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Policy Notes No.2
01 February 2001
Fiscal Policy for the Coming Recession
AbstractGrowing government surpluses, a ballooning trade deficit, and the resulting growth in private sector debt have placed the United States’ economy in a precarious position. Papadimitriou and Wray agree with President Bush that fiscal stimulus is necessary to reinvigorate the economy; in the current economic environment, monetary policy will not work. However, a tax cut that would adequately stave off a downturn needs to be substantially larger than that proposed by the president. Therefore, in addition to the president’s proposal to cut marginal income tax rates, the authors include among their recommends a payroll tax reduction and an expansion of the EITC.
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Working Paper No.321
01 January 2001
Testing Profit Rate Equalization in the US Manufacturing Sector
AbstractLong-run differentials in interindustrial profitability are relevant for several areas of theoretical and applied economics because they characterize the overall nature of competition in a capitalist economy. This paper argues that the existing empirical models of competition in the industrial organization literature suffer from serious flaws. An alternative framework, based on recent advances in the econometric modeling of the long run, is developed for estimating the size of long-run profit rate differentials. It is shown that this framework generates separate, industry-specific estimates of two potential components of long-run profit rate differentials identified in economic theory. One component, the noncompetitive differential, stems from factors that do not depend directly on the state of competition; these factors are generally characterized as risk and other premia. The other component, the competitive differential, is due to factors that depend directly on the state of competition (factors such as degree of concentration and economies of scale). Estimates provided here show that during the period under study, the group of industries with statistically insignificant competitive differentials accounted for 72 percent of manufacturing profits and 75 percent of manufacturing capital stock, which is interpreted as lending support to the theories of competition advanced by the classical economists and their modern followers.
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Policy Notes No.1
01 January 2001
Fiscal Policy to the Rescue
AbstractThe United States’ economic expansion of the past eight years has been fueled by a rise in private sector indebtedness. In 1997 the private sector spending exceeded income for the first time since 1952, and since then the gap between the two has risen markedly. The situation closely mirrors that experienced in the United Kingdom during the 1980s, when a two-year slowdown resulted in absolute declines in GDP and a three-percentage-point increase in the unemployment rate.
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Public Policy Brief No.62
10 December 2000
Is There a Skills Crisis?
AbstractDespite seven years of economic growth a large gap exists in the wages earned by workers at the top of the earnings scale and those at the bottom. The leading explanation for this growth in wage inequality continues to be the skills-mismatch theory. This theory in part posits that gains in technology have resulted in jobs having highly technical skill requirements that have outpaced growth in worker skills; demand for highly skilled workers therefore rises more swiftly than that for less-skilled workers, creating upward pressure on wages for those with the most skills. The empirical evidence is examined here and shows that there is little evidence to support the mismatch theory as there has been little sign of a shortage of workers with computer or general technical skills. If the analysis is correct, then policies currently used to close the wage gap, such as improved education and training, will not alone solve the inequality problem. Rather, the solution may require macroeconomic policies aimed at maintaining economic growth and full employment, and labor policies, such as the minimum wage, that support the earnings of workers at the lower end of the wage scale.
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Working Paper No.319
01 December 2000
Compensatory Inter Vivos Gifts
AbstractEmpirical studies of intergenerational transfers usually find that bequests are equally divided among heirs while inter vivos gifts tend to be compensatory. Using the 1992 and 1994 waves of the Health and Retirement Study, we find that only 4 percent of parents who give divide their gifts equally among their children. Estimating probit models using family panels, we find that gifts are compensatory in the sense that a child is more likely to receive a gift if she works fewer hours and has lower income than her brothers and sisters; these results carry over to the amounts given. Fixed effects Tobit estimations show that the fewer hours a child works and the lower her income is, the more the parents give. These results imply that gifts are compensatory. The empirical results are, therefore, consistent with the predictions of the altruistic model of intergenerational transfers.
