Barro, R. J., “Government Spending in a Simple Model of Endogenous Growth”, Journal of Political Economy, 95, S103–125, (October 1990).
Barro, R. J., “A Cross-Country Study of Growth, Saving and Government”, in B. Douglas Bernheim and John B. Shoven, eds. National Saving and Economic Performance, Chicago, Chicago University Press, (1991b).
Barro, R. J., and X. Sala-i-Martin, “Public Finance in Models of Economic Growth”, mimeo Harvard University, Review of Economic Studies, #59, pp. 645–661, (November 1992).
Cashin, P., “Government Spending, Taxes, and Economic Growth#x201D;, International Monetary Fund Staff Papers, pp. 237–269, (June 1995).
Chamley, C., “The Welfare Cost of Capital Income Taxation in a Growing Economy”, Journal of Political Economy, 89, pp. 468–496, (1981).
Chu, Ke-young and S. Gupta, “Protecting the Poor: Social Safety Nets during the Transition”, Finance and Development, International Monetary Fund, Washington, (June 1993).
IMF, “Social Security Reforms and Social Safety Nets” in Development Issues, prepared by the Joint Ministerial Committee of Boards of Governors of the World Bank and the International Monetary Fund, #32, (1993).
Summers, R. and A. Heston, “A New Set of International Comparisons of Real Product and Price Levels: estimates for 130 countries”, Review of Income and Wealth, 34, March, pp. 1–25, (1988).
Waldfogel, J., “The Effects of Criminal Conviction on Income and the Trust Reposed in the Workmen”, mimeo Yale University, (1992).
Yale University, and Universitat Pompeu Fabra, Spain. I have benefitted from conversations with Robert Barro, Willem Buiter, Paul Cashin, Daniel Cohen, Larry Katz, Mohsin Khan, Elvinticinc Dedesembre, Fumfum Fum, Donald Mathieson, Chris Sims, Etsuro Shioji, and Joel Waldfogel. The same version of the paper is already circulating as a CEPR working paper and it circulated as a Yale Growth Center's working paper. This research has been partly supported by the Instituto de Estudios Fiscales in Madrid and was concluded while I was visiting the Research Department at the IMF. The usual disclaimer applies.
This puzzling positive correlation was first found by Barro (1991b) and it has subsequently been documented by Cashin (1995).
A substantial fraction of the recent growth literature deals with the role of government in the process of economic development. Chamley (1981), Lucas (1990) and the subsequent literature deal with the problem of optimal taxation. For example, Barro (1990), Barro and Sala-I-Martin (1992 and 1995, ch. 4), Gloom and Ravikumar (1994), and Cashin (1995) among others, present models where the productive aspects of public spending are offset by distortionary taxes. The literature has devoted little attention to transfers and their role in the process of economic growth. This is surprising given the size of public transfers relative to other forms of public spending like public investment or infrastructure.
Most of the transfers taking place in rich industrialized nations are not between rich and poor but between young and old. In the present paper I analyze transfers between rich and poor. Old-age transfers are analyzed in Sala-I-Martin (1995). In that paper I argue that old-age transfers appear to be productive because they are a means to bribe the old, unproductive, workers out of their jobs. In the presence of human capital externalities like those proposed by Lucas (1988), the elimination of the elderly from the labor force will increase the level of income of the economy as well as its growth rate.
It can persuasively argued that, when the World Bank or the IMF worry about social safety nets in transition economies, they do so (at least partly) to ensure the success of the transition process. If too large a fraction of people become destituted in the process of transition, riots, revolutions or military coups may actually end with a program that would have been beneficial in the long run.
Encarta's Encyclopedia, for example, after describing him as a ruthless politician who fought any and all who questioned his policies, says that “although he failed to defeat the Socialists, the social security legislation he introduced—national accident and health insurance and old-age pensions—ended whatever revolutionary designs they may have had”.
This fraction β could be thought of as being chosen by the average person according to some money demand model that I do not need to specify here. It should be noted that, when making this choice, this person will take into account the probability of being mugged and will add it to the interest foregone by holding cash. That is, the larger the number of criminals operating in a certain area, the lower is likely to be the reward per unit of time devoted to crime since people living or working in that area will be careful not to carry too much money in their pockets.
Becker uses this assumption to explain passion crimes and other crimes that entail no direct monetary reward to criminals. Another unrealistic assumption is that all persons in the economy have the same attitude or preference for crime. Different people may perceive crime differently and these differences may be due to educational background and/or religious beliefs.
