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Book Series
01 April 1992
Profits, Deficits, and Instability
AbstractBusiness accounting defines profits as total revenue minus total costs. Economic theory uses various definitions of profits according to what is being measured (for example, return to ownership, national income profits, real profits) and for what purpose. The concept of profits, however, cannot and should not be reduced to a matter of measurement, but should be considered in terms of the role of profits in the workings of an economic system. The papers in this volume provide original insights into secular and cyclical changes in production and employment, and the interrelationships among profits, corporate investment and financing, instability, and government deficits.
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Working Paper No.72
11 January 1992
The Capital Development of the Economy and the Structure of Financial Institutions
AbstractThis paper evolves from the sharp contrast in Smithian and Keynesian views about the relationship between the financial structure and the economy. The Smithian perspective implies that the financial structure is irrelevant, whereas the Keynesian position concludes that effective financing is necessary for the "capital development of the economy"- there is also a need to constrain any tendency of what Keynes referred to as speculation to dominate. Thus, the essential elements of equilibrium in Keynesian theory, the financial theory of investment and the investment theory of business cycles, are most apt when examined as outcomes of processes that operate over time.
During the 1980s, there was a sharp increase in speculative financing resulting from the trend toward leveraged buyouts and the rising demand for short-term marketable corporate liabilities. A main characteristic of a capitalist economy that is stagnant or immersed in a depression is that the capital development of the economy is not progressing. The 1980s were filled with examples of financing inept investments, while the current climate is one of grossly inadequate investment levels to create a progressive full-employment economy.
The financial instability interpretation of Keynes rests upon the profitability of debt financing, and incorporates the potential collapse of asset values in an environment of speculative and Ponzi financing. Consequently, the financial structure is significantly more fragile today than earlier in the post World War II era.
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Working Paper No.71
10 January 1992
Macroeconomic Market Incentive Plans
AbstractThis paper explores the contemporary debate among economists on the means to move the economy toward high employment without inflation-beyond the traditional instruments of monetary and fiscal policy. The authors pay particular attention to the Market Anti-Inflation Plan (MAP), submitted by Lerner and Colander in 1980.
The reasons economists have searched for alternative measures relate to the problems associated with wage and price controls. MAP is an anti-inflation plan that allows relative prices to adjust: The scheme increases costs to firms that raise prices, and contains an added incentive to lower prices. Since MAP is designed to fight macroeconomic inflation by changing the incentives of individual price setters, the relationship between microeconomic behavior and macroeconomic outcomes must be addressed.
The theoretical justification for MAP is that there is a macroeconomic externality, and MAP can mitigate the ramifications of the externality. However, efforts to more clearly define the nature of this externality require a better understanding of transaction costs. Consequently, there will be the need for a mechanism to integrate such costs into microeconomic and macroeconomic models.
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Working Paper No.70
09 January 1992
The Distributional Implications of the Tax Changes in the 1980s
AbstractThis paper studies changes in the United States as a consequence of the Economic Recovery Act of 1981 (ERITA), the Tax Equality and Fiscal Responsibility Act of 1982 (TEFRA), and the Tax Reform Act of 1986 (TRA). The effects of ERITA, TEFRA, and TRA are demonstrated via measures of pre-tax and post-tax inequality based on gross household income and disposable household income. Thus, the distribution of income, and also the tax payments, consist of components that are attributed to tax changes and components that are driven by the pre-tax income.
Typically, most analysts view the distribution of pre-tax and post-tax income based on GINI coefficients. However, this analysis employs the decomposable Generalized Entropy measure, which enables the distribution of the "between group" and "within group" (weighted average) effects of taxation. Moreover, this approach allows for a more accurate assessment of tax progressivity in the long run. This process provides a better framework to evaluate the policy implications of future tax changes.
The results illustrate that long-run income tax progressivity has been declining over time. Concurrently, we witness a relative rise in pre-tax and post-tax income inequality over the latter portion of the accounting interval. It is further evidenced that a number of exemptions and the type of tax table used create more equalization within each group, but cross-group equalization is minimal. When decomposed by quintile, the data reveal more cross-group equalization than within-group equalization.
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Working Paper No.69
08 January 1992
Reconstituting the United States’ Financial Structure
AbstractDeposit insurance, the savings and loan industry, facets of the insurance industry, and a significant number of private banks have all been plagued by recent collapse. The legislative agenda goes beyond merely funding the shortfall in deposit insurance funds: Congress has suggested that reforming the deposit insurance function, as well as the associated regulatory and supervisory structure, is imperative to avoid a recurrence of Treasury financing.
An assessment of the problem, and also the prescriptions for a cure, rely on the particular theoretical perspective of the observer. The Smithian view asserts that markets always lead to the promotion of public welfare, while Keynesian theory states that market processes may lead to malfunction of the capital development of the economy-that is, something other than the promotion of public welfare. For example, the crisis in finance during 1991 is largely a delayed response to the experiment in practical monetarism that occurred from 1979 to 1982. In typically simplistic fashion, monetarism suggests that inflation is always the result of too much money chasing too few goods: Hence, controlling inflation rests on controlling money supply.
The fundamental flaw in the Bush administration’s proposals is that they subscribe to a Smithian theme. They impute the problems afflicting the finance industry (e.g. lack of capital development of the economy) to a minor flaw in the institutional structure rather than to basic characteristics of the economy. The recommendations submitted in the paper are inherently distinct from the administration’s proposal and have evolved from a Keynesian model of the economy specifying the processes and determinants of the performance of the economy.
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Working Paper No.68
01 January 1992
Transfer and Life Cycle Wealth in Japan, 1974–1984
AbstractThis paper measures, via the cumulation of life cycle saving method, the contribution of transfer to total wealth accumulation among worker households from 1974 to 1984. The findings suggest that under either the Modigliam or Kotlifoff and Summers definitions of transfer wealth, capital accumulation for these households is largely the result of life cycle saving. This study differs from previous analyses on the topic because of its "close application of the two definitions of transfer wealth and by its extensive use of simulation analysis."
Accumulated transfer wealth, under either the Modigliam or Kotlifoff and Summers definitions, constitute a small component of total accumulated wealth for worker households from 1974 to 1984. Thus, for most Japanese households (worker households being 59.8 percent of total households), capital accumulation is a manifestation of life cycle saving. However, since worker households held only approximately half of total house hold wealth in 1984, it is premature to conclude that life cycle saving dominates the wealth accumulation process in Japan.
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Working Paper No.67
10 December 1991
Employment Restructuring and the Labor Market Status of Young Black Men in the 1980s
AbstractThe decline in the employment status of young black men relative to their white peers in the post-1970 U.S. Labor market is the impetus for this research. This paper examines the effects of recent employment restructuring on young workers by race and sex. In the case of the least educated group of young black men (aged 25-34), the employment-to-population ratio declined by almost 35 percent (equivalent to 28 percentage points) from 1970 to 1985. Moreover, the 1980s were a stark reversal to the decades-long trend of a narrowing of the black/white earnings gap.
Recent literature on demand-side trends for black employment has employed aggregate Census industry and occupation classifications: A more accurate depiction of change among various demographic groups is represented in an increasingly consistent segregation of job classifications. The findings indicate that job segments with the highest concentration of young black men had the lowest employment and earnings growth, but the highest growth in educational requirements, between 1979 and 1989. Furthermore, while the distributions of moderately educated young black and white women among segments converged during this time, the black and white male distributions diverged sharply.
Hence, the results imply a strong link between changes in rates of labor market discouragement and changes in job opportunities, job quality, and educational requirements. A lingering question remains for future research: Given that the distribution of young, moderately educated black and white women has narrowed substantially, why have young black men failed to redistribute themselves toward higher-quality, growing job segments as effectively as their white counterparts?
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Working Paper No.66
10 November 1991
The Transition to a Market Economy
AbstractThe social transformation of Eastern Europe has proceeded much faster, and the destruction of communism’s legitimacy and efficacy has been more complete, than was deemed possible even a few years ago. A common tenet among the economies now emerging from communism is the lack of significant private wealth, even though there are capital assets that are used in production and have the potential to generate profits. However, since there is no relevant history of profits in the emerging economies, there is no way to meaningfully assess values of capital assets.
The financial system provides for linkages through time: Exchanges of money for well-defined claims to future-money flow are made daily. Thus, the financial structure and the physical capital assets of a capitalist economy link the present and the past to the future.
The options available to the emerging economies with respect to their financial structure are limited-the lack of significant private wealth leads to weak market for financial instruments and poor prospects for market-based financing. The initial choice of a financial structure is constrained to universal banks or public holding companies. Special venture capital holding companies and local independent banks should be integrated into the financial structure to facilitate entrepreneurial spirit. The public holding company is favored as a transitional instrument to foster the development of information and private wealth, and should be modeled after the Reconstruction Finance Corporation of the New Deal era.
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Working Paper No.65
08 November 1991
A Package of Policies to Permanently Increase Output without Inflation
AbstractEconomists have searched for policies that concurrently establish full employment with stable prices and high output. The supply side theorists of the 1980s claimed they could produce increased output with lower inflation: The crux of their argument is that "taxes and subsidies create a wedge between the private and social returns from productive activities. As people follow the maximum private return, they reduce society’s welfare due to this wedge. Thus, policies that reduce these tax-subsidy wedges will reduce inefficiency and increase output." In the aftermath of failed supply side predictions, new classicals have dismissed high unemployment and aggregate instability as actual problems. Meanwhile, new Keynesians have yet to develop a model that demonstrates the macroeconomic problem or a means to reduce unemployment.
It is submitted that both a market anti-inflation plan (MAP) and tax-based incomes policy (TIP) simultaneously reduce inflation and increase output- however, the link to output may be indirect. MAP and TIP increase supply by reducing externalities in the economy, specifically by reducing firms’ market power. Hence, there is an underlying symmetry between incentive anti-inflation plans and incentive supply-increasing policies. In sum, an integrated package of policies is proposed that yields full employment with stable prices by using fundamental procedures of internalizing externalities.
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Working Paper No.64
06 November 1991
Market Processes and Thwarting Systems
AbstractThis paper suggests that there are two longstanding views on business cycles and economic dynamics: One emphasizes endogenous stability plus exogenous disturbances, while the other focuses on endogenous instability plus institutional ‘containing’ or "thwarting" mechanisms. The latter tradition regards business cycles and economic instability as the natural and inherent consequence of self-interest-motivated behavior in complex economies with sophisticated financial institutions. In fact, it is the interaction between the system’s endoge-nous dynamics and the effects of institutions and interventions which, if "apt," constrains the outcomes of capitalist market processes to acceptable outcomes.
The endogenous instability view of the economy, in which institutional structures and interventions stabilize the fragile, essentially refutes Lucas: He asserts that the economy is a mechanism that transforms exogenous shocks (either random or unanticipated policy interventions) into business cycles, thus generating a growth equilibrium. Recent history has illustrated the flaws of laissez-faire theory as the postwar capitalist economies that have enjoyed consistently high levels of growth are big government interventionist economies. The challenge for the future is recognizing that market processes are deficient not only in their ability to maintain aggregate demand, but also as devices for assuring productive investment and a tolerable distribution of income.
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Working Paper No.63
10 September 1991
Wealth Accumulation of the Elderly in Extended Families in Japan and the Distribution of Wealth within Japanese Cohorts by Household Composition
AbstractThis paper is a critique of the literature on transfer wealth accumulation in Japan during the postwar period. The emphasis is on selected works in two areas that are closely related: the accumulation of wealth by the elderly in extended families in Japan, and the distribution of wealth within Japanese cohorts by household composition.
The central point of contention is what relationship, if any, exists between the age of the elderly in extended families and the accumulation or decumulating of wealth Ando concludes that increasing age positively correlates with decumulating wealth. In contrast, a subsequent paper by Hayashi, Ando, and Ferris asserts that the elderly in families are actually accumulating wealth. However, neither conclusion is supported by existing empirical data since the authors fail to account for the joint effect of wealth between young people and the elderly in extended families-the wealth of the young may interact with the wealth of the elderly.
The current literature, in addition to relying on invalid conclusions of a relationship between the elderly in extended families and wealth, is plagued by insufficient empirical evidence (e.g. failure to demonstrate a link between wealth and present income, making broad assumptions about transfer of wealth from parents to children, etc.). In sum, the existing research has not yet demonstrated that the elderly in extended families in recent years have been accumulating or decumulating assets, also there is no evidence (contrary to popular belief) of a relationship between household composition and the wealth.
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Working Paper No.62
10 July 1991
The Changing Contributions of Men and Women to the Level and Distribution of Family Income, 1968–1988
AbstractIn the past twenty years, the labor force participation and earnings of women, especially married women, have risen dramatically. Over the same period, men’s earnings have increased only modestly, and the distribution of family income has grown less equal. In this paper, we analyze the impact of changes in the level and distribution of earnings of men and women in the distribution of family income. We emphasize the contributions due to the increased work effort and real earnings of wives, as they account for a major portion of growth in family income over these two decades. Working wives have taken the place of economic growth as the factor that raises the standard of living of families across the entire income distribution.
We analyze Current Population Survey data for white, black and Hispanic families in 1968, 1978, and 1988. Our results show that the primary factor contributing to rising income inequality was the increased inequality in the distribution of husbands’ earnings. Wives’ earnings both raised family income and lowered inequality.
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Working Paper No.61
09 July 1991
Changes in Earnings Differentials in the 1980s
AbstractThis paper analyzes changes in U.S. earnings differentials in the 1980s between race, gender, age, and schooling groups. There are four main sets of results to report.
First, the economic position of less-educated workers declined relative to the more-educated among almost all demographic groups. Education-earnings differentials clearly rose for whites, but less clearly for blacks, while employment rate differences associated with education increased more for blacks than for whites.
Second, much of the change in education-earnings differentials for specific groups is attributable to measurable economic factors: to changes in the occupational or industrial structure of employment; to changes in average wages within industries; to the fall in the real value of the minimum wage and the fall in union density; and to changes in the relative growth rate of more educated workers.
Third, the earnings and employment position of white females, and to a lesser extent of black females, converged to that of white males in the 1980s, across education groups. At the same time, the economic position of more-educated black males appears to have worsened relative to their white-male counterparts.
Fourth, there has been a sizable college-enrollment response to the rising relative wages of college graduates. This response suggests that education-earnings differentials may stop increasing, or even start to decline, in the near future.
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Working Paper No.60
08 July 1991
Who Are the Truly Poor?
AbstractIn this paper we study changes in the prevalence and composition of poverty in the United States over the 1973–1988 period, focusing on the first and last years. Over this period, official poverty rose from 23.6 million people (11.4 percent of the population) to 31.9 million (13.1 percent), passing over a peak in the recession of 1981–1983 of over 15 percent of the population.
The official definition of poverty in the United States compares the total income of families to an officially designated "poverty line" that varies with the size and composition of the family. If the income of a family falls below its poverty line, it is said to be poor. Total poverty in the nation is the sum of the individuals living in families whose income falls below their poverty line.
One of the most persistent and fundamental criticisms of the official definition is its reliance on a single year of cash income of a family. For many families, annual income is a fluctuating figure. Unemployment, layoffs, income flows from self-employment, the decision to undertake mid-career training or to change jobs, or health considerations may all cause the money income of a household to change substantially from one year to the next. A second fundamental problem with the official definition is its heavy dependence on tastes—in particular, the tastes of the members of the household unit for income versus leisure.
Both theoretical and empirical work in economics have recognized these limitations of money income as a measure of economic well-being. Many studies have relied on the average of a number of years of a household’s income in order to gain a better estimate of "normal" income—income purged of its transitory elements. Others have taken observed, annual consumption to be a better estimate of real economic well-being than annual income (e.g. Mayer and Jencks, 1991). Consistent with the multiyear perspective, early work by Ando and Modigliani (1963) emphasized a life-cycle perspective. They argued for a measure based on a household’s optimal level of real consumption in a period, given the presence of the unit’s total resources over its remaining lifetime. Becker’s (1965) concept of "full income" extends this concept still further, and includes the time available to the household to be allocated to either work or leisure. A further refinement of this full income measure would adjust for differences in the size and composition of the consumption unit, arriving at a concept of potential real consumption per equivalent consumer unit. Such a concept forms a definition of economic welfare or economic position which rests on economic theory and which reflects a more comprehensive set of considerations than one year of cash income (Moon and Smolensky, 1977).
Here we set forth an empirically tractable measure of economic position—Net Earnings Capacity—which seeks to reflect such potential real consumption. This measure abstracts from transitory events and phenomena, unlike current cash income. It also abstracts from individual tastes for income relative to leisure, again differing from the current income measure. And, it reflects the potential of the consumer unit to generate real consumption. Finally, it adjusts for the size and composition of the family unit. Net Earnings Capacity is designed to measure the potential of a family to generate an income stream (which can then be used to support its members) were it to use its human and physical capital to capacity. Individuals living in those households with the lowest levels of Net Earnings Capacity relative to their needs are considered to be the nation’s "truly poor" (Garfinkel and Haveman, 1977).
We define the concept of Net Earnings Capacity more rigorously, and discuss the empirical techniques that we use in measuring it. Section III presents our empirical estimates of the prevalence and composition of Net Earnings Capacity poverty over the 1973-1988 period. We contrast the nation’s "truly poor" families with those families designated as the nation’s ”official poor." In Section IV, we estimate the probability that a variety of prototypical families— families with particular constellations of characteristics—will be either officially poor or Net Earnings Capacity poor. Changes in these probabilities over time will indicate both changes in the underlying character of true poverty in the United States and the extent to which the standard poverty measure conveys an inaccurate picture of the true patterns of low economic position. In the final section, we summarize our findings and indicate some of their policy implications.
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Working Paper No.59
07 July 1991
The Health, Earnings Capacity, and Poverty of Single-mother Families
AbstractApproximately 1.4 million single mothers have substantial health problems. Even if they were to work full time, they would be unlikely to earn enough to adequately provide for themselves and their children. Many of these women are not likely to find employment that offers health insurance coverage for themselves or their children. Employment is thus not an option that would provide sufficient resources—in terms of income or insurance—for them to live at or above the poverty line. Those single mothers who have a disabled child are at additional disadvantage. These children may require increased time from an adult and are likely to have considerable medical care needs and expenditures. For these families, employment of the mother may not provide adequate resources in terms of either time available to meet the disabled child’s special needs, income, or adequate health insurance.
We explore these issues, first examining the health status of single mothers compared to other women. We next estimate their earnings capacity–the amount they would earn were they to join the work force on a full-time basis, taking into account their health status and that of their children. We then investigate the percentage of single mothers and their children who would be poor if they had to rely on the earnings capacity of the women (working 40 hours per week, adjusting for health). Finally, we explore the policy implications of our findings, which seem particularly timely in the face of the new work requirements of the 1988 Family Support Act. The act requires most single mothers currently receiving or applying for Aid to Families with DependentChildren (AFDC) to enroll in training or register to work.
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Working Paper No.58
06 July 1991
Social Security Annuities and Transfers
AbstractThe division of social security (OASI) benefits into an annuity portion and a transfer portion has been well documented. I have discussed this issue extensively in previous work (1987b, 1988, 1990, and forthcoming), as did Burkhauser and Warlick (1981) previously. My methodology is quite similar to theirs. The annuity portion is defined as the benefit level the worker would receive on the basis of his(her) contributions into the social security system (OASI) if the system were actuarially fair. The calculation is based on the worker’s estimated earnings history and actual social security tax rates. The transfer portion is the difference between the actual social security benefit received and the actuarially fair annuity equivalent. As we shall see below, it has been uniformly positive for workers who have retired on or before 1983.
Burkhauser and Warlick examined the relative proportions of annuity versus transfer benefits by income class and age group. However, they did not conduct an extensive examination of the overall distributional implications of who social security transfer portion. Nor did they consider the tax implications of treating social security transfers as taxable income. These are the principal subjects of the current paper. With regard to the distributional implications of the social security system, I will examine three sets of issue. First, I will consider what the relative magnitudes have been of the annuity and transfer portions of social security income. Since I have data for three years, a related issue is whether the relative proportions have changed over time. Second, I will consider how the social security transfer portion has affected the distribution of income among elderly households. Has the transfer component been neutral or has it tended to redistribute income toward lower income elderly households? Third, the same issue can be addressed with regard to household wealth, in which social security benefit flows are transformed (capitalized) into wealth equivalents.
From a policy point of view, the more interesting issue is how do the total taxes of the elderly change with the removal of the exclusion of social security transfer income — that is, when social security transfer income is treated as taxable income. There are three questions of interest. First, how does the change in tax treatment affect the post-tax distribution of income. Second, which groups of elderly are most affected by the change in tax treatment. Third, what is the total challge in the magnitude of tax revenues.
As a final point of policy interest, I will also consider whether the extra revenues generated by the new tax treatment of social security income can serve as a "social security capital fund" to reduce the growing wealth gap among age groups in the U.S. As will become apparent in the analysis, the social security system has been quite generous to today’s elderly, providing them with benefits far in excess of their contributions into the system. Moreover, young families have fared rather poorly over the last several decades in regard to their income and wealth accumulation. I will propose a policy vehicle below, called a "social security capital fund", which can serve as an additional source of capital for today’s young workers. The source of the funding can potentially come from the extra tax revenues from elderly households. It is thus also of interest to analyze whether the additional tax revenues are large or small relative to the wealth holdings of young households and whether such a fund can make a significant difference in the well-being of younger families.
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Working Paper No.57
05 July 1991
Why Were Poverty Rates So High in the 1980s?
AbstractThis paper explores the unexpectedly slow decline in poverty that occurred over the expansion of the 1980s. We present evidence on the "stickiness" in the poverty rate in the past decade, compared to earlier decades. The following section investigates several potential non-earnings-related explanations for this fact. There is little evidence that the slowdown in the response of poverty to economic growth is due to problems with the measurement of poverty, to changes in transfer policy in the early 1980s, to the regional distribution of the poor during the 1980s expansion, or to changes in family composition among the poor.
The final section of the paper investigated the decreased responsiveness of income and earnings to the rnacroeconomy among low-income households in the 1980s. A growing body of literature has recently began to explore the widening in wage differentials among less-skilled and more skilled workers over the 1980s. That literature indicates that substantial real wage declines occurred among low-wage workers throughout the expansion of the 1980s, while substantial real wage increases occurred among higher-wage workers. These trends are clearly correlated with the trends in poverty. Declining real wages will make it harder for low-income families to escape poverty. The point of this paper is not to describe that wage decline further, but to investigate how important this decline was relative to other factors that were operating at the bottom of the income distribution.
The lower responsiveness of poverty to economic growth is not due changes in labor market responsiveness over the 1980s expansion. In fact, labor market involvement was more responsive during the 1980s: the unemployment rate fell more rapidly, and earners in the bottom quintile of the population increased their work effort more sharply in the 1980s than in the 1960s. The lower responsiveness of income among low-income households to the economic expansion of the 1980s is entirely due to declining real wages, which offset the increase in labor market effort, resulting in slower income growth.
The implication of these results is that the changing wage structure of the l980s made economic growth a far less effective it was in the expansion of the 1960s. It is still an open question whether these trends will continue into the l990s. If they do, economic growth cannot be expected to produce substantial declines in the poverty rate.
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Working Paper No.56
04 July 1991
W(h)ither the Middle Class?
AbstractResearch using cross-sectional survey ‘snapshots’ of household income taken over the past quarter century reveals a growing inequality in the distribution of annual money income of households in the United States (Thurow, 1987; Levy, 1987; Levy and Michel, 1991; Michel, 1991; Karoly, 1990; Center on Budget and Policy Priorities, 1990; Easterlin, MacDonald and Macunovich, 1990), prompting some to argue that the U.S. middle class is disappearing (Phillips, 1990; Bradbury, 1986). Aggregate data from the National Accounts and from wealth surveys (Wolff, 1989; Eargle, 1991) reinforce this conclusion by showing a growing share of income from capital, a falling share for earnings, and a slightly increasing concentration of wealth among upper-income groups. Also well-documented is greater inequality in the size distribution of earnings and wages in the late 1980s as compared to one or two decades before (GottschaLk and Danziger, 1989; Burtless, 1989; Blackbum et al., this volume).
Despite the consistency of these results, their almost universal reliance on data drawn from cross-sectional snapshots leaves unanswered many important questions regarding the nature of the changes taking place in the distribution of income and wealth. Most importantly, cross-sectional snapshots provide information only on net changes in economic position and thus reveal little about the extent and nature of movement into and out of the middle class.. Are increasing numbers of families ‘falling from grace’, as Katherine Newman (1988) puts it? If so, who are they and what events are linked to their income losses? Or is mobility into the middle class declining? And, if so, does this affect in particular young families? What avenues for upward mobility are disappearing? These are the types of questions we seek to address for adults crossing either the lower or the upper boundary of the middle class. A second set of issues we address involves linkages between changes in income and changes in wealth.
We analyze trends in the transitions of prime age (25-54 years old) adults into and out of the middle class using 22 years of data from the Panel Study of Income Dynamics. We begin by reviewing the methodology and measurement procedures that we employ to define the middle class and transitions into and out of middle-class status. Next we present our basic findings which, in fact, show a persistent ‘withering’ of the middle class since about 1980. We then search for clues as to who moved into and out of the middle-income groups and the source of such changes. Because notions of ‘class’ are usually based on measures of wealth as well as income, we also investigate longitudinal changes in the wealth distribution in the 1980s for these same individuals. Our findings on wealth reinforce those based on income. The paper concludes with a brief discussion of the policy implications of our findings.
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Working Paper No.55
10 June 1991
The Measurement of Chronic and Transitory Poverty; with Application to the United States
AbstractThis paper proposes a method of measuring chronic and transitory poverty based on any additively-decomposable index of aggregate poverty. Chronic poverty and transitory poverty in the United States are measured using data from the Panel Study of Income Dynamics (1987 interviewing year). In an attempt to identify the most impoverished subpopulations, poverty indices are decomposed according to race, type of household and educational qualifications of the head of the household.
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Working Paper No.54
09 June 1991
Why the Ex-Communist Countries Should Take the “Middle Way” to the Market Economy
AbstractThe ex-communist countries of Europe as well as Soviet Union want to find a way out of the command economy to a market system. The common advice (e.g., Lipton and Sachs, Kornai) has been to go quickly “all the way” to a fully capitalist economy. The difficulties of this policy are now becoming clear.
This paper argues that a “middle way” with many socialist elements is an attractive path for these countries, for both the transition and as a long-term goal. Economic reform of ex-communist countries must be based on two core elements. First, the primacy of law and stable private property rights must be assured. Second, free markets must be the basis of economic relations.
How could reform then be a middle way? First, firms must be independent entities owned by shareholders and responsible for making a profit, but the owners can include local, provincial (republic) and national governments, workers, and social institutions providing pensions and insurance. Government ownership has not made Volkswagen, Lufthansa or Japan Air Lines economic failures.
Second, market are institutions that must be developed. It is particularly important for a society without accepted norms and laws regarding market behavior to develop them, and to evolve efficient private contracts. Government legal codes can help. Finally, regulation can provide some of the security of socialist systems and Western welfare states.
