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Working Paper No.243
01 July 1998
State Type and Congressional Voting on the Minimum Wage
AbstractHow members of Congress vote on increases in the minimum wage is a function of several factors, most notably party affiliation and constituent interest. But also among those factors is the existence of “right-to-work” laws in the representative’s state and the presence of labor unions, especially as they represent a voting constituency. This paper examines congressional voting patterns on the minimum wage from 1949, when the first vote to increase the wage occurred, to 1996, when the last vote occurred, and finds a relationship between union strength and positive voting, a relationship between “right-to-work” states and negative voting, and a decline in the significance of unions as a factor affecting congressional voting as unionism has declined.
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Working Paper No.242
01 July 1998
Money and Credit in a Keynesian Model of Income Determination
AbstractThis paper formally integrates the theory of money and credit derived ultimately from Wicksell into the Keynesian theory of income determination, with assets allocated according to Tobinesque principles. The model deployed has much in common with the modern “endogenous money” school initiated by Kaldor which emphasizes the essential role played by credit in any real life economy, since production takes time and the future is always uncertain. New ground is broken methodologically because all the propositions are justified by simulations of a rigorous (60-equation) model, making it possible to pin down exactly why the results come out as they do. One conclusion of the paper is that there is no such thing as a supply of money distinct from the money which agents wish to hold or find themselves holding. This finding is inimical, possibly in the end lethal, to the way macroeconomics is currently taught as well as to the neoclassical paradigm itself.
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Working Paper No.241
01 July 1998
Optimal Financing by Money and Taxes of Productive and Unproductive Government Spending
AbstractThis paper contains an investigation of the effects of different means of financing government spending on economic growth, inflation, and welfare. In this setting, two different types of government spending are considered: productive expenditures that provide services to the private sector in its production activities, and unproductive expenditures that have no direct influence on the private economy. In turn, two different
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forms of finance are considered: proportional income taxation; and money creation. -
Working Paper No.239
01 July 1998
An Ethical Framework for Cost-Effective Medicine
AbstractHMO medicine has been effective in controlling once-runaway health care costs. But it sets up inevitable conflict between patient care and the financial well-being of the health plan and of its employee or contract physicians. This paper looks at the ethical problems posed by managed care (in particular, at its incentives to physicians to economize on care), and points to a regulatory framework to provide consumer protection. The trend to capitated payments is especially problematic. It relieves the insurer from interfering in medical decision-making as a means of cost control, but it pits the interests of physicians directly against the interest of patients.
Policy makers, the finding is, should not try to micromanage HMO medicine, which they have done by mandating, for example, minimal hospital stays after childbirth. The real need is for regulatory oversight of financial incentives and disclosure. Health plans ought to be required to disclose the incentives under which their physicians are paid; to provide subscribers with honest information on health care coverage; and to be prohibited from imposing “gag rules” on physicians. Moreover, ERISA ought to be recast to hold health plans accountable for errant care decisions, which they are not now in many cases. Purchasing cooperatives, the conclusion also is, would play an especially useful role if managed care continues to take hold as the institutional norm.
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Policy Notes No.7
01 July 1998
Goldilocks and the Three Bears
AbstractUnlike the Papa, Mama, and Baby Bears faced by the storybook Goldilocks, our Goldilocks faced three ferocious grizzlies: a cascading, global financial crisis, global deflation and excess capacity (or insufficient demand), and a domestic fiscal surplus in conjunction with record private deficits.
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Working Paper No.238
01 June 1998
The Macroeconomics of Industrial Strategy
AbstractThis paper explores some of the links between macroeconomic policy and industrial strategy. The perspective of the present paper is to emphasize the role of the output and investment activities of enterprises rather than the general focus on the labor market in the determination of economic performance. We have explored this aspect in some detail in connection with the inflation barrier, and argue that such a barrier should be viewed in terms of a lack of capacity. We briefly review the balance of trade constraint on growth and employment. The overall implications of those two sets of analyses is that macroeconomic performance would be enhanced by appropriate industrial strategy, and that inappropriate macroeconomic policies will damage industrial performance. Policies designed to restrain inflation by lowering the level of aggregate demand will tend to depress investment and harm capacity. Improved industrial performance requires a climate conducive to investment and research and development, which in turn depends on, inter alia, high and stable levels of aggregate demand.
