Showing papers in "Journal of Economic Perspectives in 1995"

Toward a New Conception of the Environment-Competitiveness Relationship

Abstract: Accepting a fixed trade-off between environmental regulation and competitiveness unnecessarily raises costs and slows down environmental progress. Studies finding high environmental compliance costs have traditionally focused on static cost impacts, ignoring any offsetting productivity benefits from innovation. They typically overestimated compliance costs, neglected innovation offsets, and disregarded the affected industry's initial competitiveness. Rather than simply adding to cost, properly crafted environmental standards can trigger innovation offsets, allowing companies to improve their resource productivity. Shifting the debate from pollution control to pollution prevention was a step forward. It is now necessary to make the next step and focus on resource productivity.

Inside the Black Box: The Credit Channel of Monetary Policy Transmission

Abstract: The 'credit channel' theory of monetary policy transmission holds that informational frictions in credit markets worsen during tight- money periods. The resulting increase in the external finance premium--the difference in cost between internal and external funds-- enhances the effects of monetary policy on the real economy. We document the responses of GDP and its components to monetary policy shocks and describe how the credit channel helps explain the facts. We discuss two main components of this mechanism, the balance-sheet channel and the bank lending channel. We argue that forecasting exercises using credit aggregates are not valid tests of this theory.

The Boundaries of Multinational Enterprises and the Theory of International Trade

Abstract: This paper begins with a review of empirical evidence on multinational firms. Conceptual underpinnings of a theory are developed, relying in particular on the notion of knowledge capital as a mobile, joint input into geographically separated production facilities. This idea is embedded in a simple two-country general equilibrium model that supports multinational production in equilibrium under conditions consistent with the empirical evidence. The final section examines internalization and shows why certain properties of knowledge capital also imply a preference for transferring technologies internally within the firm, rather than through arm's-length markets.

Income Smoothing and Consumption Smoothing

Abstract: One way that risk-averse households protect consumption levels is to borrow and use insurance mechanisms. Another way, common in low-income economies, is to diversify economic activities and make conservative production and employment choices. Households thus tend toward limiting exposure only to shocks that can be handled with available credit and insurance. Typically, both types of mechanisms are studied independently but much more can be learned by studying them together. First, we obtain a more complete picture of risks, costs, and insurance possibilities. Second, it opens the way to considering biases in standard tests of credit and insurance.

Tightening Environmental Standards: The Benefit-Cost or the No-Cost Paradigm?

Abstract: MS ff ichael Porter and Claas van der Linde have written a paper that is interesting and, to us at least, somewhat astonishing. It is a defense of environmental regulation-indeed, an invitation to more stringent regulation-that makes essentially no reference to the social benefits of such regulation. This approach contrasts starkly with the methods that economists and other policy analysts have traditionally used when assessing environmental or other regulatory programs. The traditional approach consists of comparing the beneficial effects of regulation with the costs that must be borne to secure these benefits. For environmental regulation, the social benefits include the reductions in morbidity or premature mortality that can accompany cleaner air, the enhanced recreational opportunities that can result from water-quality improvements, the increased land values that might attend the cleanup of a hazardous waste site, the enhanced vitality of aquatic ecosystems that might follow reductions in agricultural pesticide use or any of the other potentially significant benefits associated with tighter standards. From this benefit-cost approach emerges the standard tradeoff discussed in virtually every economics textbook. Porter and van der Linde deny the validity of this approach to the analysis of environmental regulation, claiming it to be an artifact of what they see as a "static mindset." In their view, economists have failed to appreciate the capacity of

Anomalies: Ultimatums, Dictators and Manners

Abstract: Economics can be distinguished from other social sciences by the belief that most (all?) behavior can be explained by assuming that agents have stable, well-defined preferences and make rational choices consistent with those preferences in markets that (eventually) clear. An empirical result qualifies as an anomaly if it is difficult to "rationalize" or if implausible assumptions are necessary to explain it within the paradigm. This column will resume, after a long rest, the investigation of such anomalies.

The Impact of Immigrants on Host Country Wages, Employment and Growth

Abstract: This paper discusses the recent theoretical and empirical research on immigrations impact on the income growth and labor market outcomes of natives. The geographical focus is on developed countries. (EXCERPT)

Symposium on the Monetary Transmission Mechanism

Abstract: Understanding of monetary transmission mechanisms is crucial to answering a broad range of questions. These transmission mechanisms include interest-rate effects, exchange-rate effects, other asset price effects, and the so-called credit channel. This introduction to the symposium provides an overview of the main types of monetary transmission mechanisms found in the literature and a perspective on how the papers in the symposium relate to the overall literature and to each other.

