bluuebunny/crossref_metadata_2025 huggingface dataset:
Policy Watch: Cutting Capital Gains Taxes
Authors: Auten Gerald E , Cordes Joseph J
Published: August 2012

From 1922 to 1986, long-term capital gains were taxed at lower rates than other income, generally by allowing a portion of long-term capital gains to be excluded from taxable income. While taxing capital gains at the same rates as other income has been hailed by some as a major accomplishment of tax reform, it has been criticized by others as one of its main flaws. As a result, there have been proposals each year since 1986 to restore some type of capital gains preference. These proposals have sparked a lively debate centered on three main questions: Would reducing the capital gains tax lower or raise federal revenues? Who benefits most from cutting the capital gains tax? Would lower tax rates on capital gains improve economic performance?
A Patent System for Both Diffusion and Exclusion
Authors: Ordover Janusz A
Published: August 2012

Public policy analysis of optimal patent regimes is often framed as a tradeoff between static and dynamic efficiency. In this analytical framework, weak patent protection and strict antitrust policy are taken to be directed toward static concerns, while protection of intellectual property through strong patent laws is taken as a reflection of broader social concerns for long-run growth and technological progress. This characterization has some truth, but the magnitude of the conflict between static and dynamic efficiency, can easily be exaggerated. In this article, I want to argue that weak patent protection need not be inimical to economic growth and, conversely, that strong patent protection need not be an enemy of diffusion. Appropriately structured patent law and antitrust rules can together ensure incentives for R&D and also induce cooperation among firms in diffusing R&D results through licensing and other means. At the same time, cooperation among firms at the R&D stage can counterbalance weak patent protection by internalizing spillovers from ongoing R&D programs, and such cooperation may also produce additional spillovers from the existing knowledge.
Do Individual Retirement Accounts Increase Savings?
Authors: Gravelle Jane G
Published: August 2012

Do IRAs increase savings or are they merely a windfall for otherwise well-off taxpayers? A major objective of universal IRAs was to encourage saving for retirement. A spirited debate has ensued over the use of IRA tax deductions as a means of promoting private savings. The crucial policy issue is not whether IRA contributions were substantial; they clearly were, representing about 30 percent of personal savings from 1982 to 1986. Rather the important question is the source of IRA contributions. IRAs can be financed out of 1) tax savings themselves; 2) shifting existing assets into IRAs; 3) borrowing; 4) diverting new savings into IRAs; or 5) reducing consumption. The key question is how much of IRA savings comes from reduced consumption. For overall savings to increase, private savings must increase by more than the tax savings. Conventional economic theory and evidence strongly suggests that IRAs were not effective savings incentives. The challenge to this view rests largely on studies which have appealed to a variety of “psychological” factors not normally incorporated in economic analysis. This paper reviews both types of analysis and concludes that the conventional view remains sound. Thus, a dollar devoted to deficit reduction is likely to be a safer bet for increasing savings than a dollar devoted to IRA benefits.
Organizations and Markets
Authors: Simon Herbert A
Published: August 2012

The economies of modern industrialized society can more appropriately be labeled organizational economies than market economies. Thus, even market-driven capitalist economies need a theory of organizations as much as they need a theory of markets. The attempts of the new institutional economics to explain organizational behavior solely in terms of agency, asymmetric information, transaction costs, opportunism, and other concepts drawn from neoclassical economics ignore key organizational mechanisms like authority, identification, and coordination, and hence are seriously incomplete. The theory presented here is simple and coherent, resting on only a few mechanisms that are causally linked. Better yet, it agrees with empirical observations of organizational phenomena. Large organizations, especially governmental ones, are often caricatured as “bureaucracies,” but they are often highly effective systems, despite the fact that the profit motive can penetrate these vast structures only by indirect means.
Distinguished Lecture on Economics in Government: Strengthening the Economy by Rethinking the Role of Federal and State Governments
Authors: Rivlin Alice M
Published: August 2012

This lecture brings together two subjects that are not often discussed together: national economic policy and the structure of American federalism. My thesis is that the policies needed to improve the health of the U.S. economy over the next decade or two require a new look at the division of responsibilities between the federal government and the states. In particular, I will argue that the states should have much clearer responsibility for most kinds of public investment, especially for improving the skills of the labor force and upgrading public infrastructure. The federal government should concentrate on a different set of missions, including interaction with the rest of the world, strengthening social insurance, and contributing to national saving by running a surplus in the unified federal budget.
Incentives in Principal-Agent Relationships
Authors: Sappington David E. M
Published: August 2012