One could argue that there is learning by doing (or learning by offending): people who commit few crimes are naive and are more likely to be caught. Professional criminals, on the other hand, have more experience and know how evade police more easily. Furthermore, full-time criminals may be able to bribe policemen and judges in order to lower their probability of conviction. The offsetting force is that the more crimes you commit, the more likely the police are to devote their efforts to capture you in particular (while if you are a naive part-time criminal, the police are likely to either ignore you or to spend little effort in trying to capture you). In this simple model I will assume that these forces roughly offset one another and that the probability of being convicted is independent of ti.
This wage subsidy could take the form of minimum wage laws or the prohibition of work by children (which entails the elimination of the lowest wage jobs).
Some crimes are penalized with physical or nonmonetary fees: the death penalty or cutting off the criminal's hands or ears are just two examples (since human ears are not traded in normal markets, these fees should be considered nonmonetary). I will, however, abstract from these physical penalties in the present analysis.
In fact this could be relaxed and the fee could be allowed to be concave as long as it is not too concave. The exact condition is f″›-(β-ω)·f′·(1+π)/[π·cnp].
This does not mean that poor people are inherently worse in any sense. I have assumed that everybody has the same preferences towards crime and, therefore, everybody is equally good. The implication of the model comes from the opportunity set faced by both rich and poor. It is more profitable for the rich to be legal and for the poor to be criminal. Of course I have assumed that the only reward for criminal behavior is the average level of income. It is entirely possible that rich people have access to a better, more rewarding set of criminal activities (white collar crime). If I amended the model to incorporate these factors, the implication would be that, given the size of the criminal reward a particular person faces, he would choose to devote zero time to illegal activities if the wage rate he can earn in legal activities is higher.
Here is where the assumption that governments cannot impose non-monetary penalties like death or cutting off people's ears becomes relevant. Presumably the value of lives and ears in terms of income is large enough so that crime can be deterred with the use of these nonmonetary penalties only. Countries that have access to these types of drastic penalties will not need to use transfers to reduce disruptive behavior. In this paper I will not try to explain why governments do not impose such big nonmonetary penalties for seemingly small crimes.
People cannot lose exactly everything when they go to jail: the Government must provide some level of consumption while in jail. If this was not the case, prisoners would starve to death. This would represent a nonmonetary penalty which I assumed was not allowed in this economy. This sentence should therefore say that they lose ‘almost’ everything.
This assumes that people don't learn anything new in jail. It could be the case that criminals did not really know what jail was all about and that an initial period of incarceration shows them how terrible it is. This would increase the perceived penalty and, therefore, reduce the amount of crime in the future. One argument against this is that a lot of criminals come from families and neighborhoods where crimes and criminals are abundant. Hence, it is likely that these people have a pretty good idea of what it is to be in jail so their propensity to commit crimes will not change after having been in jail once before. (see Sah (1991) or evidence on this type of social osmosis).
We could also assume that the fraction of income lost if convicted is different from the fraction of time lost if convicted. The reader can check that the key results remain the same.
which is still negative.
In a general equilibrium model, wage subsidies may have another perverse effect on crime, as they tend to generate unemployment. Note that this is not the case for transfers.
We should think of TR as including not only transfers but also wage subsidies and other kind of public welfare. As we showed in previous sections, all of them affect crime negatively. In the rest of the paper, I use the terms transfers and public welfare interchangeably.
Alternatively, it could be assumed that ϕ() is a function of TR per unit if pre-crime income. This alternative specification does not change any of the substantive results.
I assume that individuals, who own the firms, produce output at home. The results would be the same if there were competitive markets for goods and capital.
If we assume that ϕ() is a function of TR/Y rather than TR/Y, the growth rate is not a function of ϕ(τ) but, instead, a function of η(r) with η′ (r). Where η() can be derived as follows: define ϕ2() as the function that satisfies the public budget constraint ϕ(TR/AK) = τ where ϕ!()›0 (this follows from the assumptions ϕ″‹0 and ϕ(0)≥0). Invert it and plug in ϕ(TR/AK) to get the growth rate as a function of τ only where
The GFS transfer variable also includes old-age pensions. In Sala-i-Martin (1992), I show that old-age pensions should also be regarded as productive as they induce unproductive, old people out of their jobs. Hence, I am not too worried about the fact that this may be too broad a measure of transfers. Nevertheless, I think it would be interesting to distinguish empirically which one of the two components of total transfers dominates the results. For most poor countries of this sample, however, separate data on redistributional and intergenerational transfers is not available.