Knowledge that Transforms

T WO economic problems which would be on many people's list of crucial and interesting contemporary economic issues would be food costs and a recent slowing in the growth of labor productivity. These issues are interrelated. For years we had the phenomenon of a growing demand for food exceeded by an even faster growing supply of food. In recent years, there have been some changes. Labor productivity is still growing faster in the farm sector than in the nonfarm sector but the share of personal income spent for food has stabilized in the 16%-17% range. Food prices have risen and have been an important contributor to inflation. At the same time the farmers' share of the food dollar has dropped and the amount of embodied services in food purchased by consumers has risen. The well-being of an economy can be enhanced by the growth in available resources, or a more effective use of these resources. Thus, one way of lowering consumer food cost is increasing labor productivity. Obviously there are a variety of forces in operation in this situation and any attempt at partial analysis may be found wanting. Confronted with this problem, Howe, Schluter and Handy (1976) chose to use an input/output model to study changes in labor productivity in the food system. In this paper we will review the Howe, Schluter and Handy (HSH) technique and results. We will then introduce a factoring technique that allows us to solve for the contribution to total productivity of each variable in the HSH technique. Finally, we will present and discuss our results.

Donald Rousslang, Stephen Parker, The Effects of Aggregation on Estimated Import Price Elasticities: The Role of Imported Intermediate Inputs, The Review of Economics and Statistics, Vol. 63, No. 3 (Aug., 1981), pp. 436-439

THE large increase in the labor force participation of women during recent times has been accompanied by a less-noted but also important change in their employment picture-the growth of part-week work.' While the participation rate of women was increasing from 37% in 1957 to 49% in 1977, the percentage of female employment in part-week jobs was rising from 20% to 27% (U.S. Office of the President, 1970, 1978).2 Economists have linked these changes to both the secular rise of the unemployment rate in the United States and the differential between female and male unemployment (Friedman, 1977; Niemi, 1974; Perry, 1970). For example, Friedman states

POPULAR criticism to government emphasizes a slowness of the bureaucracy to respond to changing demands for service and a slowness to curtail unnecessary services. There is a long intellectual tradition supporting the continuing taxpayer revolt. But this argument emphasizes a different kind of bureaucratic distortion: the long-run tendency of government institutions to expand services beyond the voter preferred level and to waste resources in the production of services. ' It may be that short-run inflexibility may be a more important source of citizen complaint than long-run bureaucratic or political distortions. The customary methodology of public sector econometrics tends to divert attention away from such issues by assuming from the start that public services are closely related only to the preferences of the median voter 2 It supposes that divergences from median preferences are rapidly eliminated by the dynamics of political competition. For local governments an alternative argument for the median voter specification is the possibility that dissatisfied voters will migrate out of the jurisdiction. This model leaves no room for institutional distortions of either the inflexibility type or the over-expansion type.3 This paper analyzes only the former of these two distortions: the proposition that government budgets are relatively inflexible. A finding of substantial inflexibility suggests that public dissatisfaction with government could be in part due to government budgets that are continually out of equilibrium with the ever-changing demands for public services.4 Specifically, this paper is confined to the narrow issue of measuring the adjustment dynamics of public budgets among Australian local governments during the period 1967-1974. In a changing world inflexibility implies that budgeted expenditures may be far away from their equilibrium levels at any particular time and that the rate of convergence is slow. Such inflexibilities may arise from at least two sources. One is bureaucratic inertia. For example, a too large agency may resist budget cuts successfully, perhaps by mobilizing interest groups benefiting from its budget. Or conversely, a too small department may experience resistance to rapid expansion of its services from other departments competing for the same total revenues. A second source of inflexibility is the existence of capital adjustment costs. These are the costs of expanding or contracting the existing stock of public capital which imply that rapid changes in capital expenditures will be avoided.5 The econometric specification hypothesizes a long-run budget target, which incorporates in an implicit way both voter preferences and long-run institutional distortions. In order to test the hypothesis that the actual budget is slow to respond to changes in the long-run target allocation, a generalized adjustment function is specified. The results are then compared with those of the more conventional assumption that all adjustments are completed within one year. This specification also permits an investigation of the dynamic response of the budget to an exogenous shock or a trend in any of the variables which determine the long-run budget target. Consider, for example, the dynamic impact of a policy shift in the level of intergovernmental grants and suppose these are conditional grants for road construction. One would expect that the spending impact of the Received for publication May 7, 1979. Revision accepted for publication September 30, 1980. * University of Utah. I wish to thank Bruce M. Hill, Frank Lad, and a referee for helpful comments and David Hamilton for computational assistance. This research was supported by a grant from the Schools of Economics and Social Sciences at La Trobe University. 1 For a useful review of this literature see Borcherdring (1977). 2 For example, see Oates (1969) or Deacon (1978). 3Pommerehne (1978) presents cross-sectional evidence that while political and bureaucratic distortions exist in the long run, they do not dominate variables connected with the preferences of the median voter. 4 There is a substantial literature on bureaucratic inflexibility; for example, see Simon (1959) or Crecine (1969). 5 There is a large literature on adjustment costs and their impact in determining the investment behavior in the private sector; for example see Gould (1968).

