Brookings: Series - Issues in Economic Policy

The Effects of Broadband Deployment on Output and Employment: A Cross-sectional Analysis of U.S. Data

Robert W. Crandall, William Lehr and Robert E. Litan — Fri, 01 Jun 2007 12:00:00 -0400

High-speed internet access has developed rapidly in the last decade and is increasingly viewed as essential infrastructure for our global information economy. For example, as recently as mid-2000 there were only 4.1 million broadband lines in the United States and only 3.2 million of these were residential lines. Thus, in mid-2000 less than one household in thirty could access the internet at a download speed of 200 kbps or greater. Six years later, the number of broadband lines, excluding mobile wireless connections, had soared to more than 53.5 million, 49 million of which were in residences. Residential penetration had therefore risen to nearly 50 percent by the middle of last year. (If mobile wireless connections are included, total U.S. broadband lines had risen to more than 64.6 million lines.)

While most communications sector analysts concur that the ability to deliver broadband communications is a critical feature of the modern global communications infrastructure, there is limited recent empirical research on the economic effects of broadband. In particular, much of the available research is now several years old or refers to the benefits of the Internet generally or more broadly of the "digital economy" rather than to the broadband telecommunications infrastructure per se.

This study provides new estimates of the effects of broadband penetration on both output and employment, in the aggregate and by sector, using state level data. We estimate these benefits by using FCC data on broadband penetration for the lower 48 states over the 2003-05 period, controlling for a variety of other factors that also could account for the growth in output and employment during this time. Although the FCC's definition of broadband is broader than we would like - since it includes all connections of 200 Kbps and faster at a time when broadband speeds are routinely greater than 1 Mbps - the FCC penetration data are the most comprehensive and reliable source of such information currently available.

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Globalization and Income Polarization in Rich Countries

Gary Burtless — Sun, 01 Apr 2007 00:00:00 -0400

In the past quarter century income and earnings disparities increased markedly in the United States. One explanation for rising inequality is globalization. The economies of industrial countries have become more closely linked with one another and, even more importantly, with the economies of the developing world. Opponents of free trade argue that liberalized trade with poor countries has reduced the incomes of unskilled workers.

This paper shows how income inequality has changed in rich countries and considers how much of the change can be explained by closer economic integration between rich and poor countries. Globalization can explain part of the growth in wage inequality. Even if globalization fully explained the rise in earnings inequality, however, it would explain only about half the increase in U.S. income inequality. Between 1989 and 2004, U.S. income inequality would have increased substantially even if earnings inequality had remained unchanged. Other factors, unconnected to globalization, contributed to the rise in inequality. These include changes in household composition and changes in female employment patterns that have tended to increase the correlation between the earnings of husbands and wives.

Many kinds of economic and demographic shocks will produce labor market disruption, even if an economy is completely sealed off from the rest of the world. International trade probably adds to these disruptions, but globalization is only rarely the main source of disruption. Many workers who suffer serious loss as a result of economic dislocation receive scant compensation under existing social safety net programs. If we want to ensure the survival of the institutions that allow flexible wages and labor markets and that permit free trade to flourish, it is crucial to improve the protection we provide to vulnerable workers.

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Authors

Gary Burtless

Publication: Economic Studies, The Brookings Institution

Sharing and Reducing the Financial Risks of Future "Mega-Catastrophes"

Robert E. Litan — Wed, 01 Mar 2006 00:00:00 -0500

Abstract

While policymakers and leaders continue to debate the rebuilding of Gulf areas devastated by Hurricane Katrina, a much greater loss looms on the horizon. Katrina exposed more than problems with poverty, emergency management, and infrastructure. The storm also illustrated the inability of private insurance markets to handle large-scale losses. "Mega-catastrophes" are catastrophic events, like Katrina, whose costs are so large and unpredictable that private insurers either are unwilling to insure against them, or charge premiums so high that significant numbers of customers do not want or cannot afford the insurance.

Without policy solutions, federal taxpayers in particular face unnecessarily large burdens for future disaster relief. The time has come for the federal government to convert what is de facto insurance — relief provided "after the fact" — into a formal re-insurance system that assesses the cost of such catastrophic risks before such events occur. This paper includes proposals to establish an independent federal office to operate a catastrophic reinsurance program. In short, the federal government should formally acknowledge and implement what it already has become: an insurer of last resort for mega-catastrophes.

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Robert E. Litan

New Estimates of the Budget Outlook: Plus Ça Change, Plus C'est la Même Chose

Alan J. Auerbach, William G. Gale and Peter R. Orszag — Fri, 10 Feb 2006 00:00:00 -0500

Abstract

Despite substantial attention given to fiscal policy concerns in recent years, the federal government's fiscal status has continued to deteriorate, with the enactment of tax cuts, a massive new Medicare entitlement, increased spending on defense and homeland security, and related economic developments. This paper provides new estimates of the nation's fiscal status over both the 10-year and long-term horizon, based on the most recent (January 2006) Congressional Budget Office official budget figures (CBO 2006). Under plausible assumptions regarding extension of the expiring tax provisions, coverage of the Alternative Minimum Tax, and real discretionary spending growth, we calculate that the 10-year unified budget deficit for 2007–2016 will be $4.8 trillion. Excluding the cash-flow surpluses in the retirement trust funds raises the projected shortfall to $7.8 trillion. Reduced revenue is the most important factor driving the deficits during this period. Over a permanent horizon, the federal government faces a long-term fiscal gap of 10.8 percent of GDP under our assumptions. Increased spending due to demographics explains most of the long-term imbalance. Thus, a simple way to summarize the fiscal status of the government is to note that the retirement trust funds face substantial long-term deficits, and the rest of the government faces deficits in excess of 4 percent of GDP over the next decade. Dealing with these imbalances will require spending cuts or tax increases that are far beyond the scale of anything currently considered politically palatable.