This article identifies some of the major issues that have been examined in the literature on incentives. The article begins by discussing the frictions that lie at the heart of incentive problems. Next, the principal's optimal response to these frictions is explored, taking as given the characteristics of the agents with whom the principal interacts in a nonrepeated setting. The design of individualized contracts, contests, and tournaments is analyzed. Then, the principal's task of selecting the best agent is addressed, and repeated agency relationships are considered.
Economic Theories of Legal Liability
Authors: Cooter Robert D
Published: August 2012

This essay synthesizes and re-conceptualizes some central results of the economic analysis of liability law and sketches the legal details that drive them. Three different legal mechanisms for creating efficient incentives are examined in turn. The first mechanism uses the legal rule of strict liability to internalize costs. The second mechanism uses a negligence standard to create and enforce efficient standards of behavior. The third mechanism uses law to channel transactions into voluntary exchange. The initial explanation of the three mechanisms makes simplifying assumptions of perfect information, solvency, costless dispute resolution, and risk neutrality, before examining the results of relaxing these assumptions. The rules of the three major bodies of liability law—property, contracts, and torts—will be analyzed as examples within these three mechanisms. Property law concerns appropriation of ownership rights or interference with them; contract law concerns broken promises; tort law concerns accidental or intentional harm to people or property.
Melioration: A Theory of Distributed Choice
Authors: Herrnstein Richard J , Prelec Dražen
Published: August 2012

In this paper, we develop a theory of individual choice called melioration, which implies that choices distributed over a period of time may be reliably and predictably suboptimal, in terms of the person's own preferences. Consider some typical examples of distributed choices: the expenditure rate on various non-durables; frequency of athletic exercise; rate of work in free-lance type occupations; allocation of leisure time; rate of savings (or dissavings); expenditures on lottery tickets, and other forms of gambling. When people express dissatisfaction about their choices, their discontent seems clustered around these sorts of distributed choices. For example, complaints that one is working too hard (or not hard enough), exercising too little (or too much), wasting time, overeating, overspending, and so on are commonplace. The next two sections of the paper spell out the basic theory we are proposing. The following section then applies the theory to “pathological” consumption patterns, and shows that one should find a general underinvestment in those activities that exhibit increasing average returns to rate of consumption, and an overinvestment in activities that have an addiction-like interaction between value and rate. The final section compares the theory with other approaches to suboptimal choice.
Economic Literacy or Economic Ideology?
Authors: Nelson Julie A , Sheffrin Steven M
Published: August 2012

The Test of Economic Literacy (TEL), is a standardized multiple choice test developed under the auspices of the Joint Council on Economic Education with esteemed economists in an advisory role. The Test of Economic Literacy (TEL) is administered in many high school economics courses both to measure economic understanding and to monitor the effectiveness of teaching. We found that some of the questions in the test have a pronounced ideological slant. We view the biases in the TEL as characteristic vices of economists. In their weaker moments, economists can slip into a thought pattern which glorifies laissez-faire microeconomics while at the same time favoring Keynesian interventionist macroeconomics; this is precisely the bias of the TEL. The next two sections examine the ideological components of the microeconomics and macroeconomics respectively. For each part, we present a few of the questions and discuss their ideological content. For the micro part, we use the TEL data bank to analyze a matched sample of students who took the test before and after a course in economics. This empirical exercise allows us to address the questions in the title of the paper: what is taught and measured, literacy or ideology?
Nobel Laureate: Trygve Haavelmo
Authors: Moene Karl Ove , Rødseth Asbjørn
Published: August 2012

Trygve Haavelmo was in the United States from 1939 to 1947, and in this period he published most of his path-breaking contributions to econometrics for which the Nobel committee awarded him the prize. His list of publications after 1947 contains more than 100 items. We review his contributions to econometrics only briefly in order to cover his other research, which has focused on the relationship between population, natural resources, and growth; investment and capital theory; the notion of equilibrium and disequilibrium; the nature and stability of preferences; and the nature and problems of democracy.
Policy Watch: Antitrust Goes to College
Authors: Salop Steven C , White Lawrence J
Published: August 2012

It may have come as a shock to many economists, especially those in academia, to learn that the Antitrust Division of the U.S. Department of Justice (DOJ) has been investigating alleged price fixing and information exchange of financial aid among 23 prestigious east coast colleges and universities. These schools include the “Ivy overlap group”—MIT, Brown, Columbia, Cornell, Dartmouth, Harvard, University of Pennsylvania, Princeton, and Yale—and the “Pentagonal/Sisters group”—Amherst, Barnard, Bowdoin, Bryn Mawr, Colby, Mount Holyoke, Middlebury, Smith, Trinity, Tufts, Vassar, Wesleyan, and Williams. We have no specific knowledge concerning the possible validity of these allegations or expertise about their legality. Rather, in this article, we wish to present the potential applicability of current antitrust doctrines to colleges and their conduct and the possible defenses that they might raise to justify their actions.
The Modern Expansion of Tort Liability: Its Sources, Its Effects, and Its Reform
Authors: Priest George L
Published: August 2012

