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Working Paper No.207
01 August 1997
Reasserting the Role of Keynesian Policies for the New Millennium
AbstractIn this paper, Philip Arestis, of the University of East London, and Visiting Scholar Malcolm Sawyer, of the University of
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Leeds, assert the need for revived and revised Keynesian policies to secure full employment. They do not
support “fine tuning,” but argue for a medium-term approach that includes both demand-side and supply-side
strategies. Their approach is Keynesian in two ways. First, they contend that a laissez-faire market economy
does not ensure full employment. Second, they believe that a more equal distribution of market power, income,
and wealth is both a desirable goal in itself and a vehicle for increasing prosperity. They discuss the constraints
that prevent full employment and policies to deal with them. -
Working Paper No.206
01 August 1997
Are Good Jobs Flying Away?
AbstractAerospace, once the "crown jewel" of American manufacturing, is experiencing a structural decline characterized by a narrowing of the industry trade surplus, an increase in the foreign content of commercial aircraft and engines, a greater role for foreign companies in research and development, and a loss of "good jobs." Employment in aircraft engine manufacturing peaked in 1988 at over 141,000 employees and plummeted to just over 76,000 in 1995. Beth Almeida, of the Center for Industrial Competitiveness at the University of Massachusetts Lowell and the Department of Economics at the University of Massachusetts Amherst, examines the decline of the aircraft industry and attributes the slipping competitive advantage of the United States to the failure of American firms to extend organizational learning to the shop floor.
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Working Paper No.205
01 August 1997
Macroeconomics without Equilibrium or Disequilibrium
AbstractDistinguished Scholar Wynne Godley creates a numerical simulation model that attempts a synthesis between
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the monetary theory of Hicks and Kaldor, the asset allocation theory of James Tobin, and the Keynesian theory
of income and output determination. Methodologically, it substitutes Walrasian rigor for the usual narrative
exposition used by post-Keynesian writers—and indeed, by Keynes himself—before the computer age. The
meaning of the title is that the model describes neither an equilibrium where prices clear markets nor a
disequilibrium where price signals do not work properly because of the rigidities, information inadequacies,
etc. characteristic of, for instance, “New Keynesian” macroeconomics. -
Working Paper No.204
01 August 1997
The Growth in Work Time and the Implications for Macro Policy
AbstractIn May 1997, the official unemployment rate was 4.8 percent—the lowest in 24 years. Not long ago, most
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economists would have considered such an unemployment record impossible to achieve without igniting a
cycle of wage-led inflation. Yet, in the first quarter of 1997 prices rose at only a 1.8 percent annual rate; some
regional labor markets have maintained local unemployment rates of 4.0 percent without any sign of upward
wage pressure. Can unemployment go even lower before prices begin to rise? Research Associate Barry
Bluestone, of the University of Massachusetts Boston, and Stephen Rose, of the Educational Testing Service,
think that it can. -
Working Paper No.203
01 August 1997
The NAIRU
AbstractThe nonaccelerating inflation rate of unemployment, or NAIRU, has acquired a central role in
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macroeconomic theory. Fear of inflation has led to a reluctance to allow the unemployment rate
to fall below the estimated NAIRU. If so much weight is going to be placed on an estimate of a
theoretical variable, it is extremely important to know how valid that theory is and how valid the
estimates of that variable are. Visiting Scholar Malcolm Sawyer finds that the mechanism by
which an economy would reach a NAIRU has been inadequately specified and that NAIRU
models have ignored the role of aggregate demand by implicitly invoking Say’s law that supply
creates its own demand. He concludes that it is unwise to use the estimated NAIRU as a policy
variable unless and until it can be established on stronger theoretical and empirical grounds. -
Working Paper No.202
01 August 1997
Aggregate Demand, Investment, and the NAIRU
AbstractThe nonaccelerating inflation rate of unemployment, or NAIRU, is generally viewed as a
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supply-side-determined, short-run equilibrium rate of unemployment. In most NAIRU models,
aggregate demand plays no essential role in determining equilibrium unemployment. However,
Visiting Scholar Malcolm Sawyer demonstrates that the relationship between the real wage and
employment (often mistakenly called labor demand) cannot be fully articulated without reference
to aggregate demand. In Sawyer’s model, investment shifts the real wage-employment
relationship by adding to the capital stock. Therefore, in a sufficiently expansionary environment,
the NAIRU can be made compatible with full employment. -
Working Paper No.201
01 August 1997
Organizational Learning and International Competition
AbstractOver the last three decades, despite economic
growth, the United States has experienced both increasing relative inequality and an absolute decline of
real wages.
