1. “In the face of this lack of knowledge [about the consequences of the deficit], there was not much agreement on how important it was to reduce the deficit or how fast it needed to be done.”
-Rubin (2003), summarizing her extensive interviews with legislators and other policymakers about the U.S. budget making process.

2. Disagreement, Delay, and Deficits
Jessica Wallack
Graduate School of International Relations and Pacific Studies
University of California, San Diego

3. Why are fiscal (and other) reforms delayed?
Distributional conflict …
… but how does distributional conflict turn into delay?
The accuracy, timeliness, and availability of social and economic data varies widely across countries.
When publicly available data is less timely and less accurate, policymakers rely more on heterogeneous private data or personal experience to determine the appropriate policy.
Greater reliance on private information leads to greater variance of beliefs about the world - more disagreement.
Disagreement among policymakers about the objective economic situation delays resolution of distributional conflict.

4. Consequences of Inaccurate Information:
Mean Effect vs. Variance Effect
Mean Effect
Inaccurate common information
shifts average policymaker’s belief
Opinions about cost of deficit
The presence of common information reduces variation in beliefs…
… however, less accurate common information reduces variation less.
Variance Effect
Opinions about cost of deficit

5. Findings
Countries with accurate economic statistics reduce high deficits faster than countries with less accurate economic statistics.
Executive-centered systems
also reduce high deficits faster

6. Measuring Information Quality
Ideal Measures:
Reputation of data among policymakers in each country
Objective size of error in data
Feasible Measures:
Variance of price level estimates (Penn World Tables)
Information Index:
First Principal Component of:
Penn World Tables Variance (0.284)
Ability to Monitor: external data reputation (0.535)
World Bank Rating: coverage, frequency, timeliness (0.588)

7. Third Variables and Other Influences: Political and Governance Culprits
Political Institutions (DPI)
Executive-centered (0) / Parliamentary (2)
# of veto players
Degree of polarization among veto players
Democracy (Polity IV Index)
Level of Development (log GDP per capita)
Transparency (ICRG, 0-6)
Quality of Bureaucracy (ICRG, 0-6)
Debt Burden (Lagged)

8. Spearman Correlations
Information Quality, Political Institutions, Governance
Mon. Capcy
PWT Var.
WB Rating
Info
Index
Parl
Polarization
# Chx
Democ Ln
GDP
Trans
Monitoring Capacity
1.000
PWT Variance
0.279
0.307
0.182
Info Index
0.716
0.378
0.819
Parliamentary
0.415
0.080
0.184
0.167
0.342
0.334
0.405
0.280
0.286
# Checks
0.346
0.282
0.490
0.332
0.581
0.708
Democracy
0.460
0.299
0.347
0.292
0.587
0.603
0.746
1.00
Ln(GDPpc)
0.620
0.395
0.387
0.488
0.497
0.601
0.645
0.649
Transparency
0.564
0.290
0.271
0.487
0.518
0.473
0.602
0.650
Bur. Quality
0.657
0.275
0.198
0.277
0.550
0.479
0.572
0.557
0.699
0.757

9. Accuracy of Economic Statistics

10. Measuring Delay Deficits: A panel of “policy stance” observations.
Various Measures: (1) Primary, (2) Central Government, (3) Consolidated CG, (4) Public Sector
All measures scaled: + deficit, - surplus
Error Correction Model: Estimates percent of above – (country) average deficit eliminated annually.
Allows for Asymmetric Adjustment
Controls for economic fluctuations.

11. Summary Statistics Observations Mean Standard Deviation Minimum
Maximum
Primary Deficit/GDP
2234
0.689
4.790
46.272
Deficit/GDP
3239
3.214
5.224
66.231
CCG Savings/GNDI
2750
-2.546
6.220
46.307
Public Sector Deficit
804
4.171
4.889
27.400
PWT Variance
5240
0.783
0.243
0.200
1.000
Monitor
4800
0.522
0.321
0.000
WB Rating
4960
0.466
0.231
0.875
Info Index
2960
2.604
4.932
Parliamentary
6760
0.769
0.835
2.000
Polarization
6720
0.339
0.569
# Checks
2.430
1.388
7.333
Ln(GDPpc)
5021
8.200
1.047
5.639
10.692
Transparency
4720
3.345
1.389
0.107
6.000
Bur. Qual.
3.206
1.505
0.893
Democ Index
5031
3.752
4.213 10
Democracy
(>4, Polity Scale
0.432
0.495 1

12. Basic Error Correction Model with Asymmetric Adjustment
Δdt = α +β1 (dj,t-1 – dj*) +β2 T*(dj,t-1 – dj*) +α1 Shocksj,t-1 +vjt
β1 : Speed of deficit growth for relatively small deficits (-)
β2 : Incremental effect on
adjustment speed for relatively large deficits (+)
β1 + β2 : Speed of deficit reduction for relatively large deficits (-)

