Exchange traded funds (ETFs) are a new variety of mutual fund that first became available in 1993. ETFs have grown rapidly and now hold nearly $80 billion in assets. ETFs are sometimes described as more 'tax efficient' than traditional equity mutual funds, since in recent years, some large ETFs have made smaller distributions of realized and taxable capital gains than most mutual funds. This paper provides an introduction to the operation of exchange traded funds. It also compares the pre-tax and post-tax returns on the largest ETF, the SPDR trust that invests in the S&P500, with the returns on the largest equity index fund, the Vanguard Index 500. The results suggest that between 1994 and 2000, the before- and after-tax returns on the SPDR trust and this mutual fund were very similar. Both the after-tax and the pre-tax returns on the fund were slightly greater than those on the ETF. These findings suggest that ETFs offer taxable investors a method of holding broad baskets of stocks that deliver returns comparable to those of low-cost index funds.

As policy makers have sought to reduce the welfare rolls by increasing labor supply among single mothers, much attention has been given to the possible role of expanded child care subsidies, including direct provision of public preschool. At the same time, public interest in child care subsidies for two-parent households is high; for example, former Vice President Gore not long ago proposed to make high-quality pre-school fully available to every family, for every child, in every community in America (Albert Gore, 1999). In this paper, I use 1980 Census data to estimate the effect of public school enrollment for a woman's five-year-old on measures of labor supply and public assistance receipt. This approach has two advantages. First, I am able to estimate the effect of a large implicit child care subsidy.1 Second, because public kindergarten is universally available to all age-eligible children where it is provided, selection problems related to means-testing do not arise. A difficulty with public school enrollment arises because parents may choose to hold their children back a year or enroll them in private school. I deal with this issue by using five-yearold's quarter of birth (QOB) variables as instruments for public school enrollment status. This strategy works because parents' ability to enroll a child in public kindergarten in the academic year when the child turns five typically depends on the calendar date of the child's birth.2 In most states, children born in the second quarter (April 1-June 30) of 1974 will have been eligible to start kindergarten in the fall of 1979, while children born in the first quarter (January 1March 31) of 1975 generally will not. Eligibility for children born between July 1 and December 31, 1974 depends on the rules where they live.3

Robert E. Lucas, Jr.:' January 2002 issue of the Atlantic contains an article by Benjamin Schwarz and Christopher Layne called A New Grand Strategy. article deplores the role of the United States in the Middle East, which the authors interpret as derived from a perceived need to ensure the availability of from that region. As the authors observe, America derives most of its from Alaska, Canada, the continental United States, Mexico, and Venezuela. About 25 percent of U.S. petroleum imports come from the Persian Gulf. If the United States adopted a national energy strategy it could free itself from dependence on Persian Gulf oil (p. 37). They go on to advocate doing this, and leaving Middle East politics to other, still dependent powers. They explain: The role the United States has assigned itself in the Persian Gulf has made it-not Japan, not the states of Western Europe, not China-vulnerable to a backlash (p. 38). Schwarz and Layne article is a good example of what W. Lee Hansen et al. (2002 [preceding paper, this issue]) call illiteracy. Its entire argument is based on the market for oil, but the authors do not have even an Economics 101 understanding of what a market is. They construct a vision of a new U.S. foreign policy based on a wholly arbitrary matching up of particular buyers of a homogeneous good with particular sellers of the good. We will exercise hegemony in Mexico and Venezuela, they say, and let the Japanese take care of the Middle East. example illustrates three points emphasized in Use or Lose It: Teaching Literacy in the Economics Principles Course (this issue, preceding paper). First, economic illiteracy often is an affliction of the well-educated: Schwarz and Layne are articulate experts in foreign affairs. Second, economic illiteracy can be dangerous: there is more at stake than bad answers to our exam questions. Third, the ignorance involved is not ignorance of the research tools of technical economics. should not be necessary to be handy with fixed-point theorems in order to avoid mistakes like the one Schwarz and Layne make. Use or Lose It has two main theses. first is that we can and should promote economic literacy by redesigning the first collegelevel economics course (one semester) to teach principles, not methods. second is that we can use a list of 20 Content Standards provided by the National Council on Economic Education to define what it means to teach principles. I have misgivings about both these theses, to which I turn in a moment. I must say at the outset, though, that my criticism will be almost entirely nonconstructive: I agree that introductory economics needs to be reinvented, but I do not claim to know how to do it. In criticizing introductory economics courses and textbooks, the authors lament the increasingly technical nature of the course and cite others who share this view. Nostalgia is expressed (in a quote from McConnell, not a direct statement by these authors) for a 1946 text of Frank Taussig's that predates even my ancient training by 15 years! would be hard to think of a surer way to discourage the most able students from pursuing a career in economics than to offer them a 50-year-old textbook on the grounds that P. J. O'Rourke did not like graphs. Imagine proposing such a thing to an association of physicists or chemists or, for that matter, musicologists! Knowledge is cumulative-a fact that should make us happy, not sad. One of our jobs as teachers is to help our most eager and creative students get to the knowledge frontier as fast as they want to go. In the natural sciences and the arts, introductory courses are professionally oriented basic-training courses on which one can build a creative career. Economics students deserve as much. problem with leaving the matter at this is that introductory science courses tend to be useless for nonmajors. Indeed, levels of physics literacy, chemistry literacy, and musical literacy among well-educated people are in no better shape than economics literacy. This is the classic case against letting each student design his 'Department of Economics, University of Chicago, 1126 East 59th St., Chicago, IL 60637.

Reservation Wages: An Analysis of the Effects of Reservations on Employment of American Indian Men by J. Gitter and Patricia B. Reagan. Published in volume 92, issue 4, pages 1160-1168 of American Economic Review, September 2002

Estimating Individual Discount Rates in Denmark: A Field Experiment by Glenn W. Harrison, Morten I. Lau and Melonie B. Williams. Published in volume 92, issue 5, pages 1606-1617 of American Economic Review, December 2002

We present a method for decomposing wholesale electricity payments into production costs, inframarginal competitive rents, and payments resulting from the exercise of market power. Using data from June 1998 to October 2000 in California, we find significant departures from competitive pricing during the high-demand summer months and near-competitive pricing during the lower-demand months of the first two years. In summer 2000, wholesale electricity expenditures were $8.98 billion up from $2.04 billion in summer 1999. We find that 21 percent of this increase was due to production costs, 20 percent to competitive rents, and 59 percent to market power.

Economic models of incentives in employment relationships are based on a specific theory of motivation: employees are “rational cheaters,” who anticipate the consequences of their actions and shirk when the marginal benefits exceed costs. We investigate the “rational cheater model” by observing how experimentally induced variation in monitoring of telephone call center employees influences opportunism. A significant fraction of employees behave as the “rational cheater model” predicts. A substantial proportion of employees, however, do not respond to manipulations in the monitoring rate. This heterogeneity is related to variation in employee assessments of their general treatment by the employer.