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Abstract:
NOTE: This is a description of the paper and is not the actual abstract.

This paper discusses the role of the IMF in the current Asian "economic crisis". It traces the evolution of the IMF policy from macroeconomic policies in currency crises to the current attempt to impose very detailed structural reforms. The precipitating problem in Thailand and Indonesia was a massive current account deficit based on a fixed exchange rate. In Korea it was very different: excess short term speculative international borrowing leading to a mismatch of short term liabilities and currency reserves. The paper discusses why the IMF macropolicies are too contractionary and why the structural reform policies inappropriately interfere with the policies that, whether good or bad, should be left to sovereign governments.

Abstract:
The current IMF programs in Asia go far beyond the traditional role of the IMF. Instead of requiring macroeconomic policies that can achieve the necessary current account improvements, the IMF is intervening in detailed domestic policies in labor markets, corporate structure, banking, specific taxes and regulation, import rules, etc. The paper argues that such policies are an inappropriate interference with policies that should be left to sovereign governments and are likely to be counterproductive. Similarly, the Fund is seeking to substitute its loans for the obligations to foreign bankers when it should instead be seeking to bring together borrowers and creditors to restructure private loans. The paper is also critical of the monetary and fiscal policies imposed in Korea, the largest of the problem economies.

Abstract:
As recently as two years ago there was a widespread consensus among economists that fiscal policy is not useful as a countercyclical instrument. Now governments in Washington and around the world are developing massive fiscal stimulus packages, supported by a wide range of economists in universities, governments, and businesses. Why has this change occurred? What are the principles for designing a potentially useful fiscal stimulus? And what will happen if the current fiscal stimulus fails?

Abstract:
The housing sector is now (September 2007) at the root of three distinct but related problems: (1) a sharp decline in house prices and the related fall in home building; (2) a subprime mortgage problem that has triggered a substantial widening of all credit spreads and the freezing of much of the credit markets; and (3) a decline in home equity loans and mortgage refinancing that could cause greater declines in consumer spending. Each of these could by itself be powerful enough to cause an economic downturn. The combination could cause a very serious recession unless there are other offsetting forces. In this paper, I discuss each of these and then comment on the implications for monetary policy.

Abstract:
This paper begins by discussing the nature of and rationale for social insurance programs. I then consider three political principles and four economic principles that could guide the design and reform of social insurance programs. These ideas are then applied to unemployment insurance, Social Security pensions, health insurance and Medicare. A common theme is the advantage of incorporating investment based personal accounts in each of these programs.

Abstract:
This is the introductory chapter to an NBER conference volume that examined the lessons to be drawn from the financial and currency crises of the late 1990s. The paper does not attempt to summarize the specific content of that meeting but provides the author's personal conclusions about crisis prevention and management. The first part of the paper deals with policies of the emerging market economies that affect the likelihood of crises, including exchange rate regimes, capital account convertibility, foreign exchange liabilities and reserves, domestic credit structure, and financial supervision. The paper then considers policies of industrial countries that affect the risk of crises in emerging market economies, including exchange rate instability, interest rates, banking supervision, trade policy, and the provision of a lender of last resort facility. The second half of the paper deals with the way that the crises were managed by the IMF and attempts to answer the following questions: (1) Have the crises been resolved, permitting the crisis countries to return to solid economic growth and to achieve renewed access to international capital markets? (2) Did the IMF stabilization policies resolve the crisis with as little economic pain as possible? (3) Did the agreed structural reforms actually occur and, if so, were they successful? (4) How did the experience of the crisis countries affect the incentives of lenders, borrowers, and countries facing crises in the future? (5) Were the actions of the IMF politically legitimate for an international agency? (6) What were the political consequences of the crises and the policies that followed?

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
Governments around the world have enacted or are currently considering fundamental structural reforms of their Social Security pension programs. The key feature in these reforms is a shift from a pure pay-as-you-go tax-financed system, in which taxes on current workers are primarily distributed to current retirees, to a mixed system that combines pay-as-you-go benefits with investment-based personal retirement accounts. This paper discusses how such a mixed system could work in practice and how the transition to such a change could be achieved. It then analyzes the economic gains that would result from shifting to a mixed system. I turn next to the three problems that critics raise about any investment-based plan: administrative costs, risk, and income distribution. Finally, I comment on some of the ad hoc proposals for dealing with the financial problem of Social Security without shifting to an investment-based system.