This paper reviews the development of tort law during the 20th century with particular attention to the broad expansion of liability since the 1970s. It attempts to explain the origins of the expansion of liability; to present examples of its effects on product and service markets; and to analyze the extensive efforts of the past five to six years toward liability reform, efforts which I conclude have had only a slight relationship to the underlying sources of modern liability problems. Though the empirical evidence is thin, virtually all studies of the effects of specific modern rules demonstrate that modern tort law has substantially dislocated product and service markets, as one might expect of an assertive legal regime founded on largely noneconomic principles. As we shall see, market dislocations, especially for insurance, have increased sharply during the past decade.
Liability for Medical Malpractice
Authors: Danzon Patricia M
Published: August 2012

Physicians and other medical providers are subject to a negligence rule of liability. In a simple model, with perfect information and homogeneous physicians, a negligence rule of liability with an appropriately defined due care standard should induce complete compliance: there should be no malpractice, no malpractice claims, and no demand for malpractice insurance. The malpractice experience is seriously at odds with this prediction. First, what goes wrong? Second, if the system does indeed operate imperfectly, does it yield benefits in terms of injuries deterred that outweigh the high overhead costs of operating a liability system?
The Limitations of Legal Institutions For Addressing Environmental Risks
Authors: Menell Peter S
Published: August 2012

This article assesses the major systems of environmental liability in the United States—the toxic tort system and Superfund. The discussion of each of these areas first lays out the scientific background of the environmental problems and the applicable regulatory regime. It then analyzes the efficacy of these regimes for addressing environmental problems and suggests alternative institutional designs for better promoting the goals of equitable and cost-effective compensation of disease victims and efficient deterrence and remediation of environmental degradation.
The Classical Soviet-Type Economy: Nature of the System and Implications for Reform
Authors: Ericson Richard E
Published: August 2012

Below I will outline the traditional Soviet economic system, developing its logic of institutions and interactions, and pointing out their natural economic consequences. This will lead me to a list of defining characteristics of that system, characteristics that are mutually dependent and supporting and hence must be changed more or less simultaneously if effective reform is to take place. One implication is that step-by-step measures are likely to fail. Instead, complete replacement of the economic system, as apparently intended by many East European reformers, seems necessary for a market-based system to begin functioning. This will be a truly monumental task and nowhere more so than in the Soviet Union.
The Economic Transition of Czechoslovakia from Plan to Market
Authors: Brada Josef C
Published: August 2012

The Communist government of Czechoslovakia was ousted in the so-called Velvet Revolution of November 1989, and the new regime adopted as its goal the transformation of the economy to one based on markets and private property, and also one more dynamic and productive than its predecessor. This unprecedented transformation poses a variety of intellectual, political and economic questions. At the same time that the economic system is being transformed, the government must also ensure that the hybrid economy that exists during the transition functions sufficiently well to maintain adequate living standards and to sustain political support for the reform process. In this paper, I examine the economic and intellectual legacies that have shaped the transition process in Czechoslovakia, describe the system changes implemented or contemplated for the near future, and briefly comment on macroeconomic performance.
On the First Year of German Monetary, Economic and Social Union
Authors: Collier Irwin L
Published: August 2012

This paper considers the first year of German monetary, economic, and social union, discussing the issue of the DM/east mark conversion rate; privatization and property rights; the supply and demand for reconstruction services; and a difference in conceptions of distributive justice held by East and West Germans.
Hungary: In Transition to a Market Economy
Authors: Hare Paul G
Published: August 2012

Hungary began its transition to a market economy as long ago as 1968 with the adoption of the New Economic Mechanism, when detailed central planning was abandoned and the economy was regulated by means of financial and economic levers. However, after a period of re-centralization in the 1970s and further market-oriented reforms during the 1980s, it became evident that the country was still far from achieving a successful transition. Nevertheless, Hungary's attempts at economic reform over the last 20 years are remarkably instructive, both for the present government's program of transition and for other Eastern European nations. Moreover, many of the measures now being implemented in Hungary were prepared and in many cases began to be implemented prior to the country's political transformation. Hence, there is much stronger continuity in the Hungarian reforms than one can find elsewhere in the region.
The USSR Before the Fall: How Poor and Why
Authors: Bergson Abram
Published: August 2012