I. Introduction

Despite substantial attention given to fiscal policy concerns in recent years, the federal government’s fiscal status has continued to deteriorate, with the enactment of tax cuts, a massive new Medicare entitlement, increased spending on defense and homeland security, and related economic developments. This paper provides new estimates of the nation’s fiscal status over both the 10-year and long-term horizon, based on the most recent ( January 2006) Congressional Budget Office official budget figures (CBO 2006). Our general conclusions are not surprising: under plausible assumptions, the nation faces significant short- and medium-term deficits and massive long-term shortfalls. Dealing with these problems will require spending cuts or tax increases that are far beyond the scale of anything currently considered politically palatable. Our specific conclusions include the following:

CBO now projects a 10-year baseline deficit of $831 billion in the unified budget for fiscal years 2007 to 2016. The budget outside of Social Security faces a baseline deficit of $3.4 trillion.
Over the first five years of the Bush Administration, the 10-year fiscal outlook deteriorated by $8.3 trillion. In January 2001, the unified baseline for 2002 to 2011 projected a surplus of $5.6 trillion. The baseline for the same period now projects a deficit of $2.7 trillion.
The budget projections have deteriorated since the beginning of 2005. On a comparable basis, the baseline 10-year unified deficit for 2006 to 2015 has risen by almost $400 billion since January 2005.

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Alan J. Auerbach
William G. Gale
Peter R. Orszag

The Budget Crisis: Is It All Déjà Vu?

Barry P. Bosworth — Wed, 01 Feb 2006 00:00:00 -0500

Abstract

Large and sustained budget deficits have re-emerged as a central focus of the debate over U.S. economic policy. The parallels between today's situation and the large deficits of the 1980s are striking in several dimensions. Is it possible that history will simply repeat itself, and a return to the budget discipline of the 1990s will again restore balance? This paper looks back at the efforts after 1981 to resolve the conflict over how to reduce the budget deficit. Historical data from the Congressional Budget Office are used to determine the extent which changes in the budget balance can be traced to legislative actions as opposed to unforeseen changes in the economic situation and technical revisions. The paper distinguishes among three periods: (1) a period of budget stalemate from 1981–95, (2) the emergence of budget surpluses after 1995, and (3) the reappearance of deficits in 2000–2005. The elimination of the budget deficit in the late 1990s is traced to a highly fortuitous set of economic circumstances that are unlikely to be repeated.

The second part of the paper examines the fiscal outlook over both the next decade and a longer horizon in which the aging of the population emerges as a significant budget concern. The short-term outlook is dominated by a single critical decision of whether to extend the tax reductions of 2001–2003. In the longer term, the central issue is how to control outlays of the Medicare and Medicaid programs. The paper concludes with a discussion of the U.S. experience with budget rules and various reforms to the budget process.

The Budget Crisis: Is It All Déjà Vu?

Large and sustained budget deficits have re-emerged as a central focus of the debate over U.S. economic policy. For those with memories of the acrimonious budget conflicts of the 1980s, this is discouraging news. Members of the two political parties spent over a decade blaming the other for the deficits, while essentially doing nothing. However, the optimists among us can counter with the reminder that the logjam was ultimately broken in the 1990s, and the U.S. actually enjoyed substantial budget surpluses by the end of the decade. Is it possible that history will simply repeat itself, and a return to the budget discipline of the 1990s will again restore balance?

The parallels between today's situation and that of the 1980s are striking in several dimensions. David Stockman, Ronald Reagan's first budget director, is alleged to have referred to a future of "$200 billion budget deficits as far as the eye can see." In 2004, a Washington study group resurrected the Stockman quote in projecting budget deficits of $300 billion per year, again "as far as the eye can see." It might seem as though little has changed.

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Barry P. Bosworth

Global Imbalances: The Blind Men and the Elephant

Barry Eichengreen — Sun, 01 Jan 2006 00:00:00 -0500

Abstract

This paper reviews competing explanations for the pattern of global imbalances and the magnitude of the U.S. external deficit. It argues that, far from being incompatible, existing explanations are all parts of the larger story. The decline in savings rates in the United States has played an important role in the emergence of global and U.S. imbalances. At the same time, favorable productivity trends have made the U.S. a more appealing place to invest, attracting foreign savings that help to underwrite U.S. investment and finance the current account. The so-called global savings glut is a factor in the global imbalance insofar as it supports capital flows to and investment in the United States. Finally, the Sino-American co-dependency view emphasizes how Asian countries, owing to a combination of heightened risk aversion following the 1997–8 crisis and their continued commitment to export-led growth, are happy with a situation where export demand is disproportionately important relative to domestic demand, a position that is sustained by undervalued exchange rates and reflected in rapid U.S. import growth.

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Authors

Barry Eichengreen