Knowledge that Transforms

The Problem This study is concerned with the incidence of governmental economic stabilization policies on the levels of output in selected industries. The specific problem under investigation is the following: What are the relative impacts of monetary and fiscal actions on the structure of output in selected industries? The study is concerned with some micro-economic aspects of economic stabilization policies, i.e., how these policies affect the equilibrium levels of output of some selected final goods. The importance of the problem under consideration is pointed out in the report of the Commission on Money and Credit (CMC).' In discussing the considerations of policy mix, the Commission states:

A RECENT article on this subject by R. W. Campbell and myself 1 was received with considerable interest both in the West and in the East. Unfortunately, however, rather more attention was paid to our somewhat crude extrapolation to 1960 than to the main body of the work which was concerned with determining the level of industrial output in 1955 in terms of physical production ratios with 1954 dollar weights. In this present study we propose to extend this comparison to 1958 and 1960. Here, as in our previous study, a dollar value of output for each non-engineering group is determined in terms of the 1954 United States Census of Manfactures concept of value for a corresponding United States industry, taken in proportion to the U.S.S.R./ U.S. physical production ratio. This ratio is based on the output data or best available estimates for the principal product, or group of products, of the given industry. This is usually done on a four-digit level of the 1954 United States Census of Manufactures classification, according to the formula: VA = United States VA times physical production United States physical production The resulting Soviet values added for individual industries were summed for each major industry group and non-engineering as a whole and expressed in terms of per cent of the corresponding United States value totals for 1954. Finally, these ratios were recalculated in terms of United States output in 1955, 1958, and 1960 by means of the Federal Reserve Indexes. In the first article, we classified the results for non-engineering industries into three categories, according to their reliability. Due to additional research, we were able to increase the equivalent of our first category of reliability from 66% to 73 % and to reduce the third category from just under 10% to 1'2%. In spite of this, the overall changes from our original 1955 results are comparatively small. As we have stated in the previous article, the engineering outputs of the two countries do not lend themselves to a direct comparison on the basis of physical production ratios due to heterogeneity of the product mixes, lack of sufficiently comprehensive data, as well as an absence of information about military production. Consequently, the following indirect methods were used.2

PpT HE purpose of this study is to add to our empirical knowledge concerning the relationship between imports of materials and the level of economic activity and prices, as well as to make some quantitative estimates of the magnitude of the influence which these factors have in determining the volume and origin of this country's imports of materials.1 While most of the empirical work that has appeared in this area up to now has of necessity had to rely on pre-war data, a long enough time period has now elapsed since the end of World War II to permit the use of data from the postwar period in a statistical analysis.2 This study makes use of the unit value and quantity indexes of imports first computed by John H. Adler, Eugene R. Schlesinger, and Evelyn Van Westerborg in 1932.3 These indexes were computed for the years 1923 through 1950. Since that time Adler, now with the International Bank for Reconstruction and Development, and Charles G. Goor, also with the International Bank, have revised the indexes for 1949-50 and have carried them forward through 1953. As part of the present study, the indexes for total imports of materials and for imports of materials from seven geographic or political regions have been carried forward through 1960. The seven regions are: European Payments Union Countries, Other European Countries, Total Europe, Canada, Latin America, Overseas Sterling Area, and the Rest of the World. These indexes are given in Appendix B. The indexes were computed according to the Fisher Ideal index number formula and originally the years 1935-39 were used as the base period. However, after World War II it was found that the original sample of commodities no longer gave the desired coverage, and therefore additional commodities were added to the sample and the indexes were chained starting in 1949. For the period 1923-46, import data for computing the indexes was taken from the annual volumes of Foreign Commerce and Navigation of the United States, published by the Bureau of Foreign and Domestic Commerce. For the years 1947-60, the data was taken from the Bureau of the Census, Calendar Year Reports No. FT 110, United States Imports of Merchandise for Consumption. As is indicated by the use of regional indexes, this study attempts not only to analyze the demand for total imports of materials, but also the demand for imports of materials from various regions. Two of the more important reasons for the regional emphasis should be noted. First, even within the economic classification of materials the composition of imports from the various regions differs greatly. Given these differences in the composition of imports, there is ample reason why the level of United States industrial production and relative prices might affect the volume of imports coming from the various regions quite differently. A second reason for doing a study based on imports from various regions is the effect which a change in the volume of U.S. imports has on the exporting countries. The United States purchases a large share of the materials exports of various Latin American countries and Canada. Certain East European countries and some of the countries that were formerly colonies of West

ONE of the most important developments in public finance in the post-World War II period has been the great growth of state and local government debt. From a level of $15,900,000,000 in fiscal 1946, state and local government gross debt outstanding has more than quadrupled, to $69,800,000,000 in fiscal 1960.' This study is concerned with the factors affecting the volume and timing of state and local government new debt issues.2 An attempt is made here to develop comprehensive econometric models explaining post-war state government and local government new debt patterns. While in most studies of municipal debt no distinction is made between state governments and local governments, respectively, in the present study it was found that such a distinction is crucial to an adequate comprehension of the factors affecting the new debt issues. Therefore, the next two sections are devoted to separate analyses of state debt and local debt.