This essay appraises the scholarly findings on the level of consumption and output in the USSR, compared with that in the West. Such aggregative calculations are onerous for any country, and not very surprisingly have encountered particular difficulty where such a strange society as Soviet communism has been in question. Predictably, the results have been controversial, but properly viewed they still provide illuminating perspective on the extraordinary events that have lately transpired in the USSR.
Can Neoclassical Economics Underpin the Reform of Centrally Planned Economies?
Authors: Murrell Peter
Published: August 2012

This paper addresses whether neoclassical economics can provide the intellectual underpinning for a theory of reform. I examine whether the neoclassical model satisfies an essential condition to qualify for this role: does it give us a satisfactory explanation for the vast differences in performance between capitalist and socialist economic systems? First, I focus on the theoretical arguments that have traditionally been used to examine the comparative properties of central planning and markets. I show that developments within theory over the last 20 years have substantially changed the tone of these arguments, making their message more equivocal. Next I discuss empirical evidence, but of a particular sort. Much research shows that centrally planned economies perform less well than market economies; but few studies test whether the superiority of market economies appears within empirical models derived using the framework of basic neoclassical economics. Those studies are the relevant ones for the present exercise. The central conclusion is that economists must look outside the standard models of competition, the focus on Pareto-efficient resource allocation, and the welfare theorems to build a theory of reform.
Investment and Hysteresis
Authors: Dixit Avinash
Published: August 2012

It seems that firms behave contrary to the standard economic theory of investment. We observe that firms do not invest as soon a price rises above long-run average cost; instead firms wait until price rises substantially above long-run average cost. On the downside, firms stay in business for lengthy periods while absorbing operating losses, and price can fall substantially below average variable cost without inducing disinvestment or exit. Recent developments in the theory of investment under uncertainty offer an interesting new explanation. The new approach builds on an interesting analogy between real investments and options in financial markets: In the timing of investment, waiting has positive value because time brings more information about the future prospects of a project. This new approach suggests that textbook pictures of the dynamics of a competitive industry need to be substantially redrawn. More generally, it says that a great deal of inertia is optimal when dynamic decisions are being made in an uncertain environment.
Equity Effects of the Tax Reform Act of 1986
Authors: Gravelle Jane G
Published: August 2012

The major goals of the Tax Reform Act of 1986 included an increase in the equity of the tax system. We will consider the effects of the tax reform on vertical equity, horizontal equity, and intergenerational equity.
Did the Tax Reform Act of 1986 Simplify Tax Matters?
Authors: Slemrod Joel
Published: August 2012

This paper attempts to assess whether the Tax Reform Act of 1986 simplified tax matters significantly, or at all. I conclude that, despite a few scattered signs that tax-related financial planning has declined, the compliance cost of the income tax system is probably higher now than it was in the early 1980s. This suggests that the Tax Reform Act achieved little, if any, simplification in the tax system, although it remains possible that the Act dampened what would have been an even greater increase in compliance cost.
The Case for Trade Liberalization in Developing Countries
Authors: Dornbusch Rudiger
Published: August 2012

This paper reviews the actual situation of protection in developing countries, and then discusses the prospective gains from liberalization. Three experiences with liberalization, from three different parts of the world, are sketched: Turkey, Korea, and Mexico. Next the paper considers what can go wrong with trade reform. Finally, it focuses on two new directions in trade strategy: service trade liberalization and regional free trade agreements.
The Case for a New Fiscal Constitution
Authors: Niskanen William A
Published: August 2012

For the first 140 years of U.S. history, the federal budget was effectively constrained by two fiscal rules: the formal limits within the Constitution on the enumerated spending powers and an informal rule that the government could borrow only during recessions and wars. At the end of the 1920s, federal expenditures were 2.6 percent of GNP. The federal debt was constrained to about equal to 16 percent of GNP. The general price level was roughly stable over this long period. Over the past six decades, however, federal expenditures have increased to nearly 25 percent of GNP. Larger and more frequent budget deficits have increased the federal debt held by the public to an amount equal to about 50 percent of GNP. And the general price level is now about nine times the level at the beginning of this period. This dramatic change in fiscal and monetary conditions occurred without one amendment to the Constitution to authorize a change in the fiscal rules. Our effective fiscal constitution has been transformed into one in which Congress and the President may authorize any type or amount of expenditures and taxes, subject only to the voting rules for routine legislation. How did this happen? Should economists be concerned about this change in the fiscal constitution? What, if anything, should be done about it?
Economics in the Former Soviet Union
Authors: Alexeev Michael , Gaddy Clifford , Leitzel Jim
Published: August 2012

