Knowledge that Transforms

This paper shows that yields to maturity of U.S. Treasury bills are cointegrated, and that during periods when the Federal Reserve specifically targeted short-term interest rates, the spreads between yields of different maturity define the cointegrating vectors.This cointegrating relationship implies that a single non-stationary common factor underlies the time series behavior of each yield to maturity and that risk premia are stationary.An error correction model which uses spreads as Ihe error correction terms is unstable over the Federal Reserve's policy regime changes, but a model using post 1982 data is stable and is shown to be useful for forecasting changes in yields.

The effect of child-care costs on the probability that married women with children will participate in the labor market is examined. Child-care costs are estimated.using a generalized Tobit specification corrected for selection. Estimates of a structural probit model of labor-force participation provide evidence to support the prediction that increased child-care costs lower the probability of participation. It is also shown that the lower rate of labor-force participation among mothers of preschoolers is entirely the result of the higher child-care costs faced by these women and endogeneity of the number of young children in the participation equation. Copyright 1992 by MIT Press.

This paper models the selection of environmental policies under authoritarian and democratic regimes, and tests the hypothesis that political institutions systematically affect the enactment of environmental regulations. The results support the contention that political institutional arrangements, rather than resource endowments, largely determine policies concerning environmental regulation. Copyright 1992 by MIT Press.

The surge of interest in intergenerational transfers in the past decade has sparked a debate over the motivation for them. Are transfers given out of altruism or part of an exchange? While each motive is probably at work to some extent, they know little about whether one motive predominates. The question is relevant for issues concerning public income redistribution and inequality in the family but despite its importance, empirical evidence about motives is scarce because of limited data. They investigate a new data set, the National Survey of Families and Households, which remedies many of the shortcomings of other data sets containing private transfer information. They find that empirical patterns for inter-vivos transfers (i.e., transfers between living persons) are more consistent with exchange than altruism. Copyright 1992 by MIT Press.

The performance of the economy has been characterized as unacceptable by President George Bush, and that opinion is widely held. However, the nature of the problem is a matter of controversy. Some observers believe that the tax system is to blame. In my opinion, we do not have a tax problem; we have a much broader economic problem. One reason for a tax bill now would be the recession that began in the middle of 1990 and may not yet have ended. Countercyclical stimulus is a classic purpose of tax policy. However, it is possible to make the classic error of countercyclical fiscal policy and hit the accelerator only after recovery has begun. We might also add to the deficit and the national debt in the long run, raise long-term interest rates, and thereby reduce investment. Concern about the long run is well taken. Growth was extremely slow for a full year before the recession officially began. In fact, there have been 11 consecutive quarters of annualized real growth less than 2.5 percent, and that string is about to be rounded to three full years. Many forecasters, extrapolating from the expansion of the 1980's, believe that long-term potential real growth is less than 2.5 percent per year-well below the actual growth enjoyed in the 1950's and the 1960's. Some economists allege that slow recent growth and the recession were caused by failures of tax policy, specifically the Tax Reform Act of 1986 and the reconciliation bill of 1990. However, the following sectoral analysis suggests that these indictments are incorrect. A decline in real consumption in mid-1990 was probably the major single contributor to the recession. Few would allege that structural flaws in tax policy have decreased consumption; indeed, the mantra of a vocal group of policy pundits has been that the tax code has encouraged consumption. Some analysts have tried to blame the recession on either the revenue increases included in the 1990 reconciliation bill or the luxury tax included in that bill. Such claims are absurd. The deficit-reduction agreement was not even legislated until October 1990 (two months after the recession began) and its near-term fiscal impact was small. The notion that recession was brought on by declines in demand for expensive boats (whose sales peaked in 1987) and expensive automobiles (most of which are imported) makes even less sense. In the aggregate, investment has been one of the bright spots of the economy, and has held up in this recession better than in others. In the long term, the picture is even brighter. Equipment investment is stronger than total investment, with gross real investment in equipment matching its historical peak. The weak segment is investment in commercial structures which many economists would agree should not be taxfavored in pursuit of long-term economic growth and which were drastically overbuilt in the 1980's. Government budgets are restrictive, partly because of federal restraint, but even more because states and localities are cutting * Budget Committee, U.S. House of Representatives, 220 O'Neill House Office Building, Washington, DC 20515-6065. Albert J. Davis, Joseph E. Stiglitz, and Emil M. Sunley provided helpful comments but should not be implicated in any errors or omissions.