In recent years the world economy has been subject to large and unsyncronized changes in fiscal policies, high and volatile real rates of tnterest, large fluctuations in real exchange rates, and significant variations in private-sector spending. This paper reviews some of the key facts characterizing the effects of fiscal policies during the first half of the 1980s and provides a simple analytical framework suitable for the interpretation of these facts. The analytical framework builds on a two-country model of the world economy which is applied to the analysis of the transmission and effects of various changes in the time profile of taxes and of government spending. Generally, the predictions of the model concerning the relation among the intercountry patterns of consumption, long and short-term real rates of interest, real exchange rates and fiscal policies are consistent with the stylized facts.
Studies using the Cobb-Douglas specification blame growth retardation on total factor productivity growth slowdown which set in after 1958. The most comprehensive accounting for the impact of the observable growth determinants (Abram Bergson, 1983) left the decline in total factor productivity growth rate mostly unexplained, and arbitrarily attributed it to technological progress. A number of studies found that the CES production function with a constant rate of growth of the residual fits Soviet industrial data better than the Cobb-Douglas production function (for example, Martin Weitzman, 1970). In this case, postwar growth slowdown is explained (at least for part of the period) by decreasing returns on capital under elasticity of substitution below unity and a rapidly increasing capital-labor ratio. But the estimates of elasticity of substitution and other parameters vary widely across the studies; the implied rate of return on capital in the early 1950's is implausibly high (Bergson, 1979, pp. 117-20; Norman Cameron, 1981, p. 26). Some scholars found elasticity of substitution significantly lower than unity up to the mid-1960's, and close to unity after that (Cameron, p. 36; Ryan Amacher and Darius Conger, 1977, p. 318). Others, in contrast, did not find evidence of a structural break in the sample period (Weitzman, 1983). In some of the latest work, the CES production function with lessthan-unity elasticity of substitution and a constant rate of growth of the residual was found to fit the data no better, or even worse, than the Cobb-Douglas production function with slowing growth of the residual (Weitzman, 1983; Padma Desai, 1985). Thus, production function analysis of the causes of the growth slowdown is inconclusive.
Current discussions of wage norms begin with George Perry's analysis (1980). He argued that the rate of wage change appeared to shift in discrete steps. Although his study concerned aggregate wage adjustments, the union sector has long been identified as the primary source of wage rigidity and hence of wage norms. The stylized explanation for the rigidity of any market price in the efficient contracting literature is the presence of high transaction costs. High transaction costs emanate from the internal rather than the external labor market. These costs make it inefficient to update wages continuously to changing market conditions. Alternatively stated, wage rigidity or norms is a Nash equilibrium for firms under ordinary circumstances (see Costas Azariadis, 1985). The equilibrium position is maintained until the transaction costs of making the change are less than the costs of maintaining the old regime. Once the regime changes, however, the new regime or equilibrium can be a discrete rather than a marginal change from the prior regime. The regime in the unionized sector today is one of concession bargaining. Although concessions have been concentrated in those sectors that have experienced competition in a setting of deregulation and increased international trade, increased competition is more likely to be a consequence of earlier relative wage and cost changes than an exogenous cause of concessions today.' In fact, the common thread that binds together the industries that have exhibited concession bargaining is that they have emerged from a prior regime of significant and prolonged increases in union wage premiums. Indeed, as shown by Peter Linneman and myself, the increases in union wage premiums have caused a statistically significant and quantitatively large decrease in union employment. Concession bargains thus represent a shift in regimes as the parties attempt to deal with the effects of the prior regime of increasing premiums. There is little doubt that the increase in union premiums was related to the supply shocks of the 1970's; that is, while nonunionized wages declined in response to these shocks, union real wages continued to increase. In this sense, the puzzle is why the unionized sector did not shift to lower wage norms during the 1970's and not the presence of concessions today. The expansion of union wage premiums over the past decade cannot be explained by the traditional model of union-nonunion wage differentials. That model states that premiums remain steady over time unless changes occur in the underlying labor demand elasticities (i.e., the Hicks-Marshall conditions change) or the unions' tastes (reflecting the wages-employment tradeoff). Labor markets, however, have become more rather than less competitive in the 1970's as a consequence of deregulation and increasing international trade. In disequilibrium, variation in the union wage premium can occur due to the fixedcontracting periou'. Indeed, union wage rigidity is typically explained by the existence of 3-year contracts that permit only incomplete wage adjustments during the contract period. In this paper, the extent of union wage rigidity is shown to be related to contracting lags, but the lags are not identified with contract expiration and renegotiation dates. Rather, the lags and the resulting wage rigid* Professor of Economics, Law, and Management, University of Pennsylvania, Philadelphia, PA 19104. Costas Azariadis, David Hall, Clyde Summers, Lea Vandervelde, and Susan Wachter provided many helpful suggestions, and Rodrigo Quintanilla and Nancy Zurich provided valuable research assistance. The research was supported by the Institute for Law and Economics, University of Pennsylvania. 'See Peter Linneman and myself (1986) for a discussion of the endogeneity of increased international competition and, to a lesser extent, deregulation.