One of the most notable, but least discussed, aspects of the halting attempts during the past six years to reform the economies of the Soviet Union, and now those of its successor states, has been the prominent role played by professional economists. Not since the mid-1920s has the Soviet political leadership felt so strongly the need to draw upon the expertise of the economics profession to help determine its course of action. In this paper, we attempt to characterize the current state of economics in the former Soviet Union, investigate the implications that the condition of Soviet economics has for reform, and suggest possible future directions for the discipline. Our information comes from four main sources: professional publications of Soviet and Western economists, published remarks by Soviet economists, personal interviews and discussions which we conducted with young Soviet economists in the summers of 1990 and 1991, and a questionnaire administered to Soviet economists and graduate students in the Soviet Union.
Who Benefits from Affirmative Action? The Case of the AEA Summer Minority Program 1986–1990
Authors: Leeds Michael A
Published: August 2012

Since 1974, the American Economic Association Summer Minority Program (AEASMP) has provided minority undergraduates with intensive training in the core areas of economics. From 1986 to 1990, while the program was at Temple University, this consisted of advanced undergraduate instruction in microeconomics, macroeconomics, econometrics, and mathematics. As a form of affirmative action aimed at increasing the number of minority economists, the AEASMP is subject to many of the controversies surrounding more standard affirmative action programs. Upon becoming managing director of the AEASMP in 1989, I explicitly attempted to alter the admissions policy in favor of students from lesser backgrounds, favoring those from poorer families and coming from less prestigious institutions. Access to the records of all students who applied to the AEASMP while it was at Temple provides a unique chance to analyze the effect of a change in the underlying philosophy of an affirmative action program. Specifically, I examine the impact of the change in philosophy on who was admitted to the AEASMP. Then, using the grades of students admitted to the summer program, I estimate the effect of the change in admissions procedures on the performance of students in the program. Finally, I test whether students in 1989–1990 performed better than students with similar characteristics in 1986–1988, to see whether there was greater “value-added” by the program in its last two years.
Distinguished Fellow: Mincering Labor Economics
Authors: Rosen Sherwin
Published: August 2012

Jacob Mincer has helped set the research agenda and professional style in labor economics for over 30 years. His research helped uncover the empirical content of human capital theory, where he used those ideas to study the determinants of earnings and the sources and nature of earnings inequality. He was also a pioneer in studying labor force participation decisions of married women. For the past decade, Jacob has set his characteristic stamp on the empirical study of job mobility. The following brief survey is meant to convey some of the flavor of Jacob Mincer's work and why it has been so influential in labor economics.
Is There a Bias Toward Excess in U.S. Government Budgets or Deficits?
Authors: Schultze Charles L
Published: August 2012

Do the political institutions of a majoritarian representative democracy, and in particular those of the United States, systematically produce either levels of public spending or budget deficits that are excessive? Should U.S. political institutions be altered by constitutional amendment to deal with these problems? I will start by examining the issue of public spending, and then turn to the question of budget deficits.
Distinguished Lecture on Economics in Government—Setting National Priorities: 1992
Authors: Gramlich Edward M
Published: August 2012

More than two decades ago the Brookings Institution first published a book with the title of this lecture. The idea behind the book was straightforward—rather than being led by events, or falling into the trap of incremental budgeting, budgetary planners should try to set priorities. They should figure out where the country and its government budget should be some years hence, and use this priority-setting exercise as a road map on how to get there. In this lecture, I revisit the topic of setting national priorities. The ultimate message is that both the peace dividend and the recession should be viewed as highly visible diversions from what should be the main economic priorities this year. This year, as in other years, economic policy should go beyond advocating simple shifts of resources and delve into deeper questions of structural reforms.
Market Socialism: A Case for Rejuvenation
Authors: Bardhan Pranab , Roemer John E
Published: August 2012

In this paper, we will outline a feasible economic mechanism of “competitive socialism.” Our claim is that competitive markets are necessary to achieve an efficient and vigorous economy, but that full-scale private ownership is not necessary for the successful operation of competition and markets. Contrary to popular impression, this claim has not yet been disproved by either history or economic theory. It is the failure of both the political right and the left to disentangle the concepts of private ownership and the competitive market that has led to the premature obituaries for socialism. In the second section, we look at the question of the “soft budget constraint” as an agency problem under market socialism. We then propose two variants of a bank-centric system of insider monitoring as a viable solution to the agency problem. The next section discusses the essential problem of political accountability and the difficulty of credible pre-commitment in avoiding the soft budget constraint problem, and suggests ways of minimizing this problem in our proposed system. We then conclude by addressing some of the other standard objections to a proposal for market socialism.
Distortionary Taxes and the Provision of Public Goods
Authors: Ballard Charles L , Fullerton Don
Published: August 2012