Explanations sometimes offered for this inability to achieve sustainable prosperity are a
weakening of innovative ability (a result of reduced expenditures on training, education, and
research) and international competition from low-wage countries (forcing down wages).
Research Associate William H. Lazonick, of the University of Massachusetts Lowell and
INSEAD, champions a third explanation: the skill-base hypothesis.The skill-base hypothesis defines two strategies of human resource investment: a broad and
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deep skill base uses skilled work by many people, at different levels of the organizational
hierarchy, and across organizational functions; a narrow and concentrated skill base uses skilled
work by a small and elite portion of the labor force. According to the hypothesis, changes in
technology and international competition have been important factors relating to level of
sustained prosperity, but not for the reasons usually given. Lazonick observes that US firms are
still innovative, but tend to invest in technologies that require a narrow and concentrated skill
base. International competition has been important, not primarily because foreign wages are
lower, but because other high-wage nations, such as Japan, have chosen superior corporate
strategies. Lazonick uses a case study of the automobile industry in the United States and Japan
to demonstrate that investment in technologies that rely on a broad and deep skill base will lead
to more international competitiveness, economic equality, and sustainable prosperity. -
Working Paper No.196
01 July 1997
Skiki vono ko shtuvalo?
AbstractAfter the collapse of the Soviet bloc many of the transition economies experienced significant inflation, largely because their new monetary authorities and undeveloped tax infrastructure
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induced them to resort to generating revenue through seignorage. In Ukraine inflation rates
reached as high as 133 percent per month. Traditional monetary theory holds that raising
revenue through money creation causes a simple trade-off: a higher rate of money growth
generates higher seignorage, but the associated inflation causes a decline in demand for real cash
balances, reducing seignorage. The higher the monetary growth rate, the larger the real balance
effect. Therefore, the revenue-maximizing rate of money creation must be realized before the
decline in demand for real cash balances becomes the dominant effect. Visiting Scholar David
Alan Aschauer cautions, however, that there may be not one revenue-maximizing rate but short
and long rates subject to exogenous shocks caused by, for example, changes in inflation
expectations. -
Working Paper No.199
01 July 1997
Good Jobs and the Cutting Edge
AbstractGood, stable jobs with high earnings started to disappear from the United States economy in the late 1970s. The loss of the majority of these jobs resulted from structural changes, not cyclical variations in the manufacturing sector. Robert Forrant, of the University of Massachusetts Lowell, studies the machine tool industry’s role in the decline of the US manufacturing base, focusing on Japan’s ability to surpass the United States in efficient production and the adoption of new technology.
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Working Paper No.198
01 July 1997
Earnings Inequality and the Quality of Jobs
AbstractThe increase in earnings inequality in the United States is now a widely accepted fact that much
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economics literature has attempted to explain. Philip Moss, of the University of Massachusetts
Lowell, examines the increase in inequality, evaluates the frequently given explanations for it,
and offers an improved methodology for determining its causes.
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Working Paper No.197
01 July 1997
Minimum Wage and Justice?
AbstractOpposition to the minimum wage, according to Resident Scholar Oren M. Levin-Waldman,
ultimately rests on a popular political philosophy and a popular economic theory. The popular
version of classical liberal philosophy stresses individualism over the common project and
accordingly puts the employer’s right to pay low wages over the common goal of a high-wage
economy. The predominant economic theory stresses efficiency over any common goal and
presupposes that unregulated markets are naturally efficient.According to Levin-Waldman, this economic theory views the market as perfectly competitive;
left on its own, it operates efficiently to allocate goods and to pay all factors what they are
worth. Any inefficiency is blamed, without proof, on government interference with the market.
If individuals are dissatisfied with wages, they may look for another job or improve their skills.
A minimum wage, if it is above the wage that would otherwise prevail, artificially increases
wages above the marginal product of labor, reduces employment, and is, therefore, inefficient. In Levin-Waldman’s view, most economists, wanting to focus only on objective criteria,
conclude that consideration of this supposed inefficiency alone ought to drive the public policy
process. -
Public Policy Brief No.31
04 May 1997
A New Path from Welfare to Work
AbstractThe author of this brief asks why welfare, workforce development, and unemployment insurance are operated as separate entities. If the goal of the new welfare law is to end dependency and foster a work ethic, then it needs to be tied more closely to existing policy aimed at developing the workforce. Instead of viewing the new welfare system as welfare policy with a new flexibility, we should see it as an opportunity to create a more comprehensive and coherent employment program to replace outmoded public assistance.
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Working Paper No.194
01 May 1997
The Working Poor
AbstractMost Americans believe that if they work hard, they should not be poor. Although recent government welfare
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reform policy is aimed at encouraging people to work more, seven to nine million working Americans remain poor.