T HE purpose of this paper is to evaluate the policy option of controlling cyclicality in housing and briefly review its policy-related implications. This subject has recently returned to the forefront of public concern,' because it is feared that housing cyclicality contributes to the high cost of housing (HUD, 1979) and has a detrimental effect on the continuity of urban change (as patterns of neighborhood development are affected (HUD, 1978)). The importance of housing derives from its dual role in the economy (Federal Home Loan Bank Board, 1969; Goldsmith and Lipsey, 1963). At the micro level it is a large component of both the consumer budget and asset portfolio (Artle and Varaiya, 1978). It also affects the quality of urban neighborhoods spatially. At the macro level, it accounts for 25% to 30% of gross domestic investment. Since the marked cycles in housing construction lead the business cycle, countercyclical monetary policy has relied on housing as a policy instrument (Harberger, 1970). Two arguments plead in favor of greater control of housing cyclicality: (i) the high and rising cost of housing causes housing unaffordability,2 raising questions of consumer welfare and equity: which socio-economic groups suffer most and deserve compensation; (ii) cyclicality destabilizes the macro economy, generating unemployment (hence the loss of urban jobs) while at the same time compounding the high cost of housing by creating inefficiency in the housing construction industry. These combined effects limit the redevelopment of urban neighborhoods called for under the 1974 Housing and Community Development Act and thus conflict with the aims of this Act. In section II we investigate the existence of significant cyclicality and characterize it. Problems of statistical methodology are discussed in section III. We conclude in section IV with an outline of the policy-related implications of our analysis, leaving the details of the statistical formulae and data sources to appendices A and B. The main highlights of the paper are (i) New Housing construction exhibits significant cyclicality. The length of the dominant cycle varies depending on which estimate of the spectral density is used. The smoothed periodogram shows a powerful cycle around 128 months' length. The unaveraged periodogram, on the other hand, is dominated by a shorter cycle of 70 to 80 months' length. These estimates of the spectral density are shown diagramatically. The difference in the length of the dominant cycles is attributed to the well-known problem of resolution when two peaks are near each other, the smoothed periodogram will be unable to distinguish between the two. The KolmoReceived for publication October 15, 1979. Revision accepted for publication December 9, 1980. * Cornell University and Boston College, respectively. This paper was developed while the first author was a Visiting Research Scholar with the Division of Policy and Research Development at the U.S. Department of Housing and Urban Development (HUD), Washington, D.C. A preliminary version of this paper was presented at the Annual Allied Social Sciences Meeting of the American Real Estate and Urban Economics Association, Atlanta, December 1979. The authors are grateful to Craig Swan and an anonymous referee for useful comments. Ibrahim Levent helped with the calculations. 1 The U.S. Department of Housing and Urban Development (HUD), the White House, the Council on Wage and Price Control, various Congressional committees, the Office of Budget Management, etc., are all now interested in housing cyclicality and its policy implications. 2 Housing costs increased faster than most components of the consumer price index (U.S. Department of Labor, 1978), and threaten to make housing unaffordable (Data Resources, Inc., 1978; Jacobe and Parliment, 1979; Weicher, 1977). Some studies deny this, pointing to several important elements which offset the cost of housing, especially during periods of high inflation. These include tax advantages accruing to homeowners and capital gains on houses (Diamond, 1979; Hendershott and Hu, 1979; Van Order, 1979; Villani, 1978). These studies, however, neglect the equity problem resulting from the income distribution welfare effect. In a recent study using a production function analysis, Clemhout (1979) found that fluctuations in residential housing starts (or expenditures) create a range of inefficiencies in production, thereby increasing costs. Additional increases can be attributed to government regulation (Seidel, 1978), but many costs could be reduced if fluctuations in construction were moderated.

Richard W. Olshavsky, Bruce L. Jaffee, Responsiveness of Consumer Expectations and Intentions to Economic Forecasts: An Experimental Approach, The Review of Economics and Statistics, Vol. 63, No. 2 (May, 1981), pp. 298-302