Economists have long been concerned with finding an efficient level of public expenditure. The classic statement of the problem was given by Paul Samuelson (1954). An optimal level of expenditure is where the sum of the marginal rates of substitution between the public good and a reference good equals the marginal rate of transformation between the public good and the reference good (ΣMRS = MRT). However, Samuelson's formula assumes that all of the revenue needed to finance public goods can be raised with lump-sum taxes. Since this is not generally possible, the formula must be modified to account for the distortionary effects of the tax system. An appropriate modification is to multiply the cost side of the equation by a term that is commonly called the marginal cost of public funds (MCF). In the case of Samuelson's formula, where government is entirely financed with lump-sum taxes, the MCF would be exactly 1.0. In the traditional view of economists, distortionary taxes cause the MCF to be greater than one, thus raising the cost of providing public goods. In this paper, we discuss some cases where the MCF may be less than one. We will illustrate this possibility using numerical examples for labor taxes.
Predatory Versus Productive Government: The Case of U.S. Agricultural Policies
Authors: Rausser Gordon C
Published: August 2012

This essay will argue that agricultural policy in the United States has led to both the enhancement of efficiency through “productive policies” and the transfer of wealth and income to special interests through redistributive or “predatory policies.” These two activities can be labeled as PESTs and PERTs. PEST policies, or political-economic-seeking transfers, are meant to redistribute wealth from one social group to another and are not explicitly concerned with efficiency. In contrast, PERTs, or political-economic resource transactions, are intended to correct market failures or to provide public goods; these policies have neutral distributional effects, at least in design. A review of the history of public policy in agriculture reveals not only tension between the PERT and PEST roles of the public sector, but also some coordination between these two types of activities. As different interest groups pressure the political process, the government trades off PESTs and PERTs in its attempts to acquire, balance, and secure political power. At times this has led to combinations of programs that appear incoherent. In such a world, the challenge for economists is to design and advocate policies that are both economically productive and politically sustainable.
How Costly is Protectionism?
Authors: Feenstra Robert C
Published: August 2012

How costly is protectionism? This paper begins from a U.S. perspective, examining the costs to both the U.S. and other countries from U.S. protectionism. It emphasizes that substantial costs are imposed on foreign countries by U.S. protectionism. These costs result from the highly selective nature of protection in particular industries and against particular exporting countries. No discussion of the costs of protection would be complete without mentioning the increasing levels of investment by foreign firms within the U.S. economy. The paper next moves to a more global policy perspective. The emerging free trade areas in Europe, North America, and Asia raise the prospect of gains from trade within each region but also the possibility of global costs from protectionist actions across the regions.
Retrospectives: The Lost Art of Economics
Authors: Colander David
Published: August 2012

Economists generally divide economics into two distinct categories—positive and normative— but how applied economics fits within these categories is unclear. This paper argues that applied economics belongs in neither normative nor positive economics; instead it belongs in a third category—the art of economics. Currently, many economists are trying to use a methodology appropriate for positive economics to guide their applied work, work that properly belongs in the art of economics. This three-part distinction is not mine, but dates back to a classic book, The Scope and Method of Political Economy (1891) by John Neville Keynes. In his book, Keynes argued that economists' failure to distinguish the art of economics as a separate branch from positive and normative economics would lead to serious problems. One hundred years later, he has turned out to be clairvoyant.
Diffusion of Information in Medical Care
Authors: Phelps Charles E
Published: August 2012

This paper presents evidence that doctors behave very differently in making treatment recommendations depending on the region where they work, creating large variations in the quantities of care delivered to seemingly standardized populations. This evidence on “variations” (and the failure of normal explanations of the variations) leaves almost by default the idea that incomplete diffusion of information about the efficacy of medical information must be largely responsible. The paper then discusses reasons why this problem might occur: difficulties in collecting information about the success of medical procedures; difficulties in establishing property rights to such information, even if it were to be collected; and liability considerations that hinder adoption of any information that is collected. It concludes with some suggestions for addressing these problems.
Medical Care Costs: How Much Welfare Loss?
Authors: Newhouse Joseph P
Published: August 2012

Hardly a week goes by without a front-page newspaper article on rising health care costs and the uninsured. In this article, I focus mainly on costs, arguing that the issue has been somewhat misconceived: while the level of medical care spending in the U.S. is a cause for concern, the welfare losses associated with rises in that level of spending may not be as large as the public rhetoric can make them seem. In fact, cost containment may not be as urgent as is widely supposed, and some proposed “cost containment” policies may result in welfare losses for the insured and even increase the number of uninsured
Possible Reforms for Financing Long-Term Care
Authors: Scanlon William J
Published: August 2012

