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Summary S pring – S ummer 2002 Volume 11, Number 2/3

CONTENTS

INSTITUTE RESEARCH Program: of Income and Wealth 4 S Y M P O S I U M : New Directions in Research on Gender-Aware and International 14 JOEL PE R L M A N N , Poles and Italians Then, Mexicans Now? Immigrant-to-Native Ratios, 1910 and 1940

Program: Financial Markets and Monetary Policy 15 C O N F E R E N C E : The 12th Annual Hyman P.Minsky Conference on Financial Markets,“Recession and Recovery: in Uncertain Times” 24 ALEX IZURIETA , Dollarization: A Dead End 25 KENNETH H. T H O M A S , CRA’s 25th Anniversary: The Past, Present, and Future

Program: Federal Budget Policy 27 JAMEE K. M O U D U D, State Policies and the Warranted Growth Rate

Explorations in Theory and Empirical Analysis 29 AJIT ZAC H A R I A S , A Note on the Hicksian Concept of Income 30 J Ö RG BIBOW, What Has Happened to Monetarism? An Investigation into the Keynesian Roots of Milton Friedman’s Monetary Thought and Its Apparent Monetarist Legacies 32 KORKUT A . E RT Ü R K , Asset , Liquidity , and the Business Cycle

Strategic Analysis 33 WYNNE GODLEY and ALEX IZURIETA, Strategic Prospects and Policies for the U.S.

INSTITUTE NEWS 34 New Board Members 34 New Research Associates 35 New Levy Institute Book 36 Upcoming Event: Conference,“Economic Mobility in America and Other Advanced Countries”

PUBLICATIONS AND PRESENTATIONS 38 Publications and Presentations by Levy Institute Scholars 41 Recent Levy Institute Publications Su m m a ry Spring–Summer 2 002 Volume 11, Number 2/3

SCHOLARS WYNNE GODLEY Distinguished Scholar PHILIP ARESTIS Institute Professor and Senior Scholar WALTER M. CADETTE Senior Scholar STEVEN M. FAZZARI Visiting Senior Scholar JAMES K. GALBRAITH Senior Scholar CHRISTOPHER JENCKS Visiting Senior Scholar ROBERTA. MARGO Senior Scholar SUSAN MAYER Visiting Senior Scholar DIMITRI B. PAPADIMITRIOU President JOEL PERLMANN Senior Scholar MALCOLM SAWYER Visiting Senior Scholar EDWARD N. WOLFF Senior Scholar JÖRG BIBOW Visiting Scholar ALEX IZURIETA Research Fellow W. RAY TOWLE Resident Research Associate QIYU TU Visiting Fulbright Scholar L. RANDALL WRAY Visiting Research Fellow AJIT ZACHARIAS Research Fellow

RESEARCH ASSOCIATES RANIA ANTONOPOULOS WILLIAM J. BAUMOL BARRY BLUESTONE ROBERTE. CARPENTER YUVAL ELMELECH KORKUT A. ERTÜRK KRIS FEDER MATHEW FORSTATER MICHAEL J. HANDEL ROBERT HAVEMAN THOMAS KARIER WILLIAM H. LAZONICK JAMEE K. MOUDUD MARYO’SULLIVAN JAMES B. REBITZER WILLEM THORBECKE ROGER WALDINGER BARBARAWOLFE

The Levy Econo mics Ins ti t ute of Bar d Coll e ge, fou n d ed in 19 8 6 , is a nonp rof i t ,n on p a rtisan res e a r ch orga n i z a ti o n devot ed to public . Thro u g h scho l a r ship and econo mic res e a r ch it gene rat es via bl e , eff ective res p onses to important econo mic proble ms that profou n d ly affect the qua l i t y of li f e in the Uni t ed States and abroad. The Sum m a r y is a qua r terly publi c a ti o n of the Ins ti t ute ,i n tend ed to keep the aca demic commu n i t y informe d abou t the Ins ti t ute’s res e a r ch. To accomplish this goal , it contains sum m a r ies of recent res e a r ch publi c a ti o ns and reports on other activiti e s . W. RAY TOWLE, Editor KATHERINE HARPER, Text Editor The Sum m a r y and other Levy Ins ti t ute publi c a ti o ns are avai l a b le on the Ins ti t ute’s webs i te . To comm e nt on or inqui r e abou t publi c a ti on s , res e a r ch, and event s , cont a ct the Ins ti t ute online at www.l ev y. or g . T H E L EV Y E C O N O M I C S I N S T I T U T E O F BA R D C O L L E G E Bl i t h ewood An n a n d a l e - on - Hu d s on , NY 1 2 5 0 4 - 5 0 0 0 Phone: 8 4 5 - 7 5 8 - 7 7 0 0 ,2 0 2 - 8 8 7 - 8 4 6 4 (in Wa s h i n g ton , D. C . ) Fa x : 8 4 5 - 7 5 8 - 1 1 4 9 E - m a i l : i n fo@ l ev y. or g Web s i te: w w w. l ev y. or g C Printed on recycled paper LETTER FROM THE PRESIDENT

To our readers: This dou b le issue begins with an account of an interna ti o nal sympo s i um on gend er-aw a r e macr oeconom i c s , he ld at the Levy Ins ti t ute in May under the distrib utio n of in c ome and wealth program . Some 40 participants from var ious universi t ies and inter- na ti o nal orga n i z a ti o ns pres en t ed their latest res e a r ch and discussed futur e directio ns in res e a r ch and pol i c y . A gend er wage gap was comm on l y found in develo ping cou n t rie s , as were adverse impacts from interna ti o nal capital flows, libera l i z a ti on ,a n d glob a l i z a ti on . The working group exp res s e d the need for bett er data and models and exp a n s i o n of gend er-aw a r e econo mics into ot h e r areas of econo mic stud y. A working paper by Seni o r Scholar Joel Perlmann under the same program conf i r ms that Mexi c a n - to- n a t ive wage rat ios are worse toda y than those of comp a ra b le immigrants in 1910. He sug gests that today ’ s low- s k i ll e d immi- grants may not be able to advan c e the same way that immigrants did in the first half of the 20th centu r y. The program on financial markets and monetary policy begins with an account of the 12th annual Hyman P.Minsky conference,held in New York City in April. Some 100 participants from industry, government,and academia discussed the cur- rent state of the U.S. economy and its future direction. Many of the speakers advanced the notion that the recession was over, that it was one of the mildest on record, and that a moderate economic recovery was unfolding.Others, including Wynne Godley, the Institute’s Distinguished Scholar, expressed doubts pointing to a number of challenges ahead,e.g., record-high pri- vate sector debt, waning profits, high financial leverages, outlandishly flexible accounting, current account deficits, and the bubble mentality. Finally, some presenters noted the strong underlying structure of the U.S. economy and pro-growth eco- nomic policies that mitigated the impact of a number of shocks over a short period of time. A working paper by Research Fellow Alex Izurieta explores a country’s ability to undertake its own fiscal policies after dollarization of its economy and finds it inadequate to generate income, protect , and guard the financial stability of the . Another working paper, by Kenneth H. Thomas, lecturer in finance at the Wharton School of the University of Pennsylvania, evaluates the Community Reinvestment Act (1977) and recommends reforms balancing consumer and industry interests, including a return to a focus on lending to the most needy low- and moderate-income individuals. In a working paper under the program on federal budget policy,Research Associate Jamee K. Moudud investigates the effects of tax and expenditure policies on the warranted growth rate and proposes mechanisms for policymakers to raise the rate when there is long-run unemployment. Thr ee working papers are includ ed under exp l o rati o ns in theory and emp i r ical analysi s . Res e a r ch Fello w Ajit Zacha ri a s di s a g rees with the notio n that ex post defi n i ti o ns of in c ome incorporat e Hick s ’s conc ept and conc lud es that Hic ks cannot be used as a theoretical starting point for a modern natio nal income accou n t ing syst em. Vis i t ing Scholar Jörg Bib ow of the Uni versi t y of Ham b urg comp a r es the monet a r y theories of Keynes and Frie dman and finds the theory of in t erest and the dynamics of adju s t - me nt processes and exp ecta ti o n forma ti o n to be the key differenc es betw een them. He sug gests that the current monet a r y syst em ma y be the worst of al l pos s i b le world s , si n c e pol i ti c a l ly unche cked monet a r y dicta t ors determine econo mic welf a r e in modern democ r aci e s . Res e a r ch Ass oc i a t e Korku t A. Ert ü r k comp a r es Keyn e s ’s interest rat e theories and conc lud es that his earli e r insight s on the state of lon g - t erm exp ecta ti on s , des c ri b ed in his Trea ti s e on Mon e y (1 9 3 0 ) , grea t l y enh a n c e Keynesian analysis of the bus i - ness cycle . This Sum m a r y conc lud es with a strat egic analysis of pros p ects and policies for the U.S . econo my by Godle y and Izu ri et a . As always, I welcome your comments and suggestions. Dimitri B.Papadimitriou, President

T H E L EV Y E C O N O M I C S I N S T I T U T E O F BA R D C O L L E G E 3 I N S T ITUTE RESEARCH

Program: Distribution of Income and Wealth

S Y M P O S I U M :N EW DIRECTIONS IN RESEARCH ON GENDER- AWA R E that the gen der wage gap remains large . Moreover, i n s ti tu- MAC R OECONOMICS AND INTERNAT I O NAL ECONOMICS ti onal stru ctu re s , co u p l ed with patri a rchal gen der norm s and stereo type s , limit wom en’s bargaining power, h o l d i n g This international symposium was organized with support down their wage gains rel a tive to men’s . For ex a m p l e , i n from the Ford Foundation, the MacArthur Foundation, the So uth Kore a , the state con dones wi de s pre ad em p l oyer prac- University of Utah Economics Department, and the Levy ti ces requ i ring wom en to quit work upon marri a ge . Th e s e Institute. It was held May 9–10, 2002, at the Levy Institute, practi ces limit wom en’s job tenu re s , w a ge ga i n s , and abi l i ty Bard College, Annandale-on-Hudson,New York.Summaries of to or ga n i ze or join trade union s . In Si n ga pore , the state the speakers’ remarks and sessions are given below. maintains an el a s tic labor su pp ly by ex pelling low - p a i d female Ma l aysian ex port manu f actu ring workers du ri n g Session 1.Gender Inequality, Growth,and Investment econ omic down tu rn s . Facilitator for this session was DIANE ELSON of the University Gender inequality serves the political goals of continued of E s s ex . Pa rticipants were S T E PHANIE SEGUINO of t h e growth and social stability by bolstering profits, stimulating University of Vermont, DAVID KUCERA of the International exports, and reinforcing the stability of a patriarchal gender Labour Organization, WILLIAM DARITY JR. of the University of system. Lower-cost women’s labor substitutes for currency North Carolina at Chapel Hill,and Senior Scholar EDWARD N. deva lu a ti on and makes ex ports more com peti tive . WOLFF of New York University. growth may also be enhanced because exports Ma i n s tream theory holds that income equ a l i ty and generate the foreign exchange needed to purchase the sophis- ex ports have sti mu l a ted growth in As i a . However, accord i n g ticated technologies that raise productivity and stimulate to an analysis by Seg u i n o, Asian econ omic growth and growth. Furthermore, gender wage inequality may have pos- i nve s tm ent are functi ons of gen der wage inequ a l i ty: t h e itive effects on investment spending and men’s real . wi der the gap bet ween men’s and wom en’s wage s , the faster Seguino’s study attempts to capture both interclass dis- the econ omic growt h . Using data for the peri od 1975 to tribution of income (between women and capitalists) and 1 9 9 5 , Seguino analy zed the role of gen der in influ en c i n g intraclass (intrahousehold) distribution of income between m ac roecon omic outcomes and found that inequ a l i ty meas- women and men since household data could understate the u red along gen der lines has been a sti mu lus to growth in the degree of income inequality. The challenge in the future, she regi on via its po s i tive ef fect on both ex ports (by incre a s i n g said, will be to adopt a set of policies and development strate- access to tech n o l ogy) and inve s tm en t . gies that stimulate and distribute the result Si n ce the adopti on of ex port - ori en ted stra tegies in As i a n fairly by class, gender, and ethnicity. co u n tri e s , yo u n g, s i n gle wom en have form ed a rising share According to a study by Kucera,there is no solid evidence of the paid labor force . Within the manu f actu ring sector, to support the conventional wisdom that foreign investors wom en have been sequ e s tered in labor- i n ten s ive indu s tri e s favor countries with lower labor standards. His analysis that produ ce pri m a ri ly for ex port , and receive sign i f i c a n t ly showed that foreign direct investment (FDI) tends to be l ower wages rel a tive to men . In spite of correcting for greater in countries with higher labor standards because produ ctivi ty - rel a ted differen ti a l s , Seg u i n o’s stu dy showed stronger freedom of association and collective bargaining

4 S U M M A RY / S P R I N G–S U M M E R 2 0 0 2 rights signify greater political and social stability, an impor- Seguino’s result, that gender income inequality stimulated tant positive determinant of FDI location. Kucera’s research growth and exports in Asia, was termed provocative. It was employed newly constructed indicators of labor standards suggested that the result may have been affected by small that focus on actual worker rights in a cross-country statisti- sample selection issues and by the fact that her study focused cal analysis of labor costs and FDI in the 1990s for samples of on export-led . It was also noted that her study up to 127 countries. His results were consistent with a recent should have addressed the effects of immigrant labor, the sex survey of multinational executives and international experts trade, and ethnicity issues. An unanswered question related by the United Nations. Although higher labor standards are to the percentage of growth due to the gender wage gap. associated with higher labor costs (a negative factor for FDI), Kucera’s work was seen to be limited to FDI and omitted they are also associated with greater stability (a positive fac- indicators of equality, the effects of geopolitics and timing, tor), and the positive effects may well offset the negative. and an adequate definition of net investment. In both cases, Evaluating the determinants for FDI location is compli- it was noted that the scholars should link their studies with cated by the fact that FDI is heterogeneous and undertaken Keynesian or any other economic theory, or identify the sec- for different reasons. Since Kucera’s results are based on total tors leading economic growth. The results of their studies FDI, they represent a macroeconomic average. The effects of were questioned in light of the importance of structure, as labor costs on the location of total FDI depend on the rela- exem p l i f i ed by the differing com po s i ti on of Asian and tive importance of vertical FDI, which produces for Caribbean countries. exports, versus horizontal FDI, which facilitates domestic sales. According to the U.N. study, horizontal FDI is more Session 2. Gender Inequality and Trade I important than vertical, particularly in the service sector rel- Par ticipants in this session were NILÜFER ÇAG˘ATAY of th e ative to the manufacturing sector and for European and Uni versi t y of Uta h , CAREN GROWN of the Int erna ti o nal Cent er American firms relative to Japanese firms and those of newly for Res e a r ch on Women , IRENE VAN STAVE R E N of the Ins ti t ute industrialized Asian economies. of Social Studies in The Hag u e , and WILLIAM MILBERG of New Consistent with previous studies, Kucera found that Sch o ol Uni versi t y. unionization rates were not strongly related to either labor Çag˘atay focused on the relationship between trade, gen- costs or FDI inflows. Nor was there solid evidence that child der, and poverty, within the context of the human develop- labor or higher percentages of female industrial employment m ent parad i gm . She ex a m i n ed the impact of trade were associated with greater FDI inflows. Rather, FDI is liberalization policies on gender inequality, and that of gen- greater in countries with greater gender equality. Enhancing der inequality on trade performance. Her main conclusions through greater gender equality and reduc- were that men and women are affected differently by trade tions in child labor had a direct positive effect on FDI loca- policies and performance, gender-based inequalities impact tion. Moreover, the for unskilled labor was less trade policy outcomes differently, and gender analysis is relevant for multinational firms and FDI location. essential to the formulation of trade policies that enhance Kucera noted that the effects of labor standards on FDI gender equality and human development. location cannot be determined solely by considering the Ma i n s tream trade theory su ggests that expanding gl ob a l labor cost to labor productivity nexus as a causal channel.He trade is ben eficial to all wh en co u n tries produ ce spec i a l i zed called for a broader view of the economics of labor standards com m od i ties in wh i ch they have a com p a ra tive adva n t a ge . and worker rights, since FDI location and economic growth This leads to a more ef f i c i ent all oc a ti on of re s o u rces in the may be transmitted by enhancing political and social stabil- world econ omy and high er levels of o utp ut and growt h . ity and human capital development. However, m e a su res of devel opm ent based on market cri te- The discussants noted that the individual papers by ri a , su ch as income or con su m pti on ,a re now being rep l aced Seguino and Kucera were at odds with one another in terms by measu res based on human well - bei n g, i n cluding that of of the ef fect of i n come equ a l i ty on econ omic growt h . the poor, racial and other minori ti e s , and wom en . Çag˘atay

T H E L EV Y E C O N O M I C S I N S T I T U T E O F BA R D C O L L E G E 5 m a i n t a i n ed that trade must also be reeva lu a ted according to Although feminization of employment may be beneficial s ocial con tent su ch as cl a s s , gen der, and race that forms the to women in the short run, there are severe disadvantages in con text in wh i ch trade policies are en acted (as oppo s ed to the long run, such as a lack of security. In order to counter the social impact of trade based on growth and market the negative effects of globalization and financial liberaliza- acce s s ) . Any assessment of the impact of trade libera l i z a ti on tion on gender equity, Grown called for development and fis- on gen der equ a l i ty must inclu de the impact on the unpaid cal policies that en co u ra ge wage - l ed , f u ll - em p l oym en t c a re econ omy as well as on wom en’s paid em p l oym en t growth with rising productivity, including creation of - opportu n i ties and working con d i ti on s . The con cept of inelastic and restrictions on both inward poverty in terms of a b s o lute income should be broaden ed to and outward FDI. i n clu de su ch rel a tive para m eters as po s s e s s i on or lack of Sens i t ivit y of mon et a r y auth o rit ies to gend er equi t y, th e a s s et s , d i gn i ty, a uton omy, and ti m e . The probl em lies not abi l i t y of the exp ort sector to produc e inela s t ic exp orts , an d on ly in unequal re s o u rce con trol within househ o l d s , but in will i n g ness by the state to manage capital mobil i t y are requi r ed i n s ti tuti on a l i zed gen der biases in both the state and the to achi e ve gend er equi t y. The refore, Grown calle d for an m a rket . E m powerm ent of poor peop l e ,p a rti c u l a rly wom en , exp a n d ed governm e nt role in managing econo mic outcome s is essen tial to the el i m i n a ti on of human poverty. th ro u g h tim e ly interventi o n of physical capital cont ro l s ,f i n a n- Çag˘atay wa rn e d that patterns of defemi n i z a ti o n may cial capital flows, and indus t rial pol i c y . At the same tim e , sh e develo p over time and calle d for more gend er inequa l i t y stud - no t ed, it is important to recogni z e different econo mic struc - ies rela t ed to trade theories and the develo pme nt of al t erna t ive ture s . The goal is to fundament a l ly alter power rela ti o ns to trade policies and labor standards . Macr oecono mic sup port ensu r e wome n’s equi t a b le access to market res o u r ces and rela t ed to comp etiti on , in c ome distrib ution , and growth is expand their abil i t ies to make lifes t yle choi c es and care for es s en ti a l , as is more deba t e conc erning gend er, cla s s , an d th e ir families. The solution , ho wever, is not neces s a ri l y a win - na ti o nal inequa l i ti e s , and the different social rela ti on s h i p s win situa ti on . un d erlying poverty. The discussants raised some issues with the papers’ pol- An answer to the cen tral qu e s ti on abo ut what set of icy suggestions and questioned the cost of the care economy. feminist mac roecon omic and trade policies should be Van Staveren noted a number of strengths in Çag˘atay’s paper, adva n ced to prom o te and insti tute gen der equ i ty was pro- which recognized the interaction between trade and gender vi ded by Grown . Her stu dy (coa ut h ored with Seguino) set s and interpreted power issues at the household and interna- forth gen eral principles that can shift econ omies from a tional levels. Some hypotheses, however, did not address the prof i t - l ed , ex port ori en t a ti on to a wage - l ed , f u ll - em p l oy- gender composition of trade. Van Staveren recommended m ent ori en t a ti on . Her ob s erva ti on was that fiscal and mon- that future work link human development and gender capa- et a ry policies prom o ting gen der equ i ty are of ten an bilities and address a matrix of win/lose scenarios of trade- a f tert h o u gh t , and are con s tra i n ed by financial libera l i z a ti on gender relationships. This process, she surmised, could help ( wh i ch increases mac roecon omic vo l a ti l i ty) and a govern- to clarify trade policies that benefit women and the poor. It m en t’s abi l i ty to act on beh a l f of wom en . Th erefore , was noted by participants that the wage-led economy pro- i n c reasing wom en’s rel a tive access to job s , a major veh i cl e posed in Grown’s paper may not be possible. for improving gen der equ i ty, a ppe a rs to be incre a s i n gly u n obt a i n a ble in the era of gl ob a l i z a ti on . In ad d i ti on , Session 3.Gender Inequality and Trade II Grown noted that there was evi den ce that the process of Fac i l i t a tor for this session was RA D H I KA BA LA K R I S H NA N of fem i n i z a ti on reverses as the wage gap cl o s e s . Overa ll , Ma rymount Manhattan Co ll ege . Pa rticipants were M A R Z I A wom en en ter the paid econ omy under inferi or con d i ti on s FO N TA N A of the In tern a ti onal Food Policy In s ti tute , JAYAT I that cannot provi de them with a sec u re income and that G H O S H of Jaw a h a rlal Neh ru Un ivers i ty, M U M TAZ KEKLIK h a m per their abi l i ty to improve their working con d i ti ons or of the Un i ted Na ti ons Devel opm ent Progra m m e , G ROW N, t h eir rel a tive po s i ti on in soc i ety. and E L S O N.

