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Working Paper No.184
01 January 1997
The New Welfare
AbstractDuring the summer of 1996, President Clinton signed what some consider to be the most
sweeping welfare reform since the initial adoption of public assistance programs in 1935. Resident Scholar Oren Levin-Waldman compares the old and new welfare laws, assesses some of the
possible effects of the new law, and provides policy prescriptions for how to combine existing welfare
programs, job training programs, and the unemployment insurance system to achieve a more comprehensive
and coherent employment program that meets individual needs and provides public services more efficiently. -
Working Paper No.183
01 January 1997
Corporate Governance and Corporate Employment
AbstractUnless American corporations change their structure of governance, it is unlikely that many will
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remain prosperous in this age of global competition, argue Research Associates William H. Lazonick and Mary
O’Sullivan. US companies are not being hurt by low-wage competition but by their failure to invest in the
organizational learning required to remain competitive. US corporate managers have become
increasingly concerned with providing returns to stockholders, while their foreign competitors,
especially the Japanese, invest in innovative thinking in order to provide higher-quality products
at lower prices. If US corporations are to remain competitive, the authors say, they must invest in organizational learning—the acquisition by members of the
corporation of the knowledge to solve problems collectively. The goal of all should be
improving the business as a whole. -
Working Paper No.179
01 December 1996
Protracted Frictional Unemployment As a Heavy Cost of Technical Progress
AbstractIn this working paper, Research Associates William Baumol and Edward N. Wolff, both of
New York University, explore the effects of the rate of technological progress on
unemployment. They hypothesize that the sunk costs associated with a worker’s training will
depend on his or her previous training and education and the current pace of technological
change. The faster the pace of change, the greater the sunk training costs, although education
moderates the magnitude of those costs. A firm weighs wage and sunk training costs against a
worker’s marginal revenue yield. These factors combine to the disadvantage of the poorly
educated, who will be forced to accept either a low wage or a longer duration of
unemployment. A faster pace of technological change exacerbates this disadvantage. -
Public Policy Brief No.28
10 November 1996
Making Work Pay
AbstractBarry Bluestone of the University of Massachusetts and Teresa Ghilarducci of the University of Notre Dame show that although the poverty rate for elderly Americans has declined over the past three decades, the total number of persons in poverty has grown and the number of poor nonelderly adults in poverty has nearly doubled since 1970. The authors argue for a comprehensive and coherent strategy aimed at the working poor and those susceptible to highly fluctuating incomes. Two essential components of a wage insurance system already exist in the earned income tax credit (EITC) and the minimum wage. Neither by itself is an ideal solution to the wage poverty problem, but the two programs complement one another. What makes the two fit together so well is that the existence of a higher minimum wage actually reduces the negative productivity, fiscal impact, and moral hazard effects of the EITC, while the EITC makes up for the weak target efficiency and income adequacy of the minimum wage.
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Working Paper No.176
01 November 1996
Exploring the Politics of the Minimum Wage
AbstractResident Scholar Oren M. Levin-Waldman argues that, although the minimum wage is a
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serious economic issue, enacting an increase in the minimum wage is a political one. He finds
that because the empirical results of an increase in the wage floor are “inconclusive, -
Working Paper No.175
01 November 1996
What Do Micro Data Reveal about the User Cost Elasticity?