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Policy Notes No.6
01 June 1998
What to Do with the Surplus
AbstractNeither Congress nor the president is on the right track. Rather than protecting the surplus, we should be increasing spending and cutting taxes to contain the looming world recession.
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Public Policy Brief No.40
02 May 1998
Overcoming America’s Infrastructure Deficit
AbstractCondemned bridges, dilapidated school buildings, contaminated water supplies, and other infrastructure shortcomings threaten American growth, productivity, and prosperity. The authors of this brief propose a plan for financing infrastructure projects that is designed to have minimal effect on the federal budget and to promote sound fiscal operation. Federal zero-interest mortgage loans to state and local governments for capital projects specified by Congress can cut the cost of such projects, achieve needed improvements in the nation’s infrastructure, and thereby contribute to the American economy’s future.
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Working Paper No.236
01 May 1998
An Important Inconsistency at the Heart of the Standard Macroeconomic Model
AbstractThe standard neoclassical model is the foundation of most mainstream macroeconomics. Its basic structure
dominates the analyis of macroeconomic phenomena, the teaching of the subject, and even the formation of
economic policy. And, of course, the modern quantity theory of money and its attendant monetarist
prescriptions are grounded in the model’s strict separation between real and nominal variables.
It is quite curious, therefore, to discover that this model contains an inconsistency in its treatment of the
distribution of income. And when this seemingly small discrepancy is corrected, without any change in all of
the other assumptions, many of the model’s characteristic results disappear.Two instances are of particular
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interest. First, the strict dichotomy between real variables and nominal variables breaks down, so that, for
example, an increase in the exogenously given money supply changes real variables such as household income,
consumption, investment, the interest rate, and hence real money demand. Secondly, since the price level
depends on the interaction of real money demand and the nominal money supply, and since the former is now
affected by the latter, price changes are no longer proportional to changes in the money supply. Indeed, we will
demonstrate that prices can even fall when the money supply rises. The link to the quantity theory of money,
and to monetarism, is severed. -
Policy Notes No.5
01 May 1998
The Fed Should Lower Interest Rates More
AbstractSome analysts have argued against monetary ease, fearing that it might fuel a speculative boom. Alas, given the recent substantial “market correction,” this objection may safely be put away.
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Working Paper No.235
01 May 1998
East Asia Is Not Mexico
AbstractWhat was different about the collapse of the Asian emerging markets in 1997? The free fall
of the Mexican peso and the collapse of the Mexican Bolsa produced a “Tequila effect” that spread
through most of South America. But it did not create a sell-off in the global financial markets similar
to that which occurred on 27 October 1997. Normally, sharp declines in prices in emerging equity
markets produce a “flight to quality,” in which international investors shift their funds back into
developed-country markets and local investors seek to protect their wealth by diversifying into
developed-country assets. Yet the collapse in the Asian emerging markets, that started in Thailand,
spread to the other second-tier Newly Industrialising Economies (NIEs), and eventually extended to
the first-tier NIEs produced the largest absolute declines ever experienced in the major developed-country equity markets. If equity markets can suffer from what Alan Greenspan has called “irrational
exuberance,” the Asian crisis suggests that they may also suffer from “irrational pessimism.” Yet
there is much to indicate that in this case the financial markets in Japan, Europe, and the United States were
quite rational in assessing the global implications of the financial crisis in Asia. -
Public Policy Brief No.39
01 May 1998
The Unmeasured Labor Force
AbstractIs the current labor market as tight as official statistics would seem to indicate? If incumbent workers increase their hours of work, it is irrelevant to the unemployment rate, but hardly irrelevant to the level of labor supply. The authors of this brief find that job insecurity and stagnating wages have made Americans willing to work those extra hours to build a financial cushion, and a 1 percent increase in hours worked per worker for a fixed labor supply is equivalent in terms of labor supply to a 1 percent increase in the number of workers. This more realistic picture of labor supply has important implications for expectations that welfare recipients can easily find jobs, for reforms in labor market statistics to provide better information, and for the direction of monetary policy.
