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Working Paper No.49
07 April 1991
The Role of Banks Where Service Replication Has Eroded Institutional Franchises
AbstractOver the past decade forces of competition and adverse economic conditions—combined with regulatory forbearance and the moral hazards generated thereby—have contributed to severe erosion of bank profitability and a mounting number of insolvencies. At least three implications of this erosion may be identified. First, in response to pressures on capital and profits bank business strategies have begun emphasizing contraction and consolidation. Second, barring new elements of weakness afflicting other suppliers of financial services on which banks could capitalize, the role of banks in the future is likely to be reduced further. Third, the extent of this reduction will hinge to a considerable degree on whether new public policies applying to capital and deposit insurance are imposed. Life support policies will not restore the weak, but will impair the competitive viability of those remaining strong.
The material is divided into four parts. The first consists of a brief summary of recent bank performance. The succeeding sections address the three implications introduced above.
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Working Paper No.48
06 April 1991
The Economic Significance of Equity Capital
AbstractI was motivated to address this subject by the rich irony of last year’s Nobel Prize in Economics. The end of the LBO era was crowned by the recognition of work which purported to demonstrate that the value of an enterprise is independent of the volume of its debt. In response, this paper is an attempt to inform the post-Keynesian critique of Modigliani-Miller with the experience of one whose profession it is to invest equity capital in Imperfect markets under conditions of uncertainty. The "regulation and intervention" with which I am professionally concerned is that of a proprietary venture investor, prepared to forego liquidity and to accept strategic responsibility for the performance of the enterprises we control.
I have principally drawn on Douglas Vickers’ discussion of the nature and role of "money capital" beyond the General Equilibrium domain where the issues of finance are, alternatively, oxymoronic or redundant. I can testify that Vickers’ examination of the "full marginal cost of relaxing the money capital availability constraint" integrates the analysis of operating and financial issues under real world conditions’. Vickers and like-minded analysts such as Marris, Herendeen and Chamberlain have succeeded, I judge, in establishing the economic role of equity capital in an uncertain world. From that analysis and my own experience, the injunction to maximize growth subject to (1) delivering minimally satisfactory rates of return on sales and on capital employed while (2) not risking the long-run survival of the frn makes operating and investment sense.
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Working Paper No.47
05 April 1991
Financial Disturbances and Depressions
AbstractEvents of the past quarter century have renewed the interest of economic historians in major financial disturbances. The study of financial crises was common before World War II, but for the next quarter century little fresh work was done in the area. The chief exception was J. K. Galbraith’s The Great Crash. 1929 (1954). Then came M. Friedman and A. J. Schwartz’s Monetary History of the United States. 1867–1960 (1963) with its bold analysis of the great contraction of 1929–1933. Just as that analysis was gaining the attention of economic historians, the United States began to experience credit crunches, steeply rising interest rates, bank failures, debt crises, and a host of other financial disturbances the likes of which had not been seen for a good long time. Soon C. P. Kindleberger’s widely read book, Manias. Panics. And Crashes—A History of Financial Crises (1978) reminded economic historians and others of the long history of such disturbances.
My assignment here, from H. Minsky, is to review what economic historians, especially in recent years, have had to say about financial disturbances and depressions. I inferred from discussions with Prof. Minsky and from some familiarity with his own work that he very much wanted to tie together the two concepts, financial disturbance and depression. The "It" in his book, Can "It Can Happen Again" (1982) is, it will be recalled, a Great Depression. In Minsky’s work, a Great Depression results from a debt deflation or, in other words, from an extreme form of t he financial instability that he and others regard as inherent in a capitalist economic system.