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Working Paper No.318
01 December 2000
Origins of the GATT
AbstractFiftieth-anniversary explanations for the efficacy of the GATT imply that the institution’s longevity is testimony to the free trade principles upon which it is based. In this light, the predominantly American architects of the system figure as free trade visionaries who benevolently imposed postwar institutions of international cooperation on their war-torn allies. This paper takes issue with such a characterization. Instead, the success of the GATT has been crucially dependent upon its ability to generate pragmatic and detailed policy via a uniquely inclusive forum. An effective institutional procedure, not free trade dogma, has proved key to its enduranc—and this feature has been in place since the institution’s inception.
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Public Policy Brief No.61
09 November 2000
Whither the Welfare State?
AbstractThe idea that saving is the force driving private investment and economic growth has become ever more entrenched in mainstream economic thought as well as in the minds of policymakers and the general public. Even though the empirical evidence that increased household saving will directly stimulate private investment and economic growth is scant, the idea remains prominent and underlies policy debates on topics ranging from Social Security to a balanced federal budget to reducing the national debt. The popular theory underlying these cuts is countered by evidence that private sector investment is financed primarily out of business retained earnings, not household saving, which explains why current policies aimed at raising household saving via cuts to social spending programs have been unsuccessful at raising saving rates. Moreover, government spending on social programs does not necessarily reduce economic growth. Higher government spending could be supported, and a greater degree of investment spending stimulated, through a combination of lower taxes on business income and higher taxes on personal incomes of upper-income households.
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Working Paper No.317
01 November 2000
Productivity in Manufacturing and the Length of the Working Day
AbstractData from the manuscript census of manufacturing are used to estimate the effects of the length of the working day on output and wages. We find that the elasticity of output with respect to daily hours worked was positive but less than one—implying diminishing returns to increases in working hours. When the annual number of days worked is held constant, the average annual wage is found to be positively related to daily hours worked, but again the elasticity less than 1.0. At the modal value of daily hours (10 hours per day), it appears that from the standpoint of employers, the marginal benefits of a shorter working day (a lower wage bill) were approximately offset by the marginal cost (lower output).
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Working Paper No.316
01 November 2000
Harrod versus Thirlwall
AbstractThis paper contrasts the different approaches to export-led growth used by Harrod and Thirlwall. It argues that, unlike Thirlwall’s model, Harrod emphasized the importance of both demand- and supply-sides in his analysis of growth. The fundamental difference between the two authors lies in their differing characterizations of the long run. While both authors assume unemployment, Thirlwall’s long run is presumably consistent with excess capacity, while Harrod’s warranted path assumes normal capacity growth. Harrod’s perspective suggests that if the warranted growth rate exceeds the natural growth rate, desired saving is excessive relative to the amount that is necessary to maintain the economy along its maximum growth path. Under these circumstances, rising exports have the beneficial effect of adjusting the warranted path to the economy’s maximum growth path while, at the same time, giving a boost to the actual growth rate. If, however, the warranted growth rate is lower than the natural rate, then rising net exports have to be accompanied by appropriate fiscal and/or tax policies to raise warranted growth. In either case, the long-run growth rate is regulated by the social saving rate (other things equal). Data for a number of OECD countries tend to confirm this implication of what might be called a classical-Harrodian perspective. The Harrodian growth tradition suggests that growth in an open economy, with normal capacity utilization and persistent cycles, can be characterized as export-oriented rather than export-led since both demand- and supply-side factors are important.
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Working Paper No.315
01 October 2000
Crowding In or Crowding Out?
AbstractThis paper investigates the effects of budget deficits within a classical-Harrodian framework in a closed economy. In this framework, growth and cycles are endogenous, underutilized capacity is a recurrent phenomenon, capacity utilization fluctuates around the normal level in the long run, and unemployment is persistent. Give the normal rate of profit, the key determinant of growth is the social savings rate. Along the warranted path when growth is balanced and is financed via retained earnings and equity, the social savings rate can be shown to be equal to the flow of business and household savings less the money and government bond holdings of the aggregate private sector–that is, it equals the flow of investable surplus available to firms to finance investment. An increase in the budget deficit always raises short-run output growth, although the stimulus is slowed down by the accumulation of debt by firms. However, with a fixed private savings rate, an increase in the deficit lowers the warranted path. If raising the warranted path is desired, appropriate policies that would raise the social saaving rate would have to be implemented. As in Harrod, whether crowding out is harmful depends on the rate of warranted growth relative to the natural growth rate.
