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Policy Notes No.7
01 July 1999
Capital Income Taxes and Economic Performance
AbstractTax reform that reduces tax rates on capital income, no matter how successful it is in reducing the user cost of capital, will have at best minimal effects on capital formation and output and therefore on the growth of the United States’ economy.
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Public Policy Brief No.54
01 July 1999
Down and Out in the United States
AbstractDespite a long period of strong economic growth, more than 28 million working-age persons were categorized by the Bureau of Labor Statistics as out of the labor force in 1998. A small portion of this population will move into the labor force, but the majority will remain without work. This brief examines the demographics of the out-of-the-labor-force population, their reasons for not working, the likelihood that they will move into the labor force, and the adverse effects on them of prolonged joblessness. Current labor market policies, and especially welfare reform measures, have proved ineffective for the “hard-core” jobless because the policies are predicated on the mistaken notion that the private labor market is dynamic and flexible enough to accommodate anyone who wants to work. A public employment program would complement the operation of the private market, providing those who are able and willing with income, a sense of worth, the opportunity to make a social and economic contribution, and preparation for entry into the labor force.
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Working Paper No.275
01 July 1999
Minsky’s Analysis of Financial Capitalism
AbstractIn this paper, the authors discuss Minsky’s analysis of the evolution of one variety of capitalism—financial capitalism—which developed at the end of the nineteenth century and was the dominant form of capitalism in the developed countries after World War II. Minsky’s approach, like those of Schumpeter and Veblen, emphasized the importance of market power in this stage of capitalism. According to Minsky, modern capitalism requires expensive and long-lived capital assets, which, in turn, necessitate financing of positions in these assets as well as market power in order to gain access to financial markets. It is the relation between finance and investment that creates instability in the modern capitalist economy. Financial capitalism emerged from World War II with an array of new institutions that made it stronger than ever before. As the economy evolved, it moved from this more successful form of financial capitalism to the fragile form of capitalism that exists today.
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Policy Notes No.6
01 June 1999
The Minimum Wage Can Be Raised
AbstractSurvey responses make it clear the minimum wage can be raised. The question now is, How high can it be raised before serious employment consequences occur?
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Working Paper No.270
01 May 1999
Can Social Security Be Saved?
AbstractThe first part of this paper is an overview of projections of Social Security’s future and an explanation of why the projections have led many to believe there is a looming financial crisis. We argue that any problems to be faced are far down the road and not severe enough to justify the use of the word “crisis.” Something will have to be done to resolve the real and financial problems that are likely to crop up in two or three decades. However, this does not in itself mean that something has to be done today specifically to save Social Security
The second part of the paper discusses the real and financial nature of Social Security’s problems. Almost all commentators have focused on the financing of Social Security and thus have proposed financial solutions. We argue that the questions about the future of Social Security concern the size and distribution of the real economic pie. Once this is recognized, it becomes obvious that none of the popular reforms, such as privatization, reduction of current benefits, and President Clinton’s proposal to “set aside” budget surpluses, can really help. We conclude with alternative policy recommendations that are consistent with the true nature of the future problem.
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Working Paper No.269
01 May 1999
Demand Constraints and Economic Growth
AbstractIn recent years the United States has seemed to achieve the best of all possible worlds: robust economic growth, very low unemployment, and low inflation. Many attribute this performance to fewer supply-side constraints, as the country has moved away from stifling regulations and other impediments to trade. When compared with the very high unemployment rates suffered in European countries, our lower unemployment rates appear to be due to freer labor markets and to a less generous social safety net that saps private initiative.
In this paper we show that although it is true the United States has enjoyed a higher employment rate than all of our major competitors, we lag behind all other major countries in per capita GDP growth since 1970. The reason is our dismal rate of productivity growth. We show that when one decomposes per capita GDP growth into its component parts—growth of employment rates and growth of output per employee—the US experience is quite different from that of the other countries. In some sense, countries “choose” high employment paths or low employment paths, but regardless of that choice, economic growth does not appear to be much affected. We argue that this is because countries have not faced significant supply constraints; rather, per capita GDP growth has been largely demand constrained. For this reason policies aimed at removing supply constraints do not lead to more rapid economic growth. The conclusion is that, if one is to trying to increase growth rates, Keynesian “demand side” policies are preferable to “supply side” policies.
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Policy Notes No.5
01 May 1999
How Can We Provide for the Baby Boomers in Their Old Age?
AbstractThe search for the solution to the problems faced by the Social Security system should focus not on how to amend OASDI but on how best to achieve faster long-term economic growth. Achieving such growth is better left to the purview of fiscal and monetary policy, not the OASDI system.