6 S U M M A RY / S P R I N G–S U M M E R 2 0 0 2 Fontana modeled the effects of trade on women in positive effect of better price incentives; therefore, it is Bangladesh and Zambia. She employed a gendered, com- important to design complementary policies that reduce the putable general equilibrium model with two innovative fea- many competing demands on women’s time and enhance tures—the allocation of both male and female labor over a their ability to respond to economic reforms. 24-hour time frame,and the inclusion of social reproduction According to Fontana, her model is limited in that the (household work) and leisure sectors. The model was based social reproduction and leisure sectors do not allow for dif- on a social accounting matrix, which included details on the ferences in preferences and control over resources between gender composition of the labor market, household work, family members (intrahousehold effects). Also, the use of and leisure. Household types were distinguished by income multiple assumptions to derive time-allocation data may level and location, and the model accounted for land owner- have resulted in somewhat unreliable data. ship as well as capital. This level of detail permits the various Ghosh examined women’s employment in the export- effects of economic changes on women to be understood oriented manufacturing sectors in India during the era of according to their individual characteristics and circum- globalization.She noted that women are preferred employees stances, and how they affect women’s obligations and tasks in this area,primarily because they accept inferior conditions within the household. and pay and give employers greater flexibility in terms of In a trade simul a ti o n in whi c h the world pric e of copper less-secure contracts. In fact, the feminization of Southeast was rai s ed , Zam b ia suf f ered a cont ractio n of dome s t ic outpu t Asian export-oriented industries may be even more depen- and an improveme nt in two male-domi n a t ed sectors: ca p i t a l - dent than generally supposed on the relative inferiority of in t ens i ve manuf a ctur ing and comm e rcial crops . Wome n wit h women’s remuneration and working conditions. se cond a r y and tertia r y educ a ti o n gai n e d more than other In her revie w of Sou theast Asian cou n t rie s , Ghosh fou n d female workers in highe r wages and more leisu r e tim e , an d th a t , des p i t e a massive increase in the labor force partic i p a ti o n me n in urban households assum e d some female tasks in rat e of wome n in the perio d 1985 to 1997, and a slight nar- so cial reproduc tion . However, si mu l a t ing the abol i ti o n of ta r - rowing of the wage gap dur ing that ti m e ,t h ere was a decline in if f s on manuf a ctur ed imports resu l t ed in lower emp l o ymen t the share of wome n emp l o yed in the exp ort manuf a cturi n g and smalle r wage gains for wome n than for men. The intro- se ctors. Exp ort indus t ries had become the most importa n t duc tio n of in c ent ives in nont rad i ti onal agric u l tu r al exp orts emp l o yer of wome n at the margin , so , with the econom i c sh o wed that wome n were favored more by the exp a n s i o n of downtu rn , th e ir num b ers decli n ed . Sin c e the early 1990s, ho rtic u l tu r e and grou n d n uts than by comm e rcial crops , ag gregat e manuf a ctur ing emp l o yme nt actua l ly decli n e d in whi c h were more male-intens i ve. Rea ll oc a ti o n of produc tive Sou th Korea , Sin ga p ore, and Hong Kong , and there was a cor- as s e ts to “w ome n’s crops ” ma de female workers more produc - res p onding decline in the share of female manuf a cturi n g tive but reduc ed their leisu r e tim e . emp l o yees over the latter part of the deca de. The process of In the case of Bangladesh,a simulated decline in garment femi n i z a ti o n of exp ort emp l o yme nt pea k ed in the early 1990s, exports resulted in a decline in time spent in the market before the 1997 financial crisis and the 1997–99 reces s i on . economy relative to social reproduction and leisure activities. Sin c e then ,t h ere appea r s to have been a shift to more insecu re , Le s s - edu c a ted wom en were su b s equ en t ly absorbed into very small, unit- or home - b a s e d emp l o yme nt of wome n in other market activities more easily than educated ones. produc tio n chains depend ent upon outs o u r cing by large final Overall,the results showed that changes in trade policy affect di s t rib utors. men and women differently. In Ind i a , open emp l o yme nt of wome n in exp ort- o rien t ed Fontana noted that the simulations showed how impor- fa ctories is less appa r ent than it was in Sou theast Asia du ri n g tant it was to include social reproduction and leisure sectors its major exp ort boom. The re has been a small rat e of in c re a s e in analysis, and to integrate women’s time in the household in the femi n i z a ti o n of emp l o yme nt rela t ive to Sou theast Asi a n with their work in the market economy. The greater the cou n t ries and a rela t ively low growth rat e of ag gregat e rigidity of gender roles and market structures,the smaller the emp l o yme nt (now at its lowest since independ ence ) . The

T H E L EV Y E C O N O M I C S I N S T I T U T E O F BA R D C O L L E G E 7 overal l work partic i p a ti o n rat e of ur ban Indian wome n in the repres en t a t ives and inhabitants are given grea t er cont rol in 1990s decli n ed . Ghosh noted that a corres p onding increase in terms of in ves tm en t s , adm i n i s t rati on , and deli very of se rvice s , the open unemp l o yme nt rat e is a very poor indicator of actua l is essent ial in deli vering needed public goods and service s . le vels of jo b avai l a bi l i t y because the absenc e of pu b lic soci a l Go vernm e nt policy previo u s l y igno red issues of so cial secu ri t y sec u ri t y syst ems res ults in underemp l o yme nt or disgu i s e d but now recogni z es the need for gend er-s p ecific measure s . u n em p l oymen t . For urban wom en ,t h ere has been an increa s e Kek l i k , as a discussant, add re s s e d Font a n a ’s paper and in regular work in the form of sub s i d i a r y activit ies suc h as que s ti on e d the appl i c a ti o n of the model’ s classical assum p - dome s t ic and other servic es and an increase in home - b a s e d tio ns for Zam bi a , its inconc lus i ve rela ti o nship betw een trade work as part of a sub cont racting syst em for exp ort and li b eral i z a ti o n and growth , and the resu l t ing negat ive soci a l dome s t ic manuf a cturi n g .This has resulted in work and social im p l i c a ti o ns associ a t ed with a bud g et dedi c a t ing 40 percent reproduction occurring in the same place. These home-based of its exp end i tu r es towa r d debt- s e rvicing cos t s . He noted that subcontracting activities, which are poorly paid and lack governm e nt revenues are important in less-develo ped cou n - n onw a ge ben ef i t s , m ay have su b s ti tuted for both sel f - tries and that tarif f reduc tio ns affect governm e nt revenue s employment and more regular employment. There has been and reduc e public inves tm en t , whi c h in tur n negat ively affect an increase in subcontracting by export-oriented and foreign so cial policies and gend er rela ti on s . The refore, the model manufacturing companies in India. Production processes us e d by Fontana should cons i d er other factors, suc h as gov- that require more labor per unit of are more likely to ernm e nt finances , es p eci a l ly whe n appl i e d to Za m bi a . Grown lead to organizational forms dependent on subcontracting at res p ond ed to Ghosh’s paper, sa ying that it led to que s ti o ns of various levels. ho w to integrat e femi n i z a ti o n into setti n g s other than Ind i a , Outsourcing coordinated by a chain of intermediaries or Asia in gene ral , and wh et h er the process was cong ruen t constitutes an important challenge for social policy since with demo graph i c s . She poin t ed out that the issue of defemi - home-based workers’ opportunities for any kind of organiza- ni z a ti o n and reversals with res p ect to a shift in the produc tio n tion or collective bargaining are limited. Attempts to organ- chain was especi a l ly important to Ind i a , whi c h is different ize and improve conditions have been marginally successful. fr om southeast Asi a . An important story to includ e is the Moreover, outsourcing is more pronounced in sectors pro- in c re a s e d comp etiti o n from abroad leading to emp l o ymen t ducing relatively low-valued goods, such as textiles, gar- lo s s e s . Moreover, what is the role of the state in terms of righ t s ments, leather goods, and plastics. Since private employers and labor standards , and how can the state add r ess soci a l are not expected to provide decent labor conditions or viable s ec u ri ty? The differenc es betw een caste and class grou p i n g s material income standards, given the excess labor supply and should also be stud i ed , as well as how to crea t e more pro- low employment growth at best, a significant share of the duc tive emp l o ymen t . Oth e r res p ond ents poin t ed out that bu rden of worker pro tecti on must fall upon the state . Font a n a , whose res e a r ch add re s s e d the issue of lei su r e tim e , Sof t w a re and inform a ti on tech n o l ogy (IT) servi ce s , t h e ma y need a bett er defi n i ti o n and measur eme nt of lei su r e and fastest growing exports in the 1990s, produce products at the so cial struc ture , and that futur e res e a r ch by both auth o rs lower end of the scale, are highly transient,and are currently should includ e cons i d era ti on of wealth inequa l i t y and disin- concentrated among the richer, English-speaking parts of ves tm e nt at the lower end of the cha i n . urban India. Therefore, an excessive emphasis on IT could result in the diversion of resources away from more crucial Session 4.Gender Inequality and Trade III expenditures for literacy and primary education. Fac i l i t a tor for this session was E L S O N.Pa rticipants were The most basic requi r eme nt for workers in the Ind i a n GÜNSELI BERIK of the Un ivers i ty of Ut a h , SHAIANNE econo my is food secu ri t y and this, al o ng with public health O S T E R R E I C H of It h aca Coll e ge , ELLEN HOUSTO N of New programs and public housing, must be a prio rit y of the state. S ch ool Un ivers i ty, G H O S H, and K U C E RA. Imp roved access to food for a household disproportion a t ely Becker ’s theory of d i s c ri m i n a ti on states that gre a ter bene fits gir ls and women . Decent ral i z ed planning, whe re loca l erodes wage discrimination against women. Past

8 S U M M A RY / S P R I N G–S U M M E R 2 0 0 2 studies linking gender wage differentials and increased expo- exports had a stronger impact on the gender wage gap in sure to competitive forces from international trade have concentrated industries. yielded inconclusive results and the impact of globalization In Ta iw a n , i n c reasing trade openness and a high ly com- on the gender wage gap remains a puzzle. Berik tested peti tive indu s trial stru ctu re are assoc i a ted with rising gen der Becker’s theory in a study coauthored by Yana van der w a ge inequ a l i ty. So uth Kore a’s declining total trade , h ow- Meulen Rodgers of the College of William and Mary and ever, co u p l ed with a less com peti tive indu s trial stru ctu re , i s Joseph E. Zveglich Jr. of the Asian Development Bank. They a s s oc i a ted with a gradual narrowing of its manu f actu ri n g - estimated the effects of greater competition from interna- s ector gen der wage ga p.Th erefore , Berik su gge s ted , a rel a- tional trade on the gender wage gap in Taiwan and South tively less open econ omy may bet ter su pport gen der Korea in the period 1980 to 1999. Two alternative models equ a l i ty. She call ed for a reeva lu a ti on of pro tective legi s l a- were used in the analysis—the lon g - d i f feren ced model , ti on for female workers in both co u n tries to en su re that which estimates the effect of change in the trade ratio over gains from gl ob a l i z a ti on are shared more equ a lly bet ween time,and the levels model, which calculates the effect of vari- m en and wom en . Her findings were con s i s tent with other ations in the level of trade openness—to identify gender s tudies that showed sex discri m i n a ti on to be a tool for wage gap changes. i n c reasing ex port com peti tiven e s s . Beri k’s indu s try - l ed wage gap regre s s i ons disproved The first pres en t er to deal with north - s o u th comp a ri s on s Becker ’s theory. In Ta iwan and So uth Kore a , an increase in was Osterreich . Her main thesis was that gend er wage gaps in i n tern a ti onal com peti tiveness over time in con cen tra ted sem i - i n du s t ria l i z ed middle - i n c ome cou n t ries were associ a t ed i n du s tries was assoc i a ted with a wi der gen der wage ga p.Th e with a decline in manuf a ctur ing terms of trade rela t ive to s tu dy con tro ll ed for gen der differen ces in skills and the those of in du s t ria l i z ed econom i e s . Ano t h e r thesis was that the ef fect of f i rm s’ m a rket powers in their own co u n tri e s . un e qual distrib utio n of gains from trade is affected by pat- Indu s t ries were categori zed according to their dom e s ti c terns of female emp l o ymen t , providing a causal link to ( con cen tra ti on of f i rms ac ross indu s tries) and intern a ti on a l un e ven develo pmen t . Previous theories of trade negle cted the ( ra tio of trade to dom e s tic produ cti on) com peti tiven e s s . si gn i f i c a n c e of gend er rela ti o ns that affect both labor force The re s i dual ra t h er than unad ju s ted wage gap was seen to be pa r tic i p a ti o n patterns and labor market outcome s . bet ter su i ted to test Becker ’s theory. As oppo s ed to other Gen d er repres e nts one of the social param e ters for the s tu d i e s , the analysis ex p l i c i t ly te s ted for the ef fect of in c re a s - di s t rib utio n of econo mic bargaining power, res o u r ces , an d ing com peti ti on on wage discri m i n a ti on , i n tegra ting micro work bur dens within soci e ty. A num b er of st udies have data on labor markets with mac ro data on indu s trial stru c- demon s t rat ed that exp ort- o rien t ed manuf a ctur ing is associ - tu re and trade . at ed with fema l e - i n t ens i ve emp l o yme nt within and betw een In light of competitive forces from domestic market cou n t rie s . The purpose of Os t erreic h’s res e a r ch was to inves - structures, unadjusted and residual wage ratios in Taiwan tiga t e linkages betw een gend er inequa l i t ies in labor markets , were higher in concentrated than in nonconcentrated indus- terms of trade, and unequal excha n ge . Her model speci f i c a - tries. These same ratios were higher in South Korea after tio n was derived from a standard classical versi o n of pric e 1 9 9 2 . Ta iw a n’s rel a tively gre a ter market ori en t a ti on (of determi n a ti o n cou p l e d with an eng end ered unequal excha n g e industrial policy) and more competitive industrial structure an a l ysi s . The net barter terms of trade (NBTT), or rela t ive formed a backdrop of rising wage inequality and mild recov- in t erna ti o nal price s , is a functio n of w a ge s , produc tivit y, an d ery in both concentrated and nonconcentrated industries. By rate s . Cou n t ries were cho s e n based on their exp ort pro- contrast, as a result of South Korea’s less competitive indus- mo ti o n in the manuf a ctur ing sector as a strat egy to achi e ve trial structure and policy, its residual wage ratio in noncon- growth , and their increasing reli a n c e on exp orts since the mid centrated industries was relatively flat while its residual wage 19 7 0 s . This sample was indexed according to each cou n t ry’ s ratio in concentrated industries was rising. Competitive averag e of th r ee exp ort measure s — ex p orts as a percent a g e of forces arising from greater exposure to imports relative to GD P , an n ual exp ort growth , and manuf a ctur ed goods as a

T H E L EV Y E C O N O M I C S I N S T I T U T E O F BA R D C O L L E G E 9 percent a g e of exp orts — f or the perio d 1975 to 1995. Wag e According to Hou s t on, cou n t ries with grea t er gend er rat ios were calculated as the rat io of female to male earni n g s in e qua l i t y perform bett er. Her hypothesis was based on the weigh t ed by share of ea ch manuf a ctur ing exp ort sector, an d fa cts that wome n are lower-c ost su b s ti tutes for male workers wa g e gaps were adju s t ed for educ a ti on , in line with work by and that there is segregati o n as well as a cyclical res p onse to Segu i n o . North e rn (indus t rial) cou n t ries were sele cted accord- female emp l o yme nt (the buf f er hypot h e s i s ) . OECD data show ing to their signi f i c a n c e as trading partne rs for the sample a strong negat ive trend in the male/female emp l o yme nt gap so ut h e rn (semi - i n du s t rial) cou n t rie s . In light of wa g e data and a narrowing gend er wage gap in the perio d 1985 to 1999. li m i t a ti on s , tw o sets of so ut h e rn cou n t ries were used in the Hou s t on attemp ted to incorporat e social policy (public soci a l an a l ysis—10 cou n t ries using five- y ear average s , and seven exp end i tu r es) into her soci a l - g ap model of in t erna ti on a l using annual gend er wage data. comp etit iveness and captur e both the short- and long - ru n Osterreich hypothesized that the NBTT of the south im p a cts of rela t ive unit labor cos t s , techn o l o gy, in du s t ria l would improve when women there became better off relative rela ti on s , and gend er inequa l i t y. La cking good wage data, sh e to women in the north. In addition, when the north-south tes t ed the different vari a b les and got ambiguous res ults rela t - productivity gap shrank, the south’s NBTT would deterio- ing to the interactive eff ects of gend er and social equa l i t y. rate. Her research results gave overall support to the primary In discussing Berik ’s paper, Ghosh said that some que s - hypothesis and explained the unequal exchange and develop- tio ns rema i n . For exa m p l e , the res e a r ch does not add r ess the ment relationships between the two economies. Although the eff ects of the financial crisis of 19 9 8 – 9 9 , whe n there was a results relating to the secondary hypothesis were mixed, it ma s s i ve increase in unemp l o ymen t ; this must have made a was con f i rm ed wh en she used a small er sample size . di f f erenc e in the wage gap even with no clear trend in the Therefore, international wage ratios, when engendered, are econom e tric analysi s . In add i ti on , the res e a r ch does not take contributing explanatory variables for the NBTT. Moreover, in t o account the impact of im p orts on the gend er wage gap , wh en wom en’s bargaining power incre a s e s , it tends to or the soci a l / po l i t ical differenc es betw een cou n t rie s . Gh o s h improve the NBTT. This implies that feminization of the no t ed that she disagreed with Osterreic h’s hypothesis since labor force of successful manufacturing, export-oriented ne w ent rants in the south category were diversi f y ing with the countries is a contributing factor in the Prebisch-Singer same comm od i t y and not eno u g h cou n t ries were includ ed in hypothesis: that when the productivity of southern countries the stud y. Kuc era agreed with the small sample bias of increases relative to northern countries, the NBTT of the Os t erreic h’s stud y and sug ges t ed dropping one cou n t ry at a south deteriorates.Emmanuel’s labor market–based vision of time in the econom e tric analysis to see how the coeff i c i en t s unequal exchange, when engendered to explain international cha n g ed in the proces s . It was noted that since wome n are wage ratios, is also a reasonable theoretical explanation of emp l o yed in more mobile indus t rie s , whi c h wil l reloc a t e (e.g., uneven development. fr om Tai wan to China) and sub s e quen t l y reim p ort these same Policy recommendations to escape unequal exchange (in product s , downwa r d pres su r e is exerted on wome n’s wage s ,a s light of the disincentive for southern countries to protect well as men’s, le a ving the wage gap cons t a n t . their workers) and patriarchal social relations that suppress wages to maximize profits include narrowing the technolog- Session 5.Gender-Sensitive Financial Reform and ical and educational divide between men and women, and Monetary Policy: A Roundtable Discussion (Part I) between countries. Such policy would allow more diversified E L S O N was fac i l i t a tor for this session . Pa rticipants were exports, including those that embody more innovation and AJIT SINGH of the Un ivers i ty of Ca m bri d ge , ANNE tech n o l ogy. G en der-aw a r e edu c a ti onal and tech n o l ogi c a l ZA M M I T of the Un i ted Na ti ons Re s e a rch In s ti tute for Soc i a l policies are also necessary to avoid occupational gender seg- Devel opm en t , KORKUT A . ERT Ü R K of the Un ivers i ty of Ut a h , mentation that inhibits relative gains for women,and to pro- and B R I G I TTE YO U N G of the Un ivers i ty of Mu en s ter. mote labor standards and female employees’ rights through Zammit pre s en ted a capital acc u mu l a ti on model of multilateral collective actions. South Korea that analyzed growth and structural changes to

10 S U M M A RY / S P R I N G–S U M M E R 2 0 0 2 show that during periods of cyclical instability, women are asked Singh, what are the possibilities for national versus more affected than men. The country relaxed its financial international action? regime in the period 1993 to 1996 (following liberalization of Ert ü r k spok e of cu r rency cris e s , the moveme nt of fu n d s short-term capital flows in the late 1980s) and then experi- betw een current and capital accou n t s , and the risk of excha n g e enced an intense financial crisis in 1997 when GDP declined, rat e drif t . Develo ping cou n t ries have internal debt problem s , inflation increased, its currency devalued, and the govern- so a decline in their mone y sup plies by the end of the 1990s ment closed 15 large financial companies. Zammit noted that preci p i t a t ed a liqui d i t y crun ch . Int erest rat es incre a s ed ,p u bl i c there was significant irregular employment for both males debt brou g ht financial instabil i t y, and the cou n t ries faced and females before the 1997 financial cri s i s . However, in s o l venc y . The IMF rea d the events incorrectl y and vie wed women’s employment declined more than men’s, and this th e m as an attack on the currenc i e s . As the develo ping cou n - disparity is unlikely to change in the future. tries exp erien c ed real excha n g e rat e decli n e s , banks ext end ed Within a rela t ively short perio d of time fo ll owing the cr edit at highe r nominal interest rate s . The refore, th e re was an financial cris i s , Sou th Korea exp erien c ed a flowering econ- in c ent ive for these natio ns to expand credi t . omy. The associ a t ed cha n g e from reces s i on a r y to exp a n s i o n- Ertürk suggested considering foreign currency deposits ar y policies affected social pol i c i e s . Zam m i t ’s model for this as a country’s internal money supply. Reserve requirements perio d took ext end ed family income into account in deter- for saving and checking deposits are the opposite in foreign mining benef i t s . Zammit recomm en d ed new cou n t ercy cli c a l currency accounts. The implications with regard to gender me a su r es to deal with futur e cris e s , and advis e d that cou n t rie s are the way in which the mechanisms underlying the finan- not depend on exp orts . She noted that cent ral banks repres en t cial system unravel as part of the effects of government financial interests and are not rea l ly independ ent from the policy interven ti on . He noted that spec u l a tive beh avi or st a te . The refore, th e y should repres e nt wome n’s interes t s . expectations are different between men and women, and saw Si n gh ob s erved that in terms of i n tern a ti onal capital the need for concrete proposals, such as a Tobin tax (an excise f l ows and gen der, wom en are affected most by econ om i c tax on cross-border currency transactions),along with built- i n s t a bi l i ty. Th eir wages decline and their unpaid bu rden in stabilizers. i n c reases wh en there is no social sec u ri ty sys tem . Th eory Young noted that it was difficult to inclu de gen der per- su ggests that intern a ti onal capitalism prom o tes stabi l i ty but s pectives in con c rete proposals rel a ting to mon et a ry po l i c y, t h a t , for some co u n tri e s , l e ads to instabi l i ty. In su ch cases as l a bor market s , and financial com m i t tee s . Tod ay, h owever, Mex i co and So uth Kore a , OECD mem bership did not hel p. G erm a ny requ i res they be con s i dered in all areas of govern- In the case of Argentina, huge capital inflows occurred m ent po l i c y. She listed 18 recom m en d a ti on s , wh i ch after inflation stabilized following a period of i n clu ded app lying feminist econ omics and ga t h ering gen- in 1989. However, m on ey disappe a red with unbalanced der- s pecific stati s tical data. Young also recom m en ded adop- budgets and government policy sought to increase foreign ti on of a Tobin tax. capital. High unemployment and attempts to balance budg- ets on a monthly basis resulted in government spending cuts, Session 6.Gender-Sensitive Financial Reform and rising deficits, and lower government salaries and wages. The Monetary Policy: A Roundtable Discussion (Part II) International Monetary Fund (IMF) faulted the Argentinean Faci l i t a t or for this session was EL S O N .Par ticipants were VAN government and assumed that the capital markets would ST AVE R E N , GE R ALD EPSTEIN of the Uni versi t y of Mas s a chus et t s , require balanced budgets. However, output continued to and GÜ L AY CAGLA R of the Uni versi t y of Kas s el . decline. The question was,“who is willing to pay?” The only Van Staveren foc u s ed on gen der- b a s ed distorti ons in the avenue left to the nation was import and exchange controls, financial market s . She noted that the bu rden of i n s t a bi l i ty which had serious implications for the world economic du ring a financial crisis is tra n s ferred to the care econ omy, order. It is difficult for countries to take autonomous action re su l ting in nega tive feed b ack ef fect s . Moreover, t h ere is and free trade is not compatible for all countries. Therefore, su boptimal re s o u rce all oc a ti on due to discri m i n a ti on . Her