Assessing the Case for Social Experiments

Abstract: Rs ecent academic debates pit two alternative approaches to policy evaluation against one another. The first is the "experimental" approach, based on the random assignment of accepted program applicants to a recipient, or treatment, group and a non-recipient, or control, group. The second is the "nonexperimental," or "econometric," approach that uses a variety of microdata sources, statistical methods, and behavioral models to compare the outcomes of participants in social programs with those of nonparticipants. The central question addressed in this paper is whether or not randomized social experiments aid in securing answers to basic questions about the evaluation of social programs. There are many distinct and complementary approaches to the study of the impact of public policy, including full general equilibrium analysis of policy impacts (Tinbergen, 1956; Auerbach and Kotlikoff, 1987; Shoven and Whalley, 1992; Kydland and Prescott, 1991) and less ambitious partial equilibrium microeconomic structural research programs, such as those designed to estimate the impact of taxes on labor supply. Both approaches offer answers to many interesting counterfactual policy questions, but their credibility rests critically on the quality of the empirical input used to generate their answers

How Trade Hurt Unskilled Workers

Abstract: This paper will argue for what is still a minority view among economists: that the main cause of the deteriorating situation of unskilled workers in developed countries has been expansion of trade with developing countries.1 This view was advanced in Wood (1991a, b), and later developed into a book (Wood, 1994), but much the same line is taken by Batra (1993) and by Learner (1993, 1994). It has been strongly attacked, however, by economists who think the effects of trade have been small — notably Lawrence and Slaughter (1993) and Krugman and Lawrence (1994). By way of a counterattack, this paper will outline the evidence which suggests that trade is the main cause of the problems of unskilled workers, respond to some criticisms of this evidence, and challenge the evidence for the alternative view that these problems are caused mainly by new technology. At the end, it will consider some of the implications of this debate for public policy.

The Mirage of Fixed Exchange Rates

Abstract: This paper discusses the profound difficulties of maintaining fixed exchange rates in a world of expanding global capital markets. Contrary to popular wisdom, industrialized-country monetary authorities easily have the resources to defend exchange parities against virtually any private speculative attack. But if their commitment to use those resources lacks credibility with markets, the costs to the broader economy of defending an exchange-rate peg can be very high. The dynamic interplay between credibility and commitment is illustrated by the 1992 Swedish and British crises and the 1994-95 Mexican collapse. We also discuss the small number of successful fixers.

Human Capital vs. Signalling Explanations of Wages

Abstract: increases wages by directly increasing the worker's productivity. This learning explanation is usually associated with human capital theory. However, it seems unlikely that learning explains all the wage differences associated with schooling and work history. Better-educated workers are not a random sample of workers: they have lower propensities to quit or to be absent, are less likely to smoke, drink or use illicit drugs, and are generally healthier. It is unlikely that employers make full use of differences in propensities to quit or to be absent or sick when hiring workers. These characteristics are often not directly observed, and the Americans with Disabilities Act precludes firms from using either poor health or the likelihood of future sickness as a hiring criterion unless it is directly related to job performance.' However, if low levels of education are associated with these unfavorable employee characteristics, and employers are allowed to take education into account when hiring workers, we would expect employers to favor better-educated workers as a means of reducing their costs of sickness and job turnover. In turn, students will take these hiring criteria into account when deciding how long to stay in school. Students will choose a length of schooling to "signal" their ability to employers, and employers will demand a minimum level of schooling

The Monetary Transmission Mechanism: An Empirical Framework

Abstract: This paper provides an overview of the monetary transmission mechanism describing the impact of changes in monetary policy on real GDP. Changes in financial market prices--including long-term interest rates and exchange rates--are the main vehicle for the transmission of policy. The framework incorporates rational expectations and policy rules. It is empirical and appears to fit the facts well.

The Economic Benefits from Immigration

Abstract: T he rapid increase in the size of the immigrant flow reaching the United States, the major changes in the national origin composition of the immigrant population, and the decline in the skills of immigrants relative to the skills of native workers have rekindled the debate over immigration policy. The current debate revives the old concerns over immigrants "taking jobs away" from native workers and finding it difficult to adapt in the American economy, as well as questions whether immigrants pay their way in the welfare state. A large literature investigates each of these issues in detail; Borjas (1994) offers a survey. The empirical evidence indicates that more recent immigrant waves will remain economically disadvantaged throughout their working lives; that this disadvantage may be partly transmitted to their offspring; that recent immigrants are more likely to participate in welfare programs than natives; and that immigration may have contributed to the increase in wage inequality observed during the 1980s. Table 1 summarizes some of the key trends in immigrant skills and welfare participation. The relative educational attainment of successive immigrant waves fell dramatically in recent decades. In 1970, the typical immigrant who had just arrived in the United States had 11.1 years of schooling, as compared to 11.5 years for the typical native worker. By 1990, the typical immigrant who had just

The Flypaper Effect

Abstract: What happens to a state's spending when it receives an unconditional grant from the federal government? The standard theoretical analysis predicts that the increase in spending will be the same as that generated by an equivalent increase in local incomes--or roughly 5-10 percent for most states. In contrast, numerous empirical analyses have found that spending increases by much more, with some estimates near 100 percent. This result is known as the 'flypaper effect,' since the money appears to 'stick where it hits.' The authors review this evidence as well as other studies that find similar behavior in firms.