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Working Paper No.268
01 April 1999
Risk Reduction in the New Financial Architecture
AbstractFive times in a decade not yet completed, financial markets have floated to the edge of a whirlpool. In October 1998, they were about to drown when Alan Greenspan threw them a piece of string that, surprisingly, turned out to be a lifeline. The causes for this financial instability lie deep—in the economic theory that urges easy and efficient substitution of one piece of paper for another, always and everywhere; in the technology-driven tight articulation of receipts and payments that Hyman Minsky warned against a generation ago; and in the growth of leverage that diminishes the creditworthiness of major institutions when an interruption in their receipts requires them to seek funds. Meanwhile, as decision-making in finance moves from banks to markets, and the creators of derivative instruments find ways to present uncertainties as risks that can be modeled, time horizons fall and spurious interrelations promote “dynamic hedging” that communicates financial disturbance anywhere to price volatility everywhere. Prevention should be sought in rules to control the creation of leverage in the repo and derivatives markets and in limits on banks’ freedom to back away from borrowers’ cross-border liabilities in currencies other than their own. Crisis management when prevention fails will require “standstill” agreements to encourage the continuation of something like normal economic life while the losses from merely financial failure are sorted out.
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Policy Notes No.4
01 April 1999
Can Goldilocks Survive?
AbstractGrowing government budget surpluses combined with growing trade deficits have generated record private sector deficits. Unless households continue to reduce their saving—creating an increasingly unsustainable debt burden—the impetus that has driven the expansion will evaporate.
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Policy Notes No.3
01 March 1999
Surplus Mania
AbstractA federal government surplus has finally been achieved, and it has been met with pronouncements that it is a great gift for the future and with arguments about what to do with it. However, the surplus will be short-lived, it will depress economic growth, and, in any case, surpluses cannot be “used” for anything.
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Public Policy Brief No.51
01 March 1999
Small Business and Welfare Reform
AbstractThe Levy Institute conducted a survey of small businesses to elicit information about their hiring and employment practices, especially the hiring of former welfare recipients; preferences regarding education, training, and other characteristics of potential employees; effects of increases in the minimum wage on employment decisions; and their responses to various forms of government wage and training subsidies. Analysis of the survey results indicates weaknesses in the assumptions on which recent welfare reform has been based. It also suggests a role for small business that has been overlooked. An active partnership between government and small business, involving incentives for hiring and training as well as mandates for welfare reduction, is required if former welfare recipients are to become independent and productive members of the labor force.
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Working Paper No.267
01 March 1999
The Minimum Wage and Regional Wage Structure
AbstractWhen the minimum wage was first enacted in 1938, the fiercest opposition came from the South, where wages were considerably lower that in the industrial North. Today, that opposition is found to emanate from states that have right-to-work laws (regardless of location). Using census data from the Integrated Public Use Microdata Series (IPUMS) for the years 1940 to 1990, this paper looks at workers earning around the minimum wage by region and industry. It shows that, controlling for education and industry type, wages tend to be depressed more in states with right-to-work legislation than in high union density states. These effects on the wage structure have implications for the distribution of income.
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Working Paper No.266
01 March 1999
Minsky’s Analysis, the European Single Currency, and the Global Financial System
AbstractThe paper begins with a brief review of the main ideas associated with Hyman Minsky and their implications for economic policy and the achievement of full employment. There is a focus on the financial instability hypothesis, the role of the central bank as lender of last resort, and the requirements for regulation of the financial system. The implications of these ideas for economic policy are then explored at the level of the European Union and the global economy. It is argued that the Minsky analysis would suggest that at the level of the nation state, the general drift of economic policy and changes in institutional arrangements have made the prospects for full employment bleak. For the European Union, the institutions that are emerging in the context of EMU and the euro are considered in terms of their impacts on the level of economic activity. At the global economy level, the need for international institutions to regulate the global financial system is considered.
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Working Paper No.265
01 March 1999
Real Exchange Rates and the International Mobility of Capital
AbstractThis paper demonstrates that the terms of trade are determined by the equalization of profit rates across international regulating capitals, for socially determined national real wages. This provides a classical/Marxian basis for the explanation of real exchange rates, based on the same principle of absolute cost advantage which rules national prices. Large international flows of direct investment are not necessary for this result, since the international mobility of financial capital is sufficient. Such a determination of the terms of trade implies that international trade will generally give rise to persistent structural trade imbalances covered by endogenously generated capital flows which will fill any existing gaps in the overall balance of payments. It also implies that devaluations will not have a lasting effect on trade balances, unless they are also attended by fundamental changes in national real wages or productivities. Finally, it implies that neither the absolute nor the relative version of the Purchasing Power Parity hypothesis (PPP) will generally hold, with the exception that the relative version of PPP will appear to hold when a country experiences a relatively high inflation rate. Such patterns are well documented, and in contrast to comparative advantage or PPP theory, the present approach implies that the existing historical record is perfectly coherent. Empirical tests of the propositions advanced in this paper have been conducted elsewhere, with good results.