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Working Paper No.314
01 September 2000
Asset Ownership across Generations
AbstractThis paper examines cross-generational connections in asset ownership. It begins by presenting a theoretical framework that develops the distinction between the intergenerational transfer of knowledge about financial assets and the direct transfer of dollars from parents to children. Its analysis of data from the Panel Study of Income Dynamics (PSID) reveals intergenerational correlations in asset ownership, and we find evidence to suggest that parental asset ownership or family-based exposure to assets affects adult children’s decisions about bank account and stock ownership
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Working Paper No.313
01 September 2000
CRA Grade Inflation
AbstractCommunity Reinvestment Act of 1977 (CRA) ratings and performance evaluations are the only bank and thrift exam findings disclosed by financial institution regulators. Inflation of CRA ratings has been alleged by community activists for two decades, but there has been no quantification or empirical investigation of grade inflation. Using a unique grade inflation methodology on actual ratings and evaluation data for 1,407 small banks and thrifts under the revised CRA regulations, this paper concludes that nearly half of all CRA ratings are inflated. Results are presented for the four federal bank and thrift regulators and their 31 regional offices. These findings are consistent with the “Friendly Regulator Hypothesis.”
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Working Paper No.308
01 August 2000
Discontinuities in the Distribution of Great Wealth
AbstractNational surveys of household economics and well-being in the United States usually focus on income. In those income surveys with supplemental wealth modules, the very rich are underrepresented if not unrepresented. Typically, wealth data are truncated such that they do not afford a view of the extreme top of the distribution. Therefore, we attempt to supplement our knowledge about elite wealth holdings by compiling data on the richest individuals and families in the United States. To do so, we draw from the rosters of the “Forbes 400,” which have been published annually by Forbes magazine since 1982. Along with information from other business press reports and standard biographical sources, rosters of the very rich enable research on inequality at the extreme of the wealth distribution during a period of dramatic change in the composition and concentration of wealth. In this study, we focus analytically on economic sectors because we are interested less in the maldistribution of wealth by demographic groups than in inequality between different economic sectors. We will first specify our analytical approach, then examine issues in the use of business press rosters of the very rich as a data source, and follow with a discussion of the dimensions and categories of our sector typology. After presenting our results, we will address how sectoral forces old and new affect economic opportunity and great wealth outcomes.
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Working Paper No.311
01 August 2000
Racial Wealth Disparities
AbstractA vast literature in economics has examined the economic progress of African Americans during this century. Most of these studies have focused on income–or on even narrower measures of economic well-being, such as earnings–to assess the extent to which any gains made relative to other racial groups can be attributed to such factors as declining racial discrimination, affirmative action policies, changes in industrial composition, or a narrowing gap between the educational levels of African Americans and the rest of the population. However, studies of earnings and income, while important for assessing the extent to which labor market discrimination exists and the ability of African Americans to move closer to whites in terms of acquiring the skills and connections that are currently rewarded by the markets, provide an incomplete picture. This paper therefore explores how African Americans have fared in terms of wealth, a less well-known factor and an important measure of economic well-being.
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Working Paper No.310
01 August 2000
Race and the Value of Owner-occupied Housing, 1940–1990
AbstractThe racial gap in the value of owner-occupied housing has narrowed substantially since 1940, but this narrowing has not been even over time or across space. The 1970s stand out as an unusual decade in which the value gap did not narrow despite continued convergence in the observed characteristics of housing. A decline in the relative value of black-owned homes in central cities appears to have offset gains elsewhere during the 1970s, and this central city decline continued into the 1980s. In further exploration of the 1970s, evidence is found of a rising propensity for higher-income blacks to live in the suburbs. A positive correlation between riots in the 1960s and widening of the value gap during the 1970s in a panel of cities also is found.