T H E L EV Y E C O N O M I C S I N S T I T U T E O F BA R D C O L L E G E 11 recom m en d a ti ons inclu ded the need for financial insti tu- Session 7.Gender-Aware Macroeconomics ti ons to devel op into tra n s p a rent or ga n i z a ti ons and YOU N G was faci l i t a t or for this session. Par ticipants were i n c rease the nu m ber of wom en among their directors and HA R OON AK RA M - LO D H I of the Ins ti t ute of Social Studies in The s en i or staff; m e a su res su ch as gen der audits at va rious lev- Hag u e , IS A B E L L A BAK K E R of York Uni versi t y, CHARLES ABU G R E els (inheri t a n ce and property ri gh t s , land reform progra m s ) of the Int egrat ed Social Develo pme nt Cent er in Ghana, and raising public aw a reness to redu ce gen der- b a s ed distor- ROS A N N A GALLI of the Uni versi t y of Luga n o , and FO N TA N A. ti ons in financial market s ; acti on to break the mon opo ly of Akram-Lodhi outlined the effects of Vietnamese govern- the IMF on intern a ti onal policy advice ; recon s i dera ti on of ment fiscal policy on gender. He noted that government deci- l oans by the World Bank and regi onal devel opm ent banks s i ons with re s pect to the nati on’s fiscal po s i ti on were in favor of grants for human devel opm ent (including gen- conservative, that the budget deficit was very low (limited to der aspect s ) ; and the need for microc redit programs for a maximum of 5 percent), and that there was no debt prob- wom en to shift atten ti on from incre a s ed loan access to lem. A“unified”national budget was submitted as a five-year i n c re a s ed loan con tro l . plan with a complicated and restricted underlying structure. Cag lar sug ges t ed that gend er-s en s i t ive bud g eting could be A limited group drafted the plan and there was no formal in c orporat ed into the exi s t ing econo mic paradi g m and rec- mechanism for civil society to affect the budget. omm en d ed including gend er within the agenda of fi n a n c i a l The underlying structure of the budget showed that the bud g etin g . In light of the role of soc i e ty and power and the government and various committees were extremely unequal ne ed to raise governm e nt and public cons c i o u s n e s s , he recom- in gender composition (with the exception of the vice presi- men d ed a link betw een pol i t ical and econo mic analyse s . A new dents, who were powerless). The disparity worsened as one econo mic paradi g m could initia l ly incorporat e a Tobin tax. moved down the chain of command.Economic management Ep s tein ra i s ed the issue of cen tral bank policy maintain- was heavily weighted toward men, as were senior positions ing low interest ra tes to the exclu s i on of o t h er goa l s , a n d on com m i t tees to improve wom en’s issu e s . Th erefore , su gge s ted a targeting approach to manage capital flows . Th e Akram-Lodhi maintained, women need to be mainstreamed i m p act of m ac roecon omic policy (econ omic and hu m a n into Vietnam’s key economic ministries along with gender devel opm ent) on wom en and ch i l d ren should also be budgeting procedures. In addition,institutional mechanisms i n clu ded in the discussions and in set ting target s . For ex a m- should be establ i s h ed and on going dialogue prom o ted p l e , So uth Af rica set its sights on forei gn inve s tm ent and between senior ministries and organizations representing l owered interest ra tes to get it; h owever, s i n ce the nati on’s women. He proposed mechanisms to overcome institutional j obless ra te stands at 45 percen t , its target should have been constraints, including a requirement that ministries submit em p l oym en t . policy recommendations to a committee with the power to Epstein noted that FDI follows rather than leads eco- review policies for their gender impact (a “gender audit”) nomic development. There is no correlation between interest and the creation of a budgetary submission process permit- rates and , and higher interest rates ting women’s organizations to make gender-aware policy hurt the poor. However, employment targeting, in which the proposals to the government. central bank sets the range and policies subject to an interest Ba k ker ’s work dealt with con ceptual links bet ween constraint (in light of the threat of hyperinflation), would unpaid work and macroeconomics. She focused on account- involve everyone in society. It is important to understand the ability and voice and noted that all budget processes were linkages between monetary policy and employment, and the political. A wave of fiscal stabilization measures and laws in central bank needs more instruments such as credit alloca- the 1990s signaled a return to pre-Keynesian orthodoxy, a tion techniques to conduct monetary policy.The search for shift that had implications for the changing accountability such tools or techniques could lead to credit allocation and structures of fiscal policy. employment policies that are gender-sensitive. Acco u n t a bi l i ty and public policy pertain to all past, pre s en t , and futu re funded taxpayers , m a rket parti c i p a n t s

12 S U M M A RY / S P R I N G–S U M M E R 2 0 0 2 ( by sustaining an appropri a te business cl i m a te ) , and insti tu- ta xe s , sub s i d i e s , and the impact of bud g et alloc a ti o ns on acces s ti ons that cre a te bu d get def i c i t s . G iven these layers of by the poor to health, educ a ti on , and water. acco u n t a bi l i ty, d i s c u s s i ons abo ut parti c i p a tory bu d get ini- The discussants, Fontana and Galli , no t ed the benef i t s ti a tives su ch as gen der-re s p on s ive bu d gets must inclu de ea ch paper provid ed to the res e a r ch on gend er and econom i c acco u n t a bi l i ty of the legal fra m ework , dom e s tic and inter- pol i c y . However, in comm en t ing on the pres en t a ti o n by n a ti onal insti tution s , and capital markets (in the form of Abug re, Fontana qu e s ti on ed the develo pme nt of a dyn a m i c c red i bi l i ty, con s i s ten c y, and con f i dence ) . Ba k ker noted that mo del, whi c h was muc h more comp l e x and ambit ious than acco u n ting fra m eworks were important in the con text of ne ces s a r y, and sug ges t ed starting with a simplistic , s t a ti c b a l a n ced bu d get laws , and that the public had a limited abi l- mo del with a defi n e d main obje ctive. She also exp res s e d the i ty to influen c e dec i s i on - m a k i n g. Moreover, the low infla- ne ed to includ e the care econo my in the analysis and noted ti on bias (high interest ra te s , ti ght mon et a ry po l i c i e s , a n d that wome n face highe r tran s a ctio n cos t s . The que s ti o n of fiscal re s traint) em er ging thro u gh libera l i zed financial mar- using limited sample sur veys versus aggregat ed data was kets ref l ects the abi l i ty of financial insti tuti ons and inve s tors rai s ed , as was the need to includ e intrah o u s e hold consu m p - to exercise direct voi ce over mac roecon omic po l i c i e s tio n patterns . th ro u g h threats of c a n cel ed inve s tm ents or capital fligh t . By con tra s t , the poor have limited voi ce since they are bound by Session 8. What Have We Learned and Where Do l oc a ti on and re s tri cted by unre s pon s ive dom e s tic and inter- We Go from Here? n a ti onal stru ctu re s . Th erefore , wom en should analy ze and A rou n d t a b le discussion cla ri f i e d some of the issues for cur- devel op gen der- re s pon s ive bu d gets as useful instru m ents for rent and futur e res e a r ch. One issue was data problem s — t h e acco u n t a bi l i ty and to miti ga te the impact of s ocial progra m s wa g e gap data sets and U.N . data syst ems (e.g., the ILO) — a n d fo s tering social and econ omic inequ a l i ty, su ch as balanced - as s oc i a t ed econo mic indicators. Ano t h e r was the interse ctio n bu d get initi a tive s . of Keyn e s i a n , pos t - K eyn e s i a n , and feminist econom i c s . A third In the IMF financial programming model, growth is was the weak link betw een emp i r ical analysis and sett ing gov- exogenous and there is no rela ti o nship betw een the distrib u- ernm e nt pol i c y , in c luding the conn e ctivit y with power rela - tio nal impacts of growth in terms of so cial struc tur e and tio ns both internal to the econo mic syst em and in terms of a poverty. In light of these shortcomi n gs , Abug re outl i n e d his no rth / s o u th orien t a ti o n (whi c h is associ a t ed with imperia l - orga n i z a ti o n’s attemp t to build a dynamic econo mic model of is m ) . A fou r th issue was the focus of the papers on Asia and the Gh a n a . The obje ctive is to link regio nal income and exp end i - North Atl a n t ic region s , and the need for more regio nal vari a - tur e patterns and qua l i t y of li f e param e ters with macr oeco- tio n in res e a r ch (e.g., La t in Ame ric a ) . Any sub s e que nt symp o- no mic comp one nts in order to cha ll en g e the IMF model. s ium should inclu de more re s e a rch ers from sout h ern Bas e d on social accou n t ing matric es of both flows of in c ome cou n t rie s , and gend er studies should quo t e more res e a r ch and stocks of as s e ts and liabil i ti e s , the model is intend ed to fr om south e rn analyst s . A fifth issue was the need for more derive poverty reduc tio n strat egies for the cou n t ry. Whe n mi c r oan a l ysis at the intrah o u s e hold level. The need to develo p comp l e te, ho u s e hold sur veys wil l exp l i c i t l y repres e nt income al t erna t ive models and determine the impact of techn o l o gy fl o ws and exp end i tu r e deci s i on s — f or exa m p l e , food as a pro- and dome s t ic struc tur e was the sixth issue . Gen d er, cla s s , an d portio n of total exp end i tu re s — o f di f f erent popu l a ti o n grou p s race issu e s ,p a rticipants deci d ed, should be add re s s ed , and the and add r ess the geograp hic dimens i o ns of poverty by region , rel a ti onship establ i s h ed bet ween produ ctivi ty and soc i a l gend er, in c ome , and rura l / u r ban param e ters. The model wil l reproduc tion . Furt h e r work is also requi r ed with regar d to the ma k e it pos s i b le to, for ex a m p l e ,e s ti m a te the num b er of poor gend ered supp l y and demand of mon e y and asset distrib ution , female heads of ho u s e hold in rur al Ash a n t i and the way they as is simplificatio n of the termi n o l o gy associ a t ed with gend er ar e affected by tig ht monet a r y pol i c y . Regio nal poverty profi l e s res e a r ch. can then be fed into a qua l i t y of li f e module add r essing the New levers of pol i t ical interventi o n should includ e suc h eff ects of topical policy issues suc h as privati z a ti on , us e r fees , in s t rum e nts as a Tobin tax. The y should also enc ompass labor

T H E L EV Y E C O N O M I C S I N S T I T U T E O F BA R D C O L L E G E 13 st a n d a r d issues and cou n t eract trade liberal i z a ti on . Li n k a ge s cens us data sets are oft en ambig u o u s , Perlmann neverth el e s s and feedb a ck eff ects should be exp l o red to determine the conc lud es that the data do not cont radi c t Jenck s ’s finding that eff ects of capital liberal i z a ti on , in t ernal debt, and crowdi n g Mexi c a n - to - n a t ive wage rat ios are worse than those of com- out . What happens whe n the buf f ering eff ects of st a bi l i z a ti o n pa ra b le immigrants in 1910. policies are inadequa t e and the care econo my becomes over- Jenc ks cont ends that the econo mic gap betw een SCE lo aded? These rel a ti onships and impacts should be linked to im m i g rants and native whi t e workers in 1910 was far smalle r ne w growth theories and develo pme nt issue s , as well as the than fol k l o re sug gests since, according to Bor ja s ,t h ey typi c a l ly IMF and World Ban k . Perpl e xing policy qu e s ti ons that are e a rn ed abou t 88 percent of the wages of na t ive whi t e workers. na ti o nal in scope should be exp a n d ed to includ e the interna - He sug gests that SCE immigrants pros p ered because they set- tio nal level. The partic i p a n t s ’ conc lus i o n was that a broad tl e d in cities soone r than did north e rn Eur opeans and their coal i ti o n is requi r ed to cou n t er propone nts of financial liber- chi l d r en had an educ a ti o nal advan t a ge . Recognizing the al i z a ti o n since econo mic growth param e ters do not ade- im p recise natur e of the comp a ri s o n betw een past and pres en t qua t ely account for gend er and poverty issue s . fa ctors suc h as income and educ a ti on , Perlmann proceeds to ou tline pitfa l ls in Jenck s ’s approach, whi c h stresses a nation a l Poles and Italians Then, Mexicans Now? com p a ri s on of im m i g rants and natives and focuses on spe- Immigrant-to-Native Wage Ratios,1910 and 1940 cific groups within Bor ja s’s orig inal work. The purpose of JOEL PERLMANN Jenck s ’s stud y, he notes , was different from that of Borja s , who Working Paper No. 343, February 2002 at t emp ted to stud y the assimilatio n process of 32 immigran t www.levy.org/docs/wrkpap/papers/343.html groups over tim e . Moreover, recent discussions of Borja s ’s work have focu s e d on issues of cla s s i f i c a ti o n and proje ction s Are wage rat ios of recent immigrants comp a r ed to native that includ ed groups whose unique discrim i n a t ory labor mar- whi t e workers worse than com p a ra ble wage rat ios dur ing the ket exp erien c es (suc h as Mexi c a n s , Chi n e s e , and Jap a n e s e ) great immigrati o n wave of 1890 to 1920? Are today ’ s offs p rin g sub s t a n ti a l ly affected the resu l t ing forecasts of th ei r process of of low - s k i ll e d immigrants able to advan c e in the way that was as s i m i l a ti on . As a resu l t , Perlmann accounts for Jenck s ’s pos s i b le in the perio d 1910 to 1950? Is the pres e nt like the sh o rtfa l ls in data interpret a ti on ,a n a lysi s , and manipulatio n of past? A 2001 artic le by Chri s t ophe r Jenck s , ba s e d on work by im m i g rant cha r acteris t ics at the tur n of the 20th centu r y. He Ge org e Borja s , claims that rela t ive wage rat ios of im m i g ran t ta k es exceptio n to recent soci o l o gical theories of se gmen t ed Mexicans to native whi t e workers toda y are far worse than the as s i m i l a ti on , sug ges t ing that today ’ s low- s k i ll e d immigran t s rela t ive wage rat ios of im m i g rants in 1910. Sin c e Mexi c a n - ma y not be able to advan c e in the same way as was pos s i b le in born men earn less than half the wages of non - L a t ino whi te s , the perio d 1910 to 1950. he calls for a recons i d erati o n of U. S .i m m i gra ti on policy wit h Recognizing that before World War I, most SCE immi- res p ect to Mexi c o. grant groups lived within three mu l ti n a ti onal em p i re s , Using the In tegra ted Pu blic Use Mi c rodata Sa m p l e Perlmann classified all immigrant groups by place of birth (IPUMS) cens us data sets , Seni o r Scholar Joel Perlmann tes t s and by mother tongue. He excluded Jews, who had a rela- the evid enc e used by Jenc ks and Borj as to des c ri b e the cha r - tively better economic position, so that the analysis could acteris t ics of the immigrant popu l a ti o n at the tur n of the 20th focus on comparable low-skilled SCE groups. Noting the centu r y. He analyz es the skills and wages of the south e rn- , compressed nature of SCE immigration, Perlmann selected cent ral - , and eastern- Eu r opean (SCE) immigrants (more men in the 25–34 age group in 1910 to derive his second- sp eci f i c a l ly Pol e s , ot h e r Sla vs, and Ita l i a n s ) , who repres en t ed generation birth cohort. Mean group incomes (occupational the largest low- s k i ll e d immigrant group and whose exp eri- wage) were based on Borjas’s report, which used the 1903 enc es most clo s e ly res em b le the plight of Mexicans toda y, an d Commissioner of Labor report on the cost of living in 1899. cons t ruc ts a more precise comp a ri s o n of im m i g ran t - to - Perlmann notes a nu m ber of l i m i t a ti ons in Jen ck s’s cal- na t ive earni n g s in 1910. While he ackn o wled g es that earli e r c u l a ti on of i m m i grant wage s : 1900 occ u p a ti onal wage

14 S U M M A RY / S P R I N G–S U M M E R 2 0 0 2 i n form a ti on was app l i ed to 1910 data; o t h er sources (and regression of wages on age, ethnicity and geographic controls biases) in ad d i ti on to the 1900 report were used to com p ute showed that a north-south division of labor was not driving avera ge occ u p a ti onal wage s ; f a rm ers , f a rm ten a n t s , and the ethnic differences, and the net effect of metro differences was s el f - em p l oyed were exclu ded from the data base; s a m p l e s at least as large as the total effect of regional differences. were limited to families and were not ra n dom ly sel ected ; Perlmann also com p a red actual and occ u p a ti onal wage s w a ges were limited to family heads (unattach ed men were to captu re immigrant wage disadva n t a ges within and u n derrepre s en ted ) ; n a ti onal avera ges ign ored regi onal and bet ween occ u p a ti on s , and to con s tru ct va rious scales from l ocal va ri a ti ons in wages and age differen ces among work- nu m erous groups of workers . In 1940, m en in the 45–64 age ers ; and wage - e a rn i n gs ra tios by category inclu ded bo t h group earn ed rem a rk a bly similar wages ac ross occ u p a ti on s . SCE and other wh i te immigrant workers . Perlmann pro- Al t h o u gh wi t h i n - occ u p a ti on ethnic differen ces in earn i n gs ceeds to con s tru ct a more acc u ra te approach from wh i ch to were small , l a r ge racial inequ a l i ty ex i s ted bet ween and e s ti m a te earn i n gs ra tios and iden tify ethnic differen ces in within occ u p a ti on s , p a rt ly acco u n ted for by geogra phy. All w a ges by occ u p a ti on . occ u p a ti onal wage and earn i n gs ra tios differed sharp ly from Using the 1940 census, the first that included individual the 1900 occ u p a ti onal wage scale. Perlmann spec u l a tes that income by occupation (but excluded the self-employed, and the com p a ra tively high er ethnic earn i n gs ra tios in 1910 may thus, many farmers), Perlmann considered indirect evidence h ave been the re sult of the differen tial ef fects of t h e about illiteracy, alternative ways that earnings ratios might be Depre s s i on on va rious ethnic groups (ra t h er then a ref l ec- calculated, and the relevance of geographic differences. The ti on of data qu a l i ty ) . He also su rmises that the 1910 scale 45–64 age group was selected to correspond approximately m ay have missed su b s t a n tial wi t h i n - occ u p a ti on va ri a ti on s with the 25–34 age group in 1910 and to compare intra- and and that ethnic differen ces in remu n era ti on stem m ed from interoccupational wage ratios. In contrast to Jencks’s com- s h a rp differen ces in ill i terac y. His revi ew of 1950 earn i n gs parison, which aggregated immigrants and native whites, ra tios showed both actual and occ u p a ti onal wages were Perlmann constructed four different models to control for h i gh er than in 1940, a re sult that may have been a con s e- age and residence (by region and metropolitan area). His quen c e of the postwar boom .

Program: Financial Markets and Monetary Policy

CONFERENCE to this question have for public policy? Brief summaries of the The 12th Annual Hyman P.Minsky Conference on speakers’ remarks and sessions are given here. Financial Markets,“Recession and Recovery: Audio of the entire conference is available on the webcast Economic Policy in Uncertain Times” archive page of the What’s New section of the Institute’s website.

