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Policy Notes No.4
30 April 2006
Debt and Lending
AbstractMany papers published by the Levy Institute during the last few years have emphasized that the American economy has relied too much on the growth of lending to the private sector, most particularly to the personal sector, to offset the negative effect on aggregate demand of the growing current account deficit. Moreover, this growth in lending cannot continue indefinitely.
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Policy Notes No.3
17 April 2006
Twin Deficits and Sustainability
AbstractIn the mid-to-late 1980s, the American economy simultaneously produced—for the first time in the postwar period—huge federal budget deficits as well as large current account deficits, together known as the “twin deficits”. This generated much debate and hand-wringing, most of which focused on supposed “crowding-out” effects. Many claimed that the budgetdeficit was soaking up private saving, leaving too little for domestic investment, and that the “twin” current account deficit was soaking up foreign saving. The result would be higher interest rates and thus lower economic growth, as domestic spending—especially on business investment and real estate construction—was depressed. Further, the government debt and foreign debt would burden future generations of Americans, who would have to make interest payments and eventually retire the debt. The promulgated solution was to promote domestic saving by cutting federal government spending, and private consumption. Many pointed to Japan’s high personal saving rates as a model of the proper way to run an economy.
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Working Paper No.445
04 April 2006
A Random Walk Down Maple Lane?
AbstractThe development of the permanent income/life cycle consumption hypothesis was a key blow to Keynesian and Kaleckian economics. According to George Akerlof, it "set the agenda" for modern neoclassical macroeconomics. This paper focuses on the relationship of housing wealth to neoclassical consumption theory, and in particular, the degree to which homes can be treated collectively with other forms of "permanent income." The neoclassical analysis is evaluated as a partly normative and partly positive one, in recognition of the dual function of the neoclassical theory of rationality. The paper rests its critique primarily on the distinctive role of homes in social life; theories that fail to recognize this role jeopardize the social and economic goods at stake. Since many families do not own large amounts of assets other than their places of residence, these issues have important ramifications for the relevance of consumption theory as a whole.
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Working Paper No.444
06 March 2006
Tinbergen Rules the Taylor Rule
AbstractThis paper elaborates a simple model of growth with a Taylor-like monetary policy rule that includes inflation targeting as a special case. When the inflation process originates in the product market, inflation targeting locks in the unemployment rate prevailing at the time the policy matures. Even though there is an apparent NAIRU and Phillips curve, this long-run position depends on initial conditions; in the presence of stochastic shocks, it would be path dependent. Even with an employment target in the Taylor Rule, the monetary authority will generally achieve a steady state that misses both its targets since there are multiple equilibria. With only one policy instrument, Tinbergen’s Rule dictates that policy can only achieve one goal, which can take the form of a linear combination of the two targets.
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Policy Notes No.2
20 February 2006
The Fiscal Facts
AbstractToday’s federal budget deficits are a preoccupation of many American citizens and more than a few political leaders. Is the American government going bankrupt? Does our fiscal condition warrant radical surgery, as some now prescribe? Or, are we in such deep trouble that there is no plausible route of escape?
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Working Paper No.443
20 February 2006
Personality and Earnings
AbstractThis paper studies personality as a potential explanation for wage differentials between apparently similar workers. This follows initial studies by Jencks (1979) that suggest that certain personality traits, such as industriousness and leadership, have an impact on earnings. The paper aims to provide a theoretical framework within which these effects may be analyzed.
The study begins by outlining four issues as a backdrop to the model: rationality, the industry, firms, and workers. A crucial factor to the model is the meme—a mental gene that affects personality. Taking these four factors into consideration, the Contested Exchange model from Bowles and Gintis (1990) is used. Then, it is adapted to study memetic effects on the wage rate. This is followed by an analysis of how memes may affect personality and thus earnings. The issues that require further study and resolution are 1) which traits create wage differentials, and 2) two-way causality: does personality affect the wage, or does a wage premium become an incentive for a person to adopt new memes?
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Working Paper No.442
19 February 2006
Government Effects on the Distribution of Income
AbstractThis paper is the overview chapter of an edited volume on “The Distributional Effects of Government Spending and Taxation.” The paper offers the author’s perspective on the government’s role as a redistributive agent. Taxation and public spending programs are analyzed using the experiences of the United States and other OECD countries. The stark differences among the respective welfare systems are examined from an economic policy lens assessing the success and failure of the tested social policy programs. The measurement and distribution of well-being for special segments of the population, i.e., the elderly and women, are considered.