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Working Paper No.264
01 February 1999
Further Evidence on the Distributional Effects of Disinflationary Monetary Policy
AbstractThe performance of the United States’ economy between 1994 and 1998 was so good that some pundits began to call for the Federal Reserve to increase interest rates to depress economic activity and reduce asset prices. However, slowing the economy to stabilize asset prices would have adverse distributional effects. Impulse-response functions from identified vector autoregression (VAR) indicate that unexpected increases in the federal funds rate increase unemployment among blacks and Hispanics by 50 to 90 percent more than among whites. A narrative approach applied to two disinflationary periods shows that higher interest rates in the 1974 disinflation decimated the housing industry and that two interest-rate-sensitive sectors-construction and durable goods-showed the largest declines in 1980 and 1981 (periods following the 1979 tightening). Utilizing the Romer and Romer examination of the minutes of Federal Open Market Committee meetings to determine dates on which the Fed attempted to create a recession to reduce inflation, antiinflationary policy shocks can be estimated to increase unemployment among nonwhites more than twice as much as they do among whites. A social accounting matrix (SAM) indicates that in the sectors that were hardest hit by recession following the 1974-1975 and 1979-1982 disinflations (construction and durable goods), blue-collar workers were harmed more than other workers in terms of lost income and urban households were hurt much more than rural households. Minorities bear the brunt of disinflationary policy and do not share proportionately in the benefits of keeping the stock market stable, a factor that the Fed should take into account when contemplating actions aimed at stabilizing asset markets.
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Working Paper No.263
01 February 1999
From Common Market to EMU
AbstractThis paper traces the history and the institutional background of European integration to the establishment of the economic and monetary union in the European Union (EU). After the establishment of the European Economic Community (EEC) in the late 1950s, attempts at monetary integration, and ultimately monetary union, tended to assume importance only as a result of financial crisis and then returned to being a vague objective as soon as the crisis recedes. In recent years, however, monetary integration has assumed greater urgency. Economic union, on the other hand, has followed a smoother transition.
Economic integration was used after the Second World War to realize political goals, chiefly to anchor West Germany within the western European alliance. Since that time the economies of member states have slowly integrated. The economic environment of the 1950s is a far cry from the integrated community of today. In the 1950s European currencies were not convertible and domestic trade was highly protected. Intra-European trade was based on bilateral clearing arrangements institutionalized by the European Payments Union. Today EU currencies are fully convertible; capital controls, intra-EU tariffs, and quotas have been eliminated; and the single market has been completed.
Monetary union has gone through a number of stages. The Werner Plan of the early 1970s, which set the goal of economic and monetary union by the end of the decade, was only partially implemented. Its failure can be put down to unfavorable international economic conditions and poor institutional structures. In the early 1980s a new monetary initiative, the European Monetary System (EMS), was launched. It struggled through its initial phase until it was replaced by the current euro arrangements. These successive stages ultimately culminated in the Maastricht Treaty, which laid out a precise path and timetable for economic and monetary union.
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Policy Notes No.2
01 February 1999
The Emperor Has No Clothes
AbstractIf you were to write yourself IOUs to provide for your retirement and put them in a safety deposit box, would you rest comfortably, assured that you would be able to purchase all the necessities of life in 2020? Well, President Clinton’s proposal is even worse.
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Public Policy Brief No.50
01 February 1999
Public Employment and Economic Flexibility
AbstractCentral banks, national governments, and international organizations have resisted policies that would promote full employment because high employment and high capacity utilization are associated with structural rigidities that result in sluggish growth, inflationary pressures, and other undesirable consequences. What has been almost entirely overlooked is the way in which public sector activity can enhance flexibility with regard to labor, capital goods, natural resources and environmental protection, methods of production, and location of economic activity. The job opportunity approach makes strategic use of public sector activity to create truly full employment, thereby reducing the social and economic costs of unemployment, and to promote projects designed to be consistent with broad macroeconomic goals and social values.