As part of its research program on financial markets, the Levy WYNNE GODLEY Institute organized a conference, held on April 25 at the According to data released by the Congressional Budget Roosevelt Hotel in New York City, to discuss viewpoints on the Office (CBO),there was a tightening in the fiscal stance dur- current state of the U.S. economy and its future direction. Will ing the main period of economic expansion (1992–2000), a current conditions in the U.S.financial system assist or harm progressive deterioration in net export demand, and an the general macroeconomic environment or other forces neces- unprecedented expansion of private expenditure relative to sary to combat a slump, and what implications will the answers income (and escalating indebtedness). The consensus view

T H E L EV Y E C O N O M I C S I N S T I T U T E O F BA R D C O L L E G E 15 during this period was that the United States had acquired a peri od of i m provem ent (gen era ted by the slowdown ) . New Economy, which had a much faster underlying growth Godley noted that the trade deficit could be worse than pro- rate and was immune to the business cycle. Thus, fiscal pol- jected because of the relatively high import content of inven- icy was discred i ted as a tool to manage the econ omy. tory accumulation compared to final sales,and the continued However, the beginning of a recession in 2001 resulted in a deterioration of the U.S.net foreign asset position. large change in the stance of fiscal policy. Downward revi- Au gm en ting the CBO’s assu m pti ons and its forec a s t sions to the CBO’s assumptions about economic growth b a l a n ce of p aym ents deficit with an ad d i ti onal $100–200 resulted in projections of budget deficits for 2002 and 2003 bi ll i on per annum net outf l ow of i nve s tm ent income wo u l d rather than the budget surpluses predicted only 15 months requ i re total priva te ex pen d i tu res rel a tive to dispo s a bl e previously. In response, the federal government began to i n come to grow and to become the motor for ex p a n s i on relax its overall fiscal stance along with the huge reduction of over the next five ye a rs . Si n ce a growing excess of ex pen d i- i n terest ra tes to co u n teract the slowdown in econ om i c tu res over income requ i res a growing flow of n et len d i n g growth and rising unemployment rate. rel a tive to incom e , the re su l ting level of priva te indebted- Di s ti n g u i s h ed Scholar Wynne Godl ey and Re s e a rch ness would be more than twi ce the level of d i s po s a bl e Fellow Alex Izurieta studied the CBO data and forecasts and i n come by 2007. In light of ex i s ting and proj ected levels of concluded that economic growth in the period 1992 to 2000 corpora te debt , G odl ey maintained that the base run sce- occurred because there was unprecedented growth in private n a rio forms an unsound basis for stra tegic thinking and fis- expenditures relative to income. Moreover, sustained growth cal planning. The growth of n et lending (and ex pen d i tu re s in the future will depend on further expansion of private rel a tive to income) that drove the econ omy from 1992 to expenditures relative to income with an associated increasing 2000 cannot con ti nue to fuel futu re growth of a ggrega te burden of servicing the debt. Their forecast is based on offi- demand indef i n i tely. cial projections that maintain a tight fiscal stance, a strong Go dle y next pres en t ed three scena r ios that broadly cha r - dollar, and an implied deterioration of net export demand. acteriz e major proble ms likely to arise over the next five yea r s A decline in priva te sector ex pen d i tu res rel a tive to and the alterna t ive strat egies that should be cons i d ered whe n income in the fourth quarter of 2000 resulted in the current dealing with them. The first scena r io retains the CBO’s economic slowdown. The private balance remained in deficit as su m p tio ns abou t the fiscal stance and net exp ort dema n d in 2001 since the net flow of credit exceeded the growth of us e d to cons t ruc t the base run , and includ es more rea l i s ti c income. Therefore, rapid growth in the level of debt relative as su m p tio ns abou t privat e sector indebtedn e s s . The flow of to income continued, facilitated by the huge reduction in ne t lending is assum e d to decline dur ing the next few yea rs , interest rates. Notwithstanding the sharp fall in investment, causing the rise in indebtedness to taper off and the privat e corporate debt relative to cash-flow income rose rapidly, se ctor deficit to revert towa r d zero. This implies a reduc tio n in reaching record levels throughout the year. the averag e annual GDP growth rat e to 1–1.5 percent (a Updating his analysis presented at previous Minsky con- “growth reces s i o n”) , a rise in unemp l o yme nt to 8 percen t ,a n d ferences, Godley presented a “base run” scenario using the a gene ral governm e nt deficit of at least 2.5 percent of GDP by CBO’s assumptions about growth and inflation over the next 20 0 7 . The federal bud g et would therefore show a deficit rat h e r five years. The CBO assumed that GDP would grow at 1.7 than a surp l us of 1.5 percent of GDP as proje cted in the base percent in 2001–02 and 3 percent per annum thereafter, run . Sin c e the U.S . privat e sector has never been in a defi c i t inflation would remain at 2 percent per annum, and unem- pos i ti o n for suc h a length of time in the postwar period , th e ployment and the dollar rate of exchange would stay at pres- s i tu a ti on could be far wors e . For ex a m p l e , the Un i ted ent levels. In this scenario, the general government budget Kin g dom and Scandinavia exp erien c ed large and intracta bl e moves from a small surplus in 2001 back into deficit in 2002 reces s i o ns fo ll owing perio ds of privat e sector defi c i t s . and does not return to a surplus position until 2006. The The second scena r io sup erim p oses an ext reme ly large fis- trade deficit resumes its deteriorating path after a brief cal rela x a ti o n on the first scena r io in order to raise the GDP

16 S U M M A RY / S P R I N G–S U M M E R 2 0 0 2 growth rat e back to the level assum e d by the CBO. At a Note: The paper on which this presentation was based mi n i mu m , al l of the rela x a ti o n this year and next ($250–300 was published as Strategic Prospects and Policies for the U.S. bill i o n per year) would have to be rein s t a t ed in the foll o win g Economy, Strategic Analysis, June 2002 (coauthored by Alex yea rs . If the privat e sector’ s financial debt conti n ues to fall ,t h e Izurieta). fiscal stimu l us would have to rise to abou t $600 bill i o n per an n um (1996 pric es) by 2007,and the gene ral governm e nt and Session 1.The State of the U.S.Economy: federal deficits pos s i b ly to 6 percent and 5 percent of GD P , AView from the Street res p ectively. Und er this scena ri o , the balance of pa ymen t s Moderator DAVID LEONHARDT, economics correspondent for res umes its deterio rati o n in the same way as the base run . Wit h the New York Times, noted that there have been two broad the privat e balance close to zero, and in the absenc e of ne w surprises in the U.S. economy over the past year and a half. corrective measure s , th e re would be “tw in defi c i t s ”—an ext er- The first was that the economy significantly underperformed nal and governm e nt deficit of abo u t 6 percent of GD P . relative to the expectations of most during the In the third , “dre a m ” s cen a ri o, i m provem ent in net first,second,and third quarters of 2001. The second was that export demand is large enough to close the balance of pay- the economy did much better than expected during the m ents deficit and gen era te su f f i c i ent growth with full fourth quarter of 2001 and first quarter of 2002. employment without further fiscal expansion. All three bal- ROBERT BARBERA, executive vice president and chief econ- ances converge toward zero over the next 5 years. This out- omist of Hoenig and Company, Inc., noted that in a geopo- come could be achieved if the trade-weighted dollar was l i ti c a lly ch a r ged envi ron m en t , pers on a l i ties matter, a n d devalued by 25 percent at the beginning of 2003, if acceler- proposed that the basis of an economic forecast should start ated inflation did not reduce gains in competitiveness,and if with that insight. According to Barbera, the U.S. economy world demand and output were not affected by improvement currently faces two great challenges—operating without the in the U.S.trade balance. Current U.S. in excess benefit of outlandish flexible accounting, and operating amid of production would have to end in order to eliminate the periodic military shocks—as a result of Enron and 9/11. deficit, and the country would have to cease to be the Conservative accounting and the war on terrorism end the “importer of last resort.” Moreover, there would have to be ability to produce booming Brave New World growth rates. active international coordination of trade and capital trans- Barbera expects a modest recovery for the U.S. economy that actions as well as fiscal and monetary policy. is aided and abetted by “super-easy money” over the next 12 In sum, personal and corporate debt are both very high to 18 months. relative to income and this makes the economy unusually In recent yea rs , ou tlandish flexi b le accou n t ing inflated vulnerable to shocks. The government’s fiscal stance as pro- reported corporat e profits and permi t t ed consu m p tio n and jected by the CBO will not stop unemployment from rising in ves tm e nt to boom simul t a n eo u s l y. According to Bar bera, as after 2003 unless private indebtedness, already a cause for oppos e d to the notio n that Wal l Street analysts hoodwin k ed concern, resumes a rapid rate of growth relative to income. A everyone , th e re was wide s p rea d will i n g ness by the Federal major relaxation of the fiscal stance after 2003 could gener- Res e rve (Fed) , Whi t e Hou s e , Sena te , and Cong ress to permi t ate adequate growth but only at the expense of large and this faulty set of accou n ti n g . Using two sets of books allo wed growing balance of payment and budget deficits. Rapid the Brave New World boom to exist in the late 1990s. expansion of net export demand could generate adequate Comp a r ing Standard & Poor’ s (S&P) operat ing profits and growth and eliminate government and private sector deficits, Nati o nal Inc ome and Produc t Accounts (NIPA) profits in the but foreign countries would have to offset the resulting dis- GDP accounts from 1997 to the first half of 20 0 0 , the forme r inflationary shock with expansionary measures of their own. conti nu e d to grow rap i d ly and profit margins to exp a n d , whi l e However, neither the institutions nor agreed principles that the latter started to decline and profit margins fell could carry out coordinated expansionary policies around preci p i to u s l y. The main differenc e betw een these two meas- the globe are presently in existence. ur es of profit is their trea tm e nt of option s . The NIPA num b ers

T H E L EV Y E C O N O M I C S I N S T I T U T E O F BA R D C O L L E G E 17 correctl y reported optio ns as an exp ens e , whe reas they were 20 0 3 , even with a fairly robust econo my. Thus , valu a ti on , not trea t ed as a cost in income stateme nts reported to share- rat h e r than earni n gs , is the stock market’s problem . ho l d ers. The refore, operat ing income grew rap i d ly. Option s Margins and the return on invested capital peaked in cont rib uted a full percent a g e point to wage and salary income 1997. Since then,the latter has declined very sharply, notably growth (7.5 percent) over the three- y ear period , le a ding to a in technology, which reached negative proportions. There consu m e r spending boom. Thanks to good profit report s ,t h e was a buildup of operating leverage as a share of total busi- st ock market rap i d ly increa s e d and there was a capital spend - ness costs as corpora ti ons inve s ted very heavi ly and ing boom. As spending exceeded produc tion , the trade defi c i t improved productivity. This, however, came with a price tag: wid ene d and resu l t ed in a very large ext ernal imbalance. fixed costs relative to total costs were raised through higher The conservative accounting to be used in the future depreciation and interest expense. A subsequent slowing in means that the twin booms in consumption and production growth squeezed margins and triggered intense cost-cutting will not be reproduced—profits will be less interesting, and both in capital spending and in labor force payrolls, which wage and salary income will not be boosted artificially. produced the recession. Barbera noted that over the past year, the CBO’s outlook for Financial levera ge is also high by trad i ti onal measu re s . the next decade’s federal budget surplus was reduced by $4 Corpora te Am erica is ben ef i ting from tax cuts that su pport trillion. Initially, the CBO’s underlying assumptions included prof i t a bi l i ty, econ omic recovery, and capital spen d i n g.Th e permanent peace, no inflation, and an uninterrupted boom pers onal sector financing gap (the differen ce bet ween inter- market for equities. However, periodic military incursions n a lly gen era ted funds on a book basis and total capital will have a negative impact on stock markets, which still have s pending inve s tm ent as measu red in the Federal Re s erve the vestiges of Brave New World price earnings ratios that F l ow of Funds accounts) had wi den ed dra m a ti c a lly but is depended on peace and prosperity. n ow shrinking as a re sult of c utb acks in capital spending and In the short run, monetary policy can overwhelm valua- declining pri ces of capital good s . Bet ter pri ce perform a n ce tion and liquidity matters. If secular headwinds kept the fed- for capital goods could help to finance the revival of c a p i t a l eral funds rate easy in the early 1990s, then geopolitical s pending but financial levera ge has led to high ly re s tri ctive windshear confronting excessive equity market valuation will financial con d i ti ons—a credit crun ch . Th ere may be a sharp keep the federal funds rate very low. A soft landing for the decline in the demand for short - term credit wh en com p a- slow deconstruction of the Brave New World outlook would nies massively liqu i d a te inven tori e s . However, the U. S .b a n k- be a stock market that struggles and goes sideways with ing sys tem is healthy and able to finance a recovery. A super-easy money and an earnings pattern that slowly grows com p a ri s on of bank spre ads and tre a su ry debt su ggests that into those stock prices. the market sees very little solvency risk in U. S . banks but RICHARD BERNER, ma n a g ing director and chi e f U.S . econo - mu ch in the nati on’s tel ecom mu n i c a ti ons com p a n i e s . A mist with Morg an Stanley Dean Wit t er, also forecast an eco- dozen debtors account for vi rtu a lly all of the wi dening in no mic recovery but outl i n e d a num b er of cha ll en ge s : profi t s avera ge credit spre ad s . However, financing costs have started and leverag e (both financial and operati n g ) , res t ric tive finan- to decline as percepti ons abo ut credit qu a l i ty improve and cial cond i ti o ns requi r ing easy mone y, cu r rent account defi c i t s , prof i t a bi l i ty rebo u n d s , s p u rring both inform a ti on tech n o l- and the bub ble ment a l i t y (pertaining more to real estate than ogy and overa ll capital spending (but at on ly 60 percent of equi ti e s ) . Factors current l y propelling the econo mic recovery 1 9 9 0 ’s pace ) . in c lud e monet a r y and fiscal stimu lu s , an end to corporat e The current account gap, which has narrowed only cos t - c ut ti n g , and a rebound in profi t a bi l i t y (a leading indica- slightly during the recession, will eventually be reduced by a tor) . However, profits reported to the IRS wil l be depres s e d by combination of slower U.S. growth relative to the rest of the recent fiscal stimu l us cha n g es in the tax law that allo w corpo- world, a big change in relative prices, or a change in the rati o ns to accele rat e depreci a ti on . As a resu l t , the very healthy exchange rate, but the adjustment process will take time. The revival in profits seen this year wil l be signi f i c a n t l y lower in synchronous global recession will likely see a synchronous

18 S U M M A RY / S P R I N G–S U M M E R 2 0 0 2 global rebound. A decoupling of relatively cheaper markets and demand. Therefore, Levy forecast a healthy, if not strong, abroad should lead to capital flows into those markets and a rebound in the economy. decline in the dollar. Levy noted that the recession followed a typical pattern The housing bubble is not a worry, says Berner, because except for one aberration: consumption did not decline. favorable demographics such as immigration will continue Since real consumption exploded during the initial stages of to support housing demand, there is little inventory over- recovery following the past three recessions, the risk now is hang in new construction, and no supply or land use con- not that consumption will fall, but rather that consumer straints exist. Moreover, recovery dynamics in 2002 and 2003 spending will rise and accelerate modestly. Consumption predict a recovery in jobs and income, which supports con- always leads employment and, according to internal Federal sumer spending, profits,and capital spending. Re s erve calculati on s , most of the growth in con su m er M I C K EY D. L EV Y, ch i ef econ omist for the Bank of indebtedness was in the highest and lowest quintiles of America, agreed that the economic recovery was unfolding income. Prior models predicting consumer indebtedness and noted that both monetarists and Keynesians would claim overestimated defaults since consumer credit quality proved victory. From the monetarists’ perspective, the economic better than expected. Therefore, consumer spending should response was a textbook example—the Fed pumped in mon- continue to rise and accelerate modestly. etary growth as interest rates came down, the yield curve In terms of fiscal policy, Levy’s view was that last year’s steepened, the demand for money went up, velocity came tax rebates were really advances on retroactive cuts in mar- down, and nominal GDP growth decelerated. As interest ginal rates rather than a fiscal stimulus. The public’s sense rates stabilized, velocity went up and the economy acceler- that they were temporary means that the funds were proba- ated. Keynesians, on the other hand, could say that last year’s bly saved rather than spent. This year’s $70 billion tax relief tax relief was the “Worker Assistance Act of 2002,” resulting came through lower withholding schedules; these imply a in economic growth. Both perspectives indicate stimulation sense of permanence and any refunds,therefore, would likely of the economy. be spent, leading to an acceleration in nominal spending Levy pointed out that it was much more important to growt h . The ex tra $40 bi ll i on in em er gency rel i ef a n d look at underlying spending and tax structures than changes national security authorized by Congress in late September is in budget deficits or surpluses when measuring the effect of a government purchase that goes directly into GDP. Levy’s the fiscal stance on resource allocation and incentives. He belief that it was not enough was confirmed when Bush noted that the CBO changed its potential growth projections recently requested an additional $48 billion in the federal in an ex-post, ad hoc way so that the gap or structural deficit budget. explained what was happening.This approach, however, is Defense spending as a percentage of GDP is expected to not very helpful in forecasting.Rather than the cyclical rise for the next couple of years. It will add over a percentage behavior of monetary fiscal policy, Levy emphasized the point to GDP (about $100 billion) over the next 12 to 18 strong structure of the U.S. economy—low inflation, low months and will eventually crowd out other types of spend- inflationary expectations, relatively low unit labor costs of ing.After the Fed raises interest rates and nominal GDP production, very efficient capital markets and international growth stabilizes, private consumption and private invest- capital flows, and an overly capitalized banking system. U.S. ment growth are expected to become more constrained. production processes, labor markets, and prices are extraor- dinarily flexible and there are pro-growth economic policies ANTHONY M.SANTOMERO as well as credible policymakers, which together mitigate the The current U.S. economic recession, according to Anthony impact of shocks on the real economy. The adjustment M. Santomero, president of the Federal Reserve Bank of processes work; the underlying structure of the economy is Philadelphia, is unique in terms of its extent and magnitude, very sound. Although there is currently a large inventory and unusual in light of the number of negative shocks that adjustment, there will be sustained growth in consumption affected the economy over a short period of time. The shocks

T H E L EV Y E C O N O M I C S I N S T I T U T E O F BA R D C O L L E G E 19 included a stock market contraction,the bursting of the tech actions, and long-term and foreign exchange rates moved as bubble, 9/11, Enron and the ensuing debate over corporate a direct result of the effects of the predicated policy response. governa n ce , the financial crisis in Ar genti n a , erra tic oi l Thus, the Fed’s increased transparency allowed their policy prices,increasing unrest in the Middle East,and a global eco- actions to ripple through the economy since the financial nomic downturn. Nevertheless, the recession was one of the markets had a clear and accurate expectation about the mildest on record. future direction of monetary policy. Sa n tom ero out l i n ed four factors that modera ted the This rece s s i on has been label ed a business rece s s i on rece s s i on and made the econ omy re s i l i en t : the excepti on a lly because the co llapse of business and inve s tm ent spen d i n g ti m ed sti mu l a tive policy mix, the incre a s ed re s pon s iven e s s was the catalyst to the early stages of the down tu rn . and capac i ty of the financial market s , the incre a s ed flex i bi l- Devel opm ents in the nonfinancial sector, su ch as the bu rs t- i ty and produ ctivi ty of bu s i n e s s e s , and gre a ter con su m er ing of the tech bu bble and overc a p ac i ty in the tel ecom mu- con f i den ce . He noted that the 475-basis-point redu cti on in n i c a ti ons sector, re su l ted in plu m m eting gen eral bu s i n e s s i n terest ra tes in 11 different acti ons in 2001 was a typ i c a l s pending wh en the econ omy decel era ted . Bu s i n e s s e s Fed re s ponse du ring this business cycl e . Moreover, h e s l a s h ed inven tori e s , d rove down indu s trial produ cti on and a s s erted , nothing fundamental had ch a n ged in the Fed ’s em p l oym en t , and amplified the impact of the rece s s i on on a pproach to mon et a ry policy du ring the last ye a r. the manu f actu ring sector. However, these prom pt acti on s Me a nwh i l e , fiscal policy ad ded ex tra sti mu lus by accel era t- m ay have hel ped to prevent a deeper and more pro l on ged ing govern m ent spending (the most rapid increase in more rece s s i on by inciting businesses to cut pri ce s , of fer dis- than four dec ades) and cut ting taxe s . The swing in the fed- co u n t s , and move merch a n d i s e , wh i ch en h a n ced con su m er eral bu d get from a large su rp lus to vi rtu a lly nothing indi- s pen d i n g. Moreover, bu s i n e s s e s’ a bi l i ty to re s pond qu i ck ly c a tes the robu s tness of the govern m ent policy re s pon s e . was made po s s i ble by previous inve s tm ents in new tech n o l- This re s ponse came in several stage s ,i n cluding a 10-year tax ogy, a ll owing them to con ti nue to improve produ ctivi ty redu cti on program with cash reb a tes for indivi dual taxpay- t h ro u gh o ut the down tu rn (an unu sual occ u rren ce by his- ers , federal spending in re acti on to 9/11, ex tending unem- torical standard s ) . p l oym ent ben ef i t s , and providing a tax incen tive for The shallowness of the recession was a direct result of business fixed inve s tm en t . These measu res were perfect ly continued consumer spending sparked by confidence in ti m ed as co u n terc yclical policy acti ons and hel ped to pre- price stability and economic growth. As the recession turns vent a pro tracted rece s s i on . to recovery, consumer incentives to increase spending will The financial sector was also effective in insulating the come from rising incomes and better job opportunities economy. Banks entered the recession with strong balance ra t h er than redu ced interest ra tes and pri ce disco u n t s . sheets and well-positioned capital and therefore were able to Consumers have little pent-up demand and a fair amount of lend during the early stages of the recovery. Moreover, diver- debt; therefore, only a modest recovery is forecast. sification policies and strategic distribution of risks com- The current rece s s i on’s modera ting factors inclu de the bined with alternative supplies of credit allowed them to s ti mu l a tive policy mix, the re s ponse of financial market s ,t h e continue to lend during the downturn.Spending for housing f l ex i ble business sector, and the con f i dent con su m er sector. and consumer durables was sustained as long-term interest Mon et a ry policy wi ll conti n ue to be the dominant discre- rates fell relatively early in the cycle. Furthermore, price tion a r y stabi l i z a ti on tool in the futu re . Futu re rece s s i ons wi ll responses to expectations of policy actions and subsequent be milder, the re sult of perm a n ent ch a n ges in the priva te economic activity helped market interest rates cushion the s ector econ omy (ra t h er than ch a n ges in public po l i c y ) . Th e economic effects of the downturn. In this business cycle, financial sector, wh i ch is more ef fective than usual in the fixed income markets responded to, and anticipated,the soft- c u rrent reces s i on , is likely to become a perm a n ent fe a tu re in ening econ omy and the Fed ’s co u n terc yclical measu re s . the modern econ omy as risk managem ent sys tems rem a i n S h ort - term interest ra tes moved with mon et a ry po l i c y rel evant in the ye a rs ahead . The business sector ’s ra p i d