T HE international transactions of the United States are larger in volume and variety than those of any other country, and the United States dollar is more widely used than any other currency. The international financial position of the United States defies simple summary, and the status of the dollar cannot be appraised by striking a single sum or balance across any set of numbers. But these familiar observations do not diminish the importance of the statisticians' efforts to devise an efficient summary. Although no one number can say very much, some summary statistics are better than others, and a proliferation of rival constructions may merely confuse a complex situtation. The balance-of-payments statistics of the United States are more complete and detailed than those of most other countries. But the Commerce Department declines to identify a surplus or deficit in the United States payments data. Instead, it spatters its tables with a dozen separate balances covering different subsets of numbers. Five of these balances, arrayed in Table 1, purport to be comprehensive, and each has been cited by one expert or another as the most appropriate measure of the

HE quantity of money in economic modT els traditionally has been assumed (by Keynes, as well as others) to be an exogenously determined variable controlled uniquely by the monetary authorities. Traditional theory argues that, in a fractional reserve system, money supply is a constant multiple of the reserve bank's monetary liabilities which are controlled via the conventional instruments open market operations, changes in the required reserves ratio, and variations in the discount rate.' A current survey of monetary theory and policy states that the theory of money supply is virtually an unexplored area of monetary research.2 The contemporary theoretical and empirical controversies arising around the role of financial intermediaries reflect an awakening interest in money; and several recently completed studies of the money supply in developed economies provide further proof of this new interest.3 This study is intended to further knowledge of the process by which the supply of money is determined, but unlike previous studies it concerns money in a developing economy.

In this article we study the variations in capitallabor ratios among states for manufacturing industries and the role of price-induced substitution as a factor influencing the observed variations. In the first part, differences in output composition within industries are ignored. In the second part, these differences are considered and we are able to suggest whether the observed substitution is achieved through an appropriate selection of output mix, or through pure substitution, that is, substitution of factors given the same output mix.

M Y working view of the balance of payments, a reasonably commonplace one, places it on three levels. At the bottom and most basic for policy is the net balance of goods and services. This yielded a surplus of $3.8 billions in 1960, $5.4 billions in 1961 and $4.8 billions in 1962, the result of a merchandise surplus of roughly the same size and a (net) investment income which had reached $3.3 billions in 1962. Against this were military expenses (amounting to $3.1 billions in 1962), net travel outlays (amounting to about a billion in 1962) and a variety of other payments and remittances including United States Government grants of nearly $2 billions. Preliminary figures for 1963 show an improvement in the net balance of about a billion dollars, the result of further increases in investment income, a modestly larger increase in exports than in imports and a slight decline in military spending.' At the next level are the long-term private capital outflows ($2.8 billions net in 1962) and government loans (amounting net to $1.5 billions in 1962). This outflow creates a corresponding claim by Americans on overseas resources and portends a possible later improvement in the payments balance as the result of interest, dividends and repatriated earnings. These items were evidently about the same in total in 1963 as 1962. But this was as the result of a sharp curtailment of private capital outflow in the second half of the year following a very large increase in the first half. Long-term outflows are continuing at a low level as this is written in early 1964. In 1962 all the foregoing transactions the so-called basic balance involved a deficit of $2.1 billions. There has been a deficit in this account in every year since 1947. At its highest in 1959 it amounted to $4.7 billions.2 In late 1963 and early 1964, the movement in this deficit was sharply down. The third level is ultimately derivative from the foregoing. Dollar claims accumulate as the result of the foregoing commercial transactions and capital movements. They can be held in the form of dollar deposits or converted into foreign currencies or gold. In the main they have been held in dollars and thus the large accumulation of current dollar claims in recent years -from around $7 billions in 1950 to some $25 billions at present. But some $7 billions has been converted to gold and removed from the monetary gold stock in the last six years. This has been the most visible and publicized aspect of the balance of payments problem and also the one that is most purely a consequence, rather than a cause, of changes at the other levels. Few public problems can ever have been so ingeniously contrived to maximize difficulty as that of the balance of payments. There has continued to be a question as to whether there is a problem. There has been a puzzling choice between real and spurious solutions. And each of the real solutions has been protected by a stout framework of vested ideological and economic interest reinforced, in some cases, by distinctly non-secular conviction. The sources of difficulty may be dealt with under the following heads: (1) The question as to whether there is a problem; 'In the last three years, apart from secondary discussions and memoranda, I have been concerned with the balance of payments problem on two major occasions. In 1961, during the first weeks of the new administration, I had general coordinating responsibility for the special message which was transmitted to the Congress in February, 1961. On my return from India in the summer of 1963, I was asked by President Kennedy to review the problem and report. This paper draws on this experience. But, as will be evident from the context, it does not reflect accepted policy and cannot be read as any indication thereof. Moreover it was, in some measure, my task in 1963 to consider ultimately rather than presently necessary action. 2 Data from Statistical Supplement to Survey of Current Business (1963), and Survey of Current Business (June, 1963), as used in The United States Balance of Payments in 1968, The Brookings Institution (Washington, D.C., 1963). Appendix Tables for 1963 from Economic Report of the President.

