Knowledge that Transforms

Comparing two countries in which the poor have equal real incomes, the one in which the rich are wealthier is likely to have a higher infant mortality rate. This anomalous result does not appear to spring from measurement error in estimating the income of the poor, and the association between high infant mortality and income inequality is still present after controlling for other factors such as education, medical personnel, and fertility. The positive association of infant mortality and the income of the rich suggests that measured real incomes may be a poor measure of social welfare. Countries with unequal income distributions have higher rates of infant mortality than countries with similar levels of national product per capita but more equal income distributions [Flegg, 1982; Rogers, 1979]. This finding is not surprising. Infant mortality is concentrated among the poor. If the rich are richer and the average level of income is the same, the poor are poorer. What is surprising, however, is that infant mortality appears to be posi-tively related to the income share of the rich (the upper 5 percent of the income distribution) when the incomes of the poor (the lowest 20 percent) are equalized among countries. In this paper I first document this striking empirical regularity. To a first approxima-tion, an increase in the wealth share of the rich while the incomes of the poor are held constant leaves the poor's command over resources unchanged. So why is such an increase associated with a decrease in the poor's ability to achieve the valued outcome—low infant mortality? The association presumably arises because an unequal income distribution is associated with another factor making for high infant mortality. This paper considers and tests several possible explanations, such as the provision of medical services, the degree of urbanization, the extent of female literacy, and differences in the composition of births among different income groups. None of these factors adequately accounts for the positive association between the incomes of the rich and infant mortality.

This paper uses micro data from the Current Population Surveys to document the secular decline in labor market activity among prime age men from 1967 to 1987. Declines in employment occur at all ages but are found to be particularly severe among less-educated and low-wage men. Information on the cross-section wage-employment relationship and on actual wage changes indicates that the initial fall in employment from the late 1960s to the early 1970s is entirely attributable to falling labor supply whereas since the early 1970s, wage changes predict most of the decline in employment for whites and approximately half of the decline for blacks.

This paper assesses whether affirmative action programs and equal opportunity laws affect the output of economic agents. More precisely, we find that equal opportunity laws and affirmative action programs always benefit disadvantaged groups. Equal opportunity laws also increase the effort levels of all subjects and hence the profits of the tournament administrator (usually the firm). The effects of affirmative action programs depend on the severity of a group's cost disadvantage. When the cost disadvantage is severe, these programs significantly increase effort levels (and hence profits). The opposite is true when the disadvantage is slight.

We present a theory of a partial economic reform of a planned economy, similar to the one that took place in Russia since 1988 and in China earlier. In such a reform, some markets are liberalized in the sense that producers can sell output to whomever they want, including private firms, at free prices, but at the same time must sell to state firms at state prices. We show that such a reform can result in a substantial diversion of subsidized inputs away from state firms and toward private firms even when state firms value these inputs more. The result may be a reduction of total output. The simple analysis sheds light on many consequences of the Soviet reform, such as breakdown of coordination of production, increased state policing of delivery quotas, prohibitions of trading cooperatives, and opposition to privatization. The model also explains why partial reform failed in Russia but worked in China.

This paper documents that, for the period from 1975 to 1989, the aggregate net number of open market purchases and sales by corporate insiders in their own firms predicts up to 60 percent of the variation in one-year-ahead aggregate stock returns. This study also examines whether the ability of aggregate insider trading to predict future stock returns can be attributed to changes in business conditions or movements away from fundamentals. Evidence suggests that both explanations contribute to the predictive ability of aggregate insider trading.

In a neoclassical growth model, it is possible to make a case for public debt, because a balanced growth path may be dynamically inefficient. This paper shows that this possibility no longer holds in an endogenous growth model with constant external returns to capital. It is shown that an increase in public debt reduces the growth rate, so there always exists a future generation that will be harmed, and that a reduction in public debt, although it increases the growth rate, cannot be Pareto-improving: one current generation must be harmed.

The wage differential between black and white men fell from 40 percent in 1960 to 25 percent in 1980. It has been argued that this convergence reflects improvements in the relative quality of black schools. To test this hypothesis, we assembled data on pupil-teacher ratios, annual teacher pay, and term length for black and white schools in the eighteen segregated states from 1915 to 1966. These data are linked to estimated returns to education for Southern-born men from different cohorts and states in 1960, 1970, and 1980. Improvements in the relative quality of black schools explain 20 percent of the narrowing of the black-white earnings gap between 1960 and 1980.

An oft-repeated goal in many contexts is the "preservation of diversity." But what is the diversity function to be optimized? This paper shows how a reasonable measure of the "value of diversity" of a collection of objects can be recursively generated from more fundamental information about the dissimilarity-distance between any pair of objects in the set. The diversity function is shown to satisfy a basic dynamic programming equation, which in a well-defined sense generates an optimal classification scheme. A surprisingly rich theory of diversity emerges, having ramifications for several disciplines. Implications and applications are discussed.

This paper examines whether positive and negative money-supply shocks have symmetric effects on output. The results are consistent with the hypothesis that positive money-supply shocks do not have an effect on output, while negative money-supply shocks do have an effect on output. This finding is independent of whether or not expected money is assumed to affect output. The results reported in this paper imply that the Fed could increase the growth rate of real output by reducing the standard deviation of unexpected changes in the money supply.

Voters penalize federal and state spending growth. This is the central result of my analysis of voting behavior in Presidential, Senatorial, and gubernatorial elections from 1950–1988. The composition of federal spending growth seems irrelevant. The vote loss to the President's party from an extra dollar of defense or nondefense spending is the same. However, in gubernatorial elections, expansion of state welfare spending exacts a disproportionate political price. Deficit financing of federal or state spending does not appear to matter politically. I conclude by discussing the obvious question of why government budgets have grown in the face of this voter hostility.