20 S U M M A RY / S P R I N G–S U M M E R 2 0 0 2 re s ponse to produ cti on and pri ce cuts in light of a decline in the previous seven in terms of how pronounced, persistent, final sales is a do u bl e - ed ged sword that is likely to rem a i n . and pervasive it was.Although the current decline is the shal- Tech n o l ogical progress with the su pport of good stabi l i z a- lowest and shortest on record, it is comparable to the 1980 ti on policies has given the econ omy the capac i ty for recession in terms of duration. Industrial production, how- s tron ger, s te ad i er econ omic growt h . Cu rren t ly, the publ i c ever, showed the fourth largest, and longest, decline. This s eems con f i dent that this capac i ty wi ll be re a l i zed . The ch a l- recession’s employment rate declined the least of the seven, l en ge for the Fed is to provi de a policy that is dem on s tra bly but was close to those of 1969–70 and 1980. In addition, the su pportive ra t h er than disru ptive to the market econ omy ’s decline in nonfarm payrolls exceeded that of all but the pre- ad ju s tm ent proce s s e s . Wh en the econ omy gains mom en- vious two recessions. Therefore, major indicators that define tu m , the Fed wi ll have to shift from sti mu l a ting a recovery to the state of the U.S. economy show that it was very firmly in a more neutral stance ge a red tow a rd sustaining a lon g - term a recessionary episode. ex p a n s i on . The most recent recession was not unique, Achuthan noted. Although the decline in manufacturing and trade sales Session 2. Macroeconomic Issues in the Recovery was (by a narrow margin) the smallest of the seven, its per- At the outs et , mo derat or LAURENCE H. MEY E R fr om the Cent er sistence matched or exceeded that of three previous reces- for Strat egic and Int erna ti o nal Studies noted what appea r s to sions. In terms of income,it is not unusual to have recessions be a very significant rebound in GDP for the first qua r ter of with no cyclical declines. The pervasive loss of jobs was com- 20 0 2 , but signi f i c a n t l y less momen t um heading into the pletely in line with the last three recessions. These overall se cond qua r ter. As a resu l t , he said, the strength of the overal l comparisons show that the most recent economic slowdown recovery is que s ti on a bl e . Two main cros s - c u r rent themes are was a classic, cyclical recession. the pos t - bu b ble hangover and well- m a i n t a i n e d produc tivit y The fourth quarter, however, was an anomaly. GDP was num b ers. The equi t y market correctio n and its negat ive wea l t h positive because of post–9/11 factors, such as very aggressive eff ect are res t raining the econo my from normal exp a n s i on , as rate cuts that allowed for 0 percent financing (on auto- ar e a dampening of consu m e r spending and the capital over- related sales) and increased government spending.These ha n g . Moreover, financial cond i ti o ns are not as accomm od a - each accounted for more than the rise in fourth quarter GDP. tive as exp ected, as refl e cted by the equi t y pric e correctio n due Therefore, absent these aggressive policy responses, fourth to dol lar appreci a ti o n dur ing a perio d whe n it was exp ected to quarter GDP would likely have been negative. depreci a te . On the other hand, produc tivit y num b ers rela ti n g The sequence of events,as described by the long leading, to the pace of in n o vati o n and income growth over time sup - coincident,and lagging indices, was consistent with a cyclical port both consu m e r conf i d enc e and capital spend i n g . Meyer downturn. The long leading index turned down ahead of the also noted that we have been in an envir onm e nt of di s i n f l a ti o n recession, the coincident index followed that downturn, and over the past 20–25 yea r s but are now close to the long - ru n the lagging index confirmed the existence of a cyclical event in f l a ti o n obje ctive and therefore, in a maintena n c e rat h e r than and a recession. If we believe this was anything less, then we a disinflatio n program . What happens if in f l a ti o n falls belo w are likely to underestimate the risk of recessions in the future the long - t erm obje ctive, and how does the unusu a l ly low pea k and continue to believe that the business cycle has been com- un em p l o yme nt rat e at the beginning of an exp a n s i o n perio d pletely tamed, which is not true. The long leading index now af f ect the econo mic outl o ok and monet a r y pol i c y ? suggests that there will be a durable, sustainable recovery LAKSHMAN AC H U T H A N, m a n a ging director of t h e through the end of 2002. E con omic Cycle Re s e a rch In s ti tute , f i rst noted that the JAMES E. G LA S S M A N, s en i or econ omist and managi n g National Bureau of Economic Research defines a recession as director, J. P. Morgan & Company, expected the Fed to be a a significant decline in output, income, employment, and little less aggressive in response to expansions because over trade (as opposed to two consecutive quarters of negative the past 20 years, it has worked to bring inflation down and GDP). He proceeded to compare the current downturn to now seeks to maintain the current zone. The combination of

T H E L EV Y E C O N O M I C S I N S T I T U T E O F BA R D C O L L E G E 21 Fed and fiscal policy is a potent mix and this, combined with em er genc e of Chi n a . Both China and Japan are exp ortin g an unusual inventory situation, suggests that something is th e ir defl a ti on , a situa ti o n that wil l con ti nue as Asia and its about to happen. em er ging econo mies are integrat ed into the glo bal comm u- For all the turmoil that has adversely affected the markets ni t y. This may help inflatio n in the Uni t ed States.) It is uncle a r over the past year, there is deep-seated optimism underpin- at this point whet h e r the unemp l o yme nt rat e of the past ning the stock and currency markets in spite of a large cur- deca de has moved belo w the long - r un natur al rate . Sin c e rent account deficit and a strong dollar. Recovery prospects th e re is stil l some slack in the labor markets , cost pres su re s are exceptional, fiscal policy changes are highly stimulative, wil l decli n e . The refore ,u n em p l oyme nt at 5 percent or slight l y and inventories have been drawn down at a record pace. lo wer is not muc h of a threa t . Foreign investors believe there is something going on here. The level of in ves tm e nt rela t ive to GDP was very high in Moreover, as reflected in real bond yields, bond investors are the 1990s but was not based on unrea l i s t ic exp ecta ti o ns since quite optimistic about what is happening. Fed policy is th e re was a real payoff in terms of produc tivit y growth and highly stimulative, as demonstrated by short-term interest techn o l o gy. The most important story in our tim e , sa i d rates well below market rates and real interest rates close to Gl a s s m a n , is what has happene d to inflation . The Fed has zero. This is a key factor in helping to stabilize the economy. room to be more accomm od a t ive, a stance that would enh a n c e Combined with fiscal policy changes that rival Reagan’s tax the eff i c i e ncy of the U.S . econo my and cont rib ute to our good cuts and defense spending in the early 1980s, and an inven- performa n ce . The refore ,t h ere may be another deca de ahead of tory depletion rate far below the final sales growth rate, said solid noni n f l a ti on a r y growth . Glassman, there will be a decent recovery with above-trend In terms of the near-t erm outl oo k , CHRIS VAR VAR E S , pres i - growth over the coming years. dent of Macr oecono mic Advis e rs, LLC , ag reed that the reces - A slowdown in the pace of li qu i d a ti o n and an exp ected si o n was over and that we are current l y underg oing a recovery. retur n towa r d growth of final sales wil l remo ve a hug e drag Inventory investment has contributed 2.5 percentage points fr om the econo my. (H owever, the normal invent ory sales level to GDP growth so far this year (but is expected to slacken) is not rea l ly known.) Capital spend i n g , a key weakness last and con su m er con f i den ce has rebo u n ded fo ll owing the yea r , wil l also cont rib ute to highe r overal l growth rela t ive to events of 9/11. Consumption and capital spending growth, 20 0 1 . In add i ti on , profits are tur ning less negat ive— d own 35 he thinks, will be sufficient to maintain final sales growth this percent in the third qua r ter, 25 percent in the fo u rt h , and 11 year. However, a major concern is the sustainability of final percent in the first qua r ter of 20 0 2 . Sea s on a l ly adju s t ed, th i s sales growth, which has temporarily benefited from the trend signals that some thing pos i t ive is unfol d i n g , som et h i n g weather, energy prices, 0 percent financing, tax cuts, and not recogni z ed by “The Street. ”The re has been a very pos i t ive monetary ease. Varvares noted that, given little pent-up tur n on the profit side, with the exceptio n of a rise in hirin g demand, potential drags on final sales (a weaker housing sec- (wh i c h happens muc h later) . Whe n the pace of hi r ing picks tor), a strong dollar and growing U.S. trade deficit, a reduc- up , the Fed wil l begin to wit h d r aw from its accomm od a t ive tion in federal spending, and adverse wealth effects, it was st a n ce . Rising interest rat es are exp ected later in the sum m e r. unclear whether the current trend would result in a new Most inves t ors and the public are not worrie d abou t infla- growth profile or return to a flat trend. Although higher fed- tio n and do not think it wil l move lower. However, ne a r- t erm eral spending is included in his forecasts, the potential di s i n f l a ti on a r y forces are at work in the econo my. The re may remains for inadequate federal spending increases in 2003 be a furth e r small decline in inflatio n depending on the level followed by spending reductions thereafter. Therefore, the of excess capaci t y. Ec ono mists tend to disagree abou t the level key to a sustainable recovery is a revival of capital spending of fu l l emp l o yme nt and the noni n f l a ti on a r y level of un e m- in the second half of the year, along with continuing strong pl o ymen t , whi c h appea r ed to be lower than exp ected as consumption and housing activity. recent l y as the mid 1990s. (This may have been the res ult of Produ ctivi ty and prof i t a bi l i ty are ex pected to con ti nu e fa vorab le supp l y shocks and a strong doll a r , or perhaps the to su r ge du ring the first half of 2 0 0 2 , and then slow for the

22 S U M M A RY / S P R I N G–S U M M E R 2 0 0 2 n ext couple of ye a rs . Ne a r- term forces for disinflati on often incorrect. Annual real GDP growth rates of 6 percent in i n clu de a sharp, c yclical decel era ti on of unit labor co s t s the second half of 1999 and 4 percent in the first half of 2000 ( ex pected to decline another 4 percent in the first qu a rter of were far in excess of virtually every forecast. This period was this year) and the ef fects of a strong do llar and a drop in followed by a slowing in the growth rate to about 1.5 percent en er gy pri ces last year on core inflati on . In the peri od annually, which was more dramatic and broadly based than bet ween late 1999 and early 2000, capital deepening con- anticipated. Similarly, modest expansion in the fourth quar- tri buted up to 2 percen t a ge points to stru ctu ral produ ctiv- ter of 2001 was far better than expected. No one has a good i ty growt h . The su b s equ ent slowdown in inve s tm ent and record of forecasting the short-term performance of the U.S. capital stock growth is ex pected to take a full percen t a ge economy. Therefore, in the face of substantial , point out of s tru ctu ral produ ctivi ty growt h . This decl i n e policy action should be modest and infrequent so that at has been of fs et by an accel era ti on in total factor produ ctiv- worst, it is not destabilizing. i ty growt h , wh i ch played little part in the stru ctu ral pro- Over the past 20 years, the U.S. economy has been terrif- du ctivi ty accel erati o n of the second half of the 1990s as a ically resilient, absorbing a number of shocks along the re sult of capital deepen i n g.Th erefore , Va rva res forecasts an way—the 1987 stock market crash; financial crises in Latin i n c rease of just under half a percen t a ge point in stru ctu ra l America, Asia, and Russia; downsizing of the defense indus- produ ctivi ty growt h . try in the wake of the collapse of the Soviet Union; and the Varvares forecast a short-term resumption of above- virtual demise of the savings and loan industry. Despite the trend growth with the slack in the economy being absorbed litany of problems, economic growth proceeded.On average, very quickly. This growth rate would encourage reversal of surprises in the economy were largely on the upside, which, the Fed ’s mon et a ry policy by Ju n e . Un em p l oym ent is since they were accompanied by persistently low inflation, assumed to peak not much above the nonaccelerating infla- were easy to take. tion rate of unemployment (NAIRU), which he estimates to Although forecasters estimate growth of at least 4 percent be 5.4 percent. The downside risk to the forecast is that there in the first quarter of this year, the business community will be less than expected capital spending and business remains cautious about the economy and its prospects. This investment, and rising energy prices. The upside risk is that divergence of views is speculated to be the result of busi- federal spending will be higher in 2003 and inventory invest- nesses still adjusting to a low-inflation environment in which ment will be higher than expected. pri ce increases to improve profits cannot be su s t a i n ed . A rise in the use of market mechanisms to allocate Rather, cost containment or outright cost reduction is criti- resources, combined with globalization and deregulation,has cal to improving profitability. allowed the United States to absorb shocks to its economy, Inflation is another challenge to short-term forecasters which has become more flexible. Globalization has allowed and monetary policy makers because it is a phenomenon specialization and the benefits of comparative advantage. only in the long run (5 to 10+ years). Variations of the Today’s trend, therefore, is toward shorter, shallower reces- Phillips Curve,usually involving the NAIRU, are based on the sions. In addition,sensitivity of the markets to changes in the notion that unemployment is a reasonable proxy for labor economy has grown exponentially. market pressure, which ultimately translates into inflation. Significant upward pressure on wages, compensation, and GARY H.STERN unit labor costs is expected when actual unemployment According to Gary H. Stern, president of the Federal Reserve drops below the NAIRU. However, in practice, the NAIRU Bank of Minneapolis, uncertainty has significant implica- models do not work well. Federal Reserve research suggests tions for economic policy.As a monetary policy maker, he that unemployment has not contributed significantly to fore- would like anticipatory policy to head off prospective eco- casts of i n f l a ti on since 1984. Moreover, P h i llips Cu rve nomic problems and contribute to stability. However, long NAIRU models did no better at forecasting inflation than a policy lags are synonymous with uncertainty, as forecasts are simple one that assumed one year’s inflation rate equal to the

T H E L EV Y E C O N O M I C S I N S T I T U T E O F BA R D C O L L E G E 23 next. Forecasters have generally overpredicted the pace of st a bi l i t y of the econo mic syst em. Pol i c ym a k ers are left wit h inflation since the mid 1990s. fewer financial sources , and the adverse eff ects of the shock on These circumstances exacerbate the degree of uncer- in c ome and emp l o yme nt are exa cerba t ed. t a i n ty and su ggest taking a cautious mon et a ry po l i c y The study begins with the development of a theoretical, response to changes in forecasts. From about 1996 through a x i om a tic stock - f l ow model that simplifies the com p l ex 2000, there was, at most, minor tightening of monetary pol- process of economic adjustment by real-world countries fac- icy in spite of the fact that the economy was in its sixth year ing real shocks. The model comprises two countries, North of expansion (by 1996) and the unemployment rate had and South, which share the dollar issued by a sole central dropped below 5 percent (by 1997) and continued to decline bank. The national product of each country is either con- through 2000. At the time, the NAIRU estimates were in sumed by government and households or traded. Aside from excess of 5 percent and as high as 6 percent. interest payments on government bonds, there are no other Reservations about a persistent cautious policy prescrip- transfers. Government revenues consist of taxes paid out by tion include the fact that caution runs counter to the desire households, who also earn interest on government bonds. to be preemptive, and it risks an inadequate response to a The central bank issues dollars against bills disbursed by the serious problem. These reservations, however, are not yet government. Moreover, the central bank does not earn oper- cause for concern. Much of the time, excesses in the economy ating surpluses, and enterprises spend all of their receipts self-correct; policy rarely has to try to save the day. Because of from sales. Thus, changes in assets and liabilities only take the fundamental soundness and strength of the U.S. econ- place between households and governments. omy, it is important, in most circumstances, that policy be According to this simplified model, financial choices approximately, rather than precisely, correct. The cost of open to households in each country are changes in dollar bal- overreacting is probably at least as great as the cost of pro- ances and net acquisitions of perpetuity bonds. The total ceeding with caution. changes of bills (central bank assets and government debt) match total changes of money held by households (central Dollarization:A Dead End bank liability against household wealth). Financial balance ALEX IZURIETA sheets represent the stock accumulation of flows plus holding Working Paper No. 344, March 2002 gains due to changes in the price of government bonds out- www.levy.org/docs/wrkpap/papers/344.html standing at the beginning of the period. Thus, households’ wealth includes the stock of money and government bonds at “Dollarization,” or the substitution of the U.S. dollar for a current prices, while government debt is equal to the stock of nation’s own currency, is seen as an option for developing bonds and treasury bills. The central bank balances the sys- countries following successive failures of exchange rate and tem by equaling money with bills. monetary management. However, once exchange rate and Iz u ri eta assumes that an exp a n d ed pool of cou n t ries out- monetary instruments have been set aside, do other policy si d e his simplified model would not inval i d a t e the propos i - options remain? tio n that disparit ies internal to the do ll a ri zed pool would tend In this working paper, Res e a r ch Fello w Ale x Izu ri et a to be perpetua t ed. Moreover, omi t t ing comm e rcial banks so exp l o res a cou n t ry’ s abil i t y to underta k e its own fiscal pol i c i e s that financing takes place directl y among househo l d s , f i rm s , af t er doll a ri z a ti o n of its econo my. Using a simplified two- governm en t s , and the comm o n cent ral bank makes the stock- cou n t ry clo s e d model, he devises an analytical fram e work to fl o w process more tran s p a r ent , avoids other pos s i b le sources emul a t e a doll a ri z ed econo my in an inherent l y cons i s t ent of in s t a bi l i t y, and allo ws focus on the cons e quen c es of fi s c a l accou n t ing fram e work. By introducing an exogenous shock im b a l a n ce s . In add i ti on , avai l a b le sources of financing for to this hypot h e tical econo my, he inves ti ga t es the ext ent to cu r rent account and fiscal deficits are limited to borrowin g whi c h remaining fiscal policy optio ns allo w it to adj ust and fr om househo l d s ; ot h e r optio ns are seen to repres e nt mis- finds that these optio ns are inadequa t e to guard the financial le a ding or temp orar y solution s . The simplified set of option s

24 S U M M A RY / S P R I N G–S U M M E R 2 0 0 2 us e d in this stud y serves to highl i g ht the underlying struc tu ra l then sells bonds in its domestic and “world”(North) markets problem . Oth e r assum p tio ns includ e the absenc e of rela t ive at ever- i n c reasing interest rate s . Af ter a rel a tively stabl e pric e cha n g es (whi c h eventu a l ly become uniform in a com- period, both the current account and public sector deficits mo n currency setti n g ) , the exi s t enc e of excess capaci t y (to start to explode as bond interest rates in South increase rap- all o w the demand mul ti p l i e r to work eff ectively) , and a idly compared to those in North. The model yields an inher- ste a dy- s t a t e baseline (to eradi c a t e trade imbalances ) . ently unstable solution,as interest rates rise indefinitely. The use of perpetuity bonds allows the demand for Und er the second scena ri o , pol i c ym a k ers set automa ti c money to be expressed as a residual after wealth is allocated cont rols by cont racting spending or raising tax rat es to faci l i - to bonds, or as a fixed proportion of wealth. Critical to the ta t e a zero defi c i t . This tig ht rein on the public sector com- model’s solution is determining the amount of government bin e d with net interest payme nts abroad wea k ens dema n d treasury bills that can be accepted by the central bank (and and the natio nal incomes of both cou n t rie s . The strain on the recognizing that these cannot be negative,as the government fiscal stance as a policy res p onse to the ext ernal shock is reces - does not loan to the central bank). In a dollarized regime,the si on a r y since the ext ernal shock affects the balance of pa y- central bank will not lend to governments beyond what me nts and leads to both lower natio nal incomes and tax households are prepared to hold as money (which is propor- revenue s . Alt h o u g h the initial drop in exp orts from Sou th is tional to wealth). Since there is a limit to the extent to which comp ens a t ed for by lower imports so that the current accou n t governments can borrow from the central bank,they have to im b a l a n c e disappea r s over tim e , the adju s tm e nt of sp end i n g s a tisfy ad d i ti onal borrowing requ i rem ents by su pp lyi n g (i m p orts and exp orts) in both cou n t ries lowers aggregat e bonds at attractive interest rates, which implies higher costs demand and income and raises unemp l o ymen t . Thus , ti gh t- in the future and leads to instability. This is the core of the ening the fiscal stance in one cou n t ry causes aggregat e income adjustment process in the model after an exogenous shock. of the syst em as a whole to deterio rat e dram a ti c a l ly. Sout h The price of bonds is fixed in North and is allowed to fluctu- exp erien c es a more dras t ic reces s i o n since North ’s import ate according to demand and supply in South. The final rele- propens i t y affected its revenues in the first place. Izu ri et a ’s vant characteristic of the model is that money supply cannot an a l ysis shows that the impact on North and its sub s e quen t be different than money demand. feedb a ck on Sou th depends as muc h on the size of the mul t i- Izu ri e ta first solves the model to verify its internal cons i s - pl i e r as on the appl i c a ti o n of res t ric tive fiscal pol i c i e s . tency and obtain a stea dy- s t a t e baseli n e . Data sets for the two In con clu s i on , wh en exch a n ge ra te and mon et a ry po l i- econ omies match two con d i ti on s : con s i s tent acco u n ti n g cies are dismantled , fiscal policy is no lon ger a tool wi t h st ruc tur es and similar econo mies wit h o u t anomalies suc h as wh i ch to guard the financial stabi l i ty of the sys tem . Th i s hi g h debt bur dens . An exogenous shock to Sou th is then deprives po l i c ym a kers of ava i l a ble policies to gen era te in f l i c ted by cha n g ing the import propens i t y from Nort h ,t hu s i n come and pro tect em p l oym en t . Thu s , i rrevers i ble do ll a r- producing a trade and fiscal imbalance by lowering nation a l i z a ti on is a de ad en d . Iz u ri eta does not ex pect that more in c ome and eroding tax receip ts in Sout h . The implicatio ns of com p l ex analytical fra m eworks would reverse the con clu- this shock are exp l o red under two alterna t ive scena ri o s . The s i ons re ach ed in his paper. fi r st assumes fiscal self - d etermi n a ti on , whe re governm en t sp ending and tax rat es are determi n e d by pol i c ym a k ers and CRA’s 25th Anniversary: The Past, Present,and Future the model solves for the public sector borrowing requi r emen t KENNETH H.THOMAS as a res ult of a lack of tax revenue s . The second ti gh tens the Working Paper No. 346, June 2002 fiscal stance and balances the public sector while the model www.levy.org/docs/wrkpap/papers/346.html ou tlines the pace of converg enc e towa r d a current accou n t ba l a n c e and the eff ect on aggregat e income and emp l o ym en t . The Community Reinvestment Act (CRA) was enacted in Under the first scenario, the South government initially 1977 to provide access to credit for the most needy low- and draws bills from the central bank to finance the deficit and moderate-income (LMI) individuals. This lending safety net