This paper considers the market for long-term care services to treat and compensate for chronic health conditions and disabilities. This paper describes how the long-term care market has evolved and the resulting implications for expenditure control. It reviews recent developments in marketing private insurance for long-term care and questions the potential and desirability of such insurance. Finally, it discusses the argument for greater public financing within a universal social insurance program and alternative approaches to structuring such a program.
Economists and White House Decisions
Authors: Eizenstat Stuart E
Published: August 2012

While I served in the White House, [as Assistant to the President for Domestic Affairs and Policy and Executive Director of the White House Domestic Policy Staff from 1977–81], Ph.D. economists occupied the positions of Secretary of Labor, Secretary of Commerce, Secretary of Treasury, Director of the Council on Wage and Price Stability, the President's anti-inflation adviser, Chairman and Council Members of the Council of Economic Advisers, and many other senior positions throughout the government. Yet we presided over an economy with double-digit inflation and interest rates and a recession. Presidents of the United States and their White House Staff members expect economists to be omniscient prophets of the future course of the economy, unerring economic policy advisers, and teachers of the mysterious science of economics to often distracted pupils. They expect their economists to provide an economic blueprint for high growth, low inflation, and a guaranteed re-election—but without offending any important constituencies. What is the appropriate role for economists in the White House? What can they realistically be expected to do?
Organizational Capabilities and the Economic History of the Industrial Enterprise
Authors: Chandler Alfred D
Published: August 2012

In my book Scale and Scope (1990), I focused on the history of the modern industrial firm from the 1880s, when such firms first appeared, through World War II. I did so by comparing the fortunes of more than 600 enterprises—the 200 largest industrial firms at three points in time (World War I, 1929, and World War II) in each of the three major industrial economies (those of the United States, Britain, and Germany). In this paper, I first describe the similarities in the historical beginnings and continuing evolution of these enterprises and then outline my explanation for these similarities. Next, I relate my explanation of these “empirical regularities” to four major economic theories relating to the firm: the neoclassical, the principal-agent, the transaction cost, and the evolutionary. Finally, I suggest the value of the transactions cost and evolutionary theories to historians and economists who are attempting to explain the beginnings and growth of modern industrial enterprises.
An Interpretation of Recent Research on Exchange Rate Target Zones
Authors: Svensson Lars E. O
Published: August 2012

How do exchange rate bands work compared to completely fixed rates (between realignments); or, more precisely, what are the dynamics of exchange rates, interest rates, and central bank interventions within exchange rate bands? Does the difference between bands and completely fixed exchange rates matter, and if so, which of the two arrangements is best; or, more precisely, what are the tradeoffs that determine the optimal bandwidth? This article will present an interpretation of some selected recent theoretical and empirical research on exchange rate target zones, with emphasis on main ideas and results and without technical detail.
Policy Watch: Infrastructure Investment and Economic Growth
Authors: Munnell Alicia H
Published: August 2012

In the late 1980s, David Aschauer (1989) triggered a long overdue dialogue among economists and political leaders when he published a study arguing that much of the decline in U.S. productivity that occurred in the 1970s was precipitated by declining rates of public capital investment. My own work confirmed these results (Munnell, 1990a). Spending advocates seized on these findings as support for increased public investment. The enthusiasm among policymakers for the early Aschauer results was matched, if not surpassed, by skepticism on the part of many economists. Critics of these studies charged that the methodology was flawed, that the direction of causation between public investment and output growth is unclear and that, even if the historical empirical relationships were estimated correctly, they provide no clear indications for current policy. Who's right? What do we know and not know about the link between public infrastructure and productivity? And what are the implications of these results for policy?
Common Knowledge
Authors: Geanakoplos John
Published: August 2012

An event is common knowledge among a group of agents if each one knows it, if each one knows that the others know it, if each one knows that each one knows that the others know it, and so on. Thus, common knowledge is the limit of a potentially infinite chain of reasoning about knowledge. The purpose of this paper is to survey some of the implications for economic behavior of the hypotheses that events are common knowledge, that actions are common knowledge, that optimization is common knowledge, and that rationality is common knowledge. It will begin with several puzzles that illustrate the strength of the common knowledge hypothesis. It will then study how common knowledge can illuminate many problems in economics. In general, the discussion will show that a talent for interactive thinking is advantageous, but if everyone can think interactively and deeply all the way to common knowledge, then sometimes puzzling consequences may result.
Product Markets and 1992: Full Integration, Large Gains?
Authors: Flam Harry
Published: August 2012