AbstractThe responsiveness of business investment to user costs (interest rates, taxes, and depreciation rates) is
important in determining the effect of fiscal policy and aggregate stabilization policy on the economy and for
assessing the transmission mechanism of monetary policy to real economic variables. Although this
responsiveness is central to the theoretical underpinnings of most economic models, empirical support for
substantial responsiveness is lacking. In this working paper, Robert S. Chirinko of Emory University,
Research Associate Steven M. Fazzari, of Washington University in St. Louis, and Andrew P. Meyer of the
Federal Reserve Bank of St. Louis use micro data to evaluate the user cost elasticity of capital.The authors employ data obtained from the Compustat database on investment, cash flow, and sales for 4,112
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firms for 1981 to 1991. They merge this with industry-level data obtained from Data Resources, Inc., on the
user costs of 26 different capital assets variables. Unlike other studies in which user cost variables vary only
over time and not across firms, Chirinko, Fazzari, and Meyer’s user cost variables vary in both time-series and
cross-sectional dimensions. The large number of firm-level observations in the Compustat data increase the
precision of the estimates and allow a given parameter to be estimated over a relatively short time frame. The
data also help to address questions of biases not easily dealt with when using aggregate time-series data. -
Working Paper No.174
01 November 1996
The Second Generation and the Children of the Native-Born
AbstractRecent discussion and some preliminary research have given a negative prognosis for children of immigrants. Senior Scholar Joel Perlmann and Roger Waldinger, professor of sociology at the University of California at
Los Angeles, examine 1990 Census Public Use Samples (PUMS) to determine if conditions for the children
of immigrants are as poor as indicated. They are particularly interested in second-generation Mexicans as Mexicans constitute the largest group among immigrants and the group most uniformly composed of workers
who are unskilled or semiskilled and have relatively little education or capital. Given that Mexican immigrants
make up such a large proportion of all immigrants, the authors want to find out if the Mexican experience
differs from that of all other immigrants, because if it does, it may affect the data in ways that misrepresent the
experience of all non-Mexican immigrants. -
Working Paper No.178
01 November 1996
The Collapse of Low-skill Wages
AbstractNo recent development in the American labor market has been more dramatic and troubling than the
collapse in the buying power of workers’ paychecks. This drop in the value of wages coincided with a sharp increase in earnings inequality. Perhaps
the most highly publicized characteristic of recent earnings trends has been the widening gap
between highly educated and poorly educated workers. Although supply-side changes appear to provide a reasonable explanation for the modest wage
growth experienced by the most well-educated men in the 1980s, this collapse at the bottom of
the earnings ladder is almost universally attributed to downward shifts in the demand for low-skill
workers. According to this view, it was the growing mismatch between the skills demanded by
firms and those supplied by the workforce that was mainly responsible for reducing wages among
the low-skilled.This paper assesses the empirical support for the skill mismatch story: Has there, in fact, been a strong shift in demand away from low-skill workers? Does the
timing of employment shifts by skill group across industries match trends in computerization‘?
Have there been observable declines in low-wage employment shares and substantial increases in
low-skill joblessness, as the neoclassical model would predict if there is skill mismatch? The author finds that
the answer to each of these questions is no, and concludes that it is necessary to look beyond
supply and demand shifts to explain the wage collapse. -
Working Paper No.177
01 November 1996
Taxes, Saving, and Macroeconomics
AbstractResident Scholar Neil H. Buchanan offers an analysis of the macroeconomic effects of current proposals to
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reform the tax system (e.g., a flat tax or a national sales tax), focusing on the aspects of the proposals
aimed at promoting saving. Buchanan notes that a drawback in the way in which saving is officially defined is that only businesses (and
not households) are assumed to make purchases that have long-term payoffs—that is, personal spending on
items such as education and durable goods is defined as consumption, when in fact it is investment in
long-term economic well-being and therefore should be categorized as saving. The purest definition of saving
would include all resources produced in the economy during the year “that are not consumed today but are put
to use in a way that will provide returns to the economy in years to come.” Consumption also should be
redefined, the author says, to include those items utilized, but not directly paid for by consumers, such as employer-provided
benefits and the value of owner-occupied housing. -
Working Paper No.173
01 October 1996
A Critique of Competing Plans for Radical Tax Restructuring
AbstractAt almost any time there exists a plan to alter the structure of taxation, and their number seems to increase during election years. Resident
Scholar Neil Buchanan analyzes several recent tax proposals in terms of their effects on the
budget deficit, on different groups of taxpayers, and on taxpaying households as a whole. Buchanan groups the plans into three general categories: simplifying payment of income taxes,
switching to a national sales tax or value-added system, and altering the current taxation of
savings or labor incomes. The specific tax plans examined are the Gephardt plan, the Lugar
plan, the USA Tax plan, and the Armey-Shelby flat tax plan, as well as flat tax proposals in general. -
Public Policy Brief No.27
09 September 1996
Targeting Inflation
AbstractThe targets for monetary policy adopted by the Fed in recent years have not proven to be closely correlated with inflation, leading some theorists and policymakers to advocate the use of a price index, such as the consumer price index (CPI), as both the target and the goal of monetary policy. The authors of this brief show that such a choice is not wise because the CPI does not accurately reflect market-caused price increases and is not under the control of monetary policy. Their analysis extends beyond that of recent reports to show how and why the transmission mechanisms through which monetary policy is thought to affect the CPI are tenuous at best. The authors focus on the housing component of the CPI to illustrate their point. They conclude that those components of the CPI that monetary policy is likely to affect have been declining in importance, meaning that to produce a given reduction in the overall rate of inflation will require that monetary policy have an increasingly larger impact on an ever-diminishing portion of the consumer basket. Therefore, careful reconsideration of an alternative ultimate target, such as the rate of economic growth or the unemployment rate, is warranted.
