Essays on Political Economy and Macroeconomics

Abstract

This dissertation consists of four essays on a range of topics in political economy and macroeconomics which are united by having current policy relevance. The first essay studies the effects of social policy laws on beliefs and attitudes held by the public. Do laws move public attitudes in the direction of the law, or do they induce systematic backlash, whereby the attitudes of the public move in the opposite direction of the law? I set up a model showing that, in the context of identity utility, systematic backlash is the likely outcome. Using a difference-in-differences identification strategy, I examine every major U.S. social policy law from the 1960s onward, and I find statistically-significant and robust evidence of backlash in each and every case. The second essay (co-authored with Matthew Lilley) studies whether politicians can actually be rewarded for good performance, as suggested by retrospective voting models, or whether erroneous beliefs can hinder the actualization of such models. Looking through the lens of the coronavirus pandemic, we find evidence that beliefs about state death rates – which are often erroneous – are actually more important for politician approval than the true death rates. The third essay studies the effects of the flat tax reforms adopted by most Eastern European countries between the mid-1990s and early 2010s on macroeconomic outcomes including GDP growth, investment, and inequality. Setting up a simple model of intertemporal investment, I show that tax progressivity should negatively impact investment (even holding constant the average level of taxes). Turning to the data, I find statistically-significant and robust evidence of increased investment and, consequently, GDP growth resulting from the flat tax reforms. The fourth essay (co-authored with Robbie Minton) studies the influence of minimum wages on monetary policy efficacy. In a model, we show that monetary policy shocks should relax the real minimum wage and thereby lead to an expansion in (minimum-wage) employment. Consequently, monetary policy should be more effective where the share of minimum-wage workers is higher. We provide extensive empirical evidence in support of this relationship and the underlying mechanism.