Knowledge that Transforms

In September 1990, the city of Philadelphia went to the municipal-bond market to borrow $375 million dollars for one year, a not unusual event for a large city needing cash to cover weekly expenditures until the quarterly or annual tax revenues are collected. What was unusual for Philadelphia was the size of the loan request; the 1990 proposed borrowing was $187 million larger than the previous year's request of $188 million. Investors rightly suspected that Philadelphia needed money for more than just the typical cover of a few month's cash shortfall. A closer look at the city's books revealed over $73.8 million in accumulated deficits from the previous six budgets. The extra $187 million of short-term borrowing was necessary to help cover the $73.8 accumulated debt and fiscal year (FY) 1991's expected deficit of $132.6 million. Investors rejected Philadelphia's request for the additional borrowing, and the city fell into a three-year fiscal crisis. The city emerged from the crisis with city residents and shoppers paying an additional 1-percent sales tax, city workers facing a two-year wage freeze and a reduction in employee benefits, and residents living with reduced public services. The long-run effects on city employment and property values are sure to be damaging. How does a city get into such a fiscal mess? This paper seeks to provide one answer to this question using the recent (FY 1963-1990) fiscal history of Philadelphia as a case study. I. Accounting for a Fiscal Crisis

Roger Kormendi (1983) presents apparently strong evidence that, in contrast to the standard view, consumption is not reduced by taxes but is reduced by government expenditure. He interprets his results as supporting a consolidated approach to private sector behavior in which consumers effectively internalize the government budget constraint. Specifically, he claims that consumers regard government spending as the true measure of the government's claim on private resources, and so do not respond to changes in taxes, given spending. This is basically the approach advocated by Robert Barro (1974) and known also as the Ricardian Equivalence Proposition (hereafter REP). Kormendi's results appears to contradict other empirical work based on the Life Cycle Hypothesis (for example, Martin Feldstein, 1982; Modigliani 1984a; Sterling, 1985) although results similar to his have been reported (see David Aschauer, 1985; John Seater and Roberto Mariano, 1985 and the references in Kormendi). In our view, Kormendi's analysis is seriously flawed. His heuristic derivation of the consumption function leads him to a specification of the aggregate consumption function, which is not consistent with the Life Cycle Hypothesis (LCH) or with REP, and to questionable methods of estimation. Once his conceptual and methodological errors are corrected, his formulation and, more generally, the REP hypothesis are found to receive little empirical support. In the next section we rely on the LCH to derive an aggregate consumption function which shows explicitly how government expenditure and taxes should effect private consumption. This derivation helps to bring out the observable implications of REP, which are shown to be equivalent to a limiting form of the LCH in which the planning horizon is infinite. It also serves to clarify the appropriate specification of the variables appearing in the consumption function. Next, Section II reports our empirical estimates and tests. Section III compares our results with Kormendi's. Finally, Section IV reports the results of endeavors to improve the specification of fiscal variables, notably by distinguishing between permanent and transitory tax changes.

A tax reform is 'Dalton-improving' if it improves social welfare for all possible social-welfare functions that conform to Hugh Dalton's principle of transfers. According to this principle, there exists a prior social ranking of households and a transfer is approved if it it distributes from high-ranking ('rich') to low-ranking ('poor') households, without altering the ranking itself. In this paper, the authors develop a procedure for identifying marginal Dalton-improving reforms in the context of indirect taxation. The methodology is illustrated using data on excise taxes in the United Kingdom. Copyright 1995 by American Economic Association.

The small representation of women and minorities among students of economics has been noted for some time. While the proportion of B.A.'s earned by women in psychology rose from 36.7 percent in 1949-1950 to 70.8 percent in 1988-1989, in sociology from 50.6 percent to 68.8 percent, and even in mathematics from 22.6 percent to 46.0 percent, in economics it has increased from only 7.6 percent to 32.5 percent. The share of Ph.D.'s earned by women in 1988-1989 was 56.2 percent in psychology, 50.9 percent in sociology, 26.6 percent in business, 19.4 percent in mathematics, and 19.0 percent in economics. Hence, general sexism in the classroom1 does not appear to be the main culprit, nor do the explanations that mathematics requirements inhibit women's entry into economics or that women are uninterested in business-related fields seem convincing. Instead, one must look to factors specific to economics. Evidence that women students do not perform as well as men in introductory economics courses (John J. Siegfried, 1979; Gordon Anderson, et al., 1994), although they have higher grades overall, further adds to this conclusion. For these reasons there has been considerable interest among feminist economists in the chilly classroom climate, for women and minority students in economics courses. In this paper, the focus is on the small representation of women among economics faculties, the biased subject matter, and the narrow approach of traditional economics. The number of women faculty can only be increased gradually as their representation among graduate students and new faculty hires increases. However, the subject matter can be changed more rapidly, as the consciousness of instructors and authors of textbooks is raised, and the challenge to the traditional economic approach appears to be making more progress than most of us dared to hope only a few short years ago. Thus, in spite of the remaining problems, there is reason to believe that in economics, as in most other disciplines, women's progress will eventually accelerate.