Visiting Scholar Marlene Kim, of the School of Labor and Management Relations, Cook College, Rutgers
University, asks, Why are there so many working poor? Are they poor because they choose to work too few
hours? If so, why don’t they choose to work more? If they worked more, would doing so end their poverty?
These questions have significance for public policy. If choosing too few hours is the problem, the only role
policy might play is to encourage more work. But, if poverty is caused by forces beyond workers’ control,
policy could play a more substantial role. Kim finds that many of the working poor do not work more hours
because they cannot. She also finds that because their wages are so low, most of the working poor would still
be poor even if they worked full-time year-round. -
Working Paper No.193
01 May 1997
The Impact of Declining Union Membership on Voter Participation among Democrats
AbstractNo further information available.
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Public Policy Brief No.30
03 April 1997
Prescription for Health Care Policy
AbstractWith health care delivery increasingly shaped by market and budgetary discipline, the provision of health care for all seems an ever-more-distant goal.The high cost of American health care is the inevitable by-product of its method of financing. Walter M. Cadette proposes shifting the tax subsidies to health care from the tax exclusion of employment-based health insurance to an income-scaled tax credit for the individual purchase of basic health insurance. This plan holds out promise of improving the operation of the health insurance market, making the labor market more efficient, reducing overall health care costs, and providing protection for the unemployed.
Download Public Policy Brief No. 30, 1997 PDF (14.13 MB) -
Working Paper No.192
01 April 1997
Social Security
AbstractSome reform of Social Security is needed to keep the system solvent given the additional financial pressure
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that will be placed on it as the baby boom generation retires: the Social Security Administration estimates that payroll taxes will have to be increased 2.2 percent or benefits reduced by an equal amount to maintain financial balance
over the next 75 years. The Advisory Council on Social Security has suggested two possible approaches to the
long-term financing of the system. One would make minor changes to the existing system to close the gap
between contributions and benefits; the other would privatize and thus radically alter the system. Senior Fellow
Walter M. Cadette examines these two approaches and concludes that the nation would be better off reforming
the current system than making such a fundamental change as privatization. -
Working Paper No.191
01 April 1997
Dynamic Output and Employment Effects of Public Capital
AbstractStudies that have examined the effect of public spending on economic growth have reported esmates for the
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marginal product of public capital that are well in excess of, equal to, and less than the marginal product of
private capital. Not only does this wide range of estimates call for further examination, but several questions
about such spending have been neglected. Does a permanent increase in public spending induce a permanent or temporary increase in economic growth? Is public capital sufficiently productive to increase the rate of economic growth? Does the method by which new (public) spending is financed have a larger negative effect on growth
than any positive effect induced by the increase in spending itself? Visiting Scholar David Alan Aschauer, of Bates College, explores these issues, making use of state-level data to
examine the static and dynamic effects of public capital spending on output and employment growth. (See also, Working Papers No. 189 and No. 190.) -
Working Paper No.190
01 April 1997
Output and Employment Effects of Public Capital
AbstractStudies that have examined the effect of public spending on economic growth have reported esmates for the marginal product of public capital that are well in excess of, equal to, and less than the marginal product of private capital. Not only does this wide range of estimates call for further examination, but several questions about such spending have been neglected. Does a permanent increase in public spending induce a permanent or temporary increase in economic growth? Is public capital sufficiently productive to increase the rate of economic growth? Does the method by which new (public) spending is financed have a larger negative effect on growth than any positive effect induced by the increase in spending itself? Visiting Scholar David Alan Aschauer, of Bates College, explores these issues, making use of state-level data to examine the static and dynamic effects of public capital spending on output and employment growth. (See also, Working Papers No. 189 and No. 191.)
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Working Paper No.189
01 April 1997
Do States Optimize?
AbstractStudies that have examined the effect of public spending on economic growth have reported esmates for the marginal product of public capital that are well in excess of, equal to, and less than the marginal product of private capital. Not only does this wide range of estimates call for further examination, but several questions about such spending have been neglected. Does a permanent increase in public spending induce a permanent or temporary increase in economic growth? Is public capital sufficiently productive to increase the rate of economic growth? Does the method by which new (public) spending is financed have a larger negative effect on growth than any positive effect induced by the increase in spending itself? Visiting Scholar David Alan Aschauer, of Bates College, explores these issues, making use of state-level data to examine the static and dynamic effects of public capital spending on output and employment growth.
Aschauer formulates a growth model that contains a utility function and a Cobb-Douglas production function.
