Knowledge that Transforms

In their well-known paper, William Brainard and James Tobin advocated 'general disequilibrium' framework for the dynamics of adjustment to a 'general equilibrium' system. The Pitfalls framework has subsequently been widely used in the construction of flow of funds models of financial markets. The Brainard-Tobin paper has also elicited notes from Mark Ladenson and Kevin Clinton in this Review which attempt to interpret and elaborate upon the Pitfalls model. However, these authors seriously misinterpret the model and seemingly obscure rather than extend the Pitfalls framework in a maze of unnecessary mathenatical techniques and notation. Ladenson and Clinton both attempt to work with linearly dependent explanatory variables whose coefficients are not identified and cannot be meaningfully interpreted. Clinton uses this indeterminacy to provide a superficial counterexample to a BrainardTobin argument. Ladenson, on the other hand, discusses two (of many possible) sets of expedient parameter restrictions which will allow him to assign values to all of the coefficients of the linearly dependent variables. He believes that estimation of the model necessitates substantive behavioral assumptions, whereas in fact the elimination of a redundant explanatory variable alters only the appearance of the model and the interpretation of individual coefficients. In addition to discussing the errors of Clinton and Ladenson, this paper will demonstrate the simplicity with which adding up constraints can be derived, the relationship between the form of a model and the interpretation of its coefficients, and how the parameters might be estimated subject to adding up constraints. In Section I the Pitfalls model is compared with the ClintonLadenson formulation; Sections II and III concern the respective details of the Clinton and Ladenson articles; and estimation procedures are discussed in Section IV.

Project Independence should be designed to accept oil imports, build up reserves, and guarantee losses to producers of substitutes, rather than becoming another protective tariff with percentage depletion allowances and deductions of intangibles on successful wells. Contrary to claims, lower income taxes are not producing a reserve, which could be provided through direct purchase of crude for storage or by payment for in situ reserves. Risks are better avoided through loss guarantees, and integrated corporate tax rate reduction is preferable to selective politically controlled relief. Revised bidding procedures on public lands would correct the overdrilling trend that has resulted from current land-ownership rules. Low electricity prices and over-use of resources have resulted from the unnecessary undertaxing of public utilities. Property and excise taxes, import quotas, prorationing, environmental controls, and natural gas price regulations have all played a heavy part in the past tax structure. Current issues revolve around price controls, windfall taxes, income distribution, and resource allocations. Future policies will need to address the concepts of zero imports, balanced reserves, and reduced consumption. U.S. consumers should not be deprived of the benefits of reduced world oil prices in the future. This would mean keeping the U.S. in the world marketmore » while economically developing substitutes. (24 references) (DCK)« less