In recent years, the policy mix-defined as the contemporaneous joint state of monetary and fiscal policy-has conditioned the patterns of the business cycle, set up numerous imbalances in macroeconomic and microeconomic behavior, and is laying the groundwork for future economic performance. Restrictive monetary and fiscal policies produced back-to-back economic downturns in 1980 and 1981-82. From 1982 to 1985, massive fiscal stimulus against a backdrop of monetary growth targeting by the Federal Reserve comprised a loose fiscal-tight money policy mix. Subsequently, an actual and prospective tightening of the federal budget and suspension of monetary growth targeting suggest a shift in the policy mix to a tight fiscal-easier money combination. In this paper, the policy mix of the 1980's first half-in the context of an open economy with flexible exchange rates-is characterized. Some of the important economic and financial effects are identified. Among these are 1) higher nominal and real interest rates than otherwise would have been the case; 2) a strong domestic currency; 3) lower inflation rates; 4) a large and growing trade deficit; 5) an unbalanced composition of economic activity across sectors and industries; and 6) a depressed industrial sector. Some of the changes in economic performance to be expected as the policy mix is shifted in response to the Gramm-Rudman-Hollings balanced-budget statute also are shown. I. Policy Mix Alternatives, the 1980 to 1985 Episode, and the Analytical Framework
In a recent issue of this Review, (1984) Raaj Kumar Sah and Joseph Stiglitz model the impact of shifts in the agriculture-industry terms of trade on industrial accumulation and social welfare.' The intersectoral terms of trade, they note, was a key issue in the Soviet industrialization debate of the 1920's, and continues to be an important issue in contemporary less developed countries. One seemingly surprising implication of the Sah-Stiglitz model is that a shift in the terms of trade against agriculture increases industrial accumulation despite (or rather, because of ) a normal agricultural supply response. In their model, a price-induced decline in marketed agricultural surplus requires depression of industrial wages in order to reequilibrate urban food demand with supply at the lower relative food price. The income and substitution effects of these wage and price changes lower urban consumption demand for industrial goods. Together with agriculture's reduced purchasing power, this lower urban demand leads to the price scissors-induced increase in investable surplus out of industrial production. Thus emerges the strong Sah-Stiglitz result, which they label Preobrazhensky's First Proposition, that the more elastic is agricultural supply response, the more wages must be depressed in equilibrium, and the more effectively plice scissors work to increase accumulation (see their equation (15)). Apparently, the traditional preoccupation with agricultural supply response, including Preobrazhensky's,2 is wrong-headed and backwards. But it is argued here that this result obtains only under rather special labor supply and investable surplus assumptions which conform to neither the constraints of the Soviet industrialization debate, nor to most contemporary less developed countries.3
Regulatory practices by the Federal Communications Commission (FCC) have the effect of rationing the use of a particular resource required for communications satellite technology, the electromagnetic spectrum. Spectrum, or the airwaves, is the medium over which communications signals such as TV, telephone, and radar travel. Federal government allocation of spectrum among competing services has long been implemented to mitigate the interference that can arise between nearby signals-hence, for instance, the assignment of radio stations to unique regions along the AM and FM dials. That government regulation can and probably does fail to allocate spectrum efficiently, for all the usual economic reasons, has been attested to, criticized, and in turn the subject of proposed reformation in an economics literature both historic (radio spectrum regulation inspired Coase's theorem) and growing (including work which dates from Harvey Levin, 1971, and references cited therein, to, most