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Book Series
01 September 1996
Stability in the Financial System
AbstractThe S&L crisis of the 1990s led many analysts to review the events that culminated in the banking crisis of the 1930s and the subsequent passage of the Emergency Banking Act, the Banking Act of 1933, the Banking Act of 1935, and other related legislation. The restructuring of the financial system accomplished by this legislation brought about the longest period of financial stability in American history, lasting half a century. This book has two goals: to show why the banking reforms enacted in the 1930s were so successful and to present policy proposals that include the institutional provisions necessary for the financing of the capital development of the economy and a safe payments system.
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Working Paper No.171
21 July 1996
Rethinking Health Care Policy—The Case for Retargeting Tax Subsidies
AbstractMore than 40
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million Americans currently have no access to health care for reasons of income. Moreover, plans enacted or discussed at the
state level to cover the uninsured face problems of cost and quality of service as well as the
question of who pays for such programs. To solve the problem of access, Senior Fellow Walter M. Cadette advocates switching from the current
method of financing health care—employment-based health insurance with tax-excluded
premiums—to a system that would require everyone to purchase basic but
comprehensive coverage with after-tax income. A sliding-scale tax credit, based on level of
income, would then be granted. The plan could be paid for with the revenues resulting from
eliminating the current exclusion (about $74 billion in federal revenues and $5 billion in state revenues) and the $11 billion the Medicaid program pays to hospitals to assist them in paying for
services rendered to those who could not pay for them. The role of the
federal government would be to ensure that all plans meet minimum standards of coverage and,
possibly, to subsidize part of the cost of high-risk subscribers. State and local governments
would channel funds for the insurance of nontaxpayers directly to their insurance carriers.
This method of financing health care would eliminate the vertical and horizontal inequities of the
existing system and, according to Cadette, encourage individuals to seek out less expensive
insurance. -
Public Policy Brief No.26
08 July 1996
Making Unemployment Insurance Work
AbstractWhat is needed to solve the problem of growing long-term unemployment is a two-tiered system that distinguishes between short-term and long-term unemployment. The system should continue to function as an insurance program for 26 weeks to allow workers to search for employment that represents the best match with their experience, skills, and credentials. The first tier of the improved system would include reforms to reduce short-term employment through such means as altering the employer taxes that finance unemployment insurance and instituting work-sharing arrangements in order to reduce the incidence of layoffs and to maintain employment levels during periods of economic decline. The second tier would include services such as reemployment assessment and workshops and training programs to help unemployed workers find work that matches their skills or help them acquire new skills that would make them more marketable. Unemployment insurance benefits beyond 26 weeks would be contingent upon workers’ making use of these services. Levin-Waldman states that the goal of reform is not “merely to achieve greater efficiency in facilitating reemployment, but to enhance a core value of American society: work.”
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Working Paper No.170
11 June 1996
Which Deficit?