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Working Paper No.46
04 April 1991
Redistribution through Taxation
AbstractIncome tax progressivity is studied using Generalized Entropy measures of inequality. Luxembourg Income Study data sets for ten countries are used for international comparative purposes and analysis. Progressivity indices are generated using the Generalized Entropy family as well as Atkinson measures. This is to test the robustness of our observation of tax progressivity in each country. We further our understanding by looking at pre-tax and post-tax measures of inequality based on gross household income and disposable household income, respectively. The decomposition property is shown to be desirable in order to enhance our view of true inequality and the implication of taxes. Thus decomposition based on quintile, family sizes, and number of earners is conducted. This has allowed an interpretation of results that could be attributed to any of the above characteristics and components which are free of such group characteristics.
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Working Paper No.45
01 March 1991
Female-headed Families
AbstractOver the last few decades in the United States, the poverty rate for female-headed families (with no husband present) has been about three times the poverty rate for male-headed families (with no wife present) and about six times the poverty rate for married-couple families. This paper addresses the question of why, in general, female-headed families are so much poorer than other families. A decomposition of poverty rates and a set of probit models are used to identify the factors which determine the poverty rates for the three family types. The following control variables are found to be important determinants of poverty for all three family types: education of family members; age, race, disability, and unemployment of the family head; geographical location, size and age composition of the family. Both married-couple families and male-headed families are found to be less poor than female-headed families mainly because additional units of those control variables which reduce (increase) poverty have a larger (smaller) impact in the case of the former two family types than in the case of female-headed families. Of lesser importance is the fact that female-headed families, on average, have less (more) of those control variables which reduce (increase) poverty.
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Working Paper No.44
01 February 1991
Accounting for the Decline in Private Sector Unionization
AbstractDuring the 1980s several qualitative changes occurred in the union decline. First, net gains from certification (less decertification) elections fell to insignificant levels, tending to accelerate the union decline. On the other hand, union losses from the relative growth of nonunion services (structural change) also declined sharply as unionization rates became more homogeneous across sectors. As a consequence, virtually all changes in the unionization rate during the 1980s were caused by disproportional gains in non-union employment within sectors (restructuring).
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Working Paper No.43
10 December 1990
International Comparison of Household Inequalities
AbstractThis paper demonstrates the usefulness of the decomposability property of the Generalized Entropy (GE) family of measures in comparing inequality among countries. A family of Generalized Entropy measures are decomposed by family size and by the household head’s age, gender, education, and ethnicity. This is done in order to learn about components which are due to demographic differences "between" households, and "within" group components which are free of such group characteristics. This will further our understanding of the impact of different social-economic structures upon the distribution of income. Looking at the overall inequality for comparative analysis without the decompositions can provide us with only a partial picture of the differences and thus is inadequate. Moreover, internal analysis is enhanced since the decompositions will locate the potential source of inequality for diagnostic policy purposes. Luxembourg Income Study data sets are chosen for their richness and comparability of micro data on variables and attributes such as income, age, education, family size, gender, and ethnicity.
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Working Paper No.42
09 December 1990
Poverty and Choice of Marital Status
AbstractOver the last few decades in the United States, the poverty rate for female-headed families has been about five times the poverty rate for other family types. This paper addresses the question of why, in general, female-headed families are so much poorer than other families. Recognizing that individuals choose their own marital status, a self-selection model is used to identify the factors which determine the poverty rates for married- couple families, families headed by females with no husband present, and families headed by males with no wife present. The following control variables are found to be important determinants of poverty for all three family types: education of family members; age, race, disability, and unemployment of the family head; geographical location, size and composition of the family. Both married-couple families and male-headed families are found to be less poor than female-headed families mainly because the marginal effects of the control variables, and to a lesser extent the mean levels of the control variables, favor the former two types of families over female-headed families.
