There are two ways to alter the pattern of economic inequality among persons. One is to modify the distribution of factor income by changing the underlying distribution of factors or the prices or employment of those factors. The second is to modify the process by which factor income is redistributed away from its recipients. This paper is about the second way. We ask how the distribution to factor owners is and can be modified as income moves from its market origins to its disposition on goods and services. At the outset, we sketch an accounting framework within which to envision this process whereby producer incomes are transformed into user incomes. In later sections, we review some current proposals for additional transfers to the poor.
A major justification for devoting resources to the study of public health is the potential to answer questions about the burden of poor health, both in terms of the total burden faced by individuals and the burden placed upon publicly funded social insurance programs. Indeed, the adequate provision of social insurance programs is one of the key policy issues of our day. A potentially fruitful approach in undertaking this effort is to investigate the effects of specific chronic diseases and injuries upon program participation and benefit levels. Ideally, we would like to know something about the total economic costs of individual diseases using theoretically sound willingness-to-pay measures. In practice, however, willingness-to-pay measures cannot be estimated with most available health data. Though this paper cannot pin down anything as ambitious as the total economic burden of disease, it does address the narrower but still important question of what is the burden of chronic illness upon Social Security Disability Insurance (SSDI) payments, and it documents how that burden has shifted between different disease groups over the past century. Furthermore, it addresses, at least to a limited extent, the profound intellectual question of what determines disability and how biomedical, economic, social, and institutional factors determine whether an individual will be disabled. In this paper we begin an exploration of newly collected data on the health conditions and disability benefits of Union Army VeteransI and make comparisons to recipients of disability benefits in more recent tinmes. We find two main results. The first is that there has been a significant shift in the types of diseases that lead to disability, both in terms of prevalence rates and benefit levels. The second is more surprising: the disabled in modern times generally have a greater number of chronic illnesses than did disabled Union Army veterans, even those who were severely disabled. This result implies a way of thinking about disease and disability that deserves more research attention. In short, prior to the advent of modem medicine and the concurrent reductions in the physical demands of work, people became disabled not because they had numerous chronic illnesses (i.e., high rates of co-morbidity), but because individual conditions (even ones as simple as hernias or hemorrhoids) had much more severely debilitating effects on health and upon the capacity to work than those same conditions do today.
In a recent paper, Bennett McCallum (1982) lists what he considers to be prominent empirical regularities or of aggregate economies. In particular, he notes that . . output and employment magnitudes are strongly related to contemporaneous money stock surprises, [but that] ... output and employment magnitudes are not strongly and positively related to contemporaneous price level surprises (p. 4). These facts have prompted McCallum and others to develop models of the economy where prices as well as wages are predetermined. The main feature of such models is their abandonment of aggregate-supply formulations where price level disturbances provide a channel for the real effects of money. The purpose of this paper is to demonstrate the consistency of familiar Gray and Fischer wage-indexing models and their implied aggregate-supply relationship with the stylized facts (see JoAnna Gray, 1976; Stanley Fischer, 1977). In a model where the nominal wage is indexed to the price level, the efficient use of the information conveyed by the price level imposes qualitative restrictions on the covariance matrix of disturbances. First, the correlation between the price level and innovations in the deviation of actual output from the full-information output level will be zero. Second, because the money supply contains information about real disturbances that is not conveyed by the price level, the correlation between money supply innovations and innovations in the deviation of output from the full-information level will be positive. Third, the regression of innovations in actual output on the price level will provide an estimate of the optimal degree of indexation. Evidence that is generally consistent with these properties of wage-indexation models is found in quarterly data for the five largest OECD countries. Consider the familiar aggregate formulation: 1
The comments of Firouz Gahvari and of Cecil Bohanon and T. Norman Van Cott provide useful extensions of our earlier analysis. Nonetheless, our central point remains intact: the traditional labor-leisure analysis is invalid because it ignores the effects of changes in government spending on individual welfare. Gahvari points out that, in the case of public goods, the linkage between changes in tax rates and labor supply is more complex than we implied. Individuals, unable in the large number case to transform leisure into public goods, will be affected differently when the government provides a public good rather than an transfer. In Gahvari's world, where government goods are irrelevant to all private decisions (complete separability in the utility functions and no ability to purchase public goods privately), the quantity of government goods can be safely ignored in the analysis of private decisions. The decision proceeds as it would if tax revenues were totally wasted, even though the citizens' total utility is assumed constant when tax revenues change, with changes in government goods exactly offsetting the utility impacts of the change in private goods. However, we think it is misleading to label the ambiguously signed element beyond the substitution as an effect. How can there be an income effect when total utility remains constant? As the quotes cited by Gahvari from our initial paper (p. 447) illustrate, this is not the envisioned by the traditional work-leisure analysis, which refers to a change in of (utility) and reflects the notion that a tax cut will encourage individuals to work less (consume more leisure) by giving them a higher standard of living through more after-tax pay.' Implicitly, this view ignores the negative impact on living standards associated with the reduction in the supply of government provided goods (or transfers). Gahvari recognizes that when government goods replace private goods such as public education, medical services, food stamps, or cash (and ignoring any cross elasticities), our original analysis stands and there is only the substitution effect. Bohanon and Van Cott make another refinement, pointing out some secondary effects of government's tax-transfer activity. While changes in tax rates and in government-provided goods will influence the individual's budget constraint, or ability to trade off among goods, a complete analysis must also account for the fact that any such shift will move the individual into a new region of his indifference surface. His willingness to trade off among the goods may well change. The individual's view of the substitutability or complementarity among government-provided goods, private goods, and leisure becomes relevant. If the government good is strongly enough complementary to leisure and/or substitutable for private goods, the standard substitution could indeed be overcome. Returning to our original paper, we reiterate its central point. The income effect component of traditional work-leisure analysis for an individual ignores the individual's utility derived (foregone) from increased (decreased) government spending accompanying changes in revenues. To treat that indi-