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Working Paper No.237
01 May 1998
Speed of Technical Progress and Length of the Average Interjob Period
AbstractThe mean duration of unemployment approximately doubled in the United States between the early 1950s and the mid-1990s, with most of the increase occurring since the early 1970s. Using a simple model linking the average duration of unemployment with the speed of technical change, and aggregate time-series data, the authors find strong evidence that both the rate of total-factor productivity growth and investment in office, computing, and accounting equipment (OCA) per employee have a significant positive effect on mean unemployment duration. Moreover, literally all of the two-thirds rise in mean unemployment duration between 1971 and 1994 (two similar points in the business cycle) can be attributed to increases in OCA investment.
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Policy Notes No.4
01 April 1998
Small Business and the New Welfare
AbstractTo what extent have small businesses hired former welfare recipients and what might induce them to hire more? The Levy Institute conducts a national survey of small firms in many industries to find out.
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Working Paper No.234
01 April 1998
Yes, “It” Did Happen Again
AbstractThe title of Visiting Senior Scholar Jan Kregel’s working paper is a reference to Hyman P. Minsky’s book Can “It” Happen Again? The Minskian “it” is the debt deflation scenario that led to the Great Depression, and Kregel makes the case that the recent Asian crisis is just such a scenario.
Minsky defined three types of financing. Hedge financing is a position in which a firm’s expected cash flow always exceeds the financing costs and operating expenses by a wide margin of safety. Speculative financing is a position in which a firm has a positive net present value, but the expected cash flow will not be sufficient to meet all financial commitments in all periods. Ponzi financing is a position in which a firm has to borrow funds just to meet its current cash flow commitments. According to Minsky, a change in macroeconomic variables, such as the interest rate, can change a firm’s financial position from hedge to speculative or even to Ponzi by reducing the present value of the firm’s current cash flow and increasing its cash flow commitments. A bank will respond to a deterioration of the financial position of its debtors by reducing lending and attempting to recall lending. If so, firms will find themselves in Ponzi positions and will be forced to sell assets just to meet their current cash flow commitments. Selling assets creates a generalized downward pressure on output and asset prices. Thus, the term “debt deflation.”
According to Kregel, the above scenario could also result from a depreciation in the exchange rate if firms have a high proportion of imported inputs or foreign debt—and this is precisely what happened in Asia in 1997.
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Working Paper No.233
01 April 1998
Public Capital and Economic Growth
AbstractEmpirical research largely suggests that there is a positive role for public capital and a negative role for taxation and debt, and the effectiveness of public capital depends critically on its efficiency. Research Associate David Alan Aschauer develops a common framework to investigate the importance of three aspects of public capital: how much you
have, how you pay for it, and how you use it. -
Working Paper No.232
01 April 1998
The Asian Disease
AbstractThe Asian crisis is a textbook case of the “financial instability hypothesis” first expressed in 1966 by the late Hyman P. Minsky.
Minsky’s “hypothesis” was proposed to explain instability in a large, insulated, developed economy. Despite its intuitive appeal, it was not widely accepted among financial economists (Charles Kindleberger being a notable exception) because, they said, they could not find historical illustrations to fit the theory. The financial economist’s machine runs smoothly in the best of all possible worlds. What makes trouble in the financial economist’s world is the exogenous shock that affects everyone (war, oil prices) or government error (fiscal imbalance, monetary policy). “Financial distress,” Barry Eichengreen and Richard Portes write in their study of sovereign debt rescheduling, “normally results from a real shock or bad policies.” But Asia presents a cumulation of apparently rational decisions that are precisely those Minsky predicted.
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Working Paper No.231
01 April 1998
The Hierarchy of Money
AbstractThis paper attempts to bring together several of Hyman P. Minsky’s insights in order to suggest a relationship between the state’s ability to tax and the money of the economy. Minsky recognized that money represents an IOU or promise to pay and that “acceptability” is its important feature. He further recognized that the State can play an important role in determining whose IOUs will be accepted (both publicly and privately). I will argue that support for the Chartalist vision of money as a ‘creature of the State’ can be found in Minsky. Finally, I will apply the Chartalist theory to Minsky’s notion of a ‘hierarchy of money’ in order to suggest that the State determines not only the unit in which all of the monies in the hierarchy are denominated but also influences the positioning of certain monies within the hierarchy.