T H E L EV Y E C O N O M I C S I N S T I T U T E O F BA R D C O L L E G E 25 was designed to balance the interests of regulators,banks and credit to qualified applicants) supported calls for a stronger thrifts, and community groups (the CRA Triangle). Since its CRA and agents such as community development banks. inception, the CRA has undergone a number of revisions in Both industry and community groups complained about structure and mandate, with reactions from proponents and overly subjective CRA exams and ratings emphasizing docu- critics alike. In this working paper, Kenneth H. Thomas, lec- mentation and process over lending performance. President turer in finance at the Wharton School of the University of Clinton initiated the first major reform of CRA in 1993, fol- Pennsylvania, evaluates past, present, and future CRA rules lowed by three different versions resulting from conflicts and regulations and recommends optimal reforms balancing between the community and industry and among regulators. consumer and industry interests. His reforms include a According to Thomas, the banking lobby, with the strategic return to a focus on LMI lending, a reduction of grade infla- help of the Fed, won most of the reform battles in the adop- tion by regulators, expansion of the laws to include credit tion of the “new” CRA regulations in May 1995. The most unions, and streamlining of institutional testing. important change was a more performance-based exam and The CRA encourages federally insured banks and thrifts rating system, which included four tests based on an institu- to meet the needs of communities, consistent with safe bank- tion’s size and business strategy, and an overall rating based ing practi ce s . Con gress directs reg u l a tors—the Fed , t h e on lending (50 percent),investment (25 percent),and service Federal Deposit Insurance Corporation, the Office of the (25 percent) tests of large retail banks ($250 million or more Comptroller of the Currency (OCC),and the Office of Thrift in assets or affiliated with a $1 billion or more holding com- Supervision (OTS)—to periodically assess banks and thrifts pany). Each institution was evaluated relative to its “per- on their record of meeting community credit needs (a con- formance context,” which included such factors as business sideration when acting on deposit facility branch or other strategy and constraints and community needs and opportu- expansion applications). In the ideal model of the CRA nities. As a result, LMI lending was reduced to 50 percent of Triangle, regulators act as impartial referees between com- the total rating.There were few suitable CRA investments so munity groups and banks, attempting to fashion a “socially Wall Street created a CRA investment industry (which did lit- opti m a l ” re sult ben ef i ting both parti e s . According to tle to help LMI individuals) and the investment and service Thomas, continuous conflict and cooperation among the tests became a key source of grade inflation. Fully 71 percent p l ayers cre a tes dynamic ten s i on and keeps the tri a n gl e of investment test ratings were inflated by one grade (com- strong, but such relationships have not always been equal. pared to 32 percent and 29 percent for the lending and serv- In the first dozen years,the CRA and its ratings were not ice tests). The 1990s saw an increase in bank consolidations taken seriously and its powers were limited. A change in the and a subsequent major cutback in CRA exams. congressional climate in the midst of the Savings and Loan According to Th om a s ,b a n kers (including reg u l a tors and scandal revived CRA interest. Beginning in June 1990 a con gre s s m en oppo s ed to the law rega rdless of its costs and bank’s CRA rating and a portion of its exam were made pub- ben efits) perpetra ted a nu m ber of C RA urban legen d s . lic. These disclosures afforded researchers an opportunity to Con tra ry to the ch a r ges that CRA did not work and su ch study how examiners evaluated and graded banks. They dis- l oans were unprof i t a bl e , it has had a favora ble impact on covered a high level of grade inflation. Regulators responded LMI home lending and financial retu rn s . LMI borrowers’ by compressing their ratings system and simplifying their conven ti onal home purchase loans ju m ped from 14 percen t data so that the vast majority of banks fell into the “satisfac- in 1990 to 25 percent in 2000 and they were less likely to tory” range. Subsequent amendments by pro-CRA congres- prep ay or ref i n a n ce wh en interest ra tes dropped . Sec u ri ti zed sional Democrats requiring better documentation in the C RA loans now repre s ent a major sector of the secon d a ry public performance evaluation process strengthened the Act. financial market s . An o t h er urban legend is that the CRA’s These new disclosure requirements led banks and thrifts main ben ef actors are minori ti e s . In fact , 60 percent of L M I to take the CRA seriously. Cases of lending bias and “redlin- i n d ivi duals are non - Hispanic wh i te s . Al t h o u gh CRA com- ing” (the practice of geographic discrimination in granting p l i a n ce is of ten cl a i m ed to be very co s t ly to banks, it incurs

26 S U M M A RY / S P R I N G–S U M M E R 2 0 0 2 on ly mode s t ly high er co s t s , wh i ch public policy should see k groups defend the nonlending tests and have significant to improve . According to a CRA loan prof i t a bi l i ty stu dy by financial incentives to maintain the investment test, as do the Fed ,C RA- rel a ted home purchases and refinancing activ- Wall Street CRA profiteers. These factors, combined with i ties were at least margi n a lly prof i t a ble for most financial grade inflation and LMI dilution, suggest that good public i n s ti tution s . policy should reduce the investment and service tests to indi- Despite passage of a CRA “sunshine” provision requiring vidual performance evaluation factors under the lending test community groups to disclose funding sources (including as long as they are LMI credit-related. A new lending test, banks), regulators made only limited data available. A series says Thomas, should count for all rather than half the overall of Freedom of Information Act requests by Thomas to indi- CRA rating. Large banks with extensive CRA investments vidual regulators showed that several prominent community and services would continue to garner credit under a stream- groups received sizable funds from large banks. However, lined large bank exam and community groups to receive community groups and the nation’s most vocal CRA alliance, grants from banks. Moreover, doubling the minimum allow- the National Community Reinvestment Coalition, do not able size under which banks can qualify for the streamlined have to report agreements or grants received from non- exam would represent significant time and cost savings. covered affiliates of other for-profit firms supplying CRA Com mu n i ty groups requ e s ting a race - b a s ed CRA co u l d services or products to banks. Nor must they list their con- j eop a rd i ze the futu re of this need s - b a s ed law, l e s s en its pub- tributors in IRS filings. Thomas contends that all funding lic policy ben ef i t s , and redu ce its strong bi p a rtisan su pport . sources should be disclosed in order to illuminate the nature Th omas recom m ends that the assessment areas for banks of the relationships within the CRA Triangle and improve and thrifts maintain the status quo ra t h er than establish a CRA public policy. n ew reg u l a tory fra m ework based on a few special circ u m- One of CRA’s main attributes is that it is periodically s t a n ce s . Fu rt h erm ore , ad d i ti onal streamlining could com e reformed to keep it responsive to the current needs of both f rom el i m i n a ting the ill - con ceived stra tegic plan opti on . In communities and banks. However, test infrastructure at the l i ght of a perceived bre a k down in the CRA Tri a n gl e , the OTS Fed and some large banks serves as a motivating force for should mer ge into the OC C . Moreover, it may be time to them to maintain the status quo. Moreover, community con s o l i d a te the com p l i a n ce functi ons of a ll four reg u l a tors .

Program: Federal Budget Policy

State Policies and the Warranted Growth Rate demand con s i s tent with en trepren eu ri a l expectations and JAMEE K.MOUDUD i n d ivi du a l s’ a uton omous dec i s i ons to save . Re s e a rch Working Paper No. 349, July 2002 Associate Jamee K. Moudud extends Harrod’s work by inves- www.levy.org/docs/wrkpap/papers/349.html tigating the effects of tax and expenditure policies on the warranted growth rate and proposing two mechanisms to Rethinking the theory of econ omic flu ctu a ti on s , Ha rrod raise the rate when there is long-run unemployment:tax rate formu l a ted a dynamic equ i l i brium for income—the war- increases accompanied by an increase in aggregate govern- ra n ted ra te of growt h — to com p l em ent Key n e s’s static equ i- m ent spen d i n g ; and capac i ty - a u gm en ting inve s tm en t l i briu m . This is the ra te of growth produ ced by the ra te of increases by state enterprises. Moudud discusses the role of i nve s tm ent ch o s en by en trepren eu rs , wh i ch is warra n ted in the social saving rate (private plus government saving to the sense of maintaining a ra te of ex p a n s i on of ef fective GDP), explains why it regulates and has a positive effect on

T H E L EV Y E C O N O M I C S I N S T I T U T E O F BA R D C O L L E G E 27 the warranted growth rate, and shows that its role does not rat es affect growth equa l ly. These res ults sug gest that there imply the pursuit of fiscal policies. ma y be an optimal tax and spending policy whe re an increa s e In contrast to Keynes-Kalecki and neoclassical perspec- in governm e nt spending is accomp a n i e d by a grea t er increa s e tives, Moudud uses the Harrod-Domar approach to provide in tax rate s . Inc r easing the social saving rat e would also rai s e an alternative way to model fiscal policy.Harrod-Domar rec- the warran t ed growth rat e (and reduc e the bud g et defi c i t ) . ogn i zed the capac i ty - c re a ting ef fect of i nve s tm ent (it Mo u du d ’s tax functi on can incorpora te an appropri a te responds endogenously to eliminate discrepancies between tax policy mix, i n cluding a cut in profits taxe s , wh i ch is con- actual and ),that growth is endogenous, that s i s tent with an increase in the social saving ra te , govern- the multiplier relationship is short-run, and that the econ- m ent spending ra ti o, and warra n ted growth ra te . He note s omy grows along the warranted path at the normal rate of that po l i c ym a kers would ben efit from sep a ra te indirect tax capacity utilization in the long run. Policy analysis,therefore, ra tes on capitalist household and working class con su m p- revolves around a short-run cycle where the actual growth ti on . Moreover, f u rt h er manipulati ons of the tax ra tes co u l d rate fluctuates around the warranted growth rate,and a long- i n c rease the govern m en t’s spen d i n g - to - o utp ut ra tio with a run cycle where the warranted growth rate fluctuates around h i gh er warra n ted growth ra te . These policy outcom e s , s ays the natural growth rate (growth rate of the labor force plus Mo u du d , do not have to invo lve a trade - of f bet ween lon g - the growth rate of productivity). Harrod’s main concerns are run econ omic growth and incre a s ed govern m ent ex- the relationship among the actual, warranted, and natural pen d i tu res on social spen d i n g.Th ey can also be con s i s ten t growth rates; and the central paradox of expansionary fiscal with a falling bu d get deficit ra tio and the nati onal debt – to - policies—that measures influencing actual growth rates have GDP ra ti o. the opposite effect on warranted growth rates. Moudud wonders how to reconcile the unimportance of An important probl em fo ll owing Ha rrod ’s form a l i z a- public investment within Keynes’s multiplier framework, ti on of the warra n ted growth path fra m ework rel a ted to the with its import a n ce in reg u l a ting lon g - run outp ut and ex i s ten ce of ad ju s tm ent mechanisms to bring the natu ra l employment, in light of Harrod’s work showing that public ra te cl o s er to the warra n ted ra te so that the econ omy co u l d investment actually lowers the warranted growth rate. He grow at full em p l oym en t . Mo u du d ’s working paper pro- d ivi des public inve s tm ent into two com pon en t s — poses two policy mechanisms to satisfy the equ a l i ty that the autonomous public investment and induced investment by t a x a ti on - ad ju s ted social saving ra te divi ded by the capital- public sector firms—and proposes a public sector investment c a p ac i ty ra tio equals the natu ral growth ra te . Conver gen ce function where total government spending is comprised of to the full em p l oym ent growth path requ i res modu l a ti ons of public consumption, and autonomous and induced public the saving and inve s tm ent ra tios by appropri a te po l i c i e s . investment. A relative decline in public consumption or Mou d ud analyz es taxatio n policy (type of governm en t a uton omous inve s tm ent entails an increase in indu ced sp ending) and public inves tm e nt policy (compo s i ti o n of gov- investment, which raises the warranted growth rate. This ernm e nt spending) under the assum p tio n that the warran t ed policy does not augment demand but consists of a composi- growth rat e is stable and less than the natur al growth rate . tional change in government spending. Und er the simplest taxatio n policy scena r io whe rein capitalist The conventional scenario (no split between current and ho u s e holds and the governm e nt save and the onl y tax cate- capital budgets, increases in indirect or wage taxes, and pos- gory applies to capitalist househo l d s , a highe r tax rat e on cap- sible cuts in business taxes) shows that a higher aggregate tax italist income is shown to bene fit growth—capitalist saving is rate enables the government spending ratio to increase so reduc ed but public saving is rai s e d by a grea t er amount. More that the higher warranted growth rate produces lower budget ela b orat e tax functio ns show that any tax rat e increase wil l deficits and national debt ratios. The unconventional sce- raise the social saving and warran t ed growth rate s , whi l e n a rio (splitting current and capital bu d get s , ex p a n d i n g in c r easing the governm e nt spending rat io has the oppos i t e investment by public sector firms to supplement private eff ect. A sur prising implication , sa ys Mou du d , is that all tax investment, increasing the tax rate on profits), which goes

28 S U M M A RY / S P R I N G–S U M M E R 2 0 0 2 against neo l i b eral stabil i z a ti o n pol i c i e s , provid es pol i c ym a k ers based on the multiplier and suggests that future research with an add i ti o nal tool to raise the warran t ed growth rat e gauge the length of the short run empirically (how long are towa r d the natur al rat e whe n privat e inves tm e nt is insuf f i c i en t . firms willing to ignore discrepancies between capacity and A policy stance separating a government’s budget into demand?) to all ow po l i c ym a kers to pursue trad i ti on a l current and capital accounts has never been implemented, Keynesian expansionary policies. notes Moudud. Rather, fixed budget deficits or balanced The current debate on fiscal policy assumes either full budget targets combined with some elements of exogenously employment or excess capacity in the long run. This working fixed spending imply that a country has relatively little flexi- paper pursues a more conventional way of modeling the long bility under current government policies,leading to austerity run where unemployment coexists with a normal rate of measures such as reducing public investment or cutting dis- capacity utilization. Moudud concludes that a broad-based cretionary public expenditures. Moreover, Harrod’s central policy program should allow for both excess and normal paradox raises questions about expansionary fiscal policies capacity and be adaptable to different circumstances.

Explorations in Theory and Empirical Analysis

A Note on the Hicksian Concept of Income permit ex post measur eme nt of in c ome because person a l AJIT ZACHARIAS exp ect a ti ons cannot be obs e rved from market tran s a ction s . Working Paper No. 342, February 2002 In ad d i ti on , Zach a rias points out that Hi cks on ly con- www.levy.org/docs/wrkpap/papers/342.html s i dered income from the own ership of financial and phys i- cal asset s , and did not ad d ress labor income su f f i c i en t ly. The Hai g - Si m on s - Hi c ks (HSH) conc ept of in c ome is the Fu rt h erm ore , he con tends that the cen tral meaning of ma x i m um amount that can be consu m e d in a given perio d of i n come as formu l a ted by Hi cks is on ly rel evant to property time while keeping real wealth uncha n g ed. This conc ept is the i n com e . Within the con text of Hi ck s’s three approx i m a- th e oretical basis for defining perso nal and natio nal income ti on s , he notes that it is impo s s i ble to con s tru ct ex po s t us e d by most governm e nt agencies and econo mists toda y. m e a su res of l a bor income since the va lu a ti on of hu m a n Research Fellow Ajit Zacharias takes exception to the capital is an internal proce s s . By excluding labor incom e , notion that ex post definitions of income effectively incorpo- Hi ck s’s income con cept is not app l i c a ble to modern capital- rate Hicks’s concept of income. In his analysis, Zacharias ist econ omies wh ere labor income is the predominant form , notes that Hicks considered only subjective definitions of and wh ere social insu ra n ce , com p l ex codes of i n come taxa- income theoretically meaningful. Moreover, Hicks’s aim was ti on , and govern m ent servi ces are pre s en t . Th erefore , h e to develop a theory of economic dynamics without using the re a s on s , the focus of i n come measu rem ent must be broader concept of income (or related categories such as saving, than pers onal dispo s a ble income (itsel f a deriva tive con- investment, or depreciation), which he considered theoreti- cept) and modern nati onal income acco u n ting has little to cally vacuous. do with Hi ck s’s theoretical con cept of i n come (wh i ch is Zacha r ias evalu a t es Hick s ’s three approxi m a ti o ns of th e l i m i ted to income from financial and physical asset s ) . cent ral meaning of in c ome in rela ti o n to the conventi on a l Zach a rias con clu des that no Hi cksian con cept of HSH conc ept. These suc ces s i vely take into account cha n g es in i n come exists that can be used as a theoretical starting poi n t exp ected interest rat es and price s , and allo w ex ante measur e- for a modern nati onal income acco u n ting sys tem . By me nt of in c ome but, according to Zacha ri a s , do not eff ectively excluding the import a n ce of i n d ivi dual su bj ectivi ty

T H E L EV Y E C O N O M I C S I N S T I T U T E O F BA R D C O L L E G E 29 em braced by Hi ck s , c u rrent def i n i ti ons of n ominal and re a l m e s s a ge was also that “m on ey matters ,” so Fri ed m a n’s ini- i n come are more in line with the def i n i ti ons put forw a rd by tial theoretical po s i ti on was not too differen t . Haig and Si m on s . Fri edman com mu n i c a ted his mon et a rist vi s i on in quantity-theoretic, Wicksellian, and neo-Walrasian terms. What Has Happened to Monetarism? An Investigation Bibow points out that while he followed Keynes’s analysis of into the Keynesian Roots of Milton Friedman’s Monetary the variables affecting money demand along Cambridge tra- Thought and Its Apparent Monetarist Legacies ditional lines, his analysis employed a broader concept of JÖRG BIBOW wealth and asset choice (including durable goods and human Working Paper No. 347, June 2002 capital). He deemphasized the role of interest rates and www.levy.org/docs/wrkpap/papers/347.html related as variables affecting the demand for money, while singling out inflation expectations as a key Has monet a r ism had a lasting eff ect on the theory and practic e influence on velocity. Friedman assumed that equilibrium of mon et a r y policy? In this working paper, Vis i t ing Scho l a r interest rates were determined by the real forces of produc- Jörg Bib ow of the Uni versi t y of Ham b urg comp a r es the works tivity and thrift,as opposed to Keynes’s conclusion that inter- of John Mayn a r d Keynes and Mil t on Fried m a n , the fou n d i n g est rates were determined independently within the financial fa t h e rs of opposing scho ols of mon et a r y thought , and exa m - system. The issue is whether market forces,left to themselves, ines their theories and proposals in light of cu r rent monet a r y will keep market rates of interest roughly allied with equilib- pol i c i e s . The key theoretical issue , sa ys Bib ow, is the theory of rium rates or whether guidance from monetary authorities is in t eres t , whi c h lies at the root of di f f erenc es in their approach required to establish a level of interest in financial markets to mone y demand and liqui d i t y preference . Regar ding pol i c y compatible with equilibrium of the real economy. cont rol , Keynes preferred a stabil i z ed wage unit combi n e d Frie dman reli e d on market adju s tm e nts of in t erest rate s with a flexi b le cent ral bank in cha r g e of st eering interest rate s and wages to secu r e long - r un equi l i b rium at full emp l o ymen t and aggregat e dema n d , while Frie dman favored a stabil i z ed and warne d against auth o riti e s ’ fi n e - t uning the econo my (i.e., cent ral bank with zero discretio n combi n e d with interest rate s ma n i p u l a t ing interest rate s ) . Rat h e r, policies should focus on and emp l o yme nt levels freely determi n e d by financial and the growth rat e of so me monet a r y aggregate . In terms of pol - la b or markets , res p ectively. Bib ow finds it puzzling that des p i t e ic y , Frie dman parted comp a n y with Keynes and the “cla s s i c s , ” today ’ s dominant market ideol o gy, Fried m a n ’s idea of dele gat - a pos i ti o n that, sa ys Bib ow, am o u n t ed to a “rela t ive stabil i t y ing interest rat e cont rol to the markets rat h e r than independ - hypot h e s i s ” and is far from po s tu l a ting absolute stabil i t y of ent cent ral bankers enj o ys little popu l a ri t y. ma r ket econo mies along new classical lines. He beli e ved that The em p i rical ori gins of Fri ed m a n’s mon et a rism lie in ma r kets would deli ver more favorab le res ults wit h o u t govern- his studies (with A . J. S chw a rtz) on mon et a ry factors in me nt interventi on , in partic u l a r , in t erest rat e manipulation s business cycles for the Na ti onal Bu reau for Econ om i c by cent ral bankers. Ana l ysis of Fri ed m a n’s policy propos a l s Re s e a rch , and his own re s e a rch on con su m pti on . con f i rm ed Bib ow’ s findings rela t ed to his monet a r y theory: Fri ed m a n’s perm a n ent income hypothesis de s c ri bes con- in t erest rat e ad ju s tm ents were key to Fried m a n ’s resu r rectio n su m pti on as a functi on of wealth ra t h er than curren t of the classical stabil i t y pos tu l a te . i n com e . He re su rrected the qu a n ti ty theory of m on ey as a According to Bi bow, Fri ed m a n’s analysis of m on ey tool for theoretical and em p i rical re s e a rch , wh ere mon ey is demand may have been inspired by Keynes’s liquidity prefer- s een as the root cause of econ omic instabi l i ty and sec u l a r ence theory. However, Keynes firmly denied that changes in pri ce s . His main message , “m on ey matters” ( i . e . , it has productivity and thrift would have any direct, immediate s trong real ef fects in the short ru n ) , was perceived as an effect on interest rates,and he also denied the existence of the a t t ack on Key n e s’s incom e - ex pen d i tu re approach . Key n e s’s “loanable funds mechanism.”The presumption that market vi s i on , h owever, i n clu ded the po s s i bi l i ty that mon ey co u l d forces (banks’ profit motive) tend to move interest rates in con s train real activi ty. As a re su l t , s ays Bi bow, Key n e s’s the right direction might be correct under certain conditions,

30 S U M M A RY / S P R I N G–S U M M E R 2 0 0 2 says Bibow, but this equilibrium tendency would arise not a m ong econ omists are em p i ri c a l , not theoreti c a l . Bi bow along loanable funds lines, but Keynesian liquidity prefer- rej ects this bel i ef , as the theory of i n terest was found to be ence lines. Bibow sides with Keynes’s conclusion that the the key dividing issu e . Ot h er key ingred i ents for stabi l i ty, loanable funds theory, which Friedman adhered to, is fatally h owever, a re em p i ri c a l , su ch as the interest el a s ti c i ty of flawed and that Keynes’s theory of interest is logically correct ex pen d i tu re s . Moreover, Bi bow ’s analysis of Fri ed m a n’s and provides a valuable theoretical framework where interest i n terest ra te ad ju s tm ent process shows that autom a ti c rates (somehow determined within the financial system) set ad ju s tm ents along loa n a ble funds lines requ i re implicit the pace of economic activity, rather than vice versa. Keynes’s a s su m pti ons that are important em p i rical issu e s : n ega tive concern was that interest rates might not be sufficiently l i n k a ges bet ween falling aggrega te demand and the dem a n d adjustable by deliberate policy. for loa n a ble funds must be small , i n terest ra te ex pect a ti on s Friedman believed that government should provide a must move broadly in line with current yi el d s , and the mar- monetary framework operating under the “rule of law”(leg- ket - d riven interest ra te ad ju s tm ent process must be appro- islated rules) rather than the discretionary authority of pri a tely forw a rd - l ooking and com p a ti ble with the banks’ administrators. He proposed a monetary and fiscal frame- on going prof i t a bi l i ty. work for economic stability involving banking reform (sepa- Bib ow points out that evid enc e of hug e damages caused by rating money and credit) and monetary reform (directly cent ral bankers inspired both econom i s t s ’ work. However, th e y linking monetary and fiscal policies), with monetary policy ha d oppos i t e vie ws on the fea s i bi l i t y of comp etent governm en t conducted by the Treasury. A second proposal, the k-percent in t erventi o n and the eff i c i e ncy of ma r kets . One may side wit h rule, centered directly on monetary policy to minimize Keynes on the theory of in t erest (and against the absolute sta- authorities’ scope for discretion and stop them from manip- bil i t y pos tu l a t e) but stil l see the point in Fried m a n ’s rela t ive ulating interest rates. It would be implemented directly (not st a bi l i t y hypot h e s i s . Bib ow conc lud es that Frie dman vie wed indirectly via interest rates) and the money supply would be mon e y as having direct eff ects over assets and pric es in the controlled by the Fed in terms of the reserves available to the broadest sense and did not foll o w Keyn e s ’s vie w that the rol e banking system,a more predictable benchmark than the fed- of li qu i d i t y preferenc e was loca t ed within the financial syst em eral funds rate. Monetary policy would mean buying securi- and indirectl y affected the real econo my in the cont ext of ties (growing at k percent) each week in the open market in t erest rat e determi n a ti on . The theory of in t ere s t ,t h erefore ,i s without disturbing interest rates. Friedman’s proposal to the key theoretical issue sepa ra t ing Keynes and Fried m a n , freeze the monetary base (k = 0) would effectively reduce while the key emp i r ical issues includ e the dynamics of adju s t - central banker discretion to zero. me nt processes and exp ecta ti o n forma ti on . Pol i ti c a l ly, Frie dman reje cted conc ent rati o n of powers free Conventional monetary wisdom worldwide still consists fr om direct pol i t ical cont rol . Ec onom i c a l ly, his key conc erns of deliberate manipulations of short-term interest rates by were the dispersal of res p ons i bi l i t ies for monet a r y and fiscal central banks,notes Bibow. Interest rate settings are linked to pol i c i e s , the lack of overal l accou n t a bi l i t y, policies depend ent policy goals by some more or less transparent reaction func- up on person a l i t ies rat h e r than the law, and the sus c eptibi l i t y of tion—Keynesian “fine tuning”—through the use of feedback in d epend ent cent ral bankers to the “point of vie w of ba n k ers. ” rules and often in the absence of any effective accountability. In add i ti on , he vie wed auth o riti e s ’ di s c r etion a r y powers as a Inflation targeting and the Taylor rule, for example, require so u r ce of un c erta i n t y, whe reas precomm i tm e nt to stea dy authorities to stabilize the economy at its full employment mon et a r y growth promo t ed public conf i d ence . From his per- potential and at some target rate of inflation. The most par- s pective , taking aw ay discreti on by neutralizing the adoxical aspect, says Bibow, is the current fashion for central (u n el e cted) cent ral bank by a proper legis l a t ed rule off ered a bank independence, which often goes far beyond control of low - r isk strat egy. the interest rate instrument and includes huge amounts of Fri edman pre s en ted his mon et a ry thought in Hi ck s i a n discretion regarding policy goals, particularly when central IS-LM terms to doc u m ent his bel i ef that basic differen ce s bankers focus only on price stability.