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Working Paper No.441
18 February 2006
Prolegomena to Realistic Monetary Macroeconomics
AbstractThis paper sets out a rigorous basis for the integration of Keynes-Kaleckian macroeconomics (with constant or increasing returns to labor, multipliers, markup pricing, et cetera) with a model of the financial system (comprising banks, loans, credit money, equities, and so on), together with a model of inflation. Central contentions of the paper are that there are virtually no equilibria outside financial markets, and the role of prices is to distribute the national income, with inflation sometimes playing a key role in determining the outcome.
The model deployed here describes a growing economy that does not spontaneously find a steady state even in the long run, but which requires active management of fiscal and monetary policy if full employment without inflation is to be achieved. The paper outlines a radical alternative to the standard narrative method used by post-Keynesians as well as by Keynes himself.
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Working Paper No.440
17 February 2006
Parental Child Care in Single Parent, Cohabiting, and Married Couple Families
AbstractThis study uses time diary data from the 2003 American Time Use Survey and the United Kingdom Time Use Survey 2000 to examine the time that single, cohabiting, and married parents devote to caring for their children. Time spent in market work, in child care as a primary activity, and in child care as a passive activity are jointly modeled using a correlated, censored regression model. Separate estimates are provided by gender, by country, and by weekend/weekday day. We find no evidence that these time allocation decisions differ for cohabiting and married parents, but there is evidence that single persons allocate time differently – as might be expected, given different household time constraints. In the US single fathers spend significantly more time in primary child care on weekdays and substantially less time in passive child care on weekends than their married or cohabiting counterparts, while in the UK single fathers spend significantly more time in passive child care on weekdays. Single fathers in each country report less time at work on weekdays than their married or cohabiting counterparts. In the US, single mothers work more than married or cohabiting mothers on weekdays, while single mothers in the United Kingdom work less than married or cohabiting mothers on all days.
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Working Paper No.439
16 February 2006
Where Do They Find the Time?
AbstractParents who undertake paid work are obliged to spend time away from their children, and to use nonparental childcare. This has given rise to concern that children are missing out on parental attention. However, time-use studies have consistently shown that parents who are in paid employment do not reduce their parental childcare time on an hour-for-hour basis. Since there are only 24 hours in the day, how do parents continue to be engaged in direct care of their own children while also committing significant time to labor market activities? Using data from the Australian Bureau of Statistics Time Use Survey 1997 (4,059 randomly selected households) to compare the time allocation of employed fathers, employed mothers, and mothers who are not in the labor force, this paper investigates how this phenomenon arises. The strategies available are reducing the time devoted to other activities (principally housework, sleep, leisure, bathing, dressing, grooming, eating), and rescheduling activities (from weekends to weekdays, or changing the time of day at which particular activities are undertaken). The paper investigates whether parents use nonparental care to reschedule as well as to replace their own care.
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Policy Notes No.1
17 January 2006
Credit Derivatives and Financial Fragility
AbstractOn September 15, the Federal Reserve convened 14 large credit derivatives–dealer banks to an unusual meeting. The last such meeting occurred on September 16, 1998, in secret. At that time, a major financial institution was melting down and threatening to take some large banks with it. This time, they met to discuss the same topic: the clearing of transactions in the credit derivatives market.
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Working Paper No.438
17 January 2006
Keynes’s Approach to Money
AbstractThis paper first examines two approaches to money adopted by John Maynard Keynes in his General Theory (GT). The first is the more familiar “supply and demand” equilibrium approach of Chapter 13 incorporated within conventional macroeconomics textbooks. Indeed, even post-Keynesians utilizing Keynes’s “finance motive” or the “horizontal” money supply curve adopt similar methodology. The second approach of the GT is presented in Chapter 17, where Keynes drops “money supply and demand” in favor of a liquidity preference approach to asset prices that offers a more satisfactory treatment of money’s role in constraining effective demand. In the penultimate section, I return to Keynes’s earlier work in his Treatise on Money (TOM), as well as the early drafts of the GT, to obtain a better understanding of the nature of money. I conclude with policy implications.
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Public Policy Brief No.83
17 January 2006
Reforming Deposit Insurance
AbstractThe Federal Deposit Insurance Corporation (FDIC) currently insures bank deposit balances up to $100,000. According to some observers, statutory protection creates moral hazard problems for insurers because it allows banks to engage in risky activities. As an example, moral hazard was a key contributor to huge losses suffered when thrift institutions failed during the 1980s.
