Knowledge that Transforms

Politicians almost all talk about the deficit, and almost all decry it. Very few, literally, know what they are talking about. To my dismay I have felt over some years that too many economists fall in the same category. I shall insist, contrary to Ricardian views, that deficits do matter and can matter very much. They can be too small as well as too large, and you cannot even begin to tell what they are until you measure them right. At this time, the real is too small. One can pick from a huge variety of deficits. The federal for the 1991 fiscal year reported by the Office of Management and Budget (OMB), including off-budget and on-budget items, was $269 billion. This compares with an economically more meaningful federal on national income accounts of $190.3 billion, which was just 3.3 percent of gross domestic product. If you were to follow Congressional legislation and arbitrarily exclude social security (and the postal service) from the unified or total OMB budget you can work the up to $321 billion. More sensibly, one can exclude $67 billion for that is, the savingsand-loan bailout, which is at this point merely a financial transaction substituting explicit federal debt for the debt implicit in deposit guarantees. This would get the down to $202 billion. If one looks at a (measured at 5.5 percent unemployment, which I would consider too high), eliminating the effects of the recession along with deposit insurance, the would be $124 billion. Looking at what is called the primary, standardized-employment budget, excluding interest payments along with deposit insurance, one actually finds a substantial surplus, of $71 billion.' There are other, more meaningful measures of the that might well be advanced. These would entail: 1) adjustment for the inflation tax on the holders of existing debt; 2) including the offset of state and local government surpluses, particularly since federal grants contributing to those now meager surpluses comprise a major element in the federal deficit; and 3) excluding net capital expenditures, as would be consistent with private business accounting. These most appropriate adjustments, as shown in Table 1A, bring the deficit down from its 1991 figure of $269 billion to a paltry $17 billion. Still another way of looking at the budget is to note that an appropriate concept of balance for the government in a growing economy, like that for any business, is that the debt grow no faster than income or output, so that the debt:income ratio does not rise, as shown in Table 1B. The 7-percent growth that the economy has experienced in previous, nonrecession years would then imply an increase in debt-or deficit, aside from the effects of the recession-of $188 billion. This in a meaningful sense would be balance; but that is again 3.3 percent of GDP, almost precisely the actual federal on the national income account. Furthermore, that includes a substantial component due to the recession. By standards of constant debt: GDP ratio, a high-employment, cyclically adjusted budget would be in substantial surplus. The one sophisticated objection frequently offered to budget deficits without, I must say, paying much attention to how

The deterioration of the U.S. merchandise trade deficit in the 1980s fell mostly on durable goods. Using a representative-agent model, the authors show that the key distinction between the trade balance in nondurables and durables is the role of intertemporal prices in the latter. A decrease in intertemporal prices associated, for example, with an exchange-rate overvaluation should, therefore, be expected to worsen the trade balance in durables more than in nondurables. This interpretation of the compositional changes of the U.S. trade balance is supported by their econometric findings. Copyright 1992 by American Economic Association.

What is the effect of a tariff reduction that applies only to a subset of commodities subject to tariffs? This important question was addressed systematically for the first time by James Meade (1955 Ch. 13) in his classic work Trade and Welfare. After a careful analysis, Meade concluded, [T]here is more likely to be a gain in economic welfare if the rate of duty is high on the which will come in in increased and is low on the which will come in in reduced volume (p. 208).' This result was proved formally by Trent J. Bertrand and Jaroslav Vanek (1971), who demonstrated that, in a small open economy, if the highest tariff rate is reduced to the next highest one, welfare will rise provided the import demand for the good with the highest tariff exhibits gross substitutability with respect to all other goods.2 Subsequently, following a different strand of the literature as exemplified in John Green (1961), Tatsuo Hatta (1973, 1977) and Peter Lloyd (1974) independently proved similar results in terms of Hicksian substitutability.3 In deriving their results, Bertrand and Vanek allowed for the use of final goods as intermediate inputs (i.e., interindustry flows).4 However, neither they nor the subsequent writers (including Hatta and Lloyd) allowed for the existence of imported intermediate inputs that are not produced domestically. Therefore, a natural question is whether the piecemeal policy prescription derived by them remains valid in the presence of pure imported intermediates. This question is particularly important for developing countries for two reasons. First, by far the bulk of the of developing countries are intermediate and capital goods. According to the World Bank, during the period 1975-1985 50 percent of developing countries' were accounted for by intermediate inputs, and an additional 30 percent were capital goods. A sizable proportion of both capital and intermediate goods are neither produced nor directly consumed in these countries. Second, the Meade-Bertrand-VanekHatta-Lloyd result has been the cornerstone of trade policy reform in many developing countries, especially during the last decade. In most countries, trade reform has been based on the so-called concertina approach, under which the highest tariffs are reduced to the next highest ones and then to the next highest ones, and so on. Thus, * Lopez: Professor, Department of Agricultural and Resource Economics, University of Maryland, College Park, MD 20742, and consultant, Trade Policy Division, World Bank, 1818 H Street, N.W., Washington, DC 20433; Panagariya: Senior Economist, Trade Policy Division, World Bank, 1818 H Street, N.W., Washington, DC 20433, and Professor, Department of Economics, University of Maryland, College Park, MD 20742. The findings, interpretations, and conclusions in this paper are entirely those of the authors. They do not necessarily represent the views of the World Bank, its Executive Directors, or the countries they represent. The authors are indebted to two referees and Tatsuo Hatta for valuable comments on an earlier draft. IIn this quotation, primary imports refers to the goods on which tariffs are reduced, while secondary imports refers to other importables subject to tariffs. 2Robert Lipsey and Kelvin Lancaster (1956) had proved the basic result of Bertrand and Vanek in a one-factor, three-good model with a Cobb-Douglas utility function. 3More recently, Takashi Fukushima (1979) has proved the validity of the Hatta-Lloyd result when the highest tariff is shared by several commodities, while Rodney Falvey (1988) has done the same in the presence of quantitative restrictions on imports. 4Although Hatta (1973, 1977) did not allow explicitly for interindustry flows, his results can also be shown to be valid in the presence of such flows.