Abstract:
This paper discusses a possible solution to the double problem that faces European governments in dealing with the future of Social Security pensions. Like other governments around the world, they must deal with the rising cost of pensions that will result from the increasing life expectancy of the population. But the European governments have the extra problem that any solution must be compatible with a European Union labor market in which individuals from any member country are free to work anywhere within the European Union. The solution to this double problem that is developed in this paper combines an investment-based system of individual accounts with a 'notional defined contribution' system financed by pay-as-you-go taxes.

Abstract:
This paper, a forthcoming chapter in the Handbook of Public Economics, reviews the theoretical and empirical issues dealing with Social Security pensions. The first part of the paper discusses pure pay-as-you-go plans. It considers the effects of introducing such a plan on the present value of consumption, the optimal level of benefits in such plans, and the emprical research on the effects of pay-as-you-go pension systems on labor supply and saving. The second part of the paper discusses the transition to investment-based systems, analyzing the effect on the present value of consumption of such a transition and considering such issues as the distributional effects and risk associated with such systems.

Abstract:
How internationally mobile is the world's supply of capital? Does capital flow among industrial countries to equalize the yield to investors? Alternatively, does the saving that originates in a country remain 'to be invested there? Or does the truth lie somewhere between these two extremes? The answers to these questions are not only important for understanding the international capital market but are also critical for analyzing a wide range of issues including the nation's optimal rate of saving and the incidence of tax changes.

Abstract:
This paper begins by discussing the inherent conflict between the simultaneous existence of a single currency for the countries of the European Economic and Monetary Union (EMU) and the independent fiscal policies of those countries. The Stability and Growth Pact was an attempt to reconcile that conflict. I describe how EMU governments have chosen to ignore the Stability Pact's constraint on budget deficits and how they sought to undermine it by changing the rules themselves. The final part of the paper describes the actual resolution of the issue by the agreement reached at the end of March 2005 by the European Council. The new policy effectively abandons the Stability Pact and leaves the way open to much larger sustained deficits.

Abstract:
This paper comments on five aspects of globalization: (1) the gains from international flows of goods and capital; (2) the role of foreign direct investment and reasons for its increase; (3) the preventions and management of currency crises; (4) the fluctuation of relative currency values; and (5) the segmentation of global capital market.

Abstract:
Although there is now widespread agreement in the economics profession that discretionary 'counter-cyclical' fiscal policy has not contributed to economic stability and may have actually been destabilizing at particular times in the past, there is one important condition when discretionary fiscal policy can play a constructive role: in a sustained downturn when aggregate demand and interest rates are low and when prices are falling or may soon be falling.

This short note begins by summarizing the general case against using fiscal policy for stabilization. It next considers the argument for using a 'hyperexpansive' monetary policy to reduce the risk that a low rate of inflation will lead to a deflationary situation in which monetary policy becomes ineffective. Such a policy would increase the risk of asset price bubbles and of a misaligned exchange rate.

Discretionary fiscal policy provides an alternative way to stimulate the economy when aggregate demand and interest rates are low and when prices are falling or may soon be falling. A stimulus can be achieved without increasing budget deficits if the fiscal policy acts by providing an incentive for increased private spending. Specific examples for the U.S. and Japan are considered.

Abstract:
The creation of the euro and the European Central Bank is a remarkable and unprecedented event in economic and political history: creating a supranational central bank and leaving eleven countries without national currencies of their own. The experience of the first year confirms that one size fits all' monetary policy is not suitable for Europe because cyclical and inflation conditions vary substantially among countries. Labor market policies during this first year will increase this problem in the future and may lead to more trade protectionism. The paper explores reasons why cyclical unemployment, structural unemployment, and inflation may all be higher in the future as a result of the single currency. Although some advocate the euro despite its economic problems because of its assumed favorable effects on European political cohesiveness, the paper argues that it is more likely to lead to political conflict within Europe and with the Unites States.

Abstract:
This nontechnical paper discusses the adverse effects of high marginal tax rates on labor income and on investment income. It explains that the deadweight loss of a tax on labor income depends on the response of taxable income and not just the change in labor supply. An across the board increase in personal tax rates involves a deadweight loss of 76 cents per dollar of revenue and only collects about two-thirds of the revenue implied by a %u201Cstatic%u201D calculation.A tax on investment income brings a deadweight loss even if household saving does not respond to taxes and the net rate of return. What matters is the response of future consumption. The tax on investment income is also effectively a tax on labor supply because current work effort produces income that will be spent on future consumption and the tax on investment income reduces the future consumption that results from more work today. An appendix shows for a simple log utility case that the tax on labor income has a smaller deadweight loss than a tax on investment income with the same present value of revenue.There is a further discussion of the various ways in which capital income taxes distort economic activity.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
This report discusses the adverse effects of high marginal tax rates on labor income and on investment income. It explains that the deadweight loss of a tax on labor income depends on the response of taxable income and not just the change in labor supply. An across-the-board increase in personal tax rates involves a deadweight loss of 76 cents per dollar of revenue and collects only about two-thirds of the revenue implied by a static calculation, according to this report.