AbstractFor some time economists have acknowledged that reported budgetary data do not necessarily reflect actual economic activity. Agreement has not been reached, however, on how budget figures should be adjusted to reflect such activity accurately. In this working paper, Resident Scholar Neil H. Buchanan examines 13 alternative measures of the budget deficit in order to determine which, if any, are theoretically or statistically sounder than existing measures. He evaluates them in terms of their theoretical value, that is, their ability to capture benefits (such as higher levels of employment [subject to NAIRU constraints], higher rates of growth, and higher levels of private investment), and costs (higher rates of inflation and lower levels of private investment, consumption, and net exports) to the economy. He also tests whether the new definitions provide empirically more robust estimates than existing measures.
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Working Paper No.169
10 June 1996
Comparing Alternative Methods of Adjusting US Federal Fiscal Deficits for Cyclical and Price Effects
AbstractIn this working paper, Resident Scholar Neil H. Buchanan statistically tests six alternative
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definitions of the federal budget deficit to determine if these definitions improve the results of
econometric studies that use the deficit as an exogenous variable. His objectives are (1) to
evaluate Robert Eisner’s conclusion that a price-adjusted deficit definition improves econometric
results and (2) to compare alternative measures of the deficit. -
Working Paper No.168
09 June 1996
Assimilation
AbstractAssimilation of today’s immigrants is one topic in the current debate on immigration. Some observers assert that recent immigrants are unable to assimilate into American society as easily as past
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immigrants were able to. Others counter that the pressures against assimilation today are not
strong. In this working paper, Senior Scholar Joel Perlmann and Research Associate Roger
Waldinger, professor of sociology at the University of California at Los Angeles, argue that
assimilation cannot be studied as an outcome alone, but should be viewed as a process, aspects
of which are important in their own right. -
Working Paper No.167
08 June 1996
Money, Finance, and National Income Determination
AbstractTraditional economic models have largely failed to account adequately for the roles of money
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and finance in economic operations. For example, traditional models assume an exogenously
determined, fixed money stock and ignore the outcomes of spending changes that result from
changes in bank loans. As such, traditional models take place outside of historical time and have
no role for institutions in determining economic outcomes other than to promote optimizing
behavior. In this working paper, Distinguished Scholar Wynne Godley presents a formalized
stock-flow model consistent with the ideas of Keynes, Kaldor, and especially Hicks. Godley’s
model takes place in historical time and under conditions of uncertainty and incorporates a role
for the financial sector in providing funding for both capital investment and firm operations,
should expectations prove false. The model was subjected to numerical simulation and found
solvable and stable. -
Working Paper No.166
01 June 1996
The Minimum Wage and the Path towards a High Wage Economy
AbstractAccording to Resident Scholar Oren M. Levin-Waldman, the arguments both in favor of raising
the minimum wage (to restore its real spending power to levels of previous years, to increase the
incentive to work, and, as a matter of fairness, to allow those who work to earn incomes above
the poverty line) and against raising the minimum (displacement effects resulting in lower levels
of employment) both have merit, but ultimately “miss the point” because their focus is too
narrow. They concentrate on how a change in the wage floor would affect one segment of the
labor market (those at the bottom or teenage workers, for example) and not on how it would
affect the market as a whole. Moreover, because findings on the short- and intermediate-term
effects of a change in the minimum wage are inconclusive, discussion should focus on the longterm
effects of raising the minimum wage, which could include raising productivity levels.
The arguments for and against a higher minimum wage boil down to whether the US economy -
Working Paper
01 June 1996
The Minimum Wage and the Path Toward a High Wage Economy
Abstractf73a205376.txt
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Working Paper No.165
01 May 1996
Economic Insecurity and the Institutional Prerequisites for Successful Capitalism
AbstractIn this working paper, Distinguished Scholar Hyman P. Minsky and Visiting Scholar Charles Whalen search for reasons to account for the split in post-World War II economic performance—that is, the difference in performance between the 1946–66 period and the 1966–96 period. The authors discuss a number of economic problems that have arisen during the past quarter of a century, including slower growth, stagnant earnings, rising financial instability, and increasing inequality. Minksy and Whalen concede that factors such as globalization and technological change have undoubtedly played a role in the split performance. An additional important and often overlooked element is the evolution of the US financial structure. The authors explain that a key component influencing the evolution of the financial sector during recent decades has been the rise of "money manager" capitalism. Important features of money manager capitalism are increased financial fragility (lower margins of safety in indebtedness and a greater reliance on debt relative to internal finance) and the introduction into the financial structure of a new layer of intermediation. In particular, managers of pensions, trusts, and mutual funds currently control the largest share of the liabilities of corporations. These managers are judged by only one criterion: how well they maximize the value of funds. As a result, business leaders have become increasingly sensitive to the stock market valuation of their firm.