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Working Paper No.262
01 January 1999
The 1966 Financial Crisis
AbstractThe so-called credit crunch of 1966 has long been recognized as the first significant postwar financial crisis and one that required the first important intervention by the Federal Reserve Bank. In the midst of the robust postwar expansion, the Fed began to fear inflation and tightened monetary policy to the point at which profitability of financial institutions was threatened. As Minsky argued, “By the end of August, the disorganization in the municipals market, rumors about the solvency and liquidity of savings institutions, and the frantic position-making efforts by money-market banks generated what can be characterized as a controlled panic. The situation clearly called for Federal Reserve action.” The Fed was forced to enter as a lender of last resort to save the muni bond market, which in effect validated practices that were stretching liquidity. As a result of Fed intervention, the economy continued to expand, new financial practices emerged and were validated, leverage ratios increased, memories of the Great Depression faded, and markets came to expect that big government and the Fed would come to the rescue as needed. That 1966 crisis was only a minor speed bump on the road to Minskian fragility. To some extent, 1966 proved to be the first verification of the “financial instability hypothesis” that Minsky had been developing since the late 1950s, and the events of that year would stimulate further development of his analysis of the early postwar transition from a “robust” financial system toward a “fragile” financial system.
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Policy Notes No.1
01 January 1999
How Negative Can US Saving Get?
AbstractIn 1998 the volume of private spending in the United States rose by almost twice the increase in disposable income. The impact of this excess private spending financed by increased net borrowing has been profound; without it, the economy would have stagnated. Can this pattern of demand growth continue? The answer is a resounding no.
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Working Paper No.261
01 January 1999
Theories of Value and the Monetary Theory of Production
AbstractThis paper extends earlier work that argued that liquidity preference theory should be interpreted as a theory of value. Here I will argue that two theories of value are needed for analysis of a monetary production economy: the labor theory of value and the liquidity preference theory of value. Both Keynes and Marx were trying to develop a monetary theory of production; Marx, of course, adopted a labor theory of value in his analysis, and it was previously argued that Keynes adopted a liquidity preference theory in his. A monetary theory of production should adopt both, however, and I will argue that Keynes seems to have recognized this. Further, Keynes did adopt labor hours as the measure of value and said he agreed that labor produces all value. I admit it is still a leap to claim that Keynes accepted both theories of value. Instead, I argue he should have adopted both and will show that this is consistent with the purposes of the General Theory.
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Strategic Analysis
01 January 1999
Seven Unsustainable Processes
AbstractThe purpose of this Strategic Analysis is not to make short-term predictions about the life expectancy of the current economic expansion in the United States, but to determine if the present stance of fiscal and trade policy is appropriate in the medium term. The expansion has been generated by economic processes that are unsustainable—processes in private saving, private borrowing, and asset prices that have fueled the growth of demand against a negative impetus from both fiscal policy and net export demand. Given unchanged fiscal policy and the consensus forecast for growth in the rest of the world, continued expansion requires that private expenditure continue to expand relative to income on a record and growing scale. It seems impossible that this source of growth can be forthcoming indefinitely, although it may well continue into next year. When private demand falters, it will be necessary to bring about a substantial relaxation of fiscal policy and ensure a structural improvement in the United States’ balance of payments. (Table 1 revised October 2000.)
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Public Policy Brief No.49
10 December 1998
Corporate Governance in Germany
AbstractThe postwar system of corporate governance in Germany is being threatened by the failure of some industries to maintain their competitive position (with resulting significant job losses) and pressures for financial liquidity driven by those who have accumulated substantial financial holdings, institutions competing for control of those holdings, and those concerned about the funding of the pension system. The strength of the competitors (mainly the Japanese) lies not in cost differences, but in their capabilities, based on financial commitment and organizational integration, to innovate and thereby to build the long-run future of the corporation. If German labor, finance, and corporate managers each insist on pursuing independent strategies to extract returns from industrial enterprises and if corporations replace investment in innovation with shareholder value as the basis for corporate decision making, German industry may be unable to regenerate the basis of sustainable prosperity.
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Public Policy Brief No.48
09 December 1998
Japanese Corporate Governance and Strategy
AbstractDespite the crisis in the Japanese financial sector, prolonged recession, and competitive challenges, Japan’s formidable productive system remains strong. Nevertheless, the system of corporate governance, which has pursued a strategy of retaining corporate revenues and reallocating labor resources and returns to labor in order to invest in productive capabilities, faces short-term pressures from a transformation of the financial sector and long-term pressures from the growth of intergenerational dependence. Current reforms seek to generate funding for the pension system and profits for financial enterprises from international securities and money markets. These reforms seem to work within the corporate governance framework that emphasizes the retain-and-reallocate strategy, but the question is whether they will create powerful pressures to extract returns from the domestic economy, thereby affecting how corporations are managed and resources allocated.
Download Public Policy Brief No. 48, 1998 PDF (9.83 MB)