HIS paper develops and applies a model for analyzing regulatory change in the freight transportation industry. The model incorporates multiple product markets, multiple transport modes and imperfect competition between the modes. An application of the model to consider some of the consequences of extending the Interstate Commerce Commission's agricultural exemption to the railroads, for the movement of corn in the Midwest, is provided. The analysis has three significant elements. First, we extend the work in Daughety and Inaba (1978a,b) to obtain transport demands that are based on the theory of the firm. The shipper chooses markets to ship to, mode to ship by, as well as output level and amounts to ship. He faces transport modes that are differentiated by service characteristics which are generally stochastic in nature. Analyses of demand for freight transport that have been especially attentive to transport service characteristics and other micro-parameters include Allen (1970), Boyer (1977), Daughety and Inaba (1978a,b) and Levin (1978). While varying in some degree as to form and technique, these studies have all attempted to estimate disaggregate models of shipper behavior. In some cases this behavior was eventually aggregated to some form of market (or industry) demand functions. While such analyses are generally time-consuming and expensive the results have (at least sometimes) been worth the effort, paying off in models of demand that are responsive to important market parameters. Second, we propose a mechanism for constructing equilibria in imperfectly competitive transport markets. The underlying approach is to introduce a coniectural variations narameter that reflects different assumptions about how carriers will react to the actions of competitors. Third, we apply our methods to examine some of the consequences of extending the agricultural exemption (see, e.g., Locklin (1972)) to the railroads. Three market equilibria are computed: A base case wherein rail is regulated and trucks are unregulated and two polar deregulation cases wherein railroads act either competitively or in a coordinated fashion. Data to estimate transport demands were obtained from a survey of country grain elevator operators on shipments of corn originating in the Midwest (Iowa, Illinois and Indiana) and destined for interior, East Coast and Gulf Coast markets. ICC data were used to estimate rail cost functions, while survey data were used to provide truck rate functions, surrogates for truck supply functions. Our computations indicate that while transport rates will generally nrse after deregulation, rail rates will increase relatively more in markets characterized by low-volume or, short-haul activity. This will encourage a redistribution of freight patterns between rail and truck. Essentially, we argue that trucks will dominate in low-volume or short-haul markets so that just about all shipments made by country grain elevators will be by truck. On the other hand, rail will predominate over shipments made from inland terminal elevators to coast export markets, even in the face of barge competition. It is particularly interesting that these conclusions are implied by either of the two polar deregulation cases. That is, our conclusions are the same whether railroads price competitively or coordinate their actions. Of course, there is one difference: rates will tend to be slightly higher under coordination.

T HE proposition that imperfections in product and labor markets lead to wage rigidity has been stressed by many authors in their analysis of wage inflation.' The most commonly held view is that wage differentials which result from these imperfections behave countercyclically. That is, periods of rapid inflation and/or low unemployment are believed to be associated with reduction of the wage premium attributed to both unionization and oligopolistic structure. On the labor market side it is argued that wage rigidity is primarily due to lags introduced by collective bargaining.7 In periods of low demand union wage levels are maintained through long term agreements. On the upswing these same long term agreements do not allow the union wage to react as quickly as the nonunion wage to increases in demand. Cross-sectional estimates of economy-wide union/nonunion differentials are often used to support this hypothesis.3 On the product market side it is often argued that concentrated industries have the ability to raise prices in periods of economic slack. This market power is a permissive factor which may allow workers in these industries to demand a share of the excess profits.4 Of course, the work force must have some method of demanding this share. It is usually assumed that union power is relatively great in these concentrated industries. Thus, this argument is really conditioned on imperfections in both the labor and product market, and is therefore much closer to an interaction hypothesis than a pure oligopolistic structure hypothesis. Proponents of this argument further hypothesize that concentrated industries do not increase prices as fast as competitive industries in an economic upturn. Wage differentials between concentrated and unconcentrated industries are therefore expected to narrow in periods of rapidly increasing prices. With one exception,5 the support for this hypothesis comes from studies of wage changes in concentrated versus unconcentrated industries.6 This paper is a reexamination of the wage rigidity hypotheses. The impacts of unionization and concentration on average wage levels are first estimated for a series of cross-sectional observations in manufacturing between 1947 and 1976. The differences in these cross-sectional impacts across time are then analyzed using rates of inflation and unemployment levels as explanatory variables.

S ince the breakdown of the par-value system there has been a dramatic increase in the variability of exchange rates. Often the question is raised whether this variation is rational or whether it is the outcome of disorderly markets which are bereft of stabilizing speculation or-even worse-are dominated by destabilizing speculation. The considerable research stimulated by this issue has yet to yield conclusive results, and whether the foreign-exchange market is rational or efficient is still an open question.' Of course, the market is not an abstraction but is comprised of flesh-and-blood participants whose behavior may show varying degrees of rationality. This paper utilizes a new body of data to undertake a preliminary investigation into the market behavior of one major group of participants: U.S. firms whose foreign-currency positions are regularly reported to the U.S. Government.

A critique of the analyses and conclusions reached by a study of the relationships between economic and demographic variables conducted by Hazledine and Moreland published in 1977 is presented. Inappropriate analyses of cross-sectional data from 82 countries resulted in parametric estimates that did not justify the conclusions reached by Hazledine and Moreland. Concerning diminished returns to scale suffered by less developed regions the author found on reexamination the scale estimates to differ only slightly across regions and also the parameter reflecting returns to scale with respect to labor and capital to produce erroneous estimates for developed countries. The reported significant positive relationship between infant mortality and birth rate is not justified for low income countries because the mortality variable had been dropped from 2 of the 3 fertility regressions for low income regions. The relationship specified therefore holds only for Asia. The large differences across regions in savings behavior is a questionable finding for several reasons including the inappropriate comparisons across regions of estimated coefficients drawn from differently specified equations. In addition various extrapolations and simulations were found to be useless because of instabilities in and poor predictive capability of the underlying estimates.