Knowledge that Transforms

The crumbling of the Berlin Wall in Germany in 1989, the dismantling of Communist Party control of Central and Eastern European governments in 1990, and the dissolution of the Soviet Union in 1991 have created the opportunity for substantive reductions in military expenditures in the United States and Europe. This paper addresses conceptually and empirically some of the issues surrounding the potential structural impacts of disarmament upon an open economy's allocation of capital and labor between tradable and nontradable goods, upon the relative price of tradables and nontradables, and upon the nation's price level relative to a world average. Theoretically, the effects of military spending reductions on these variables is ambiguous: the effects depend upon the relative factor intensities in production of civilian versus military goods and those of civilian tradable versus nontradable goods, as well as upon the relative importance in utility of civilian tradable versus nontradable goods. Empirically, the model suggests that the effects of disarmament on the relative demand for and relative supply of nontradables to tradables are economically and statistically significant. However, because military spending reductions will tend to increase the relative supply only slightly more than the relative demand, their relative price (i.e., the real exchange rate) is predicted to decline by only a small amount. Consequently, lower military expenditures are predicted to result in a small real depreciation of a country's currency and, thus, only a minor fall in the national price level relative to the world average.

Our concern in this paper is with the measurement of economic growth, or more precisely, the mismeasurement of growth that may occur from ignoring household production. As an economy develops, production shifts from households to markets.' Traditional measures of economic growth which ignore most household production may therefore be biased upward. The existence of household production also complicates international comparisons of real GNP as there are significant differences in the relative size of the household sector across developed and developing economies. There is an extensive empirical literature on the size of the household sector. Most estimates place the value of household production in the United States for recent years at 30-40 percent of GNP.2 Previous studies have found that the relative size of the household sector has remained fairly constant over time, implying that measured growth rates provide a reasonable proxy for overall growth rates. Existing estimates of household production, however, have little theoretical grounding. For the most part, they also ignore the use of capital in the household sector. In addition, most estimates relate to a single point in time.3 Finally, existing studies relate to time periods after which the large movements out of the household and into the market may have taken place. In this paper, we provide new estimates of the value added in household production for selected years from 1930 to 1985. We find that the relative size of the household sector in recent times is smaller than is commonly estimated. We also find, contrary to the results of others, that the relative size of the household sector has fallen continuously since 1930. We conclude that real per capita output has grown from 1930 to 1985 at a rate that is significantly below the rate implied by conventional measures of output. We develop in the next section a formal model of household production which we hope will help us to clear up such issues as the appropriate value to impute to household labor, how to treat time spent transacting, and how to deflate household production in order to obtain real output. The model is not a general-equilibrium model. Its role is not to derive implications for growth, but rather to guide us in our accounting exercise.

The title of this paper is not yet anachronistic, for the Soviet heritage of domestic and interrepublican economic arrangements sets the initial constraints for economic reform in the republics of the former Soviet Union. A standard approach to economic reform in socialist economies has developed over the last two years, on the basis of both experience, especially in Poland, and analysis (see e.g., Joint Study of the Soviet Economy, 1990; David Lipton and Jeffrey Sachs, 1990; Fischer and Alan Gelb, 1991). We start by reviewing this new orthodox prescription and then examine the developing Russian reform program in its light. We turn next to the special aspects of reform in the former Soviet republics, interrepublican economic relations and reform coordination, and conclude with a brief discussion of the role of the West.

Politicians almost all talk about the deficit, and almost all decry it. Very few, literally, know what they are talking about. To my dismay I have felt over some years that too many economists fall in the same category. I shall insist, contrary to Ricardian views, that deficits do matter and can matter very much. They can be too small as well as too large, and you cannot even begin to tell what they are until you measure them right. At this time, the real is too small. One can pick from a huge variety of deficits. The federal for the 1991 fiscal year reported by the Office of Management and Budget (OMB), including off-budget and on-budget items, was $269 billion. This compares with an economically more meaningful federal on national income accounts of $190.3 billion, which was just 3.3 percent of gross domestic product. If you were to follow Congressional legislation and arbitrarily exclude social security (and the postal service) from the unified or total OMB budget you can work the up to $321 billion. More sensibly, one can exclude $67 billion for that is, the savingsand-loan bailout, which is at this point merely a financial transaction substituting explicit federal debt for the debt implicit in deposit guarantees. This would get the down to $202 billion. If one looks at a (measured at 5.5 percent unemployment, which I would consider too high), eliminating the effects of the recession along with deposit insurance, the would be $124 billion. Looking at what is called the primary, standardized-employment budget, excluding interest payments along with deposit insurance, one actually finds a substantial surplus, of $71 billion.' There are other, more meaningful measures of the that might well be advanced. These would entail: 1) adjustment for the inflation tax on the holders of existing debt; 2) including the offset of state and local government surpluses, particularly since federal grants contributing to those now meager surpluses comprise a major element in the federal deficit; and 3) excluding net capital expenditures, as would be consistent with private business accounting. These most appropriate adjustments, as shown in Table 1A, bring the deficit down from its 1991 figure of $269 billion to a paltry $17 billion. Still another way of looking at the budget is to note that an appropriate concept of balance for the government in a growing economy, like that for any business, is that the debt grow no faster than income or output, so that the debt:income ratio does not rise, as shown in Table 1B. The 7-percent growth that the economy has experienced in previous, nonrecession years would then imply an increase in debt-or deficit, aside from the effects of the recession-of $188 billion. This in a meaningful sense would be balance; but that is again 3.3 percent of GDP, almost precisely the actual federal on the national income account. Furthermore, that includes a substantial component due to the recession. By standards of constant debt: GDP ratio, a high-employment, cyclically adjusted budget would be in substantial surplus. The one sophisticated objection frequently offered to budget deficits without, I must say, paying much attention to how