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Working Paper No.41
09 December 1990
Generalized Entropy Measures of Long-run Inequality and Stability among Male Headed Households
AbstractShort and long-run inequalities and income stability among households with male heads are measured and analyzed using the Panel Study of Income Dynamics for 1969–81. The results suggest short-run inequalities are increasing over the period with fluctuations. These fluctuations contain transitory components which can be eliminated by smoothing of the data. Long-run measures are less subject to fluctuations and, therefore, provide a better measure of inequality. They show a decrease in inequality in the early periods but increases after the mid–1970’s. Several aggregator functions are used to compute "permanent income" variables for the long-run measures of inequality and stability. The measures are decomposed to reflect differences in age, education, and race. They are decomposed also into groups which are free of such group characteristics. Education has the most important influence on inequality. Stability profiles indicate, furthermore, most of the reduction in inequality in the early periods among households with male heads has been within particular groups. Reductions across groups are minimal.
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Working Paper No.40
10 November 1990
A Kernel Regression of Phillips’ Data
AbstractEconomists have assumed that the Phillips curve, which shows a positive (negative) relation between inflation and the output ratio (unemployment rate), may be mapped off the aggregate demand -aggregate supply apparatus. The paper shows that the Phillips curve requires that unlikely restrictions be put on the form of the aggregate supply and aggregate demand curves. In this case, it is inappropriate to treat data on inflation and capacity utilization as the basis for estimating an underlying formal model. The paper therefore uses a nonparametric, data-driven method to describe the data. This method, of kernel regression, shows the inflation-unemployment association in Phillips’s sample to be negative on a global scale, yet irregular within particular ranges of unemployment.
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Working Paper No.39
09 November 1990
Poverty and Household Composition
AbstractThis paper has investigated the relationship between poverty and family type, as reflected in the marital status and gender of the head of the family number of factors have been identified as important determinants of poverty for all family types: education and work experience of family members, race, disability, and unemployment of the family head, geographical location, size and composition of the family.
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Working Paper No.38
10 July 1990
The Mathematics of Economic Growth
AbstractTraditionally, economists have considered that mathematics acts as a universal language that lends clarity to theoretical statements. This paper proposes that mathematics does not function as a mere language. Rather, the advocacy of particular theoretical views and the choice of mathematical formalisms go hand-in-hand. The paper explores this issue by investigating the role of mathematics in developments of the theory of economic growth.
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Working Paper No.37
10 May 1990
What Happened to the Corporate Profit Tax?
AbstractThe radical reorientation of the federal budget during the 1980s provided generously for military expansion at the expense of pressing social needs. In the wake of such dramatic upheavals, the federal government will eventually be compelled to seek out new sources of revenue in order to compensate for the decade of neglect. But where will the resources be found to close the deficit, fully fund education, support the sick and impoverished, rebuild the infrastructure, and cleanup the environment? The Economic Policy Institute has placed a price tag of $65 billion on these necessities. As policy makers survey the revenue alternatives—military cuts, a more progressive income tax, a corporate take-over tax—one area they should not overlook is the corporate profit tax.
Most people were aware that the corporate profit tax provided relatively little revenue in support of federal expenditures during the 1980s. But perhaps less well-known is the fact that corporations have enjoyed a steady decrease in their tax share for the past three decades. In 1960 corporate profit taxes financed approximately 22% of all expenditures by the federal government compared to only 7% in 1986. By exploring the reasons for this decline it becomes possible to appreciate the magnitude of the potential revenue that could be generated from corporate tax reform.
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Working Paper No.36
10 April 1990
The Microeconomics of Monopoly Power
AbstractThe purpose of this paper is to outline a consistent microeconomic theory of the firm based on the concept of monopoly power. It builds on the heritage of Post Keynesian authors, Robinson, Kaldor, and Kalecki, but literally extends the theory in several directions. First, monopoly power is defined formally in terms of substitution. In this way, monopoly power is recognized as a fundamental characteristic of a firm which in turn affects other aspects of its behavior. Also in this theory, the relationships between monopoly power, demand elasticities, markups, total profits, and the distribution of profits, are traced systematically. Before turning to the theory it is important to point out that I have benefited as much from the mistakes of my predecessors as from their genuine insights. Kriesler (1987), for example, noted that Kalecki created considerable confusion by failing to clearly distinguish between the degree of monopoly and the markup. This problem is resolved here by defining monopoly power in terms of substitution and identifying it as one of several determinants of the markup. It is always easier to recognize a problem like this one and propose a solution when someone else has stumbled across it first.