13. Significant Asymmetry
Primary Deficit/GDP
Deficit/GDP
Public Sector Deficit/GDP
CCG Savings/
GNDI
Distance from mean: b1
-0.474***
-0.380***
-0.370***
-0.261***
(0.078)
(0.046)
(0.069)
(0.035)
Distance from mean* Above mean: b2
0.209**
0.156**
0.076
0.065(*)
(0.094)
(0.075)
(0.091)
(0.040)
Observations
1871
2732
756
2367
Countries 88
104 46
113 R2
0.18
0.146
0.133
0.078
Control Variables: Growth Changes. Robust standard errors in parentheses
*** Significant at 1%; ** Significant at 5%; * Significant at 10%. (*) Significant at 15%.

14. Political and Information Effects: Fixed Effects with Interaction Terms
Δdt = α
+β1(dj,t-1 – dj*)
+β2 Tj,t-1*(dj,t-1 – dj*)
+β3 Infoj*(dj,t-1 – dj*)
+β4 Infoj*Tj,t-1*(dj,t-1 – dj*)
+β5k Poljk *(dj,t-1 – dj*)
+β6k Poljk *Tj,t-1*(dj,t-1 – dj*)
+α1Tj,t-1 + α2Tj,t-1*Infoj
+ α3kTj,t-1*Poljk
+ α4Shocksj,t-1 +μj+ɛjt
Sum gives “Information Effect” on deficit reduction speed
Sum gives “Political Effect” on deficit reduction speed

15. Slow Adjustment, Below-Average Information Quality
Deficit Reduction
Speed:
Information
Rating: 0.6

16. Medium Adjustment, Below Average Information Quality
Deficit Reduction Speed:
Information
Rating: 0.60

17. Faster Adjustment, Better Information Quality
Deficit Reduction Speed:
Information
Rating: 0.8

18. Medium Adjustment, Best Information Quality
Deficit Reduction Speed:
Information
Rating: 1

19. Fast Adjustment, Best Information Quality
Deficit Reduction Speed:
Information Rating: 1.00

20. More accurate information associated with faster deficit reduction
Findings
More accurate information associated with faster deficit reduction
Executive-Centered associated with faster deficit reduction than parliamentary government
Polarization, checks & balances, governance: no statistically significant effect.

21. Effect of Information Accuracy on Deficit Reduction Speed: (b3 + b4 )
Info. Var./
+ Control Var.
Primary Deficit/GDP
CG Deficit / GDP
Public Sector Deficit/GDP
CCG Dissavings/GNDI
PWT Variance
-0.031
-0.144
-0.091
-0.241***
+ Parliament
-0.124(*)
-0.262*
-0.010
-0.334***
+ Polarization
-0.251***
-0.311*
0.006
-0.364***
+ # Checks
-0.194***
-0.230*
-0.365***
+ Ln(GDPpc)
0.017
-0.068
-0.081
-0.395***
+ Bur. Qual.
-0.218**
-0.212*
0.039
-0.442***
+ Transparency
-0.140*
-0.193**
0.003
-0.394***
+ Democracy
-0.171**
-0.238*
-0.073
-0.378***
+ Lagged Debt
-0.362**
-0.407***
-0.029
-0.294***
Extra percentage points of above-average deficit reduced in a given year from having maximum (1) information quality instead of minimum (0).

22. Effect of Information Accuracy on Deficit Reduction Speed (Information Index)
Info. Var./
+ Control Var
Primary Deficit/GDP
CG Deficit / GDP
Public Sector Deficit/GDP
CCG Dissavings/GNDI
Info Index
0.086
0.013
-0.095(*)
-0.038***
+ Parliament
0.091(*)
0.011
-0.098(*)
-0.040**
+ Polarization
0.119**
0.009
-0.108(*)
-0.021
+ # Checks
0.002
-0.099(*)
-0.018
+ Ln(GDPpc)
0.121(*)
0.006
-0.088
-0.042(*)
+ Bur. Qual.
0.092(*)
-0.072*
-0.091***
+ Transparency
0.018
-0.064(*)
-0.056**
+ Democracy
0.085
0.008
-0.111*
-0.032(*)
+ Lagged Debt
-0.003
0.050
-0.101(*)
Extra percentage points of above-average deficit reduced in a given year from an increase of 1 standard deviation of information index.