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Policy Notes No.3
01 March 1998
Small Business and the Minimum Wage
AbstractTo what extent have small businesses hired former welfare recipients and what might induce them to hire more? Do small businesses change their hiring and employment practices in response to an increase in the minimum wage? The Levy Institute conducts a national survey of small firms in many industries to find out.
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Working Paper No.230
01 March 1998
The Romance of Assimilation?
AbstractLittle research has been done on the role of intermarriage in the blending of peoples in the American past, and
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even less has been done on the effect of past intermarriage on the ethnic identity of today’s Americans. Senior
Scholar Joel Perlmann sees value in studying intermarriage to show fault lines in society (social distance is
larger across some divisions than others) and to examine the effect intermarriage ultimately has on
assimilation. Perlmann asks, Is it assimilation that causes intermarriage or intermarriage that causes
assimilation? As he sees it, the causality works in both directions: weakened ethnic allegiances are a source of
intermarriage and intermarriage weakens ethnic allegiances./P> -
Working Paper No.229
01 March 1998
E Pluribus Unum
AbstractKnowledge of English is near universal, and preference for that language is dominant among most immigrant nationalities. However, only a minority remain fluent in the parental languages, and there are wide variations among immigrant groups in the extent of their parental linguistic retention. These variations are important for theory and policy because they affect the speed of acculturation and the extent to which sizable pools of fluent bilinguals will be created by today’s second generation.
The authors examine patterns of language adaptation in a sample of over 5,000 second-generation students in South Florida and Southern California, employing multivariate and multilevel analyses to identify the principal factors accounting for variation in foreign language maintenance and bilingualism. While a number of variables emerge as significant predictors, they do not account for differences across immigrant nationalities which become even more sharply delineated. A clear disjuncture exists between children of Asian and Hispanic backgrounds whose parental language maintenance and bilingual fluency vary significantly. Reasons for this divergence are explored and their policy implications are discussed.
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Working Paper No.228
01 March 1998
Education’s Hispanic Challenge
AbstractTwo family characteristics are consistently associated with educational attainment: the level of education of
parents and the material resources available to support the education of the children. Hispanic parents have a
lower level of education than any other group, and Hispanic income is lower than any other group except
African Americans. Hispanic children are underrepresented in preschool. On average, by age 13 Hispanic
children are two years behind non-Hispanic white students in English and four years behind in science.
Hispanic high school students are less likely to be enrolled in college preparatory courses. The cumulative
effect is that Hispanics, especially those of Mexican ancestry, are less likely to attend and complete college than
any other ethnic group. Only 7 percent of Mexicans aged 25 to 37 have completed college.
The reduced likelihood that native-born Hispanics will complete college does not point to a rapid assimilation
into the American economic mainstream.The cause of the disparity is a combination of school, parental, cultural, and
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structural factors, including inadequate school financing, school segregation, low socioeconomic status of
parents, and low educational level of parents. According to the author, the upgrading of the educational
attainment of Hispanic children will require intervening beyond the classroom, and probably will require
experimenting with more involvement of parents and communities—an effort that will have to be sustained over the
long term. -
Working Paper No.227
01 March 1998
The Japanese Financial Crisis, Corporate Governance, and Sustainable Prosperity
AbstractBefore the Japanese stock market crash of 1990, Japanese industry was a phenomenal success. A recent
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unemployment rate of under 4 percent, although low by world standards, is the highest Japan has experienced since
the current mode of calculation began in 1953. Japan’s industrial dominance, sustained prosperity, and
commitment to lifetime employment seem to be in danger. Research Associate William Lazonick, of INSEAD
and the Center for Industrial Competitiveness at the University of Massachusetts–Lowell, takes issue with this
perception. He finds that the Japanese economy is in a better position than the United States to achieve
sustainable prosperity, which he defines as “the spreading of the benefits of economic growth to more and
more people over a prolonged period of time.” -
Policy Notes No.2
01 February 1998
How Should the Surpluses Be Spent?
AbstractThe federal budget deficit is disappearing; some shadows linger, but the latest Congressional Budget Office projections put the government budget in deficit by only $5 billion in fiscal year 1998, in balance by 2001, and in surplus through at least 2008. In this Policy Note, Research Associate David Alan Aschauer examines the likely economic consequences, particularly on saving, investment, and long-term economic growth, of three alternative uses of budget surpluses: paying down the debt, increasing government spending, and cutting taxes.