How Do Politicians Save? Buffer Stock Management of Unemployment Insurance Finance
48 Pages Posted: 25 Jun 2013
Date Written: June 2013
Abstract
This paper successfully fits a model of forward looking government savings behavior to data from the U.S. state Unemployment Insurance (UI) programs 1976-2008. Specifically, we find states do not perfectly smooth tax rates in Barro's sense, but follow behavior consistent with a buffer stock model where politicians trade-off their desire to immediately expend all savings against the fear of running out of funds. We find that states increase benefits or lower taxes when savings balances are high. State UI budgets, as rationalized by the buffer stock model, display surpluses that are more pro-cyclical than Barro's model would imply but substantially less cyclical than contemporaneous budget balance.
Keywords: forward looking politicians, impatience, precautionary saving
JEL Classification: E21, H11, H74
Suggested Citation: Suggested Citation