Knowledge that Transforms

Most economists believe that legislation obligating the government to increase expenditures in the future will have some current stimulative effect on private spending; tax increases scheduled to take place in the future will depress current spending. Few economists, however, have considered the effects of budgeting or actuarial rules that oblige the government to change current spending patterns or tax laws. If such rules are followed, future taxes and expenditures will turn out to be different from current ones. Will private behavior be affected solely by currently legislated tax rates and expenditures? Or will it be affected instead by the taxes and expenditures that current budgeting rules appear to require? This question is central to interpreting the fiscal implications of additions to Social Security reserves. Social Security revenues, including interest, will exceed expenditures by $52 billion in 1989. The annual surplus will reach $98 billion by 1994 and $450 billion by 2020. These shortand medium-term surpluses are projected to be dwarfed by even larger deficits starting around 2030. Using a 2 percent real interest rate and other detailed economic and demographic assumptions, the Social Security actuary now projects that expenditures will exceed revenues over the next 75 years by just under 5 percent of the present discounted value of expenditures. Furthermore, the long-run deficit, measured in present-value terms, will grow larger each year. As each year passes, one year of surplus passes into history and all the future years with large deficits move one year closer. The present value of future benefit obligations will consequently grow relative to the present value of future revenues. Ironically, the annual surpluses in the Social Security accounts will swell to unprecedented levels just as the long-run deficit is rising. Which is the better guide to the effect of Social Security on aggregate demand-the annual surpluses, whose growth suggests that Social Security's contribution to fiscal policy is now restrictive; or the long-term deficits, which are also growing larger and suggest that Social Security is stimulative? One's answer to this question determines one's interpretation of recent budget policy. Consider the effect of the Social Security Amendments passed in 1983. Because the OASDI program faced severe financing problems in the early 1980s, Congress reduced benefit entitlements and raised Social Security taxes, but delayed full implementatDiscussants: Robert M. Ball, National Academy of Social Insurance; Lawrence H. Thompson, U.S. General Accounting Office; John Hambor, Social Security Administration.

Changes in the poverty level of related black children in families in the United States are examined for the period 1969-1979. data concern a sample of 45 SMSAs that contained at least 100000 blacks in 1980. The research investigates the extent to which changing family structure family composition and areal economic conditions are associated with changing poverty rates of black children across metropolitan areas. (EXCERPT)

The effect of developing country loan reschedulings on large U.S. banks is investigated using an event study methodology. The major finding concerns the evolving nature of the impact of loan reschedulings. During 1978-80, reschedulings had a positive effect on bank returns, in contrast to the negative impact found for the 1981-83 period. An explanation for these results is provided by a model of the rescheduling process that recognizes the noncompetitive aspects of rescheduling negotiation.