A common finding of virtually all previous studies of black-white earnings differences is that the earnings of white males appear to rise at a more rapid rate with each additional year of work experience (or with age) than do the earnings of black workers. This finding has been noted by economists since at least the mid-1950's when Morton Zeman called
Current debate on monetary and fiscal policies is much concerned with the effects of such policies, and of changes in the budget and money supply. I propose here to discuss some taxonomic problems related to the concept of policy effects. Their resolution bears directly upon the controversy between Keynesians and Monetarists. I shall show that it is largely a sham-dispute, and it will appear that the empirical findings of the Monetarists have little relation to the Keynesian creed. Even negative effects of the budget with strong positive effects of money supply are fully consistent with strong positive effects of fiscal action and weak or strong effects of monetary action. The examination of the concept of effects of economic policy will be undertaken in relation to a model that is specified so as to include both the conventional Keynesian set-up for determining effective demand, and a credit mechanism that links effective demand to the banking system in the spirit of the Monetarists
DeRosa and Goldstein (hereafter D-G) argue that the appropriate test for a pricing should regard only the sign of a05, the estimated coefficient of the cost change dummy variable (V1) and the sign and magnitude of a7, the estimated coefficient on the interaction term between the cost change dummy variable and the change in variable cost (V1 X AVC). In their words, Since a0 [the intercept term] in equation (2) is the estimated time trend of prices and cannot be uniquely identified with the hypothesis under investigation, it should not be used as evidence of an asymmetry (p. 880, fn. 6). We would argue instead that the magnitude of the intercept term in the price equation lies at the heart of the issue. The intercept term is the empirical manifestation of inflationary inertia, reflecting the expectations of price and wage setters. George Perry has called this phenomenon the inflationary norm. As discussed below, the estimated intercept terms in both crosssectional and time-series price equation studies have been positive and of relatively large magnitude, especially in the 1970's. (D-G's estimated intercept terms are 1.20 and 2.09 for the 1972-76 period.) The alternative configurations of a0 (the intercept term), and a5 (the coefficient on the cost-change dummy variable) are shown in Figure 1. In panel (a), a0 a ,5 = 0 and there is no asymmetry. In panels (b), (c), and (d), the basic result holds: namely, that a given percentage increase in variable cost produces a larger price increase than the decrease in price produced by a cost decrease of the same magnitude. Only in panel (e) does the work in the opposite direction. Generalizing, given a positive value of a0, the basic pricing result holds for all positive values of a5 and for negative values of a5 provided that j a5j > 2ao. Only when I a5 I > 2ao, a5 < 0, does the work in the opposite direction. This latter condition is met neither in our results nor in those reported by D-G.' Our point of agreement with D-G is in their argument that the negative sign on a5, the coefficient on the cost-change dummy variable, is not by itself the appropriate test for the asymmetry. We disagree with them, however, in the degree of importance to be attached to the intercept term.
The comment by Edwin West addresses my 1984 benefit-cost analysis and, more specifically, its conclusion that the subsidy received by the Royal Shakespeare Company (RSC) is justified. West maintains that a broader inquiry may reverse that judgment, and he raises three main points for discussion: deadweight loss, pseudo demands, and benefit distribution. I shall consider these matters seriatim. First, however, it should be recalled that the original analysis took a narrow stance deliberately and that footnote 14 conveyed the message. Because of difficulty in determining how much patronage went to Aldwych and Stratford activities alone, RSC patronage obtained from all sources, public and private, was treated as if it applied only to those two centers. But, besides performing there, the RSC, over the financial years 1968-69 to 1977-78, worked The Warehouse, The Other Place, Theatregoround and other domestic tours, overseas proscenia, and television inter alia. Therefore assigning total patronage exclusively to the centers imparted a bias that favored the case against the subsidy. Nevertheless, the investigation did omit deadweight loss. Prompted by West's remarks on the subject, I resurrected the data to try to obtain a rough but reasonable estimate of Aldwych and Stratford patronage. In the exercise, patronage was distributed conceptually across all RSC activities on the premise that each activity shared the total in the same proportion that it shared total expenses.' No attempt was made to separate private gifts from public ones. Table 1, which presents the pertinent details, indicates that nominal patronage going exclusively to the centers averaged ?513,778, about 85 percent of the total. With the mean of the Retail Price Index amounting to .801, this figure becomes ?641,421 in real terms. Benefit, the increase in real consumers' surplus at the centers, still registers ?900,204 enabling the benefit-cost ratio to rise from 1.18 to 1.40.2 These calculations ignore an important side effect of the subsidy; namely, the additional tax collections coming from both increased ticket sales and increased labor income. As the earlier Table 3 indicated, a profit-maximizing Aldwych sells 16,528 tickets at a real price of ?3.78 including the value-added tax (VAT). A VAT rate of 8 percent, not inappropriate for the period in focus, therefore means a pretax real price of ?3.50 and a real VA T levy of ?0.28 per ticket for a total of ?4,628. Under actual (subsidized) conditions the Aldwych sells 234,045 tickets at a real tax-inclusive price of ?1.77 and pays a real VAT of ?30,426, an increase of ?25,798 over the profit maximizer. Similarly, actual Stratford generates ?9,153 more in real VAT than does a profit-maximizing Stratford bringing the combined VAT increase to ?34,951.3 Table 3 likewise showed that patronage expands employment by 461,448 man-hours at