Knowledge that Transforms

Empirical investigations of wage determination have often produced autocorrelated residuals from time-series wage equations. Runs of overor underprediction have usually been regarded as weaknesses in specification to be corrected or explained away. In 1980, however, George Perry suggested that such runs represent an important, if neglected, characteristic of American wage setting. He argued that of wage change develop in the labor market. These norms, according to Perry, change discretely; there are periods of more or less wage pushiness. Aggregate wage indexes can be influenced, even if norm shifts are not fully reflected everywhere, providing those sectors that are affected have sufficient weight in the indexes. An obvious division in the labor market is between the union and nonunion sectors. There is reason to believe that while there has been a (downward) shift in wage norms recently, the impact has been concentrated in the union sector (see my 1985 article). Indeed, the union sector is probably inherently more prone to norm shifts than the nonunion.

Whether a change of party control of government in a country with an advanced industrial economy results predictably in a sustained change in its level of aggregate economic activity is continually disputed in economics. While many issues are involved, the central question is whether constraint (environment) or discretion (party control) dominates the explanation of public policy. Party-induced changes in public policy demonstrate accountability in democratic government to a scientist; to an economist they raise the spectre of inefficient outcomes associated with the political business cycle. In addition, since sustained, party-induced effects on economic policy are inconsistent with the assumptions of many macroeconomic models, economists have also stressed the need for rigorous econometric controls before accepting the existence of such effects.

This paper analyzes the intertemporal allocation effects of anticipated tax rate changes, reconsidering the recommendations of the Meade Committee in a perfect foresight general equilibrium model of economic growth. It is shown that the R-base (or consumption) tax can be more distortionary than an income tax and that a revenue-neutral integration of corporate and personal taxation will lower social welfare. Moreover, it is argued that a dividend tax dominates the R-base tax because it places its distortions on the financial, rather than on the real, side of the economy. Copyright 1989 by American Economic Association.