The economic case for a middle way is supported by its widespread success, including Austria, Germany’s “social market” economy, Sweden, Canada and Japan. The cultural case is based on an economy’s need to be reasonably consistent with its society’s customs and norms. It is less of a shock for an ex-communist society to move to the “middle way” than to a purely capitalist society.
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Working Paper No.53
10 May 1991
A Critical Analysis of Empirical Studies of Transfers in Japan
AbstractNo further information available.
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Working Paper No.52
10 April 1991
Debt, Price Flexibility, and Aggregate Stability
AbstractIn conventional macroeconomic thought, price flexibility stabilizes thc economy. The more quickly prices fall (or inflation decreases) in a demand-induced recession, the faster output returns to its full-employment level. An alternative tradition, however, suggests that price flexibility can be destabilizing. If a recession reduces expectations of Jitlzre prices, this can raise current real interest rates and dampen aggregate demand. In addition, as actual current prices fall in a recession, real debt burdens rise which can reduce aggregate demand due to financial distress or the response of capital markets. This paper presents simulations from a dynamic macroeconomic model designed to examine the empirical effects of price flexibility. Our results show that, for credible specifications and parameter values7 the destabilizing effects of greater price flexibility can be larger than the conventional stabilizing channels. Therefore, it is possible that greater price flexibility magnifies the severity of economic contractions initiated by negative demand shocks.
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Working Paper No.51
09 April 1991
Financial Crises
AbstractThe presentations at this conference are by economists from Academies and economists who professionally confront real world problems, either in private finance or in public policy. As economists we accept that the remarks made by Keynes in the closing passage of The General Theory are true: "… the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. ….I am sure the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. … Soon or late it is ideas, not vested interests, which are dangerous for good or evil."
We like this assertion not only because it makes us important but also because it makes good sense.
The ideas that Keynes refers to are theories. A theory prior for rational action. A of system behavior is a proposed action, whether by individual agents in households or firms, a bank, a government agency or a legislative body is appropriate action only as a theory connects the action to the desired result. Because some institutions, such as deposit insurance, the savings and loan industry, and a number of the great private banks, that served the economy well during the first two generations after the great depression, seem to have broken down, the need to reform and to reconstitute the financial structure is now on the legislative agenda.
As we try to fix the financial system three questions should be asked of the pushers of a policy proposal:
- "What is it that is taken to be broke?",
- "What theory about proposal?"
- What are the dire consequences of not fixing that which you assert is broke?
In what follows I will take up three points
- Two views of the results of the economic process
- Systemic and idiosyncratic sources of financial crises
- Some ideas about the scope for policy in the present "crisis".
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Working Paper No.50
08 April 1991
How Useful Are Comparisons of Present Debt Problems with the 1930s?
AbstractMy assignment for this Conference on the Crisis ln Finance, as I understand is, is in the first instance to bring to bear the debt experience of the Great Depression of 1929/1940. I summarize first the record as shown in a Twentieth Century Fund report, which I prepared in 1938 for the Fund’s Committee on Debt Adjustment.
This report already contained a good deal of hindsight, since it was written five years after the end of the recession of 1929/33. But the process of reconstruction is also relevant to present-day problems. In particular, the New Deal reforms in the debt field set the pattern of law and financial customs within which the forces of finance have been operating in recent decades.
Parallels and contrasts between the debt situations of 1928/1930 and the 1988-90 are next examined. After some institutional analysis, quantitative examination of changes through time (1966/1989) is undertaken, using a set of tables [reproduced in the ANNEX] on the balance-sheet history of households and of non-financial corporations.
In the light of all this experience, I make a quick excursion into the field of financial reform. It is not my business on this occasion to spell out the policy alternatives. But we must ask whether basic reform may not be needed to keep debt problems from plaguing us year after year- and also whether attempts at reform may themselves bring the crisis to a head!
It turns out that the issue of reform in a crisis-context hinges on whether the United States can quickly set in motion a major new industry to act as an economic "locomotive". I claim that this is feasible- the "new industry" being restoration and restructuring of the U.S. infrastructure. To get it in motion calls for a revival of fiscal policy along radical new lines.
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