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Working Paper No.35
10 January 1990
Industrial De-diversification and Its Consequences for Productivity
AbstractDue in large part to intense takeover activity during the 1980s, the extent of American firms’ industrial diversification declined significantly during the second half of the decade. The mean number of industries in which firms operated declined 14 percent, and the fraction of single-industry firms increased 54 percent. Firms that were "born" during the period were much less diversified than those that "died", and "continuing" firms reduced the number of industries in which they operated. Using plant-level Census Bureau data, we show that productivity is inversely related to the degree of diversification: holding constant the number of the parent firm’s plants, the greater the number of industries in which the parent operates, the lower the productivity of its plants. Hence de-diversification is one of the means by which recent takeovers have contributed to U.S. productivity growth. We also find that the effectiveness of regulations governing disclosure by companies of financial information for their industry segments was low when they were introduced in the 1970s and has been declining ever since.
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Working Paper No.34
01 January 1990
The Determinants of US Foreign Production
AbstractBased on an analysis of industry by region data the author finds little evidence that U.S. unions have been a significant factor in the decision of U.S. firms to produce abroad. Additional evidence suggests that U.S. foreign production may have had a negligible effect on the domestic unionization rate. Corresponding with previous research, the results do indicate that comparative advantage, monopoly power, and foreign tariffs are important determinants of U.S. foreign production.
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Working Paper No.33
10 December 1989
What Remains of the Growth Controversy?
AbstractThis essay contrasts the production function approach to Kaldor’s model of increasing returns which are demand-determined. In particular, the essay analyzes Kaldor’s three major empirical "laws", which were adopted by later economists, and the criticisms of these three "laws" by economists who used the Cobb-Douglas production function as a basis of analysis. In conclusion, the essay finds that econometrics has provided an inadequate basis upon which to choose between this aggregate production function and Kaldor’s model of growth.
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Working Paper No.32
10 November 1989
The Effects of Mergers on Prices, Costs, and Capacity Utilization in the US Air Transportation Industry, 1970–84
AbstractWe analyze the effect of mergers on various aspects of airline performance during the period 1970-84, using a panel data set constructed by Caves et al. Estimates derived from a simple "matched pairs" statistical model indicate that these mergers were associated with reductions in unit cost. The average annual rate of unit cost growth of carriers undergoing merger was 1.1 percentage points lower, during the five-year period centered on the merger, than that of carriers not involved in merger. Almost all of this cost reduction appears to have been passed on to consumers. Part of the cost reduction is attributable to merger-related declines in the prices of inputs, particularly labor, but about two-thirds of it is due to increased total factor productivity. One source of the productivity improvement is an increase in capacity utilization (load factor).
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Working Paper No.31
01 September 1989
The Changing Role of Debt in Bankruptcy
AbstractThe changing economic environment of the late 1980s has been dominated by the financial I innovations brought about by the growing demand for credit by U.S. corporations. When looking at this phenomena from a very long perspective of 50 to 60 years as some researchers have done [Taggart, 1985; Ciccolo and Baum, 1985], he rise in leverage on corporations’ balance sheets may not create high anxiety. However, incorporating into that picture the episode known as the Great Depression should give one pause and a moment for reflection. It was the Great Depression that followed the prosperous episodes of the 1920s when households’ and the financial sector’s use of debt pushed up the private sector’s debt-equity ratio.
When looking at the rise in debt usage from a more localized view as this study has done, the damage that is possible even without a recession is brought into focus. Debt, short term debt, has emerged as a very decisive factor in the study of bankruptcy. In contrast to the previous studies on failure where earnings and profitability dominated as predictors/determinants, this study has provided support for the view that in this time period the rise in short term debt usage may lead to increases in bankruptcy. As the data also very vividly point out, this increase is not isolated to small firms, but increasingly, large firms are joining the ranks of the failed.