recently, Stanley Besen et al., 1984). Left unaddressed, however, have been the implications of inefficient spectrum regulation for the pace and direction of technical change. Specifically, the problems of static resource misallocation may be compounded by inefficiency in induced innovation (V. Kerry Smith, 1974, 1975; Koji Okuguchi, 1975; Wesley Magat, 1976). If FCC allocations incorrectly signal the true economic scarcity of spectrum, innovation to augment spectrum and other inputs on the basis of relative scarcity may be misdirected, and the overall rate of R&D spending may be distorted accordingly. The effect of government regulation on innovation in communications satellite technology merits particular attention for several reasons. First, a recent FCC ruling will increase the cost of future satellites by requiring them to operate at FCC-mandated minimum levels of intensity of spectrum use, on top of rationed quantities of spectrum (see Federal Register, 1983, para. 69). Second, unlike other uses of spectrum, there is a large public sector component to satellite R &D spending that is also likely to be affected by FCC regulation. Undertaken by NASA, current research expenditures on advanced communications satellite technology have been justified in large part by a perceived need to develop methods that use spectrum more intensively (see NASA, 1984, and U.S. Congress, House, 1984). Third, and again distinguishing satellites from other users of spectrum, the inherently global nature of satellite technology renders satellite spectrum allocations a contentious international issue. In particular, developing countries not currently using satellite technology have expressed serious concern about future spectrum availability. In response, technical change economizing on spectrum is frequently endorsed by regulators, and moral suasion is accordingly brought to bear on industry, as an appropriate solution (see FCC, 1985, and U.S. Congress, 1982).1 This paper proceeds as follows. Section I tailors a model of induced innovation de-
Governments often finance the development of new technologies. Such new technologies are public inputs whose simultaneous use by several industries imparts a kind of increasing returns to scale to the economy. By means of an example incorporating such a government-financed public input, this note demonstrates that (i) differences in the absolute amounts of factor endowments alone can cause trade, and (ii) such a trade can exhibit Leontief's paradox. Consider an economy which uses its endowments of labor L and capital K to produce two tradable private goods X, and X2 and a public input XO. The public input is not traded internationally but is purchased by the government and made available to the private-good industries. Their production functions are given by'
Numerous studies have established that part of the very substantial male-female earnings gap is explained by differences in the amount of human capital workers have accumulated. (See, for example, Jacob Mincer and Haim Ofek, 1983.) Institutional factors have also been found to play a role in determining wages (David Gordon et al., 1982). Occupation further helped to explain the remaining gap, but several researchers have shown that introducing dimensions of work authority by taking into account the individual's position in the work hierarchy explains more of the variation in earnings than does occupation (Martha Hill, 1980). Last, two recent studies (Ferber and Spaeth, 1984; Spaeth, 1985) also included control over monetary resources. This variable added substantially to the explanatory power of earnings regressions, even after human capital variables, institutional factors, and several other measures of work authority had been entered. Like the other studies, Ferber and Spaeth also found that reward structures for men and women are quite different, suggesting the possible existence of discrimination. The question whether women may also be at a disadvantage in achieving control over monetary resources was not investigated. When Hill examined the process of achievement of work authority, she found substantial differences between male and female workers. In this paper we examine whether the same is true for attaining financial control. I. Data and Analysis