T H E L EV Y E C O N O M I C S I N S T I T U T E O F BA R D C O L L E G E 31 Bibow surmises that the current monetary system may be “true ”valu e s , no automa t ic mechanism exists in the short run the worst of all possible worlds. Central bankers enjoy far to che ck their advan ce . Opi n i o n (noise) moves price s . Thus , a more discretion than Keynes would ever grant them, while rise in the bear pos i ti o n at a time whe n secu ri t y pric es are the risks assoc i a ted with discreti on as em ph a s i zed by rising sug gests the tur ning point of a business cycle exp a n - Friedman are completely ignored. Instead of delegating pol- si on . A banking syst em’s abil i t y to accomm od a t e a rising level icy to the markets, says Bibow, politically unchecked mone- of produc tio n becomes impaired whe n financial senti m en t t a ry dict a tors determine econ omic wel f a re in modern fa l t ers (i.e., profits fall short of exp ecta ti o ns underlying asset democracies. This state of affairs, while not a triumph of pri ce s ) , a bear po s i ti on devel op s , financial circ u l a ti on Keynesianism,is completely irreconcilable with monetarism. in c re a s e s , and interest rat es rise (oft en above the natur al rate ) . Li k ewis e , a decline in the bear pos i ti o n dur ing a bus i n e s s Asset Prices,Liquidity Preference,and the Business Cycle up s w ing prevents the interest rat e from rising with increa s i n g KORKUT A.ERTÜRK le vels of activit y. The refore, in d epend ent of the policy of th e Working Paper No. 348, June 2002 banking syst em, an increase in inves tm e nt in excess of sa vin g www.levy.org/docs/wrkpap/papers/348.html ne ed not put any downwa r d pres su r e on asset price s . E rt ü rk spec u l a tes that Key n e s’s later re s ponses to his In his Treatise on Money (1930), Keynes argued that the inter- c ri tics ign ored the role of a s s et pri ce ex pect a ti ons in bu s i- est rate need not rise with rising levels of expenditure. The ness cycle dy n a m i c s , because his Gen eral T h e o ry t h eory of two main themes underlying his argument included elastic- l i qu i d i ty preference , cen tered on ex pected va ri a ti ons in the ity of the money supply and the interaction between indus- pri ce of l oan capital, h ad become mu ch more re s tri ctive . trial and financial circulation. The first theme, however, was Va ri a ti ons of s h a re pri ces were dealt with under the mar- abandoned and the second reformulated in the liquidity ginal ef f i c i ency of c a p i t a l . Ex pected ra tes of retu rn on capi- preference theory of interest outlined in his General Theory tal were assu m ed to ad just to an equ i l i brium interest ra te some years later. Thus, the connection between expectations th ro u g h va ri a ti ons in the scale of i nve s tm en t . Key n e s’s atten- about asset prices and the money supply was severed. In this ti on was foc u s ed exclu s ively on the portfolio ch oi ce bet ween working paper, Research Associate Korkut Ertürk of the bonds and mon ey. Be a rish (bu llish) sen ti m ent referred to a University of Utah examines Keynes’s original argument in h ei gh ten ed (redu ced) sense of risk assoc i a ted with illi qu i d - the Treatise and determines that reconsideration of his earlier i ty. The spec u l a tive demand for mon ey referred to the qu a n- i n s i ghts on the state of l on g - term ex pect a ti ons gre a t ly ti ty of l i qu i d i ty dem a n ded , holding liqu i d i ty preferen ce s enhances Keynesian analysis of the business cycle. con s t a n t . Thu s , s pec u l a tive motives were sep a ra ted into a In the Trea ti s e, ela s ti c i t y of the mone y supp l y depend ed de s i re to avoid capital losses and the import a n ce of m on ey on policies of the banking sector as a whole and the cent ral b a l a n ces as an insu ra n ce against unfore s een con ti n gen c i e s . ba n k . The impact of a fall (rise) in financial circ u l a ti on was This argument was eventu a l ly incorpora ted into ort h odox similar to a pol i c y - i n du c ed increase (decr ease) in the mone y portfolio theory, f u rt h er we a kening the link bet ween liqu i d- supp l y. In du s trial circ u l a ti on was linked to the produc tio n i ty preferen ce and the bu ll and bear sen ti m ents ex pre s s ed in and circ u l a ti on of goods and servic es (ro u gh ly cash depos i t s ) , the Tre a ti se. while financial circu l a ti o n was linked to deci s i o ns invol vin g Ertürk reformulates Keynes’s Treatise argument in light titles to financial wealth (rou gh l y saving depos i t s ) . Keyn e s of the IS-LM framework, where the supply of and demand defi n e d four types of sp ecu l a t ive markets in conn e ctio n wit h for money is expressed as a function of income, the interest di f f erent phases of the business cycle . His approach, sa ys rate, and expected future prices of securities. He shows that E rt ü rk , was con s i s tent with the modern “n oise trader ” monetary relief from a business downturn (in the form of a ap proach to finance, whe re riskless arbit rag e is eff ective whe n lower interest rate) comes about more from changed expec- it comes to the rela t ive pric es of as s e ts but not to the pric es of tations about having hit bottom than from fewer transac- sh a r es and bonds as a who l e . Whe n pric es devia t e from their tions associated with decreased levels of activity. Ertürk’s

32 S U M M A RY / S P R I N G–S U M M E R 2 0 0 2 formulation is able to show that the interest rate is deter- from the Treatise. Moreover, Keynes’s penetrating insights on mined by the dynamic interaction of the three variables noise trading in the stock exchange are at odds with what emphasized in the Treatise: banking sector behavior, the state “liquidity preference” now means in the economic literature. of bearishness, and the level of industrial circulation. Ertürk suggests that the General Theory’s implicit approach Ertürk notes that Keynes’s treatment of investment in his to finance was more orthodox mainly because of Keynes’s General Theory weakened his liquidity preference argument methodological shift to equilibrium analysis.

Strategic Analysis

Strategic Prospects and Policies for the U.S.Economy Figure 1: Total Private Sector Debt to Disposable Income Ratio, 1960–2001 WYNNE GODLEY AND ALEX IZURIETA www.levy.org/docs/stratan/prospects.html 1.8

1.6 In 2000,the U.S.current account deficit reached a record 4.5 percent of GDP. Recently released CBO figures show that the 1.4 government’s fiscal stance by that year was tighter than at any time in the previous 40 years. These imbalances have been 1.2 Beginning financed in recent years by dramatic increases in the level of of expansion private debt, which fueled the expansion of the 1990s. The 1.0 ratio of private sector debt to disposable income showed rather rapid growth, reaching the 1990 peak of 1.49 in 1998 0.8 and contiuing to rise to all-time highs thereafter (Figure 1). 1960 1970 1980 1990 2000

This trend cannot be sustained indefinitely. So urce: Na tional Income and Product Ac counts (NIPA), flow of funds, and authors’ calculations. Recent work by Dis ti n g u i s h e d Scholar Wynne Godle y and Res e a r ch Fello w Ale x Izu ri e ta has assessed the likely implica- tio ns of the coming adju s tm e nts in privat e borrowing for the Figure 2: Financial Balances by Sector, 1961–2007 econo my as a who l e . The ir new strat egic analysis brin g s these 8 proje ctio ns up to date and evalu a t es pos s i b le policy res p ons e s . 6 Projected The privat e sector su rp lus rea che d historic levels early in 4 the exp a n s i o n (1991–92) before deterio rat ing to unprece- 2 dent ed deficits (proje cted to be -7 percent of GDP by yea r- en d 0 Government 2001) for a muc h long er perio d than at any previous tim e –2

(F i g u r e 2). The outl o ok for the next five or so yea r s depend s –4 Foreign up on tent a t ive assum p tio ns regar ding the futur e cou r se of –6 Beginning econo mic growth , cu r rent account defi c i t s , and so on. If it is of Private –8 expansion as su m e d that neit h e r the federal deficit nor the current –10 account deficit depa r ts dram a ti c a l ly from its current trend , 1961 1970 1980 1990 2000 privat e debt would have to conti n ue to bur g eon, rea ching a Source: NIPA and projections using CBO assumptions. Sign is reversed for level of twice disposable income by 2007. In a more realistic government sector.

T H E L EV Y E C O N O M I C S I N S T I T U T E O F BA R D C O L L E G E 33 scenario in which private borrowing reverted somewhat deficit with the rest of the world, would bring about a 1980s- toward normal levels,the economy would fall into a “growth style “twin deficits” problem, with increased government recession,” with unemployment reaching nearly 8 percent. borrowing being financed by foreign investors. The only On the other hand,if the government were to attempt to viable solution is thus to somehow boost demand for U.S. avert a recession by further relaxing its fiscal posture, an exports, but no market forces exist that will automatically inflation-adjusted infusion on the order of $600 billion per bring about such an adjustment. Moreover, a reduction in year would be required. But a stimulus of that magnitude, in the trade deficit might bring dire consequences for other the absence of accompanying measures to reduce the nation’s nations that rely on exports to the United States.

INSTITUTE NEWS

NEW BOARD MEMBERS Coopera ti on and Devel opm en t , and an advi s er to the Con gre s s i onal Bu d get Office . She is curren t ly the Eu gene E. The Ins ti t ute is pleased to welc ome Nobel Laurea t e Jos e ph E. and Ca t h erine M. Trefet h en Profe s s or of Business and pro- Sti g litz to its Boar d of Go verno rs. He is coreci p i e nt of the 2001 fe s s or of econ omics at the Un ivers i ty of Ca l i forn i a , Nobel Priz e in Econo mics and was chi e f econo mist of th e Berkel ey; a re s e a rch assoc i a te at the Na ti onal Bu reau of World Bank from 1997 to 1999 and chair of the Pres i d ent ’s E con omic Re s e a rch ; a fell ow of the Yale Corpora ti on ; and a Council of Ec ono mic Advis e rs from 1993 to 1997. In his aca - m em ber of the advi s ory boa rds of the Cen ter for demic career, Sti g litz has been a profes s o r at Yal e , Prin c eton, In tern a ti onal Po l i tical Econ omy, Broo k i n gs Pa n el on Oxf ord, and Stanford Uni versi ti e s . He is a fello w of th e E con omic Activi ty, and Wom en’s Econ omic Round Ta bl e . Ec onom e tric Soci e ty and a memb er of the Nati o nal Aca demy Yell en received a B. A . f rom Brown Un ivers i ty and a Ph.D. of Sc i en ce s . He is also the reci p i e nt of the pres ti g ious Joh n f rom Yale Un ivers i ty. Bat es Cla r k Meda l , awa r ded bien n i a l ly to the Ame rican econo mist under the age of 40 who has made the most signi f - NEW RESEARCH ASSOCIATES icant cont rib utio ns to the field . He was a Ful b rig ht Scholar and Tap p Jun i o r Res e a r ch Fello w at Cam b rid g e Uni versi t y in 1970. Rania An ton opoulos is an assistant profe s s or of econ om i c s Sti g litz received a B.A . degree from Amh e rst Coll e ge and a at New York Un ivers i ty. She has two main areas of re s e a rch Ph . D . fr om the Mas s a chus e tts Ins ti t ute of Techn o l o gy. He is i n tere s t : i n tern a ti onal com peti ti on and lon g - run determ i- cu r rent l y a profes s o r of econom i c s , bus i n e s s , and interna ti on a l nants of forei gn exch a n ge ra te s , and gen der and econ om i c s , and public affairs at Colu m b ia Uni versi t y. wh i ch is different from the econ omics of gen der in that it a t tem pts to con ceptu a l i ze the econ omy by incorpora ti n g The Ins ti t ute is also pleased to welc ome Jan e t Yelle n to its gen der as a key soc i oecon omic category within mac ro- and Boar d of Go verno rs. Yelle n served as a memb er of the Boar d m i c ro t h eoreti c s . An ton opoulos recen t ly joi n ed Ni l ü fer of Go verno rs of the Federal Res e rve from 1994 to 1997 and as Çag˘atay, Diane Elson , and Ka ren Grown as a copri n c i p a l chair of the Pres i d ent ’s Council of Ec ono mic Advis e rs from i nve s ti ga tor for “ Kn owl ed ge Net working and Ca p ac i ty 1997 to 1999. She has been a Gu ggen h eim Fell ow, a fell ow Building on Gen der, Mac roecon om i c s , and In tern a ti on a l of the Am erican Ac ademy of Arts and Scien ce s , chair of t h e E con om i c s ,” a program funded by the Ford Fo u n d a ti on .S h e E con omic Policy Council of the Orga n i z a ti on of E con om i c is curren t ly inve s ti ga ting the gen der dimen s i ons of va ri o u s

34 S U M M A RY / S P R I N G–S U M M E R 2 0 0 2 i n d i ces of econ omic well - bei n g.An ton opoulos received a orga n i z ers , con tri butors are Reynolds Fa rl ey; D avid Ha rri s ; P h . D. in econ omics from New Sch ool Un ivers i ty. Sonya Ta foya ; Josh Goldstein and Ann Morn i n g ; Roderi ck Ha rri s on ; Na t h a n i el Pers i ly; C . Ma t t h ew Sn i pp ; Ba rry Korku t A. Ert ü r k is an associ a t e profes s o r and chair of th e E d m on s ton , S h a ron M. Lee , and Jef f rey S. Pa s s ell ; Ma t t h ew econo mics depa r tme nt at the Uni versi t y of Uta h . His gene ral Jacob s on ; Wern er So ll ors ; Ma r go An ders on ; Hu gh Davi s res e a r ch interests includ e mon et a ry theory, econo mic growth Gra h a m ; Melissa Nobl e s ; Nathan Glazer; Peter Skerry; and develo pmen t , gend er and develo pmen t , ma t h em a ti c a l Jen n i fer Hoch s ch i l d ; Ken n eth Prewi t t ; and Clyde Tu cker, mo deli n g , pol i t ical econo my, and the history of econom i c S teve Mi ll er, and Jen n i fer Pa rker. th o u gh t . He has served as cons ultant to the Ins ti t ute for Training and Re s e a rch of Wom en , the Com m onwe a l t h Secr eta ri a t , and the Depa r tme nt of Social and Econom i c Aff a i r s of the Uni t ed Nati o ns Gene ral Secr eta ri a t , and was a mem b er of the Int erna ti o nal Advis o ry Comm i t t ee for the UNIFEM Bie nnial Report. Ert ü r k received a Ph.D. in eco- no mics from New Scho ol Uni versi t y.

NEW LEVY INSTITUTE BOOK

The New Race Question: How the Census Counts Multiracial Individuals Joel Perlmann and Mary Waters, eds. New York: Levy Institute and Russell Sage Foundation, 2002 (forthcoming)

Bi t terly fo u ght con troversies su rro u n ded U. S . cen suses of the late 20th cen tu ry, p a rti c u l a rly the one of 1 9 9 0 , over pop- u l a ti on undercounts and po s s i ble ad ju s tm en t s . Cen sus 2000 was equ a lly con trovers i a l — yet Ken n eth Prewi t t , d i rector of the Cen sus Bu reau du ring the 2000 enu m era ti on , wri tes in The New Ra ce Questi o n that wh en historians look back on the censu s , the deb a tes over underco u n ting wi ll get on ly a foo tn o te ; the ch a n ge in the race qu e s ti on , he pred i ct s , wi ll get a ch a pter. In deed , the race qu e s ti on introdu ced in the 2000 cen sus has open ed the door to a new way of m e a su ri n g and thinking abo ut race . All owing indivi duals to report i den ti f i c a ti on with more than one race ch a ll en ges lon g - h el d f i cti ons and stron gly defen ded bel i efs abo ut the very natu re and def i n i ti on of race in our soc i ety. This vo lume ex a m i n e s these monu m ental ch a n ges from a mu l ti d i s c i p l i n a ry per- s pective . The co ll ected papers are the direct out growth of the Septem ber 2000 Levy In s ti tute con feren ce , “Mu l ti r ac i a l i ty: How Wi ll the New Cen sus Data Be Us ed ? ”, or ga n i zed by Perlmann and Wa ters . In ad d i ti on to the

T H E L EV Y E C O N O M I C S I N S T I T U T E O F BA R D C O L L E G E 35 UPCOMING EVENT PRELIMINARY PROGRAM

CONFERENCE FRIDAY, OCTOBER 18 “Economic Mobility in America and Other Advanced 8:30–9:00 a.m.   Countries” October 18–19, 2002 9:00–9:15 a.m.    Blithewood, Annandale-on-Hudson, New York Dimitri B.Papadimitriou, President,Levy Economics Organizer: Edward N. Wolff, Levy Economics Institute Institute and New York University 9:15–11:00 a.m.   The main aim of this conference is to take stock of the Mobility in Economic Well-Being knowledge gained regarding the economic aspects of eco- : Dimitri B.Papadimitriou nomic mobility, both over a lifetime and intergenerationally, Jonathan D. Fisher and David S. Johnson, Bureau and its relationship to inequality. Various indicators of of Labor Statistics mobility—using income, earnings, or consumption as their “Consumption Mobility in the United States: basis—will be examined and the ramifications of the find- Evidence from Two Panel Data Sets” ings on directions for public policy explored. Conchita D’Ambrosio, Università Bocconi and DIW “E c ono mic Mobil i t y in Ame rica and Oth e r Advan c ed Berlin, and Joachim R. Frick, DIW Berlin Cou n t rie s ” repres e nts the Levy In s ti tute’s com m i tm ent to “Germans on the Move? Mobility in Well-Being res e a r ch in the distrib utio n of in c ome and wealth and the in the 1990s” qua l i t y of li fe . Levy In s ti tute Seni o r Scholar Edwa r d N. Wol f f : Thesia Garner, Bureau of Labor Statistics of New York Uni versi t y is coordi n a t ing the conf erence . 11:00–11:30 a.m. 

11:30 a.m. – 1:00 p.m.   Mobility in the Labor Market : Edward N. Wolff, Levy Economics Institute and New York University Robert Haveman and Brian Knight, University of Wisconsin,Madison “Effects of Labor Market Changes on Young Adult Employment, Labor Market Mobility, Living Arrangements, and Economic Independence: A Cohort Analysis” Bruno Contini, Laboratorio R.Revelli, Centre for Employment Studies,and University of Torino “Earnings Mobility and Labor Market Segmentation in Europe and the U.S.: Preliminary Explorations” : Heidi Hartmann, Institute for Women’s Policy Research

36 S U M M A RY / S P R I N G–S U M M E R 2 0 0 2 1:00–2:30 p.m.  SATURDAY, OCTOBER 19 8:30–9:15 a.m.   2:30–4:00 p.m.   Poverty over the Life Cycle 9:15–11:00 a.m.   : Ajit Zacharias, Levy Economics Institute Wealth Mobility I Thomas L. Hungerford, Social Security Administration : TBA “The Persistence of Hardship over the Life Course” Lisa A. Keister, Ohio State University Fotis Papadopoulos and Panos Tsakloglou, Athens “Getting Rich in America: The Prevalence and University of Economics and Business Determinants of Wealth Mobility” “Short-Term Poverty Dynamics in Europe: Richard H. Steckel, Ohio State University, and A Comparative Analysis” Jayanthi Krishnan, Temple University : TBA “Wealth Mobility in America: AView from the National Longitudinal Survey” 4:00–4:30 p.m.  : Ngina Chiteji, Skidmore College

4:30–6:00 p.m.   11:00–11:30 a.m.  Intergenerational Income Mobility : TBA 11:30 a.m. – 1:00 p.m.   Paul A. Johnson, Vassar College Wealth Mobility II “A Nonparametric Analysis of U.S. Intergenerational : TBA Dependence in Income” Seymour Spilerman and Florencia Torche, Columbia Jo Blanden and Stephen Machin, University College University (London) and Centre for Economic Performance, “Wealth Transfers and Living Standards: London School of Economics A Comparison of Chile and Israel” “Cross-Country Comparisons of Changes in Jay L. Zagorsky, Ohio State University Intergenerational Mobility” “Wealth, Mobility and Race:A Longitudinal Study : Barbara Wolfe, University of Wisconsin, of U.S. Young Baby Boomers” Madison,and Levy Economics Institute : Robert A. Margo, Vanderbilt University and Levy Economics Institute 6:00–9:00 p.m.    1:00–2:30 p.m. 