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Working Paper No.30
10 August 1989
Growth Cycles in a Discrete, Nonlinear Model
AbstractThis paper develops a discrete, nonlinear growth cycle model for a macroeconomy. The nonlinearities, which correspond to empirical relationships between profitability and capacity utilization in the postwar U.S. economy, can produce stable, periodic and chaotic behavior. These behaviors are established analytically, and further investigated through simulation. Data from the simulations are used to show that chaotic attractors can produce time series which are useful representations of business cycles.
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Working Paper No.29
01 August 1989
Unionization and the Incidence of Performance-based Compensation in Canada
AbstractNo further information available.
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Working Paper No.28
10 July 1989
The Covariance Transformation and the Instrumental Variables Estimator of the Fixed Effects Model
AbstractThe covariance transformation is a useful and often necessary procedure to estimate the fixed effects model. When some explanatory variables are contemporaneously correlated with the disturbance term, the covariance transformation can be used in conjunction with an instrumental variables procedure to obtain a consistent estimator. This paper describes how to correctly compute the IV estimator as a two stage least squares estimator. In addition, I show that if the IV estimator is incorrectly computed using a two stage least squares approach where the covariance transformation is not applied until the second stage, the resulting estimator is not in general consistent.
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Working Paper No.27
10 June 1989
Money and Equilibrium
AbstractEconomic theory has undergone a very deep transformation during the last forty years. Its method and its tools of analysis have evolved dramatically. The standards by which theoretical statements are now appreciated are far more demanding, especially from a formal point of view, than was the case before World War II. Precision and logical validity in raising questions and problems have increased as well. The set of hypotheses necessary to deal with the usual issues of political economy has been made more explicit, allowing everyone to have a more clearer interpretation of what has been done in the different fields.
The content and the relevance of the concept of equilibrium have been strongly affected by these transformations. This paper, obviously, does not attempt to give an account of all these changes. It will focus on just one consequence of this evolution: the relevance of the concept of equilibrium in dealing with the traditional question of the working of the market, the central institution in our economies.
To put the matter very briefly, the question addressed here concerns the place of equilibrium in economic theory: does mainstream economics allow for another theoretical reference? For two centuries at least, equilibrium was referred to as a particular situation towards which the market mechanism was supposed to drive the economy. An important issue was to prove this conjecture. Whereas mainstream economists (Smith, Ricardo, Stuart Mill, Marshall and Walras) endeavored to prove the stability of the market, critical authors tried to show that certain fundamental flaws of the market mechanism make instability and crisis the rule in a capitalist economy. Among the factors said to be responsible for this result, the monetary character of the economy seems the most important (as was emphasized by Boisguilbert, Sismondi and Marx in the past and by Keynes in our time).
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Working Paper No.26
09 June 1989
Marx’s Value, Exchange, and Surplus Value Theory
AbstractThe concept of commodity society based on a specific division of labour (opposition between private and social labor) and that of surplus-value are the most prominent achievements of Marx’s intellectual efforts in dealing with the economy of capitalism. This paper attempts to evaluate the consistency of the theoretical propositions inherent in these concepts. The main contention is that an internal criticism of Marx’s theory of exchange and surplus-value leads one to restate it in a different framework. This framework. Which may be called monetary approach represents an alternative to value theory.
The first section of the paper is devoted to Marx’s value theory, especially to the form of value analysis. We suggest that Marx did not succeed in deriving money from commodity. As a consequence, money, if any, has to be presupposed at the same time as the specific division of labor. Doing so is breaking with the typical abstraction of value theory which substitutes values for monetary magnitudes, the former being thought of as expressing the essence of society in contrast with the latter conceived as surface phenomena.
The second section points out the logical inconsistencies which make the surplus value theory unsuitable for its purpose. A restatement will be suggested in which the monetary character of economic relations is again central.
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