The goal of the '“1992” program is to complete by January 1, 1993, what the European Community set out to do in 1957: create a common market with a free flow of goods, services, labor, and capital. If the program is completed, the twelve member countries of the Community will form a common market larger than the United States, both in terms of population and gross domestic product (GDP). The renewed efforts have fuelled high expectations among the participants, and led to apprehension among many onlookers. Will “1992” bring the full integration and substantial benefits that are expected? Do countries outside the European Community have reason to fear “1992” or will they also benefit?
Knowledge and Equilibrium in Games
Authors: Brandenburger Adam
Published: August 2012

This paper describes an approach to noncooperative game theory that aims to capture considerations that exercise the minds of real-world strategists. The most commonly used tool of noncooperative game theory is the Nash equilibrium. This raises the question: Are there assumptions on what the players in a game think—including what they think other players think, and so on—that lead to consideration of Nash equilibrium? The paper provides answers to this, and related, questions. The approach of this paper involves analyzing the decision problem facing each player in a strategic (“interactive”) situation. In addition to grounding game theory in considerations that are of the essence in actual strategic situations, the approach has a number of other objectives: 1) to make game theory more immediately accessible to people who are trained in decision theory but who are not “game theorists” and 2) to make game theory easier to teach to students. Finally, the approach suggests new directions for research into the nature of strategic situations.
Contested Exchange Versus the Governance of Contractual Relations
Authors: Williamson Oliver E
Published: August 2012

There is much in the paper by Samuel Bowles and Herbert Gintis [“The Revenge of Homo Economicus: Contested Exchange and the Revival of Political Economy”] with which I agree. But there are also real differences—which is to be expected, since they and I examine economic organization through very different lenses. Thus whereas they view economic organization through the lens of power and contested exchange, I believe that economizing and governance is, for most purposes, a more productive perspective. I also have a variety of minor differences with their paper.
Corporate Tax Integration: A View From the Treasury Department
Authors: Hubbard R. Glenn
Published: August 2012

“Integration” of the corporate and individual income taxes refers to any plan in which corporate income is taxed only once, rather than taxed both when earned and when distributed to shareholders as dividends. A consensus is emerging from the ongoing studies, both within the Treasury and outside, that such integration is desirable.
Human Development in Poor Countries: On the Role of Private Incomes and Public Services
Authors: Anand Sudhir , Ravallion Martin
Published: August 2012

Development is often taken to mean rising incomes. Discussions of the “goals of development” now often emphasize the reduction of poverty, rather than raising average incomes per se. The role of social services—particularly basic health and education—has also received greater emphasis in the 1980s, viewed mainly as instruments for raising the incomes of the poor. But, in all these approaches, income growth of one sort or another is what development is all about. A rather different view of the meaning of development has recently found expression in the 1990 Human Development Report (HRD) produced by the United Nations Development Programme. A conceptual underpinning for this approach can be found in the work of Amartya Sen. The essence of this view is that human development—what people can actually do and be—is the overriding purpose of economic development. Underdevelopment is viewed as the lack of certain basic capabilities, rather than lack of income per se. We do not aim here to advocate one of these approaches over the other, but rather to explore their implications for development policy. For instance, what does the human development approach imply about the role of economic growth and, in particular, about reducing income poverty? Should development priorities shift toward the provision of public services in poor countries, even if such a shift is at the expense of income growth?
A Portfolio of Nobel Laureates: Markowitz, Miller and Sharpe
Authors: Varian Hal
Published: August 2012

Three pioneers of quantitative finance have now been justly honored: Harry Markowitz, Merton Miller, and William Sharpe received the Nobel Prize in Economic Science in 1990. From today's perspective it is hard to understand what finance was like before portfolio theory. Here I attempt to provide a very brief history of the quantitative revolution in finance, drawing upon P. Bernstein's Capital Ideas (1992) and accounts of the three Nobel laureates.
Policy Watch: Child Support Policies
Authors: Lerman Robert I
Published: August 2012

With more parents living apart, the societal problem of parents who fail to share with each other or with their children becomes more acute. Although governments have mainly relied on public transfers to address the resulting economic hardships among children, the emphasis has been shifting toward mandatory sharing through the rigorous enforcement of child support laws. This paper first describes the economic context for child support; the expanding federal role in regulating awards and collections; the complex array of incentive and equity effects associated with child support; the record of obtaining support payments from noncustodial parents; and the effects of new award-setting and enforcement policies. Finally, it considers the child support assurance system (CSAS) approach, recently proposed in Congress. Under this plan, the government would make up the difference between some minimum assured payment and the child support actually paid by the non-custodial parent.