Lecture 1: Introduction to Public Economics Antoine Bozio Paris School of Economics (PSE) Ecole´ des hautes ´etudesen sciences sociales (EHESS) Master APE and PPD Paris { September 2021 1 / 80 Practical Informations • One course, three professors • Antoine Bozio • Julien Grenet • Thomas Piketty • Related courses at PSE • Economic History (Thomas Piketty) • Optimal Taxation (St´ephaneGauthier) • Ageing and Public Policy (Antoine Bozio) • How to reach me ? • E-mail : [email protected] • Office Hours : Tuesday, 9.30-10.30am, Campus Jourdan, Office R3-15 • Please send an email to make sure I am available 2 / 80 Practical Informations • Reading list in the syllabus • Articles with * are mandatory reading • Feed your intellectual curiosity • Tutorials • TA : Jeanne Bomare • 3 sessions, 3 problem sets • Evaluation • 1 Problem set 2 marked ( 3 of final grade) • 2 Exam at the end of term ( 3 of final grade) • Material : slides and articles with * • Example of past exams on the web site 3 / 80 Public Economics In Search of Good Government Figure 1 { The Allegory and Effects of Good Government Source : Wikipedia ; Ambrogio Lorenzetti, “Effeti del buon governo in citt`a",Palazzo Pubblico, Siena. 4 / 80 What is Public Economics ? • What's in a name ? { \Political economy" (18th c.) { \Public finance” (19th c.) { \Public economics" (1960s) • Public finance vs public economics • In the U.S., still \public finance”, but very different from finances publiques • Public economics is about the economics of the public sector (cf. German Staatswirtschaft) • Aiming to answer two types of questions : (i) How do government policies affect the economy ? (positive approach) (ii) How should government policies be designed to attain certain objectives ? (normative approach) 5 / 80 Historic overview of the field • Political Economy in the 18th c. • Adam Smith, John Stuart Mill, David Ricardo, Karl Marx, etc. (see Musgrave, 1985) • Tariff policy (international trade) • Public goods (A. Smith) • Taxation (Physiocrats, D. Ricardo) • Adam Smith in The Wealth of nations (1776) • \Canons of taxation" 1 Equality 2 Certainty 3 Convenience of payment 4 Economy of collection 6 / 80 National traditions of public finance • German school, \Staatswirtschaft" • Economists more favorable to public sector, so-called \pulpit socialists" (Kathedersozialismus) e.g., Werner Sombart, Adolph Wagner, Gustav von Schmoller • French school • Marginal calculus, public sector pricing, optimal taxation • Engineers working in public utilities (Ponts, Mines, EDF) e.g., Jules Dupuit, Maurice Allais, Marcel Boiteux (Kolm, 2010) • Italian school, \Scienza delle Finanze" • Marginal utility, the State as nexus of interests e.g., Antonio de Viti de Marco, Maffeo Panteleoni • Stockholm school, \Stockholmsskolan" • Macroeconomic stabilisation, welfare states e.g., Knut Wicksell, Gunnar Myrdal, Bertil Ohlin, Erik Lindahl 7 / 80 Historic overview of the field • Welfare economics • Development of public economics with Musgrave and Samuelson in the 1950s (see Dreze, 1995) • Theoretical progress with mathematical analysis • Three \branches" of government (Musgrave 1959) 1 Resource allocation to address market failures 2 Income redistribution 3 Macroeconomic stabilization • Recent developments • Split with macroeconomics (in the 1970s) • Focus on empirical approaches 8 / 80 Why choose Public Economics ? \I admit to more than only a scientific motivation ; intelligent and civilized conduct of government and the delineation of its responsibilities are at the heart of democracy. (...) [It] requires an understanding of the economic relations involved ; and the economist, by aiding in this understanding, may hope to contribute to a better society." Richard A. Musgrave Preface to The Theory of Public Finance. A Study in Public Economy (1959) 9 / 80 Why choose Public Economics ? 1 Relevance • Public economics is about improving economic welfare • Public economics is about good government • Public policies affect millions of people 2 A dynamic academic field • At the frontier in applied microeconomics : cf. \credibility revolution" (Angrist and Pischke, 2010) • Tight integration of theory and data • Large use of big data • Strong interactions with other fields : labour, behavioural economics, I.O., macro, etc. 10 / 80 Empirical methods in public economics 1 Quasi-experimental methods • Variety of methods : DiD, event-studies, RDD, RKD, bunching, etc. • Emphasis on non-parametric graphical techniques : \Show me the graph !" 