The authors develop and test the orthogonality conditions implied by a dynamic model of the inflation tax. A distinguishing feature of the analysis is that the welfare loss from inflation, the money-demand function, and the time path of inflation are jointly derived from first principles of government and private-sector intertemporal optimization. Quarterly data for Argentina, Brazil, and Israel are used in implementing the model. Although the overidentifying restrictions of the model are not rejected in most cases, there are several data points characterized by higher rates of inflation than the optimal rates under precommitment. Copyright 1992 by American Economic Association.

deductive logics are used extensively in both orthodox and radical approaches, positive movement toward a raceand gender-balanced economics requires opening the methodological door to the many alternatives available for constructing economic reality. Such an opening, however, is predicated on an understanding of how current practices exclude or marginalize the experiences of the majority. Economic science, especially in the dis, tilled version taught in undergraduate classes, has been dominated by a single theoretical voice which has been authoritatively defined as THE valid approach to economic questions. McCloskey (1983) identifies this voice as the economic variant of modernism in which all economic outcomes are ultimately traceable to the universal imperatives of individual choice. As argued in Feiner and Bruce Roberts (1990), a catholic application of this approach blocks the discussion of topics relating to race and gender in economics. In the classroom, economics professors whose emphasis on formal mathematical modeling and the neoclassical approach excludes consideration of alternative approaches create a false sense of security about the science underlying the discipline. In fact, questions need not be limited to mathematical modeling or the behavior of the rational economic man because alternatives do exist. The new scholarship enables students to ask more inclusive questions by expanding existing models and developing alternative models. This approach to methodology is grounded in and draws upon important critical discoveries in experimental and social sciences (Ruth Blier, 1986; Joyce McMarl Nielson, 1990). The social diversity it recognizes is mirrored by the diversity of methods employed for solving problems and addressing issues. By comparing Claudia Goldin's (1990) and Teresa L. Amott and Julie A. Matthaei's (1991) explanation of malefemale wage differentials, one can see how different methodological approaches affect both course content and cognitive achievement. Goldin couples the human-capital model with a traditional empirical approach to determine the reasons for the wage gap and its persistence. Amott and Matthaei couple a qualitative historical approach with an alternative feminist-Marxist model to determine the reasons for the wage gap and its persistence. Cecilia Conrad (1992) suggests that most economics classes would rely solely on a treatment like that found in Goldin. Such an exclusive emphasis is unwarranted, however, as it produces both an unbalanced view of the available economic approaches and an unbalanced view of contemporary controversies within economics. In comparing the paths of political and scientific change Thomas Kuhn (1970 p. 92) comments that: ... scientific revolutions are inaugurated by a growing sense, again often restricted to a narrow subdivision of the scientific community, that an existing paradigm has ceased to function adequately in the exploration of an aspect of nature to which that paradigm itself had previously led the way. When a growing number of economists recognize the likely connection between the curriculum's emphasis on economic orthodoxy and the failure of the profession to produce an adequate number of female and minority practitioners, then there will be a readiness to look at new approaches and paradigms. Convincing the mainstream to take up this task will be difficult; [w]hen paradigms enter, as they must, into a debate about paradigm choice, their role is necessarily circular. Each group uses its own paradigm to argue in that paradigm's defense (Kuhn, 1970 p. 94 [emphasis added]). This content downloaded from 157.55.39.215 on Tue, 30 Aug 2016 04:18:15 UTC All use subject to http://about.jstor.org/terms VOL. 82 NO. 2 AL TERNA TIVE PEDAGOGIES AND ECONOMIC EDUCA TION 561 Both those who would include greater attention to race and gender variables and those who would either continue to exclude them from attention or else handle them in an orthodox manner argue from their cho-