Consumption Insurance: An Evaluation of Risk-Bearing Systems in Low-Income Economies

Abstract: The hypothesis of full risk sharing can be taken to data from low-income countries and evaluate formal and informal financial systems. In many contexts, idiosyncratic risks are high, so credit/insurance arrangements could be beneficial. Statistical tests reveal that households in southern India take advantage of these possibilities; villages in Cote d'Ivoire and countries in Thailand do not do as well. The paper includes an empirical description of the devices used to smooth consumption and a theoretical discussion of private information and incentives on ideal operating systems. The full information and mechanism design frameworks provide benchmarks for policy analysis.

Are Your Wages Set in Beijing

Abstract: The economic troubles of less-skilled workers in the United States. and OECD-Europe during a period of rising manufacturing imports from third world countries has created a debate about whether, in a global economy, wages or employment are determined by the global rather than domestic labor-market conditions. One side argues that trade is all that matters; another side, that trade does not matter at all. The author rejects these polar views; empirical analysis has found modest but real trade effects in displacement of less-skilled labor and declines in the price of goods produced by low-skilled workers.

Monetary, Credit and (Other) Transmission Processes: A Monetarist Perspective

Abstract: Monetarist analysis of the transmission process highlights the response of relative prices and real wealth to monetary (and other) impulses. Monetary impulses are neutral in the long run. Short-run nonneutrality reflects uncertainty, incomplete information about the persistence and nature of impulses, fixed contracts, and other institutional detail. Patterns of change in relative prices have some common features but they also differ from cycle to cycle and by countries. This paper compares the monetarist analysis of intermediation to the lending view and presents evidence on the role of relative prices, lending, and other types of intermediation.

An Introduction to the Wage Curve

Abstract: En conomists and policymakers are interested in understanding the forces that determine the level of unemployment and the level of wages. This paper describes an empirical discovery-made with the help of international microeconometric evidence covering more than a dozen nations-about a link between these two variables. The connection can be portrayed on a graph with the level of unemployment on the horizontal axis and the level of wages on the vertical axis. Then the "wage curve," as shown in Figure 1, is a downwardsloping locus. This relationship tells us that (holding others things constant) if a region has a rise in unemployment in a particular year, those who live there will have a fall in their wages in that year. What does this curve mean? How, in a field where fully controlled experiments are almost impossible, could there be any convincing scientific basis for this wage curve? What is the relationship between the wage curve and a Phillips curve, other than that the curve of Figure 1 looks like a Phillips curve with the vertical axis mislabeled? How does the wage curve fit into existing economic knowledge, and is the empirical finding consistent with competitive theory? This paper sketches answers to these kinds of questions. The discussion draws on our book, The Wage Curve (Blanchflower and Oswald, 1994), where the points raised here are investigated more fully. It also rests upon work done by other economists whose work is listed in the paper and the bibliography.

Nonmarket Institutions for Credit and Risk Sharing in Low-Income Countries

Abstract: The design credit and risk institutions in low-income countries provides one of the most exciting testing grounds for theories of contracting with imperfect information and limited enforcement. This paper reviews some of the recent literature, with a special focus on nonmarket institutions that cope with risk and provide credit. This literature attempts to bring together insights from economic theory, especially information economics, contract theory, and mechanism design theory. However, it is also applied, being motivated by the circumstance of the poor countries that their authors have visited and studied.

Income Inequality and Trade: How to Think, What to Conclude

Abstract: Recent econometric work and growing analytical consensus suggest that exogenous international market pressures are a contributing factor to trends in U.S. wage/earnings inequality. Trade accounts for a share of these inequality trends close to or somewhat greater than its 10-15 percent share of economic activity, especially over medium-term horizons and dependent on precise definition. Trade is neither a trivial influence nor a dominant one. Evidence exists that its influence has declined slightly in the past decade, however. Rapid technological growth in exportable sectors seems more important.

