Eric Blair's forecast from the 1940's called for a 1984 international political economy with constant war between three global powers, designed to use up resources otherwise so abundant that the masses would be free to reflect on, and consequently depose, the bureaucratic elite (George Orwell, 1949). Orwell's forecast was wrong, although perhaps in part only because it was a self-negating prophecy: one that induces corrective measures. Undoubtedly the most successful long-term economic forecast was Joseph's prediction to the Pharaoh of the fourteen-year agrarian business cycle. Others with less privileged information have fared less well. A founder of our own profession, Malthus, erroneously predicted long-term stagnation at the subsistence level, because he underestimated technical change (although for Sub-Saharan Africa and parts of South Asia, the Malthusian projection appears closer to the mark). This essay reviews long-term forecasts from the last several decades in the area of international economics, to see whether patterns can be distinguished in their success or failure.
In his 1983 paper, Jeremy Siegel derives a seemingly implementable policy rule involving optimal responses to interest rates. The existence of such a rule would be of tremendous interest to central banks whose monetary policies place heavy weight on responses to interest rates. The Siegel rule is especially appealing because it is (i) an optimal combination policy in the sense of William Poole (1970), and (ii) the proposed implementation of the rule does not require detailed knowledge of the structure of the economy. All that is required is a calculation of the covariance between innovations in prices and interest rates. Within the confines of a rational expectations equilibrium model, in which Siegel assumes agents do not make use of information embodied in the current nominal interest rate, he is able to design an optimal combination policy that does not require detailed information about the economy. That such an optimal policy exists is not new, but that it can be easily implemented is novel.' The policy rule depends solely on the covariance between innovations in the aggregate price level and innovations in the nominal rate of interest, normalized by the variance of innovations in the interest rate. When this index is zero, policy has been set optimally. When the index is positive the feedback term on interest rates in the money supply rule is too large, and when the index is negative the feedback term is too small. Given that one can obtain reduced-form expressions for prices and interest rates, the index is easily computed. Unfortunately, Siegel's proposal violates Robert Lucas's (1976) critique. That is, he implicitly treats as invariant certain aspects of economic behavior that will generally change when one moves to an operational interest rate This note shows in detail that in a model where prices are flexible and agents observe local market prices (i.e., the model at least employed verbally by Siegel), that the coefficients in the aggregate supply and demand functions are not invariant to the form of the money supply rule. This lack of invariance will cause Siegel's rule to be nonoperational. The sensitivity of parameters in aggregate supply functions to policy is not restricted to equilibrium models with flexible prices. This property also extends to contracting models with endogenous indexing (see, for example, Jo Anna Gray, 1976). Therefore, Siegel's rule will not be implementable in a wide variety of commonly used macro models.
Since the publication of Bridger Mitchell's article on the Optimal Pricing of Local Telephone Service (1978), it has been assumed that social welfare can usually be increased by moving from a flat monthly rate for local calls to a two-part tariff with a price per call that is somewhat in excess of marginal cost. While a fixed monthly charge for local calls can be considered a regressive head tax (A. M. Henderson, 1947), it does not follow that a two-part tariff will resolve the equity problem. In this paper I use a simple diagram and a two-person revenuemaximizing formula to illustrate one of the more important limitations of usage-sensitive pricing. In the following analysis, it is assumed that there are two types of telephone users. The first type of consumer, D1, is assumed to have a net demand for calls or message units, represented by the linear equation: