Knowledge that Transforms

T HE successful completion of European recovery in the 1950's brought to the western industrial countries the least restricted regime of international trade and payments in many decades. Its very freedom, however, has revealed a number of problems in maintaining consistent domestic and international economic policies, and in keeping the international policies of different countries consistent with each other. Increasingly, these problems have seemed to center on the matter of international reserves and liquidity. Many plans have emerged for changing our reserves and liquidity arrangements. The variety of proposals at hand reflects more than just divergent views on how to handle a given problem. It also stems from differing diagnoses about the exact nature of the liquidity problem, differing prescriptions for related features of international economic policy, and, finally, differing hunches about the political acceptability of the changes proposed. This paper aims not at cluttering the scene with a new proposal, nor even a new summary of existing plans.1 Rather, it turns to the problem of picking among the alternatives. Once the substantive issues are settled regarding the nature of the difficulty and the future network of international monetary arrangements, then assembling the optimal plan becomes a task for the technicians. What follows is an attempt to classify, first, the diagnoses of present ills and, second, the underlying substantive issues. It is an essay, not on the efficient solution, but on the efficient search procedure.

PpT HE purpose of this paper is to appraise the cyclical performance of fiscal policy over two recent cycles ranging from 1957-3 (peak) to 1960-2 (peak), and from 1960-2 to the first quarter of 1963. Also, an attempt is made to appraise the full employment adequacy of fiscal policy over this period. The exercise shows that grading, as always, is a delicate matter and that the results will differ depending on what formula is used. The effectiveness of fiscal policy is not easily measured. Obviously, it cannot be demonstrated by searching for a simple association between budget deficit and prosperity, nor can its ineffectiveness be proven by showing deficits to be associated with declines in GNP.1 What matters, first of all, are changes in budgetary position relative to changes in GNP. Moreover, a distinction must be drawn between the built-in effects of changes in GNP on changes in fiscal position, and the effects of discretionary changes in fiscal parameters on GNP. The former relation, which dominates the picture of the last decade, leads to the observed positive association between change in GNP and the level of budget surplus. This association in no way disproves the proposition that the built-in increase in deficit dampens the decline in GNP, just as the built-in increase in surplus dampens the rise. The effects of discretionary changes in fiscal parameters, in turn, should lead to a negative relation between changes in GNP and budget surplus, but this relationship involves lags and is not easily read from the data. Ultimately, the only satisfactory way of measuring the effects of budget policy on GNP during a past period is in terms of an econometric model which isolates fiscal factors. No such attempt will be made here. Rather, we shall compute various overall indices of fiscal performance, based on a more or less simplified multiplier model of fiscal policy effects, and address ourselves to certain conceptual problems which they pose. Our concern will be first with the contribution of fiscal policy to cylical stability, and then with measures of its full employment adequacy.

D URING the past twenty years a great deal of econometric research has been directed toward the study of the saving behavior of economic units. Thus, personal saving has been explored quite intensively through (personal) consumption studies, especially so in the post-war period. The question of corporate saving, however, has in large measure been neglected, although a casual look at the data would disclose that it has ranged in magnitude from about 300 per cent of personal saving in 1947 to just under 50 per cent in recent years. Undeniably, this is a very significant component of total savings. By corporate saving we mean, of course, undistributed profits; hence, this question could be studied equivalently by studying the dividend policies of firms. On the latter topic some studies have been made and some tentative hypotheses have been formulated. The most widely held view in the recent literature is that propounded by Lintner in his pioneering contribution, [2] and [3]. Lintner's hypothesis states that corporations are conservative in their financial policy, and, consequently, their dividend disbursement activity is characterized by a considerable degree of inertia, and more precisely, that there exists some optimal or target dividend payment (per share) to which corporations adhere. Departures from this level are made only reluctantly, following a change in the level of profits which is deemed to be more or less permanent. Lintner's statistical analysis is based on time series data pertaining to aggregate corporate dividend disbursements and profits. His model has dividends at time t, explained by dividends at time t 1, and profits at time t. This is not a very satisfactory approach, except for shortrun prediction (of aggregate dividends), since it fails to account for apparently wide (intertemporal) variations in the dividend policy of various corporations, and does not go sufficiently far in elucidating the motives and factors involved in deciding the amount of corporate profits to be retained.

PROFESSORS Friedman and Meiselman' recently have reported that a simple theory model describes aggregate consumption more accurately than a simple autonomous expenditure model. They believe this result is evidence that the quantity theory is a better description of the American economy than the autonomous expenditure or Keynesian theory.2 If their interpretation were correct, the Friedman-Meiselman paper would be one of the most significant economic studies in many years. But it is not correct. Friedman and Meiselman have represented the autonomous expenditure theory in a very unorthodox form. Their statistical comparisons are extremely sensitive to how the autonomous expenditure theory is represented. Below, I employ a more conventional representation of the autonomous expenditure theory and demonstrate why Friedman and Meiselman's tests are misleading. Further, using this conventional model and some of their data, little empirical evidence is found which favors the theory. Finally some other conceptual weaknesses of the Friedman-Meiselman tests are illustrated. Briefly, Friedman and Meiselman compare simple, partial, and multiple correlation coefficients obtained from the following equations, estimated from annual (1897-1958) and quarterly (1945-1958) data for the United States: C=al+8(A (1) C=a2 +82M (2) C = a3+/33A +13P (3) C = a4 +84M+y4P (4) C = a5 + 35A + 85M (5) C = a6 + 86A + 86M + Y6P (6)

