What Remains of the Theory of Demand Management in a Globalizing World?

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  One might expect that rising US income inequality would reduce demand growth and create a drag on the economy because higher-income groups spend a smaller share of income. But during a quarter century of rising inequality, US growth and employment were reasonably strong, by historical standards, until the Great Recession. This paper analyzes this paradox by disaggregating household spending, income, saving, and debt between the bottom 95 percent and top 5 percent of the income distribution. We find that the top 5 percent did indeed spend a smaller share of income, but demand drag did not occur because the spending share of the bottom 95 percent rose, accompanied by a historic increase in borrowing. The unsustainable rise in household leverage concentrated in the bottom 95 percent ultimately spawned the Great Recession. The demand drag of rising inequality could be one explanation for the stagnant recovery in the recession’s aftermath.

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• Working Paper No.1042 13 February 2024

  Saving Social Security

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  For more than 25 years, the Social Security Trust Fund was projected to run out of money in 2033 (give or take a few years), potentially causing benefits to be severely reduced in the absence of corrective legislative action. Today (February 2024), projections are made by the Social Security Administration that indicate that future benefits will need to be reduced by roughly 25 percent or taxes will need to be increased by about 33 percent, or some combination to avoid benefit curtailment. While Congress will most probably prevent benefits from being reduced for retirees and those nearing retirement, the longer Congress and the president take to address the shortfall, the more politically unpalatable (and possibly draconian) the solutions will be for all others.

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  COP28 and Environmental Federalism: Empirical Evidence from an Emerging Economy, India

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  Against the backdrop of COP28, this paper investigates the impact of intergovernmental fiscal transfers (IGFT) on climate change commitments in India. Within the analytical framework of environmental federalism, we tested the evidence for the Environmental Kuznets Curve (EKC) using a panel model covering 27 Indian states from 2003 to 2020. The results suggest a positive and significant relationship between IGFT and the net forest cover (NFC) across Indian states. The analysis also suggests an inverse-U relationship between Gross State Domestic Product (GSDP) and the environmental quality, indicating a potential EKC for India. The findings substantiate the fiscal policy impacts for climate change commitments within the fiscal federal frameworks of India, and the significance of IGFT in increasing the forest cover in India. This has policy implications for the Sixteenth Finance Commission of India in integrating a climate change–related criterion in the tax-transfer formula in a sustainable manner.