23. Primary Deficit vs. Public Deficit (Low Information Quality)

24. Primary Deficit vs. Public Deficit (Higher Information Quality)

25. Effect of Political Institutions on Reduction Speed
Pol Var/
Info. Var
Prim Deficit/GDP
CG Deficit/ GDP
PS Deficit
/GDP
CCG Dissavings/GNDI
Parliamentary
PWT Var
0.119***
0.003
0.112***
0.066*
Info Index
0.122***
0.025
0.101
0.048
Polarization
0.071**
0.035
0.028
0.001
0.434
0.039
0.087
-0.142
Checks
0.033
-0.016(*)
0.063**
0.004
0.032
-0.041
Democracy
0.006
-0.037***
0.022
-0.009
0.008
0.02
-0.007

26. Effect of Governance Quality on Reduction Speed
Governance Var./
Info. Var
Prim Deficit/GDP
CG Deficit/ GDP
PS Deficit
/GDP
CCG Dissavings/
GNDI
Level of Development
PWT Var
0.002
-0.065
0.003
0.048*
Info Index
-0.149(*)
0.017
-0.028
0.011
Bureaucratic Quality
0.064*
-0.016
0.021
0.038(*)
0.088
0.121(*)
-0.105
0.118***
Transparency
-0.003
-0.023
0.031***
0.013
-0.061
0.046(*)
-0.167
0.064

27. Information and Economic Outcomes
Demonstrated connection between information quality and speed of policy change
Implication: better data improves policymaking as well as policy.
credible economic and social data speeds reform
important to provide policymakers with information they perceive as relevant and useful.

28. New Avenues for Research
Why is more accurate economic information associated with faster reform?
Testing “variance effect” more directly:
Interaction with country institutions, specific reform settings
Interaction with underlying disagreement
Other questions to ask about data:
Bias of data providers
Timeliness
What factors lead to investment in better publicly available information?

29. “In the face of this lack of knowledge [about the consequences of the deficit], there was not much agreement on how important it was to reduce the deficit or how fast it needed to be done.”
-Rubin (2003), summarizing her extensive interviews with legislators and other policymakers about the U.S. budget making process.

30. Significant Asymmetry
Benchmark: Sustainable Deficit
Primary Deficit/GDP
Deficit/GDP
Public Sector Deficit/GDP
CCG Savings/
GNDI
Distance from mean: b1
-0.411***
-0.130(*)
-0.103
-0.084*
(0.089)
(0.086)
(0.096)
(0.051)
Distance from mean* Above mean: b2
0.135
-0.176
-0.101
0.059**
(0.125)
(0.135)
(0.088)
(0.026)
Observations
739
1000
221
802
Countries 43 58 23 57 R2
0.245
0.16
0.072
0.074
Control Variables: Growth Changes. Robust standard errors in parentheses
*** Significant at 1%; ** Significant at 5%; * Significant at 10%. (*) Significant at 15%.

31. Effect of Information Accuracy on Deficit Reduction Speed: (b3 + b4 )
Benchmark: “Sustainable” Deficit
Info. Var./
+ Control Var.
Primary Deficit/GDP
CG Deficit / GDP
Public Sector Deficit/GDP
CCG Dissavings/GNDI
PWT Variance
-0.095
-0.031***
-0.035
-0.055
+ Parliament
-0.083
-0.056***
0.020
-0.050
+ Polarization
-0.186*
-0.076***
-0.017
-0.067
+ # Checks
-0.116(*)
-0.063***
0.005
-0.045
+ Ln(GDPpc)
-0.225*
-0.070***
0.032
-0.163*
+ Bur. Qual.
-0.108
-0.020(*)
-0.001
+ Transparency
-0.040**
-0.056
+ Lagged Debt
-0.101
-0.026*
-0.020
-0.092
Extra percentage points of above-average deficit reduced in a given year from having maximum (1) information quality instead of minimum (0).

32. Deficit Reduction Speeds: Individual Country Estimates
Deficit Measure
# Countries
Mean
Std. Deviation
Minimum
Maximum
Primary Deficit 88
-0.274
0.400
-2.186
0.929
CG Deficit
104
-0.358
0.313
-1.206
0.536
CCG Dissaving
113
-0.225
0.291
-1.268
0.574
Public Sector Deficit 46
-0.318
0.264
-1.068
0.141

33. Adjustment Speed and Information Quality (OLS on Country Estimates)
Speed of PS Deficit Reduction
Speed of CCG Dissavings Reduction
PWT Variance
-1.875
-1.463***
(1.693)
(0.483)
PWT Var (Sq)
1.340
1.080***
(1.112)
(0.375)
Constant
0.261
0.194
(0.616)
(0.137)
Max Adjustment Spd
0.700
0.677
# Observations 43
101
R-sq
0.015
0.062
Robust standard errors in parentheses.

34. Adjustment Speed and Information Quality (OLS on Country Estimates)
Speed of PS Deficit Reduction
Speed of CCG Dissavings Reduction
Information Index
-0.122
-0.044*
(0.094)
(0.255)
Constant
-0.266**
-0.254***
(0.106)
(0.039)
# Observations 20 56
R-sq
0.116
0.026
Robust standard errors in parentheses.