Feldstein explains that tax on investment income brings a deadweight loss even if household saving does not respond to taxes and the net rate return. What matters is the response of future consumption. The tax on investment income is also effectively a tax on labor supply, he explains, because current work effort produces income that will be spent on future consumption and the tax on investment income reduces the future consumption that results from more work today. Finally, he discusses the various ways in which capital income taxes distort economic activity.

Abstract:
This paper presents several alternative Social Security reform options in which the projected level of benefits for every future cohort of retirees is as high or higher than the benefits projected in current law. These future benefits can be achieved without any increase in the payroll tax or in other tax rates. Under each option, the Social Security Trust Fund is solvent and ends with a sustainable positive and growing balance. Each option combines the current pay-as-you-go system of defined benefits with an investment-based personal retirement account (PRA). Assets in the PRA can be bequeathed if the individual dies before normal retirement age. We also consider the option in which an individual can take all or part of his accumulated PRA balanced as a lump sum at normal retirement age. The basic plan that we present in greatest detail combines a transfer to the personal retirement account of a portion of the individual's payroll tax equal to 1.5 percent of earnings if the individual agrees to deposit an equal out-of-pocket amount. The additional national saving that results from this option leads to increased business investment and therefore to increased general tax revenue; a portion of that revenue, equal to 1 percent of the PRA balances , is transferred to the Social Security Trust Fund. The other options that we present include plans with no out-of-pocket contributions by individuals and others with no transfer of general revenue to the Trust Fund. We also discuss the implications of different rates of return on the PRA balances and, more generally, the issue of risk, including a market-based method of guaranteeing the real principal of all PRA deposits.

Abstract:
This paper provides a relatively nontechnical discussion of the effects of shifting from a pay-as-you-go system of Social Security pensions to a fully funded plan based on individual accounts. The analysis discusses the rationale for such a shift and deals with five common problems: (1) the nature of the transition path; (2) the effect of the shift on national saving and capital accumulation; (3) the rate of return that such accounts would earn; (4) the risks of unfunded and funded systems; and (5) the distributional effects of the shift.

Abstract:
China has legislated a mixed social security pension system with a defined benefit pay-as-you-go portion and an investment-based defined contribution portion. This paper analyses the economics of these two types of systems in the Chinese context and calculates the advantage to China of using an investment-based portion. Several options for reform of the recently legislated system are considered.

Abstract:
The first part of this paper argues that income inequality is not a problem in need of remedy. The common practice of interpreting a rise in the gini coefficient measure of inequality as a bad thing violates the Pareto principle and is equivalent to using a social welfare function that puts negative weight on increases in the income of high income individuals. The real distributional problem is not inequality but poverty. The paper considers three sources of poverty and asks what if anything might be done about each of them: unemployment; a low level of earning capacity; and individual choice.

Abstract:
This paper uses the recent controversy between the European Union and the Irish Republic to discuss the more general relation between the European Union, the EMU and the member countries. Despite outstanding economic growth and budget surpluses, Ireland has been criticized by the European Commission because it has reduced taxes in the context of a relatively high rate of inflation. The first part of the paper considers the ways in which the EMU is likely to affect inflation and cyclical unemployment in the member countries over the longer term. The second part deals more specifically with the current Irish situation and the reasons for an EU reprimand of a very small country. That part suggests that an alternative standard, based on the principle of 'do no harm' would have lead to a different outcome. Finally, the paper describes a policy of creating investment-based personal retirement accounts that would allow Ireland to share its future budget surpluses with taxpayers in a way that does not contribute to inflationary pressures.