John F. Kain, A Contribution to the Urban Transportation Debate: An Econometric Model of Urban Residential and Travel Behavior, The Review of Economics and Statistics, Vol. 46, No. 1 (Feb., 1964), pp. 55-64

N recent years, we have seen a renewed interest in the problem of competition among banks. An increasing number of bank mergers has brought forth new legislation, such as the Bank Holding Company Act (1956) and the Bank Merger Act (1960), which directs regulatory agencies to preserve competition in banking. At the same time, it has become apparent that there is little or no empirical evidence on the relationship between bank performance and market structure. This paper aims chiefly at determining whether or not market structure or concentration has any effect on commercial bank performance. It is considered to be the groundwork from which it is hoped will spring more sophisticated techniques for handling the conceptual difficulties here encountered. It seems reasonable to begin an analysis of bank competition with what is undoubtedly the most delimited borrower market, the market for small business loans. There are fewer borrower alternatives for small business loans than for almost all other bank services. Business loans are also, of course, the most important component of commercial banks' loan portfolios. An investigation of this market provides an estimate of the upper bound of departures from competitive conditions. If no evidence of market power can be found in markets for business loans, other bank services for which there are more substitutes are not likely to display monopolistic practices. This paper attempts to test two hypotheses: (1) that, ceteris paribus, the level of business loan rates is higher in markets having relatively high concentration; and (2) that, ceteris paribus, business loan rates are less flexible in markets having relatively high concentration. In testing these hypotheses, an attempt is made to distinguish the effect of market structure from other regional differences, such as those of loan demand, bank costs, type of banking, etc. This paper seeks to probe the following questions: (1) What is a competitive market structure? (2) What is the quantitative effect of a given change in concentration, such as might result from a bank merger? (3) What determines the spatial market for bank loans? (4) Does branch banking have an effect on market performance different from that of unit banking? (5) How should market structure be measured? (6) Do banks which possess market power behave differently than competitive banks over the business cycle?

Lester D. Taylor, Thomas A. Wilson, Three-Pass Least Squares: A Method for Estimating Models with a Lagged Dependent Variable, The Review of Economics and Statistics, Vol. 46, No. 4 (Nov., 1964), pp. 329-346

A LONG standing issue in labor market analysis is the question of the relationship between cyclical variations in economic activity and labor force participation. There are three main hypotheses that have vied for attention. hypothesis holds that when economic activity declines, workers become discouraged and leave the labor force. hypothesis maintains that labor force participation increases at low levels of economic activity when workers enter the labor force under the pressure of the loss of work by the primary worker.' hypothesis maintains that any inflow of additional workers is offset by an outflow of discouraged workers so that, on balance, the over-all participation rate remains virtually constant, or that at least there is no clearly discernible cyclical relationship.2 In this paper, we present evidence that lends clear cut support to both the discouraged worker and the additional worker hypotheses. An initial decline in from a cyclical peak results in large-scale discouragement and withdrawal from the labor force. Subsequent declines in are met by a smaller decline in labor force participation. As the period of economic slack grows longer, pressure on additional workers to enter the labor force builds up and this tends partially to offset the discouragement effect. Statistical isolation of these effects has resulted in our ability to explain 88 per cent of the variation, after allowance for seasonal change, in labor force participation over the last decade. Our method takes into account the duration of unemployment and explains why a given change in produces different quantitative changes in participation at different times, and thereby, shows why univariate tests of the hypotheses have been inconclusive. discouraged worker effect is, in general, the dominant effect. Thus, for the period 19531962, the rule of thumb that emerges is that the loss of 100 jobs is roughly associated with a reduction in the size of the measured labor force of 50 persons. Because the dominant effect is withdrawal from the labor force, the official unemployment statistics understate the magnitude of unemployment during periods of economic slack. In order to provide a more accurate guide for short-run policies, we utilize our results to construct or full employment labor force series. By labor force we mean that size labor force that would have been recorded had the economy been at employment. These labor force series are then utilized to recalculate the level of unemployment and the unemployment rate. These calculations provide us with measures of the gap, defined as measured unemployment plus net cyclical withdrawal from the labor force. For November 1962, the official seasonally adjusted unemployment rate was 5.8 per cent. manpower gap unemployment rate, however, stood at between 9.45 and 10.30 per cent; the difference between the two gap rates being dependent upon the criterion of that was used in the calculations. One of our findings is that there has been a rising secular trend in the labor force participation ratio. Forecasts based on these findings suggest that the potential labor force in 1975 will be at least four million more than is currently projected by the Bureau * authors are members of the Department of Economics at Oberlin College. Professors George Andrews, Samuel Goldberg, Robert Solow, James Tobin, Robert Tufts, and Dr. Richard Nelson provided valuable comments on various parts of the study, as did the participants of the Ford Foundation Workshops on Unemployment and Economic Growth. 'The phrase has also been used to describe the hypothesis that favorable economic conditions attract secondary workers into the labor force. In this paper the phrase is used to denote the presumption that adverse economic conditions induce secondary workers to enter the labor force. 2For a survey of the literature, see Herbert S. Parnes, The Labor Force and Labor Markets, in Heneman et al. eds., Employment Relations Research (New York, 1960), 1-42.