2 Sufficient statistics approach • Structural vs reduced-form debate (Rosenzweig and Wolpin, 2000) • Sufficient statistics : theory is used to derived formulas based on empirical estimates (Chetty, 2009) 3 Big data have transformed empirical research { Scanner data on consumer purchases { Administrative tax data { Administrative social security data 11 / 80 Figure 2 { Language trends in Public Economics 100% Regulation, Public Goods, etc 90% Political Economy 80% 70% Transfers 60% 50% Education Fraction ofWords Fraction 40% 30% Taxes 20% Poterba PE Director 10% 0% Year Notes : The graph shows the frequency of words within different topics as a fraction of all words across topics. The sample comprises all NBER working papers 1975{2018 tagged \public economics" (4676 papers). Source : Kleven (2018), \Language trends in Public Economics" [see slides]. 12 / 80 Figure 3 { The Rise of Identification 60% 50% 40% 30% Fraction of Papers Fraction 20% 10% 0% Year Notes : The graph shows the fraction of papers that mention the word “identification” in the context of empirical identification. The sample comprises all NBER working papers 1975{2018 tagged \public economics" (4676 papers). Source : Kleven (2018), \Language trends in Public Economics" [see slides]. 13 / 80 Figure 4 { The Rise of Quasi-Experiments 25% Diff-in-Diff Regression Discontinuity 20% Bunching Event Study 15% 10% Fraction of Papers Fraction 5% 0% Year Notes : The graph shows the fraction of papers that refer to each type of quasi-experiment. The sample comprises all NBER working papers 1975{2018 tagged \public economics" (4676 papers). Source : Kleven (2018), \Language trends in Public Economics" [see slides]. 14 / 80 Figure 5 { The Rise of Administrative Data 35% 30% 25% 20% 15% Fraction ofPapers Fraction 10% 5% 0% Year Notes : The graph shows the fraction of papers that mention the words \administrative data" in the context of empirical identification. The sample comprises all NBER working papers 1975{2018 tagged \public economics" (4676 papers). Source : Kleven (2018), \Language trends in Public Economics" [see slides]. 15 / 80 Figure 6 { Use of Survey Data in top Journals, 1980{2010 Source : Chetty and Bruich (2012), Public Economics Lectures. Notes : \Survey" datasets refer to micro surveys such as the CPS or SIPP and do not include surveys designed by researchers for their study. Sample excludes studies whose primary data source is from developing countries. 16 / 80 Figure 7 { Use of Admin Data in top Journals, 1980{2010 Source : Chetty and Bruich (2012), Public Economics Lectures. Notes : \Administrative" datasets refer to any dataset that was collected without directly surveying individuals (e.g., scanner data, stock prices, school district records, social security records). Sample excludes studies whose primary data source is from developing countries. 17 / 80 A broad set of skills required • Moral philosophy • What is justice ? What is fair ? • Institutional knowledge • Government policies are complex • Details matter • Economic theory • Welfare economics : micro, macro, IO, etc. • Optimal tax theory • Empirical methods • Reduced form vs structural approaches • Ex-ante vs ex-post policy evaluations 18 / 80 Course outline 1 Introduction to public economics [A. Bozio] 2 Tools of welfare analysis [J. Grenet] 3 Externalities [J. Grenet] 4 Public good [J. Grenet] 5 Commodity taxation [A. Bozio] 6 Labour income taxation [A. Bozio] 7 Labour income taxation [A. Bozio] 8 Preferences aggregation and intertemporal justice [T. Piketty] 9 Wealth and property taxation [T. Piketty] 10 Optimal taxation of capital [T. Piketty] 11 Corporate taxation [A. Bozio] 12 Social insurance [J. Grenet] 19 / 80 Lecture outline I. Public spending and taxation II. Normative theories of social justice III. Rationales of government interventions 20 / 80 I. Public spending and taxation 1 Growth of the State 2 Theories aiming at explaining growth of the State 3 Background facts on public spending 4 Background facts on public taxation 21 / 80 Growth of the State • Minimal state in the 19th c. • Public spending ≈ 10% of GDP • Almost no social spending • Huge growth in the 20th c. • 1920s : States doubled in size compared to 19th c. • Strong acceleration during the period 1960{1980 • See Lindert Growing Public (2004) for detailed documentation about this expansion • High level today, with some heterogeneity • Public spending today ≈ 45% of GDP • Heterogeneity in the total level : • France, Sweden ≈ 55% GDP • U.S. and Japan ≈ 40% GDP 22 / 80 Figure 8 { Public Spending (% of GDP), 1870{2014 80% Sweden 70% France 60% Germany United Kingdom 50% United States Japan 40% 30% 20% 10% 0% 1860 1880 1900 1920 1940 1960 1980 2000 2020 Source : Bozio and Grenet (2010), figure 1. Tanzi and Schuknecht (2000) for period 1870-1960 ; OECD Historical Statistics (2001) for period 1968-1988 ; OECD.Stat for period 1989-2014. 23 / 80 Figure 9 { Social Spending (% of GDP), 1880{2016 35% France Germany 30% Japan Sweden 25% United Kingdom United States 20% Denmark 15% 10% 5% 0% 1880 1900 1920 1940 1960 1980