The utility function has constant intertemporal elasticities of substitution and is maximized by producers and
consumers; in the production function capital is divided into two components: public infrastructure capital and
a broad measure of private capital containing both tangible and human capital. The production function exhibits
constant returns to scale across private and public capital inputs, but increasing returns to scale across raw
labor and capital. The government sector purchases and maintains a stock of public capital that is proportional
to the stock of private capital. Public capital also is assumed to have some positive productivity effect on private
capital. The initial public capital stock is funded by the issuance of perpetuities (debt) and is thereafter
maintained by a tax levied on private production. (See also, Working Papers No. 190 and No. 191.) -
Working Paper No.188
01 April 1997
No Easy Answers
AbstractHigh unemployment rates and increasing terms of unemployment have persisted in western European
countries for the past 20 years. These problems have been explained as resulting from inflexibility in the labor
market created by such policies as protective labor market regulation and generous social assistance. The lower
rates and shorter duration of unemployment in the United States were thought to result from greater labor
market flexibility.On the basis of this analysis, European nations enacted changes, such as weakening
regulations, to increase labor market flexibility. However, labor market analysts have found not only that such
efforts have been largely unsuccessful at reducing unemployment or increasing labor mobility, but also that
the United States experienced rising wage inequality over the same time period that unemployment problems
occurred in Europe. In other words, both the United States and Europe face serious labor market problems.In
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this working paper, Rebecca M. Blank, of Northwestern University and the Northwestern
University/University of Chicago Joint Center for Policy Research, analyzes these problems to assess the
extent to which they reflect different institutional responses to related economic problems. -
Working Paper No.187
01 March 1997
Real Estate and the Capital Gains Debate
AbstractThe recent budget agreement contains a capital gains tax cut. The principal justification for reducing the capital
gains tax rate relies on the efficiency-equity trade-off. The capital gains tax is designed to increase equity by
taxing the wealthy, but advocates of rate reduction claim that the tax has the side effect of decreasing efficiency
because it discourages productive investment. The argument is that the tax structure errs on the side of equity
so much that it has reduced the efficiency of the economy to the point where there is less wealth for everyone,
and so a capital gains tax cut is needed to get the economy moving.Research Associates Michael Hudson and Kris Feder call attention
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to a neglected aspect of the capital gains debate: two-thirds of capital gains are taken on real estate—that is, on
unproductive investment. An investment in real estate
merely changes ownership of existing wealth; it does not produce wealth. Any capital gains on the appreciation
of land value are not a reward for productivity but a windfall for whoever happens to own the land. Yet the
capital gains tax treats a return from the appreciation of land the same way it treats a return resulting from
improvements to land or from business investment. Such a tax structure is both inefficient (because it rewards unproductive investment at the expense of
productive investment) and inequitable (because it rewards some of the wealthiest individuals at the expense of
everyone else). There is an efficiency-equity trade-off on productive investments such as capital, but not on
fixed assets such as land. Therefore, Hudson and Feder argue, we should not decrease the capital gains tax
unless we first separate returns to business investment from returns to real estate speculation and tax real estate
at a higher rate. -
Working Paper No.186
01 March 1997
Gender Wage Differentials, Affirmative Action, and Employment Growth on the Industry Level
AbstractIn their study of industry wage premia, Research Associates Judith Fields of Lehman College, City University of New York, and Edward N. Wolff of New York University find that gender wage differentials can be explained only in part by the distribution of women and men in different industries, and that
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other factors, such as discrimination, play a role as well. They make the case that focused antidiscrimination policy can be
effective in reducing the gender gap. -
Working Paper No.185
01 March 1997
Disinflationary Monetary Policy and the Distribution of Income
AbstractSome economists and others argue that, despite years of low inflation, a further decrease in the rate of price
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growth would be beneficial by reducing the dead-weight losses created by inflation-induced distortions.
According to Research Associate Willem Thorbecke, of George Mason University, such arguments fail to
consider the costs and benefits of changes in the distribution of income arising from deflationary policies. In
this working paper, he examines the relative costs and benefits of such policies for firms (by size and sector)
and workers (by income group and race). -
Public Policy Brief No.29
02 February 1997
Institutional Failure and the American Worker
AbstractDavid R. Howell argues that the collapse of low-skill wages in the United States cannot be explained by a skill mismatch resulting from a technology-driven decline in the demand for low-skill labor. He presents evidence refuting the prevailing belief that a substantial shift in demand away from low-skill work characterized the 1980s. Howell asserts that a more compelling explanation for the growing wage gap can be found in fundamental changes in the institutions, practices, and norms that determine labor market outcomes—a return to a confrontational attitude toward labor by management, a shift to a laissez-faire approach to regulatory and redistributive functions by government, and management’s adoption of low-road strategies to cut labor costs in response to competitive pressures.
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