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Working Paper No.309
01 August 2000
Profits
AbstractProfits are the incentive for production and therefore employment in almost all of the world’s economies; they also may represent exploitation of workers and consumers. Jerome Levy, using a complex process, derived the profits identity during the years 1908–1914. Michal Kalecki, taking advantage of the development of national accounting, derived it in the 1930s. Levy viewed the equation as a tool for developing policies that would enable capitalist economies to achieve high rates of employment. Recent American experience gives weight to his views. Kalecki’s insights from the identity strengthened his belief that unemployment was inescapable under capitalism. He would find empirical support in Europe’s high unemployment rates during the past two decades.
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Working Paper No.307
01 July 2000
An Examination of Changes in the Distribution of Wealth from 1989 to 1998
AbstractThis paper considers the distribution of wealth in the period from 1989 to 1998 as an indicator of the economic condition of households. It examines changes in the distribution of wealth over that period, mostly using data from the Survey of Consumer Finances (SCF). Some of the SCF data used here have previously been studied by Weicher (1996), Wolff (1996), and Kennickell and Woodburn (1992 and 1999). As background, the paper also uses some estimates published by Forbes magazine on the 400 wealthiest people in the United States. The first section of the paper briefly discusses the data. The next section uses the Forbes data to characterize changes at the very top of the wealth distribution. The third section presents a variety of estimates of wealth changes for the population below the “Forbes 400″ level using SCF data. The fourth section examines the sensitivity of the SCF estimates to a variety of assumptions about systematic mismeasurement in the data. The final section summarizes the findings of the paper.
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Working Paper No.306
01 July 2000
Household Savings in Germany
AbstractThis paper describes how German households save and how their saving behavior is linked to public policy, notably pension policy. The analysis is based on a synthetic panel of four cross sections of the German Income and Expenditure Survey (“Einkommens- und Verbrauchsstichproben,” EVS, 1978, 1983, 1988, and 1993). The paper carefully distinguishes between several saving measures and concepts. It separates discretionary savings from mandatory savings and uses two flow measures: first, the sum of purchases of assets minus the sum of sales of assets and, second, the residual of income minus consumption. Our main finding is a hump-shaped age-saving profile with a high overall saving rate. However, savings remain positive in old age, even for most low-income households. How can we explain what may be termed the “German savings puzzle”? Germany has one of the most generous public pension and health insurance systems in the world, yet private savings are high until old age. We provide a complicated answer that combines historical facts with capital market imperfections and a distinction between the role of discretionary and mandatory savings.
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Working Paper No.305
01 July 2000
Can European Banks Survive a Unified Currency in a Nationally Segmented Capital Market?
AbstractThe euro was expected to become a substitute for the American dollar as an international currency. However, compromises made during its creation make it a less than perfect substitute in the medium term. Among these compromises was the application of macro convergence and micro diversity in financial markets and supervision at the national level. This now prevents the creation of a unified capital market and places EU banks at a disadvantage when competing with US banks in global markets. There were also peculiarities in the integration process that led to a single currency in the United States that suggest further institutional changes will be necessary.
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Working Paper No.304
01 July 2000
Family Structure, Race, and Wealth Ownership
AbstractResearchers have documented racial inequalities in wealth ownership and have offered a variety of explanations to account for these differences. One potentially important contributing factor that has received little attention is racial differences in family structure. This paper explores racial differences in the structure of family of origin and family in adulthood and examines the impact of these differences on wealth accumulation patterns. Using the National Longitudinal Survey of Youth, I find that large family size and family disruptions in childhood are negatively associated with wealth accumulation, portfolio behavior, and wealth mobility in adulthood. My analyses suggest that family size is a more important factor determining wealth accumulation for whites than for blacks or Hispanics and that family disruption is most strongly related to wealth outcomes for Hispanics. I find that family structure in adulthood is only modestly associated with overall wealth but strongly related to portfolio behavior and wealth mobility and that these relationships are relatively fixed across racial groups. My findings lend support to arguments about the importance of the role that resource dilution plays in determining life outcomes. They also suggest that efforts to reduce racial inequality in wealth ownership may be most effective if they seek to reduce the impact of deprivation early in life.