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Working Paper No.164
01 May 1996
The Consumer Price Index As a Measure of Inflation
AbstractA consensus is emerging among economists and policymakers that the consumer price index
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(CPI) as a measure of cost of living has an upward bias. As a result, downward revisions of cost-of-
living adjustments are frequently recommended, especially in discussions about deficit
reduction. Such revisions would lower the rate of increase of some entitlements and raise the rate
of increase of federal government revenue by reducing future adjustments to tax brackets. In this new working paper, Dimitri B. Papadimitriou, executive director of the Levy Institute,
and L. Randall Wray, research associate of the Levy Institute and associate professor of
economics at the University of Denver, express their surprise that this discussion has not been
broadened to include the use of the CPI as a measure of inflation and a target of monetary policy.
The Federal Reserve has increasingly pursued the single goal of price stability, or zero inflation,
although according to Papadimitriou and Wray, it has been unable to find a target that it can hit
and to demonstrate a consistent link between any of its targets and inflation. The authors argue
that if the CPI overstates inflation and the Federal Reserve uses it as a target, the Fed is basing
its policy on a measurement error. Given recent findings of measurement bias in the CPI, they
contend that it is inappropriate at this time to identify zero inflation with a constant CPI. In a
detailed analysis of the components of the CPI they conclude that the CPI is not a reliable guide
for policy purposes. They question whether tight money can reduce inflation as measured by the
CPI, and they note that the impact of such a policy could be perverse. -
Working Paper No.163
01 May 1996
Managing Foreign Capital Flows
AbstractBetween 1990 and 1994, developing countries in Asia posted $261 billion in net capital inflows, an amount
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equivalent to about half the total inflows to all developing countries. Although foreign direct investment
accounts for the largest portion of net inflows to Asia, the share of portfolio investment has been steadily
rising, from an average of 8 percent of net inflows between 1983 and 1989 to 24 percent between 1990 and
1994. Suggested reasons for the increase in portfolio investment have been a high demand for capital coupled
with favorable growth prospects, deregulation and liberalization of capital accounts, domestic financial reform
(which has facilitated foreign investment in domestic securities), lower interest rates, and international portfolio
diversification. Capital inflows have been important in supporting high rates of investment, particularly in
Indonesia, Malaysia, and Thailand, but short-term capital inflows also have threatened macroeconomic
instability by inducing volatility of key financial variables such as the exchange rate. Threats to stability have, in
turn, led countries to install direct control measures to dampen large swings in short-term capital inflows. In
this working paper, Yung Chul Park, of Korea University and the Korea Institute of Finance, and Chi-Young
Song, of the Korea Institute of Finance, analyze the experiences of Korea, Thailand, Malaysia, and Indonesia in
managing these capital inflows. -
Working Paper No.162
01 May 1996
Capital Account Regulations and Macroeconomic Policy
AbstractA resurgence of perceived opportunities by international investors has resulted in a new policy debate
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regarding the regulation of capital flows into certain South American countries. The integrationist camp
defends totally open markets on the grounds that they result in a more efficient financial sector, greater asset
diversification, and other benefits; those in the isolationist camp support regulating capital inflows on the
grounds that they generate macroeconomic instability and reduce the effectiveness of monetary policy. Noting
that there are both costs and benefits associated with external capital flows, Guillermo Le Fort, international
director of the Central Bank of Chile, and Carlos Budnevich, manager of financial analysis for the Central
Bank of Chile, argue against both extremes, opting instead for a policy falling somewhere between the two.
An intermediate policy of gradual and limited financial integration has been adopted in Chile and Colombia,
two countries experiencing capital account surpluses. Le Fort and Budnevich examine the macroeconomic and
financial results during the 1990s of the countries’ policies regarding external capital accounts.