Knowledge that Transforms

The past decade has witnessed the growth of a large literature on international cooperation in trade and macroeconomic stabilization policy. Virtually all the models developed to date, however, are based on one of two extreme assumptions concerning governments' ability to commit to international agreements. Either they assume that governments can make constitutionally binding long-term agreements, or else they assume that governments have no ability to make legal commitments whatsoever. In the latter case, international policy cooperation is possible only to the extent that reputational factors will allow.' In this paper, I consider a world in which there is no legal mechanism for enforcing long-term international agreements, but where governments must still incur some small direct costs if they renege. These small costs might arise due to legislative or administrative frictions. I also allow for the possibility that international economic policy agreements can include small sidepayments. For example, in negotiating a bilateral reduction in tariffs, two allies could simultaneously agree to redistribute the burdens of defense expenditures.

Recently in this journal William E. Cole and Richard D. Sanders (1985) criticized the Todaro migration model and offered a different approach. A lively and interesting debate followed but the Cole and Sanders (CS) model was not actually solved. Indeed Michael Todaro...suggested that the model yielded no unique algebraic solution a charge to which CS...did not respond. This [one-page] note identifies the changes needed to provide closure of the CS model. (EXCERPT)

This paper presents a model of finitely lived rational agents in which unanticipated innovations in the stock of fiat money affect real variables. An unanticipated inflation reduces the real value of the nominally denominated national debt, thereby reducing the crowding-out of capital and/or the tax burden. Both effects stimulate increased investment in capital, which leads to an increase in real output and wages in the following periods. In contrast with price-surprise models, these real effects occur even if the monetary innovation is instantly and perfectly observed by agents.

The U.S. federal budget deficits averaged about 1 percent of GNP in the 1960s, about 2 percent of GNP in the 1970s, and then rose to a peak of 5.5 percent of GNP in the four bad years of fiscal 1983 to fiscal 1986. By fiscal 1989, they had fallen back to 2.9 percent of GNP, and under present legislation they are now projected to drop to about 1.5 percent of GNP by 1994. When deficits were at their peak, before the start of the budget bargain for fiscal 1987 (the first budget to show any sizeable deficit reduction), the country passed the GrammRudman-Hollings (GRH) deficit control law. This law has been revised and amended over time, but it is still operating in roughly its initial form. Superficially, the numbers given above suggest that it must be working pretty well. Moreover, in many ways GRH was written to respond to the standard criticisms of deficit constraint legislation: it did not call for abrupt cuts in deficits but rather gradual declines, it was legislative and flexible rather than constitutional and rigid. Yet just as the country is on the verge of finally getting its deficits under control, the legislation is coming under vicious attack, including even that of one of its sponsors, Senator Hollings. Why should such an apparently successful piece of legislation be so widely scorned? In this paper I take on this question. I first illustrate how GRH was intended to operate with a simple indifference curve model, and use this model to see what kinds of changes should have occurred in budget bargains and spending patterns. Then I look for these changes by comparing numbers from the pre-GRH era (1983-86) with those from the post-GRH era (1987-89). I also identify other sources of improvement in budgetary position from the earlier to the later period. This numerical comparison suggests that the direct effects of GRH played a very minor role in the improvement in the U.S. budgetary position, though it seems likely that difficult to evaluate indirect effects were much more significant.

As is widely known, the EEC has gone through some troubling budgetary difficulties in recent years. Disputes have revolved around the growth of agricultural subsidies and about the contributions to be made to the EEC by various member countries; in particular, the U.K. These problems have been brought under control for the short run. However, the implementation of the Single European Act could be greatly complicated, and might falter, if policymakers again became intensely involved in acrimonious budgetary disputes. Maintaining budgetary control for the next several years, and for that matter in the longer term as well, is thus a matter of considerable tactical importance within the context of the overall progress of European economic affairs. In view of the fact that the threat of acute budgetary crisis has receded somewhat, and in view of the prospect of a significant step forward toward more complete economic integration associated with the 1992 initiative, it seems appropriate to give some thought to the budgetary problems that the EEC is likely to confront in the medium term. At a time of enormous political change in Eastern Europe, it is exceptionally hazardous to attempt projections about economic affairs in the EEC. It is easy to visualize scenarios in which significant amounts of resources, whether from the EEC itself or from individual member states, are directed toward promoting economic and other reform in the East, forcing new choices with respect to the commitment of resources by member countries to the EEC. However, to limit the scope of this paper, attention is restricted to developments within the EEC itself. The major trends in the EEC budget are easily delineated, since only a few main initiatives account for the bulk of EEC expenditures. First, agricultural subsidies through the European Agricultural Guidance and Guarantee Fund (EAGGF) have entailed large expenditures. Through the 1980s, these outlays accounted for about two-thirds of EEC expenditures. Another major category of EEC expenditures are for the so-called funds, in particular the European Regional Development Fund (ERDF) and the European Social Fund (ESF). The ERDF funds economic development projects in specially targeted low-income regions. The ESF funds programs that promote the training and employment of workers, especially youth and long-term unemployed persons. These and related expenditures have accounted for about 10-15 percent of expenditures during the 1980s. Altogether, then, agricultural and structural expenditures account for about 85 percent of the total budget. The U.K. has repeatedly protested against what it regards as excessive contributions to the EEC relative to the return that it gets in the form of structural fund outlays, and it has garnered a partial rebate of its contributions to the EEC, equal to two-thirds of the difference between the U.K. VAT contribution and EEC expenditures allocable to the U.K. These rebates account for roughly 5 percent of the EEC budget. As a result of decisions taken in 1988, the outline of the EEC budget for the next sevtDiscussants: Paul Courant, University of Michigan; Rudolph Penner, The Urban Institute; John Yinger, Syracuse University.

Ronald Findlay's analysis of the long-run equilibrium (uniform international growth rates) determinants of the terms of trade, in the context of North-South models of trade and growth, is reconsidered when the North is a Keynesian and a Kaleckian economy. Also examined are the determinants of the terms of trade in long-period equilibrium (uniform profit rates), so that the consequences of capital mobility are accounted for. Two surprising results are noted: first, the long-run terms of trade when the North is a Kaleckian economy will be independent of the North's markup and, second, in the long-period it is theoretically possible for the North to raise its markup, but experience a deterioration in its own terms of trade.