Some Lessons from the Yield Curve

Abstract: T he relationship between short- and long-term interest rates-the yield curve or term structure of interest rates-is a subject that many people are happy to ignore, until the moment when they are saving for retirement and must choose between a bond fund and a money market fund, or are borrowing to buy a house and must choose between a fixed-rate or an adjustable-rate mortgage. At such times the term structure of interest rates may become unexpectedly fascinating. The yield curve is equally important for economic policymakers, but like private individuals, they may neglect the subject until it forces itself on their attention. In 1994, the term structure moved to the center of debate on U.S. economic policy. The Federal Reserve became intensely aware of the yield curve as initially modest increases in short-term interest rates provoked unusually sharp responses in long bond yields. Meanwhile, the U.S. Treasury began to shorten the maturity of the government debt in the hope of lowering federal interest costs. The academic literature on the term structure is enormous, and it continues to expand whether or not the subject is in fashion. Fortunately, the literature has improved in quality in the 25 years since Ed Kane's (1970) half-serious jibe: "It is generally agreed that, ceteris paribus, the fertility of a field is roughly proportional to the quantity of manure that has been dumped upon it in the recent past. By this standard, the term structure of interest rates has become ... an extraordinarily fertile field indeed." I first summarize recent research on the term structure of interest rates and then relate it to recent swings in the bond market and the government's choice of debt maturity. 'Melino (1988) and Shiller (1990) are excellent recent surveys of the academic literature. Campbell, Lo and MacKinlay (1996, ch. 10- 1) offer a graduate-level textbook treatment.

The Ethology of Homo Economicus

Abstract: Early critics of John Stuart Mill attacked him for creating a monomaniacal economic man concerned only with the accumulation of money. In fact, Mill's construct possessed a considerably richer psychology including desires for leisure, luxury, and sexual relations. This psychology played a central role in Mill's analysis of alternative institutional regimes. Mill also considered the social origins, or 'ethology,' of preference structures. Mill's framework provides a useful reference point for ongoing work in comparative economics and feminist economics. In particular, Mill's emphasis on psychological parsimony needs careful reconsideration by advocates of enriching the motives of economic man.

Tackling the European migration problem.

Abstract: This paper will begin by examining the historical pattern of migration and the empirical dimension of western Europes migration problem. A next step examines the labor market issues and impacts on natives as western Europe perceives them. The paper concludes with a discussion of policy issues and options. (EXCERPT)

The Case for Randomized Field Trials in Economic and Policy Research

Abstract: Social experiments have been used in research since the 1960s, yet the technique of controlled experimentation still arouses controversy among social scientists. The crucial element that distinguishes a controlled experiment from other forms of research is random assignment of treatment to the observational units of study. Because treatment differences in the sample occur as a result of random chance, the effects of the treatment on behavior can be measured with high reliability. This paper examines the advantages and disadvantages of experiments in comparison with other research techniques and describes the circumstances where randomized trials should be preferred over other methods.

The Promise of Public Sector-Sponsored Training Programs

Abstract: As concern about workers’ skills has risen, so has interest in the role that government training programs might play in addressing ‘America's workforce crisis.’ One way to gauge whether increased reliance on these programs will substantially improve the skills of the workforce is to examine the impact of past programs. The evidence from these programs indicates that, although the gains were small, for the most part we got what we paid for. This outcome should not be surprising because investments in training were exceedingly modest compared to the skill deficiencies that policymakers have been trying to address.

Optimal Voting Rules

Abstract: Modern social choice theory, following Kenneth Arrow, treats voting as a method for aggregating diverse preferences and values. An earlier view, initiated by Marquis de Condorcet, is that voting is a method for aggregating information. Voters' opinions differ because they make errors of judgment; absent these errors they would all agree on the best choice. The goal is to design a voting rule that identifies the best choice with highest probability. This paper examines maximum likelihood estimation. Surprisingly, the optimal rule can also be axiomatized by variations of Arrow's axioms.

Time for Revisionism on Rent Control

Abstract: Economists' traditional hostility to rent contols is based on models that treat the housing market as perfectly competitive and on the experience with 'hard' controls in New York City and many European countries following World War II. The current 'soft' rent control systems in North America are varied and qualitatively different from earlier hard controls. The theoretical case against them is weak, particularly when the housing market is viewed as imperfectly competitive. The empirical case against them is weak, too. Economists should reconsider their blanket opposition to current rent control systems and evaluate them on a case-by-case basis.

The Economic Case Against Drug Prohibition

Abstract: This paper discusses the costs and benefits of drug prohibition. It offers a detailed outline of the economic consequences of drug prohibition and a systematic analysis of the relevant empirical evidence. The bottom line is that a relatively free market in drugs is likely to be vastly superior to the current policy of prohibition.

Islamic Economics and the Islamic Subeconomy

Abstract: Although Islamic economics was developed to serve cultural and political ends, efforts have been made to put its ideals into practice. There now exist Islamic banks, which claim to offer an interest-free alternative to conventional banking, and government-run Islamic redistribution systems, which were established to reduce inequalities. These institutions have not revolutionized the economic lives of Muslims. Yet, along with a wide variety of enterprises that have emerged outside the purview of Islamic economics, they have formed vibrant Islamic subeconomies in numerous metropolises. These subeconomies are expanding because they foster interpersonal trust and offer opportunities for guilt relief.