Knowledge that Transforms

In his Presidential Address five years ago, Zvi Griliches (1994) called attention to the severe difficulties that beset current attempts to measure the growth of labor productivity in the American economy. Because of these difficulties, it is likely that the true rate of economic growth is substantially underestimated. The root of the problem is the difficulty in measuring output in the service sector which now represents two-thirds of the economy. In such sectors as health care and information services, the contribution to gross domestic product (GDP) is measured by inputs rather than outputs, a procedure that makes it impossible to gauge accurately improvements in the quality of output. Thus, in the case of computers, which are transforming American society, economists have been unable, so far, to find a measurable contribution of computers to the rise in labor productivity—an astonishing paradox. I want to follow up on this problem of mismeasurements. My thesis is that the profession

Using state-by-state voting data for U.S. presidential elections, we observe that voter turnout is a positive function of predicted closeness. To explain the strategic component of political participation, we develop a follow-the-leader model. Political leaders expend effort according to their chance of being pivotal, which depends on the expected closeness of the race (at both state and national levels) and how voters respond to their effort. Structural estimation supports this model. For example, a 1-percent increase in the predicted closeness at the state level stimulates leaders' efforts, which increases turnout by 0.34 percent. (JEL D72, C33, C72, H41)

Unemployment in the United States has been below its presumed NAIRU ( nonaccelerating-inflation rate of unemployment) of 6 percent for more than four years. The doctrine or dogma of the NAIRU led to the expectation that an unemployment rate below the NAIRU would make accelerating inflation inevitable; but by all measures inflation has, if anything, declined and shows no signs of increasing. The NAIRU doctrine has had a major role in macroeconomic theory and monetary policy for several decades. For example, the seven hikes in interest rates by the Fed in 1994–1995 seem to have been motivated not by concerns about existing inflation (CPI-U inflation was steady and below 3 percent) , but by fears that an unemployment rate falling toward the 6-percent level, and then below 6 percent in September 1994, would foster future inflation. Theoretical and statistical criticisms of the NAIRU have been growing (see e.g., Robert Solow, 1986; James Tobin, 1993; Eisner, 1994; Rod Cross, 1995 [ essays by Cross, Frank Hahn and Tobin ] ; Ray Fair, 1996; Olivier Blanchard and Lawrence Katz, 1997;

Longevity Complementarities under Competing Risks by William H. Dow, Tomas J. Philipson and Xavier Sala-i-Martin. Published in volume 89, issue 5, pages 1358-1371 of American Economic Review, December 1999

The 44 Liquormart decision, eliminating Rhode Island's ban on liquor price advertising, made Rhode Island the subject of a natural experiment for measuring the effect of advertising on prices. Using Massachusetts prices as controls, we find that advertising stores substantially cut only prices of the products that they advertise. Prices of other products, at both advertising and nonadvertising stores, do not change. Advertising stores cut their prices on products advertised by rivals, while nonadvertising stores do not. We find no reductions in price dispersion across stores. Newspaper-advertising stores appear to draw a higher share of customers after they advertise. (JEL L11, L51, L66)

This paper examines how population growth affects the average level of utility particularly the consumption per capita. It also focuses on the effects of population growth on the ratio of dependent consumers to working-age adults. The model employed in this paper has three demographic groups: working-age adults who produce and consume and the young and elderly who only consume. This study concluded that the transition to lower population growth requires a long period of reduced dependency in which society benefits from lower spending on children while it has yet to pay for higher old-age dependency. The dependency level after 30 years is not significantly different from that which would exist in an optimal stable population. Any rise in fertility that would decrease old-age dependency in the long run would require a lengthy period of higher-than-steady-state dependency.

Version of Record

Portfolio Choices of Parents and Their Children as Young Adults: Asset Accumulation by African-American Families by Ngina S. Chiteji and Frank P. Stafford. Published in volume 89, issue 2, pages 377-380 of American Economic Review, May 1999

This paper constructs a model of the transfer paradox for a small open economy with nontraded goods. It demonstrates that increased production of nontraded goods can change their domestic price so as to offset the otherwise beneficial effect of aid and, under certain conditions, to create a transfer paradox even in a small country. The model is estimated with time-series data for 44 aid-dependent countries for the period 1970–1990. The results support the model and show that the nontraded goods expansion effect is more likely to cause immiserization than Johnson's tariff-distorting export-displacement effect. (JEL F0, O1)

Income Distribution in Urban China during the Period of Economic Reform and Globalization by Azizur Rahman Khan, Keith Griffin and Carl Riskin. Published in volume 89, issue 2, pages 296-300 of American Economic Review, May 1999