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On The Long-Term Macroeconomic Effects Of Social Spending In The United States

  • Alfredo Marvão Pereira

    ()

    (Department of Economics, The College of William and Mary)

  • Jorge M. Andraz

    ()

    (Faculdade de Economia, Universidade do Algarve)

We estimate the long-term impact of changes in social security and social protection spending on economic performance in the USA. We estimate a VAR model relating GDP, unemployment rates, saving rates, and social spending. Our results suggest that social spending has significant distortionary effects in the labor markets as measured by its long term effects on the unemployment rate, which translate into a detrimental effect on long-term output, this despite a positive, albeit small, effect on the gross savings rate. There are important policy implications of these results. If one considers the systems as they are, any further expansion in their generosity would have detrimental long-term effects. These detrimental effects, however, are neither an indictment of social spending or evidence against extension of benefits. What they highlight is the need to carefully consider the financing mechanisms currently used and the need to align benefits and contributions in the pension component of social security and the need to find a taxrevenue mix that is less distortionary for the unfunded benefits.

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File URL: http://economics.wm.edu/wp/cwm_wp151.pdf
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Paper provided by Department of Economics, College of William and Mary in its series Working Papers with number 151.

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Length: 9 pages
Date of creation: 12 Apr 2014
Date of revision:
Handle: RePEc:cwm:wpaper:151
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Web page: http://www.wm.edu/economics/

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  1. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1329-1368, November.
  2. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The effects of monetary policy shocks: evidence from the Flow of Funds," Working Paper Series, Macroeconomic Issues 94-2, Federal Reserve Bank of Chicago.
  3. Michael Bräuninger, 2005. "Social Security, Unemployment, and Growth," International Tax and Public Finance, Springer, vol. 12(4), pages 423-434, August.
  4. Ramon Marimon & Fabrizio Zilibotti, 1997. "Unemployment vs. Mismatch of Talents: Reconsidering Unemployment Benefits," NBER Working Papers 6038, National Bureau of Economic Research, Inc.
  5. Afonso, António & González Alegre, Juan, 2008. "Economic growth and budgetary components: a panel assessment for the EU," Working Paper Series 0848, European Central Bank.
  6. Benos, Nikos, 2009. "Fiscal policy and economic growth: empirical evidence from EU countries," MPRA Paper 19174, University Library of Munich, Germany.
  7. Gonzalo, J. & Lee, T.H., 1995. "Pitfalls in Testing for Long Run Relationships," Papers 38, Boston University - Department of Economics.
  8. Valerie A. Ramey, 2011. "Can Government Purchases Stimulate the Economy?," Journal of Economic Literature, American Economic Association, vol. 49(3), pages 673-85, September.
  9. Andrew A. Samwick, 2000. "Is Pension Reform Conducive to Higher Saving?," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 264-272, May.
  10. Rudebusch, Glenn D, 1998. "Do Measures of Monetary Policy in a VAR Make Sense? A Reply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 943-48, November.
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