This brief by Panos Konstas outlines a plan to reduce the risk of government losses by replacing insured deposits with uninsured deposits and eliminating some of the costs of deposit insurance. His plan proposes a self-insured (SI) depositor system that places an intermediary between the lender (saver) and borrower (bank) in the credit-flow chain. The FDIC would guarantee saver loans and allow the intermediary to borrow at the risk-free interest rate if the intermediary’s bank deposit is statutorily defined outside the realm of FDIC insurance. The risk is therefore transferred to depositors (intermediaries); thus creating incentives for depositors to earn a rate of return at least equal to the cost of borrowing plus a risk premium based on the risk profile of banks.
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Working Paper No.437
16 January 2006
Enhancing Livelihood Security through the National Employment Guarantee Act
AbstractThe National Rural Employment Guarantee Act of 2005 is a major development in the history of poverty reduction strategies and rural development policies in India. Though the successful passage of the Act is due to the long struggle by NGOs, academics, and some policymakers, its successful implementation is a much bigger challenge. Effective implementation of the Act requires that labor-intensive works be planned for the needy poor on a continuous basis; that the right kind of assets are undertaken to promote the development of the local/regional economy; and that the labor-absorbing capacity of the mainstream economy be raised and assets maintained well and used productively to generate benefits for the poor, as well as to promote pro-poor economy growth.
The past experiences of wage employment programs in India, however, suggest that there are several challenges ahead. These include strengthening the planning component of the program, particularly planning for infrastructure and natural resource management; coordination and conversion of the Employment Guarantee Scheme with ongoing programs; ensuring supply of labor on EGS works; promoting equity in the ownership of the assets; and using assets to improve the employment generation in the long run. This paper discusses these challenges and observes that the Employment Guarantee Act should not be treated as one more poverty alleviation program, but should be seen as an opportunity to eradicate the worst kind of poverty and to empower the poor and promote pro-poor growth of the Indian economy.
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Working Paper No.436
15 January 2006
Importing Equality or Exporting Jobs?
AbstractThis study investigates the impact of increased import competition on gender wage and employment differentials in American manufacturing over the period from 1976 to 1993. Increased import competition is expected to decrease the relative demand for workers in low-wage production occupations and the relative demand for women workers, given the high female share in these occupations. The findings support this hypothesis. Disproportionate job losses for women in low-wage production occupations was associated with rising imports in US manufacturing over this period, and as low-wage women lost their jobs, the average wage of the remaining women in the study increased, thereby narrowing the gender wage gap.
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Working Paper No.435
14 January 2006
Speculation, Liquidity Preference, and Monetary Circulation
AbstractThe sharp exchanges that Keynes had with some of his critics on the loanable funds theory made it harder to appreciate the degree to which his thought was continuous with the tradition of monetary analysis that emanates from Wicksell, of which Keynes’s A Treatise on Money was a part. In the aftermath of the General Theory (GT), many of Keynes’s insights in the Treatise were lost or abandoned because they no longer fit easily in the truncated theoretical structure he adopted in his latter work. A part of Keynes’s analysis in the Treatise which emphasized the importance of financial conditions and asset prices in determining firms’ investment decisions was later revived by Minsky, but another part, about the way self-sustained biases in asset price expectations in financial markets exerted their influence over the business cycle, was mainly forgotten. This paper highlights Keynes’s early insights on asset price speculation and its link to monetary circulation, at the risk perhaps, of downplaying the importance of the GT.
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Working Paper No.434
13 January 2006
Time to Eat
AbstractEating requires the raw food materials that make up meals and also the time devoted to buying food, preparing meals and eating them, and cleaning up afterwards. Using time-diary and expenditure data for the United States for 1985 and 2003, I examine how income and time prices affect both time and goods input into this household-produced commodity. By focusing on these two years, between which income and earnings inequality increased, I analyze how household production is affected by changing economic opportunities. The results demonstrate that inputs into eating increase with income, and higher time prices at a given level of income reduce time inputs. Over this period the relative goods intensity of producing this commodity increased, especially at the lower part of the income distribution, and the average time input dropped substantially. The results are consistent with goods-time substitution being relatively difficult for eating and with substitution becoming relatively more difficult as production expands.
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Strategic Analysis
01 January 2006
Are Housing Prices, Household Debt, and Growth Sustainable?
AbstractRising home prices and low interest rates have fueled the recent surge in mortgage borrowing and enabled consumers to spend at high rates relative to their income. Low interest rates have counterbalanced the growth in debt and acted to dampen the growth in household debt-service burdens. As past Levy Institute Strategic Analyses have pointed out, these trends are not sustainable: household spending relative to income cannot grow indefinitely.