A voluntary export restraint (VER) is preferred to a tariff by a government concerned about electoral returns when the influence of industry profits is large relative to the losses to consumers from higher prices. If the foreign firm is uncertain of these pressures, the antidumping code facilitates the complete transfer of the relevant information and generates a VER rather than a tariff in equilibrium. The choice across instruments is determined by the political attributes. Domestic and foreign profits rise with the antidumping-generated VER, and the VER lowers the volume of trade by more than the expected duty. Copyright 1996 by American Economic Association.

In this paper we follow previous research by using experimental data to assess the two nonexperimental evaluation approaches. Our data are from a series of social experiments conducted in several states during the 1980s to evaluate programs aimed at helping welfare recipients find jobs. We simulate the two nonexperimental approaches by creating comparison groups from the true control groups and by comparing the resultant nonexperimental estimates of program effects with experimentally derived estimates of program effects. Although experimental data are required to provide an assessment of the nonexperimental approaches they are not required to create the comparison groups in practice. Thus our results have direct implications for choosing a nonexperimental evaluation strategy when an experiment is not feasible. The remainder of this paper is organized as follows. Section I describes the social experiments and the various comparison groups created for the analysis. Section II discusses the methods used to generate and assess the nonexperimental estimates. Section III presents the empirical results and Section IV offers some conclusions. (excerpt)

A widely held view suggests that politically independent central banks bring about relatively low and stable inflation rates.' A more debated question is whether one has to pay for this good outcome with more real instability. In his seminal contribution, Kenneth Rogoff (1985) suggests that an independent and inflation-averse central bank reduces average inflation but, as a result, increases output variability; the conservative central banker reduces the inflation bias, due to the time-inconsistency problem, but stabilizes less. However, Alesina and Summers (1993) do not find that, at least within the OECD countries, more independent central banks are associated with more variability of growth or unemployment. Thus, they conclude that independent central banks bring about low inflation at no apparent real costs. The point of this paper is to provide theoretical underpinnings to this finding, which is in contrast to Rogoff (1985).2 The basic idea is that one can isolate two sources of output variability. One is the economic variability induced by standard exogenous shocks that monetary policy is supposed to stabilize, for instance, money demand shocks or supply shocks. The second source of variability is or, more generally, policy-induced. This is the variability introduced in the system by the uncertainty about the future course of policy. For instance, Alesina (1987) studies the effect of uncertain electoral outcomes in a model where the two contending parties have different preferences over inflation and unemployment. An inflation-averse, independent central banker does not stabilize as much the economic variability, in order to keep inflation low and stable. This is Rogoff's point. However, by insulating monetary policy from political pressures, an independent central bank can reduce the variability. The overall effect of independence on output variability is, thus, ambiguous. This result is consistent, at least prima facie, with the evidence in Alesina and Summers (1993) on the lack of correlation between centralbank independence and output variability. In fact, it is possible that when the politically induced output variability is predominant, a more independent central bank reduces average inflation and the variance of output.

The 0. J. Simpson affair is only the latest in a series of events that have focused attention on domestic violence. Using data collected by Murray Strauss and his colleagues, Lawrence Sherman (1992) estimates that each year there are 18 million incidents of domestic violence fitting the criminal-justice classification of an assault and that police officers handle at least two million cases of violence involving a spouse or lover. Domestic-violence assault is more common than all other forms of violence combined. Recognizing that domestic violence is a social as well as a private issue, a number of police departments have participated in experiments designed to learn how they can best handle domestic-violence calls. In this paper, we use data from the experiment in Minneapolis to determine how police treatments in cases of domestic violence affect the couple's subsequent violence. We also examine how socioeconomic factors such as age and employment are related to domestic violence. These factors are considered in part because they may affect the police actions. Our model is a stochastic dynamic model that allows the effects of the police actions to vary over time. In brief, we find that arrest is more effective than advising or short-term separation but that the differential effect is transitory.