T a given rate of growth in the general A level of personal income, which kind of expenditure will increase its share and which will decrease and, further, what will be the extent of these changes? requirement for this kind of knowledge has increased in recent years in relation to the theory of economic development as well as for purposes of short-run projection. Prior to the latter half of the 1940's, it had been thought that the above questions might be readily answered by the straightforword application of the generalized Engel's Law. Professors Allen and Bowley I gave the theoretical explanation with a specified form of preference function which was found to be consistent with the empirical cross-section regressions. Thus, it was suggested that if we could assume the invariability of the consumers' preferences both among income groups and over time, it would be possible to predict the consumption of various categories of goods and services and future savings, given income and prices and with the knowledge of the numerical values of the preference parameters. This line of approach had been tried from the time of Professors I. Fisher and R. Frisch.2 It is well known, however, that the validity of the analogy between the cross-section and the time series came to be doubted with the discovery of the long-run stability of the savings ratio in the aggregate time series by Professor Kuznets. Several new theories of consumption appeared with the common target of explaining with a unified theory all of these three kinds of empirical observations: the long-run time series, the short-run time series, and the cross-sectional relations. About ten years ago, the present authors began to try to estimate the consumers' preference functions in a numerical form, making use of continuous time series of the family budget data which were available, at that time, for interwar years in Japan. We undertook this task partly because of pure curiosity and partly because of the practical desire to improve the analysis of index-number problems,3 as well as to make predictions on the simultaneous determination of family expenditures. Starting from the classical model of Professors Allen, Bowley, and A. Wald,4 and after making some tentative computations, we came to see the necessity of introducing some shift elements into the structural equations which were used. First, we tried to adopt Professor Tobin's 5 liquid asset hypothesis in a generalized form which took not only the liquid assets, but also the asset holdings for every individual category of family expenditure into account. results of the empirical tests, however, did not show a logical consistency with our interpretation of Tobin's hypothesis. This forced us to examine the applicability of Professor Duesenberry's theory of interdependent preferences.6 * work on this paper was done as part of the Keio Economic Research Project financially supported by the Institute of Industry & Labor Studies, Keio University. final, considerably revised, version was prepared at Professor W. W. Leontief's Research Seminar during Tsujimura's stay at Harvard as a Fulbright Research Scholar, 1961 to 1962. We are also heavily indebted to Professors J. S. Duesenberry and H. S. Houthakker for valuable suggestions. They, of course, are not responsible for any remaining errors. 'R. G. D. Allen and A. L. Bowley, Family Expenditure: A Study of Its Variation (London, 1935), especially appendix. 2 Ragnar Frisch, New Methods of Measuring Marginal Utility (Tubingen, 1932). It is interesting to see that Frisch's analogy of the spring balance on the dynamic feature of consumer's taste appears to be very close to our present specification of Duesenberry's theory of habit formation. 'H. S. Houthakker, The Influence of Prices and Incomes on Household Expenditures, Bulletin of the International Statistical Institute (Bruxelles, 1960); W. W. Leontief, Composite Commodities and the Problem of Index Numbers, Econometrica, iv (1936); and P. A. Samuelson, Foundations of Economic Analysis (Harvard, 1945). 'A. Wald, The Approximate Determination of Indifference Surfaces by Means of Engel Curves, Econometrica, viii (April 1940). 'James Tobin, Relative Income, Absolute Income, and in, Money Trade, and Economic Growth (Macmillan: New York, 1951). 6 J. S. Duesenberry, Income, Saving, and the Theory of Consumer Behavior (Harvard, 1949).

Soviet spokesmen have claimed repeatedly that the USSR is an ideal market for primaryproduct exports of underdeveloped countries. The markets of leading western industrial countries, on the other hand, are said by the Soviets to be extremely unsatisfactory due to the chaos and stagnation allegedly inherent in the capitalist system. The purpose of this paper is to assess the validity of these Soviet claims by comparing the relative performance of the USSR and leading western industrial countries as markets for primary products in the period 1955 to 1961. The method used is one which tests whether Soviet primary product imports were larger, more rapidly growing, and more stable than western imports. This comparison is based entirely on available official foreign trade statistics of each country.