance -0.095 -0.031*** -0.035 -0.055

+ Parliament -0.083 -0.056*** 0.020 -0.050

+ Polarization -0.186* -0.076*** -0.017 -0.067

+ # Checks -0.116(*) -0.063*** 0.005 -0.045

+ Ln(GDPpc) -0.225* -0.070*** 0.032 -0.163*

+ Bur. Qual. -0.108 -0.020(*) -0.001 -0.067

+ Transparency -0.045 -0.040** 0.005 -0.056

+ Lagged Debt -0.101 -0.026* -0.020 -0.092

Deficit Reduction Speeds: Individual Country Estimates

Deficit Measure

# Countries Mean

Std. Deviation Minimum Maximum

Primary Deficit

88 -0.274 0.400 -2.186 0.929

CG Deficit

104 -0.358 0.313 -1.206 0.536

CCG Dissaving

113 -0.225 0.291 -1.268 0.574

Public Sector Deficit

46 -0.318 0.264 -1.068 0.141

Adjustment Speed and Information Quality

(OLS on Country Estimates)

Robust standard errors in parentheses.

Speed of PS Deficit Reduction

Speed of CCG Dissavings Reduction

PWT Variance -1.875 -1.463***

(1.693) (0.483)

PWT Var (Sq) 1.340 1.080***

(1.112) (0.375)

Constant 0.261 0.194

(0.616) (0.137)

Max Adjustment Spd

0.700 0.677

# Observations 43 101

R-sq 0.015 0.062

Adjustment Speed and Information Quality

(OLS on Country Estimates)

Speed of PS Deficit Reduction

Speed of CCG Dissavings Reduction

Information Index

-0.122 -0.044*

(0.094) (0.255)

Constant -0.266** -0.254***

(0.106) (0.039)

# Observations 20 56

R-sq 0.116 0.026

Robust standard errors in parentheses.