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Policy Notes No.7
01 July 2000
Why Does the Fed Want Slower Growth?
AbstractThe Fed has raised interest rates six times in the past year to slow the economy, in the belief that unemployment is too low. There is scant evidence, however, that low unemployment leads to inflation, that the economy is in danger of overheating, or that higher interest rates will reduce inflation. Instead, the Fed is merely hastening a downturn that will impose huge costs on society’s most disadvantaged.
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Public Policy Brief No.60
08 June 2000
A Dual Mandate for the Federal Reserve
AbstractThe Federal Reserve currently has two legislated goals—price stability and full employment—but a debate continues about making price stability the Fed’s primary and overriding goal. Evidence from the recent history of monetary policy contradicts arguments in favor of assigning primacy to inflation fighting and supports giving full employment equal importance. Economic performance under the dual mandate has been excellent, with low unemployment and low inflation, while many European countries whose central banks focus solely on inflation are experiencing double-digit unemployment. The costs of unemployment are high, but the costs of even moderate inflation are estimated to be low. Central bankers, who tend to be inflationaverse, need to be prodded to consider goals other than inflation. And, if the Fed pursues price stability exclusively, the price level is not free to increase in the event of an adverse supply shock to prevent large increases in unemployment. A dual mandate allows the Fed to focus on one goal or the other as conditions demand and to balance policy effects.
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Policy Notes No.6
01 June 2000
Drowning in Debt
AbstractThe economic expansion in the United States has been driven to an unusual extent by falling personal saving and rising borrowing by the private sector. If this process goes into reverse, as has happened under comparable circumstances in other countries, there will be severe recession unless there is a big relaxation in fiscal policy.
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Working Paper No.303
01 June 2000
“It” Happened, but Not Again
AbstractThis paper asks two questions: First, can we explain Japan’s ongoing financial crisis by means of an institutional analysis similar to the one Hyman P. Minsky applied to the American economy during the postwar period? Second, what are the implications of this analysis for what is going on in the Canadian and American economies today?
To answer the first question, we develop an interpretation of Japan’s postwar history, in particular, the evolution of its financial institutions that we believe fits Minsky’s institutional analysis. We begin by identifying three broad periods in Japan’s postwar economic history through 1990. We label the 1945 to 1972 period as “stable,” thanks in part to tight regulation of the financial and trading system. By the early 1970s and through the end of the decade, however, these systems were under severe strain for both internal and external reasons. Internally, Japan’s largest companies were relying less on bank credit to finance investment and trade and more on retained earnings. This affected the financial system by reducing bank profitability and forcing banks to seek business elsewhere, notably in the real estate sector. Externally, Japan suffered from the collapse of the Bretton Woods exchange-rate system, increasing trade tensions with the United States that led to “forced” deregulation, and what were two very difficult oil shocks for a country unusually reliant on oil imports. During the last period, from 1980 to 1990, Japan’s economy easily outperformed the OECD countries, leading to yet more pressure from abroad to deregulate and stimulate domestic demand. Ultimately, we suggest that the country’s financial system was not able to adapt adequately to a rapidly changing domestic and international setting. This created a powder keg for ill-considered fiscal and monetary policy (surpluses and high interest rates) and fertile ground for the financial crisis that took root in 1990 and persists to some extent today.
To answer the second question, we draw parallels between events leading up to Japan’s 1990 stock market crash and events in the United States and Canada today, with particular emphasis on the current policy stance in both countries toward budget surpluses and inflation. We argue there are good reasons to be concerned that history may be about to repeat itself.
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