2:30–4:00 p.m.   Earnings Mobility : Heather Boushey, Economic Policy Institute Steven J.Rose, ORC Macro International “E a rn i n g s Mobil i t y: Determining What Mea su r e to Use ” Jeffrey S. Zax, University of Colorado, Boulder “Permanent, Transitory, and Life-Cycle Inequality” : Jens Christensen, Mount Holyoke College

T H E L EV Y E C O N O M I C S I N S T I T U T E O F BA R D C O L L E G E 37 P U B L I CATIONS AND PRESENTAT I O N S

PUBLICATIONS AND PRESENTATIONS BY Tax ” (w ith M. C. Sawy er) . In S. C. Dow and J. Hill a rd , eds , LEVY INSTITUTE SCHOLARS Keyne s , Unc erta i n t y and the Glo bal Econ o m y: Beyond Keyne s , Volume Two. Nort h a m pton , Ma s s . : E dw a rd Elga r, 2 0 0 2 ; PHILIP ARESTIS Institute Professor and Senior Scholar “Fiscal Policies in the Euro s ys t em” (w ith M. C. Sawy er) . In Publ i c a ti on s : “The 1520-1640 ‘Great Inf l a ti o n’: An Early Arne Heis e , ed. , Neues Geld — a l t e Geld p oli t ik? Die EZB im Case of Cont roversy on the Natu r e of Money ” (w ith P. Mak ro ö ko n o m i cs he n Int erak ti o n s ra u m .Mar bur g , Ge rma n y: Howell s ) . Jou rnal of Post Keynesian Eco n o m i cs,Wi n ter Metropol i s - V erla g , 20 0 2 ; “Thi r d Way, New Labou r , and the 20 0 1 – 0 2 ; “The Euro : Refl e ctio ns on the First Thr ee Yea r s” Ch a ll en ges to Econ omic and Mon et a ry Un i on ( with M. C . Saw yer, A . Brown , and K. Mo u ra ti d i s ) . Mac ropo l i c i e s” ( with M. C . Saw yer ) . Wi rt schaft und Int erna t ional Revie w of Appli e d Econ o m i c s,Janu a r y 2002; Ges ells cha f t 20 0 2 . “Financial Crisis in Sou theast Asi a : Dis p elling Illus i o n the Presentations: “Economics of the Third Way: Labour and Min s k yan Way ”( with Mur ray Glickm a n ) . Ca m b ri d g e Journ a l the Ch a ll en ges to EMU Mac ropo l i c i e s ,” Dep a rtm ent of of Econ o m i c s,Mar ch 2002; “The First Thr ee Yea r s of the Eur o” E con om i c s , Un ivers i ty of Bi l b a o, S p a i n , Ja nu a ry 26, (w ith M. C. Sawy er) . Oiko n o m i k os Tac hydro m o s ,Mar ch 30, University of Ljubljana, Slovenia, April 19, Staffordshire 20 0 2 ; Guest Editor (with Peter Sin cl a i r ) , Sp ecial Iss ue in University, April 25, Nottingham Trent University, May 1, mem o ry of Max w ell John Fry, and auth o r, “The Imp a ct of and Oxford Brookes University, May 15; “Financial Policies Financial Liberal i z a ti o n Policies on Financial Develo pm en t : and the Average Productivity of Capital: Evidence from Evid enc e from Develo ping Econom i e s ” (w ith P. Deme tria des , Devel oped and Devel oping Econ om i e s” ( with P. B. Fat to u h , and K. Mou ra ti d i s ) . Int erna t ional Jour nal of Dem etri ades and B. Fa t to u h ) , E a s tern Econ om i c Fi n a n ce and Eco n o m i cs, April 2002; “G el d po l i tik im Association, Boston, March 15–17; organized (with Georgios Euro s ys t em und Alt erna t iven für Voll be s ch ä f ti g u n g ”(w ith M. Ch ort a reas) a on e - d ay Con feren ce on Tra n s p a rency in C . Saw yer ) . WS I - Mi t tei l u n gen: Mo n a t szei t sch rift des Mon et a ry Po l i c y, Bank of E n gl a n d , Lon don , May 10; Wi rt schafts- und Soz i a lwi s sen sch a f t l i ch en In s ti tuts in der “Credibility of EMS Interest Rate Policies and Implications Han s - B ö ck l e r-S tif tu n g , May 2002; Guest edi t or (with Jag j i t for the EMU: A Markov Regime-Switching Approach” (with Cha dha) and auth o r “D oes Inf l a ti o n Tar g eting Aff ect the K . Mo u ra ti d i s ) , 6th In tern a ti onal Con feren ce on Trade– O f f betw een Outpu t Gap and In f l a ti on Vari a bi l i ty ? ” Mac roecon omic An a lysis and In tern a ti onal Finance , (w ith G. M. Cap orale and A. Cipo ll i n i ) . The Man ch e s t er Ret hym n o, Crete , May 23–25, and 8th In tern a ti on a l Sch o ol June 2002; “The Bank of En g land Macr oeconom i c Dubrovnik Economic Conference on Transition Economies, Model: Its Natu r e and Imp l i c a ti on s ” (w ith M. C. Sawy er) . Cav t a t , Croa ti a , June 26–29; “The Im p act of F i n a n c i a l Jour nal of Post Keynesian Econ o m i c s,Sum m e r 2002; “Cau s e s Globalisation on Employment,”International Symposium of Eur o In s t a bi l i ty ”( with M. C. Sawy er, I. Bief a n g - F ris a n ch o on Globalisation, New Technologies,and Employment, Haus Mari s c a l , and A. Brown) and “M acr oecono mics of St erli n g Villigst, Schwerte, Dortmund, Germany, May 31 – June 2; and the Eur o” (w ith M. C. Sawy er) . In A. El - A graa , ed. , Th e “Inflation Targeting: What Have We Learned?”,University of Eur o and Britain: Impl i c a t ions of Moving into the EMU. Bilbao, Spain, June 14. Lon don : Pren ti ce Ha ll , 2 0 0 2 ; “Con f l i ct in Wa ge and Unem p l o yme nt Determi n a ti o n in the U.K . ” (w ith I. Bief a n g - WALTER M.CADETTE Senior Scholar Fris a n c ho Mari s c a l ) . In S. C. Dow and J. Hill a rd , eds . , Pos t Publ i c a ti on s : “Social Secu ri t y Privati z a ti on : A Bad Idea . ” In Keynesian Econ o m e trics , Mic roeco n o m i c s and the Th e o r y ofth e Arno Tau s ch , ed. , The Th r ee Pill a r s of Wis dom? A Rea d e r on Fir m: Beyond Keyne s , Volume One . North a m p ton, Mas s . : Glo bal i z a ti o n , Wor ld Bank Pension Model s , and Welf a r e Socie ty, Edw a r d Elgar , 20 0 2 ; “An Evalu a ti o n of the Tobin Tran s a ction s Hun ti n g t on, New York: Nova Science , 20 0 2 ; “H ealth Car e

38 S U M M A RY / S P R I N G–S U M M E R 2 0 0 2 Fi n a n ce : A Dysf u n c tio nal Syst em. ” Qu a r terly Com m en t a r y of MALCOLM SAWYER Visiting Senior Scholar Sa n d e rs Rese a r ch Asso ci a t es Lim i t ed, Fi r st Quarter, 20 0 2 , an d Publ i c a ti on s : “The Euro : Refl e ctio ns on the First Thr ee Ind i c a to r s,Fal l 2002, “Le s s o ns from Septemb er 11.” Qu a r terly Ye a rs” ( with P. Are s ti s , A . Brown , and K. Mo u ra ti d i s ) . Com m en t a r y of Sa n d e rs Rese a r ch Asso ci a t es Lim i t ed,Thi r d Int erna t ional Revie w of Appli e d Econ o m i c s,Janu a r y 2002; Qu a r ter, 2 0 0 2 ;“ How Stock Optio ns Lea d to Scandal.” Op- ed , “The NA I RU, Aggrega te Demand and Inve s tm en t .” New Yor k Tim e s ,Jul y 12, 20 0 2 . Metroeco n o m i c a , Februa r y 2002;“The First Thr ee Yea r s of th e Pre s en t a ti on : “ Health Ca re Finance : A Dys f u n cti on a l Eur o” (w ith P.Ares ti s ) . Oiko n o m i k os Tac hydro m o s ,Mar ch 30, Sys tem ,” Ruth M. S h ell ens Mem orial Lectu re , Ca lva ry 2 0 0 2 ; “G el d po l i tik im Eu ro s ys tem und Al tern a tiven für Hospital, the Bronx, New York, February 28. Vo ll be s ch ä f ti g u n g” ( with P. Are s ti s ) . WS I - Mi t tei l u n gen : Mon a t s zeit s chr ift des Wi rt schafts- und Sozi a l wis s ens cha f t l i ch e n JAMES K.GALBRAITH Senior Scholar In s ti tuts in der Han s - B ö ck l e r-S tif tu n g , May 2002;“The Bank of Publications: “The Importance of Being Sufficiently Equal.” E n gland Mac roecon omic Model : Its Na tu re and Social Philosophy and Policy,Winter 2002; Review of Michael Imp l i c a ti on s ” (w ith P. Ares ti s ) . Jour nal of Post Keyne s i a n Bernstein, A Perilous Progress: The Economics Profession in the Econ o m i c s,Sum m e r 2002; “Causes of Eur o Ins t a bi l i ty ” (wi t h 20th Century. Washington Monthly,January 2002; “Share P. Ares ti s , I. Bief a n g -Fris a n c ho Mari s c a l , and A. Brown) and Revenue, Save Jobs.” The Nation, February 11, 2002; “The “M acr oecono mics of St erling and the Eur o” (w ith P.Ares ti s ) . U. S . E con omy May Have Fu rt h er to Fa ll .” Au s tra l i a n In A. El -Agraa , ed. , The Eur o and Britain: Impl i c a t ions of Financial Review,March 2002; Moving into the EMU. Lond on: Prenti c e Hall , 20 0 2 ; “An Presentations: “Rising Inequality in China: Supplementary Evalu a ti o n of the Tobin Tran s a ctio ns Ta x ”( with P.Ares ti s ) . In Evi den ce from Official So u rce s” ( with Qifei Wa n g ) , S. C. Dow and J. Hill a rd , eds . , Keyne s , Unc erta i n t y and the Association for Comparative Economic Studies, Atlanta, Glo bal Econ o m y: Beyond Keyne s , Volume Two. North a m p ton, January 6; “The Economy and the Need for Action,”National Mas s . : Edw a r d Elgar Publ i s h i n g , 20 0 2 ; “Fiscal Policies in the Press Club,Washington, D.C., January 7. Euro s ys t em” (w ith P. Ares ti s ) . In Arne Heis e , ed. , Neue s Gel d — a l te Gel d pol i tik? Die EZB im Ma k ro ö ko n o m ic sh en DIMITRI B.PAPADIMITRIOU President In tera k ti o n s ra u m.Ma rbu r g, G erm a ny: Metropo l i s - Verl a g, Presentations: “The U.S. Recession: Can the Federal Reserve 20 0 2 ; “The ory of Ec ono mic Dyn a m i c s : An Essay on Cycli c a l Pick up the Tempo?”,The Stern School, New York University, and Long - R un Cha n g es in the Capitalist Econo my.” In X. New York Ci ty, Febru a ry 22; “ ‘ Ra ti onal All oc a ti on of Greff , J. La ll em on t , and M. de Vroey, eds . , Dic tio n n a i r e des Resources’ or ‘’ Are Not the Economic Problems,” Grandes Ouvres Econ o m i q u e s .Pari s : Ed i ti o ns Dalloz , 20 0 2 ; Rel i gious Bel i ef and Econ omic Beh avi or, Ba rd Co ll ege , “Thi r d Way, New Labou r , and the Cha ll en g es to Econom i c An n a n d a l e - on - Hu d s on , N. Y. , Ma rch 6; “ Rece s s i on and and Mon et a ry Un i on Mac ropo l i c i e s” ( with P. Are s ti s ) . Recovery: Gu i delines for Po l i c y,” In tern a ti onal App l i ed Wirt s chaft und Ges ells cha f t 20 0 2 . Business Re s e a rch Con feren ce , Pu erto Va ll a rt a , Mex i co, Pre s en t a ti on s : “ Bu d get Deficits and Econ omic Po l i c y,” March 15. University of Linz, Austria, January 17;“Monetary and Fiscal Policy in the Eu rozon e ,”Ch a m ber of L a bo u r,Vi en n a , JOEL PERLMANN Senior Scholar January 18;“Monetary Policy in the U.K. and the Eurozone,” Pu bl i c a ti on : “Com m ents on Secon d-G en era ti on Tra n s- Atlantic Conference on Central Banking,Maritime Institute, nationalism.”In Peggy Leavitt and Mary Waters, eds., Second Baltimore, March 2–3;“Investment, Aggregate Demand, and Gen era tion Tra n s n a ti o n a l i s m. New York : Ru s s ell Sa ge the NAIRU,” Seventh Post-Keynesian Conference, Kansas Foundation, forthcoming. City, June 27.

T H E L EV Y E C O N O M I C S I N S T I T U T E O F BA R D C O L L E G E 39 EDWARD N. WOLFF Senior Scholar Massachusetts, January 11; “China’s Economic Transition,” Pu bl i c a ti on s : “The Stagn a ting Fortunes of the Mi d dl e Keck Cen ter for In tern a ti onal and Stra tegic Stu d i e s , Class.” Social Philosophy and Policy,Winter 2002, rpt.in Ellen Claremont McKenna College, Claremont, California, March Frankel Paul, Fred D.Miller Jr., and Jeffrey Paul, eds., Should 12; “The WTO and China’s New March,”Asian and Asian Di f feren ces in In come and Wealth Ma t ter ? Ca m bri d ge , American Institute, California State University, Los Angeles, England: Cambridge University Press, 2002; “Inheritances March 13; “China’s WTO Membership and the New Strategy and Wealth In equ a l i ty, 1 9 8 9 – 1 9 9 8 .” Am erican Eco n o m i c of Internationalization,” Global Studies Project, California Review, May 2002; “The Impact of IT Investment on Income State University, Dominguez Hills, March 14. and Wealth In equ a l i ty in the Postwar U. S . E con omy.” Information Economics and Policy,June 2002; “Comparative AJIT ZACHARIAS, Research Fellow Income and Wealth Distribution.”In Malcolm Warner, ed., Pu bl i c a ti on : “A Cri ti que of Robert Bren n er.” Revi ew of In tern a tional En c ycl opedia of Business and Ma n a gem en t, Radical ,Winter 2002. Second Edition. London: Thomson Learning, 2002; “The Economic Status of Parents in Postwar America.”In Sylvia WILLEM THORBECKE, Research Associate Hewl i t t , Nancy Ra n k i n , and Corn el We s t , ed s . , Ta k i n g Publications: “A Dual Mandate for the Federal Reserve: The Parenting Public: The Case for a New Social Movement. Pursuit of Price Stability and Full Employment.” Eastern L a n h a m , Ma ryl a n d : Rowman and Littlef i el d , 2 0 0 2 ; Top Economic Journal, Spring 2002; “Budget Deficits, Inflation Heavy: A Study of Increasing Inequality of Wealth in America. Risk, and Asset Prices.” Journal of International Money and New York: The New Press,2002. Finance,August 2002; “European Macroeconomic Policy Presentations: “Recent Trends in Living Standards in the In terdepen den c i e s” ( with Ch ri s tian Ei gen - Zu cch i ) . In United States,”U.S. Basic Income Group Conference, New Thomas L. Brewer and Gavin Boyd, eds., Globalizing Europe. York, March 8–9,and Eastern Economic Association, Boston, Northampton, Mass.: Edward Elgar, 2002. March 15–17. Presentations: “Monetary Policy,Risk Management, and Bank Lending: Evidence from Turkey,” Asian Development JÖRG BIBOW Visiting Scholar Bank In s ti tute , To kyo, Decem ber 26; “The Econ om i c Publ i c a ti on s : “The Monet a r y Policies of the Eur opean Cent ral Outlook,” LRI Institute, Fairfax, Virginia, January 29; “U.S. Bank and the Eur o’s (Mal - ) P erforma n ce : A Stabil i ty - O ri en t ed Structural Change, Macroeconomic Policy Issues,” Center As s e s s m en t .” In tern a tional Revi ew of Appl i ed Eco n o m i cs, for Global Change and Governance, Rutgers University, Janu a r y 2002; “The Mar kets versus the ECB, and the Eur o’s Newark, New Jersey, March 15; “Parchment, Guns, and Plu n ge . ” Eas t ern Economic Jou rn a l,Win t er 2002; “Ma r ket Liberty: Constitutional Insights in Churchill’s History of the Fai lu r e or Cent ral Bank Fai lu r e? The Case of the Eur o and the En gl i s h - Speaking Pe opl e s,” APCS An nual Meeti n gs , Sa n Eur opean Cent ral Ban k . ” Ch a ll en g e,Mar ch– A pril 2002. Di ego, Ca l i forn i a , Ma rch 24; “Linking Firm and Ba n k Pre s en t a ti on : “What Has Ha ppen ed to Mon et a ri s m ? ” Behavior with Macroeconomic Shocks,”Asian Development European Society for the History of Economic Thought Bank Institute, Tokyo, May 28. Conference, University of Crete, March 14–17. GWYNETH H.CROWLEY, Head of Information Services QIYU TU Visiting Fulbright Scholar Publ i c a ti on : “Us e r Perceptio ns of the Library ’ s Web Page s : A Presentations: “Short-Term Costs vs. Long-Term Benefits? Focus Group Stud y at Texas A & M Uni versi ty ” (w ith Rob The Dec i s i on - Making of Ch i n a’s WTO Agreem en t ,” Leff el, Diana Ram i re z , Judith Hart , and Tomm y S. Arms t rong Harvard-Yenching Institute, Harvard University, Cambridge, II ) . The Jour nal of Aca d e mic Lib ra ri a n s h i p ,July – A ugust 2002.

40 S U M M A RY / S P R I N G–S U M M E R 2 0 0 2 RECENT LEVY INSTITUTE PUBLICATIONS Asset Prices,Liquidity Preference,and the Business Cycle KORKUT A.ERTÜRK WORKING PAPERS No. 348, June 2002

Incentives in HMOs State Policies and the Warranted Growth Rate MA R TIN GAYN O R , JAMES B. RE B I T Z E R , and JAMEE K.MOUDUD LOWELL J. TAYLO R No. 349, July 2002 No. 340, October 2001 Polish and Italian Schooling Then,Mexican Schooling Now? Israeli Attitudes about Inter Vivos Transfers U.S. Ethnic School Attainments across the Generations of the S EYMOUR SPI L E R M A N and Y U VAL ELMELECH 20th Century No. 341, November 2001 JOEL PERLMANN No. 350, July 2002 A Note on the Hicksian Concept of Income AJIT ZACHARIAS Race, Ethnicity, and the Gender Poverty Gap No. 342, February 2002 YUVAL ELMELECH and HSIEN-HEN LU No. 351, August 2002 Poles and Italians then,Mexicans Now?: Immigrant-to-Native Wage Ratios, 1910 and 1940 STRATEGIC ANALYSIS JOEL PERLMANN No. 343, February 2002 As the Implosion Begins . .. ? Prospects and Policies for the U.S.Economy: A Strategic View Dollarization: A Dead End WYNNE GODLEY and ALEX IZURIETA ALEX IZURIETA July 2001 No. 344, March 2002 The Developing U.S.Recession and Guidelines for oPlicy The ‘Third Way’ and the Challenges to Economic and WYNNE GODLEY and ALEX IZURIETA Monetary Union Macropolicies October 2001 PHILIP ARESTIS AND MALCOLM SAWYER No. 345, May 2002 Strategic Prospects and Policies for the U.S.Economy WYNNE GODLEY and ALEX IZURIETA CRA’s 25th Anniversary: The Past, Present, and Future June 2002 KENNETH H.THOMAS No. 346, June 2002 POLICY NOTES

What has Happened to Monetarism?:A n Investigation The War Economy into the Keynesian Roots of Milton Friedman’s Monetary JAMES K. G A L B RA I T H Thought and Its Apparent Monetarist Legacies 2001/8 JÖRG BIBOW No. 347, June 2002 Hard Times, Easy Money? Countercyclical Stabilization in an Uncertain Economy RO B E RT E. C A R PE N T E R 20 0 1 / 9

T H E L EV Y E C O N O M I C S I N S T I T U T E O F BA R D C O L L E G E 41 Are We All Keynesians (Again)? The Summary and all other Levy Institute publications are DIMITRI B. PAPA D I M I T R I O U and L . RA N DALL W RAY avai l a b le online on the Levy Ins ti t ute webs i t e (w w w. l ev y. o rg ) . 20 0 1 / 1 0 To order any of the above publications,call 845-758-7700 Kick-Start Strategy Fails to Fire Sputtering U.S. or (in Washington, D.C.) 202-887-8464, fax 845-758-1149, Economic Motor e-mail [email protected], write The Levy Economics Institute WYNNE GODLEY of Bard College, Blithewood, PO Box 5000, 2002/1 Annandale-on-Hudson, NY 12504-5000, or visit our website at www.levy.org. PUBLIC POLICY BRIEFS

The Future of the Euro Is There an Alternative to the Stability and Growth Pact?

PHILIP ARESTIS, KEVIN MCCAULEY, and MALCOLM SAWYER No. 63, 2001 (Highlights, No. 63A)

Campaign Contributions,Policy Decisions, and Election Outcomes A Study of the Effects of Campaign Finance Reform C H R I S TO PHER MAG E E No. 64, 2001 (Highlights, No. 64A)

Easy Money through the Back Door The Markets vs. the ECB J Ö RG BIBOW No. 65, 2001 (Highlights, No. 65A)

Racial Wealth Disparities Is the Gap Closing? E DWARD N. WO L F F No. 66, 2001 (Highlights, No. 66A)

The Economic Consequences of German Unification The Impact of Misguided Macroeconomic Policies J Ö RG BIBOW No. 67, 2001 (Highlights, No. 67A)

Optimal CRA Reform Balancing Government Regulation and Market Forces KENNETH H. THOMAS No. 68, 2002 (Highlights, No. 68A)

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