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Working Paper No.433
04 December 2005
All Types of Inequality Are Not Created Equal
AbstractEvidence of an increase in various forms of inequality since the 1970s has motivated research on its relationship to growth and development. The findings of that research are contradictory and inconclusive. One source of these divergent results is that researchers rely on different group measures of inequality. Inequality by gender, household, class, and ethnicity may produce divergent effects on growth since they operate on macroeconomic outcomes via alternative pathways. Further, even within groups, the effect of inequality on growth depends on the measure used. For example, inequalities in capabilities (such as education and health status) may operate differently on growth than inequality in wages and income. This paper explores the different conceptual approaches to measuring between-group and within-group inequality and delineates the sometimes contradictory pathways by which these measures affect economic growth and development. The typology is applied to the cases of East Asia and Latin America.
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Working Paper No.432
02 December 2005
Job-Hopping in Silicon Valley
AbstractObservers of Silicon Valley’s computer cluster report that employees move rapidly between competing firms, but evidence supporting this claim is scarce. Job-hopping is important in computer clusters because it facilitates the reallocation of talent and resources toward firms with superior innovations. Using new data on labor mobility, we find higher rates of job-hopping for college-educated men in Silicon Valley’s computer industry than in computer clusters located out of the state. Mobility rates in other California computer clusters are similar to Silicon Valley’s, suggesting some role for features of California law that make non-compete agreements unenforceable. Consistent with our model of innovation, mobility rates outside of computer industries are no higher in California than elsewhere.
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Working Paper No.431
23 November 2005
Monetary Policy Strategies of the European Central Bank and the Federal Reserve Bank of the US
AbstractIn the debate on monetary policy strategies on both sides of the Atlantic, it is now almost a commonplace to contrast the Fed and the ECB by pointing out the former’s flexibility and capacity to adjust rigidity, and the latter’s extreme caution and its obsession with low inflation. In looking at the foundations of the two banks’ strategies, however, we do not find differences that can provide a simple explanation for their divergent behavior, nor for the very different economic performance in the United States and in Euroland in recent years. Not surprisingly, both central banks share the same conviction that money is neutral in the long period, and even their short-term policies are based on similar fundamental principles. The two policy approaches really differ only in terms of implementation, timing, competence, etc., but not in terms of the underlying theoretical orientation. We then draw the conclusion that monetary policy cannot represent a significant variable in the explanation of the different economic performances of Euroland and US The two economic areas’ differences must be explained by considering other factors among which the most important is fiscal policy.
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Working Paper No.430
22 November 2005
Are Long-run Price Stability and Short-run Output Stabilization All That Monetary Policy Can Aim For?
AbstractA central tenet of the so-called "new consensus" view in macroeconomics is that there is no long-run trade-off between inflation and unemployment. The main policy implication of this principle is that all monetary policy can aim for is (modest) short-run output stabilization and long-run price stability—i.e., monetary policy is neutral with respect to output and employment in the long run. However, research on the different sources of path dependency in the economy suggests that persistent but nevertheless transitory changes in aggregate demand may have a permanent effect on output and employment. If this is the case, then, the way monetary policy is run does have long-run effects on real variables. This paper provides an overview of this research and explores how monetary policy should be implemented once these long-run effects are acknowledged.
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Working Paper No.429
14 November 2005
Bad for Euroland, Worse for Germany
AbstractThis paper assesses the contribution of the European Central Bank (ECB) to Germany’s ongoing economic crisis, a vicious circle of decline in which the country has become stuck since the early 1990s. It is argued that the ECB continues the Bundesbank tradition of asymmetric policymaking: the bank is quick to hike, but slow to ease. It thereby acts as a brake on growth. This approach has worked for the Bundesbank in the past because other banks behaved differently. Exporting the Bundesbank “success story” to Euroland has undermined its working, however; given its sheer size, Euroland simply cannot freeload on external stimuli forever. While Euroland cannot do without proper demand management, the Maastricht regime and especially the ECB are firmly geared against it. The ECB’s monetary policies have been biased against growth and have thus proved bad for Euroland as a whole. Meanwhile, the German disease of protracted domestic demand weakness has spread across much of Euroland. Yet, by pursuing its peculiar traditions of wage restraint and procyclical public thrift, the ECB’s policies have had even worse results for Germany. Fragility and divergence undermine the euro’s long-term survival.
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Policy Notes No.6
28 September 2005
Social Security’s 70th Anniversary
AbstractSocial Security turned 70 on August 14, although no national celebration marked the occasion. Rather, our top policymakers in Washington continue to suggest that the system is “unsustainable.” While our nation’s most successful social program, and among its longest lived, has allowed generations of Americans to live with dignity in retirement, many think it is time to retire Social Security itself. They claim it is necessary to shift more responsibility to individuals and to scale back the promises made to the coming waves of retiring baby boomers.
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