Abstract:
Productivity in the United States has been growing faster in the past seven years than it did in the previous quarter century. U.S. productivity growth accelerated while that in Europe declined. This paper asks why U.S. productivity growth has been faster than in the past and than in Europe. An important reason for the faster growth has been the strong incentives for managers at all levels to make the kinds of changes that can raise productivity even if that involves personal risk and discomfort. These incentives became much stronger during the 1990s for reasons that I speculate about but do not begin to understand fully. The information technology developments in personal computers and in internet and intranet communications provided a powerful means to achieve the productivity gains that everyone was seeking. But even if the new IT opportunities had not come along, the combination of strong incentives and a receptive corporate climate would have led managers to find other ways to increase productivity, although undoubtedly not by as much. European firms had neither the incentive structure nor the corporate environment supportive of making change that could involve significant job changes and layoffs. Although Europe has higher unemployment rates, it is much more difficult to lay off workers in Europe than in the United States. Reorganizing white collar work to change job assignments and locations is also much easier in the U.S. than in Europe. The future is likely to see continued strong productivity growth and perhaps even increasing productivity growth in the United States if the incentives and corporate environments remain supportive. The prospects for Europe remain uncertain.

Abstract:
This paper presents a simple model of market equilibrium to explain why firms that maximize the value of their shares pay dividends even though the funds could instead by retained and and subsequently distributed to shareholders in a way that would allow them to be taxed more favorably as capital gains. The two principal ingredients of our explanation are: (1) the conflicting preferences of shareholders in different tax brackets and (2) the shareholders' desire for portfolio diversification, we should that companies will pay a positive fraction of earnings in dividends. We also provide some comparative static analysis of dividend behavior with respect to tax parameters and to the conditions determining the riskiness of the securities.

Abstract:
EMU would be an economic liability. A single currency would cause at most small trade and investment gains but would raise average cyclical unemployment and would probably raise inflation, perpetuate structural unemployment, and increase the risk of protectionism. EMU is nevertheless being pursued in order to create a political union. Fundamental disagreements among member states about economic policies, foreign and military policies, and the sharing of political power are likely to create future intra-European conflicts. A united Europe would be a formidable participant in the 21st century's global balance of power, with uncertain consequences for world stability and peace.

Abstract:
The level of the dollar is part of a complex general equilibrium system. Nevertheless, it is helpful to recognize that the high level of the dollar is necessary to generate the current account deficit equal to the difference between national saving and investment. Understanding the high level of the dollar therefore requires understanding the reasons for the low level of national saving in the United States. Reducing the large current account deficit will require both a higher rate of national saving and a more competitive dollar. Although the necessary decline in the real value of the dollar can in theory occur without a decline in the dollar's nominal value, the implied magnitude of the fall in the domestic price level is implausible. A decline of the real value of the dollar that is large enough to reduce the current account deficit significantly requires a significant decline in the nominal value of the dollar.

Abstract:
This paper examines the risk aspects of an investment-based defined contribution Social Security plan. We focus on the risk after the plan is fully phased in. Individuals deposit a fraction of wages to a Personal Retirement Account (PRA), invest these funds in a 60:40 equity-debt mix, and in a similarly invested annuity at age 67. The value of the assets follows a random walk with mean and variance of a 60:40 equity-debt portfolio over the period 1946-95, a mean log return of 5.5 percent (net of administrative costs of 0.4 percent) and a standard deviation of 12.5 percent. We study he stochastic distributions of this process by doing 10,000 simulations of the 80-year experience of the cohort that reached age 21 in 1998. The resulting annuities are compared to the future defined benefits specified in current law (the benchmark' benefits). With no uncertainty, a 5.5 percent log return would permit the benchmark benefits to be purchased with PRA deposits of 3.1 percent of payroll, only one-sixth of the pay-as-you-go tax needed for the benchmark benefits. Saving a higher share of wages provides a cushion' that protects the individual from the risk of an unacceptably low level of benefits. For example, PRA deposits of 6 percent of wages reduces the probability that the benefits are less than the benchmark to 0.17 and the probability that they are less than 61 percent of the benchmark to 0.05. PRA deposits of 9 percent of wages (half of the tax rate required in a pay-as-you-go system) would substantially reduce these risks. This pure investment-based plan is an extreme case. The investment risk can be reduced further by using a mixed system that combines pay-as-you-go and investment-based components or that makes intergenerational transfers conditional on the performance of stock and bond prices.

Abstract:
Although capital is now generally free to move across national borders, there is strong evidence that savings tend to remain and to be invested in the country where the saving takes place. The current paper examines the apparent conflict between the potential mobility of capital and the observed de facto segmentation of the global capital market. The key to reconciling this 'Feldstein-Horioka paradox' is that, although capital is free to move, its owners, and especially the agents who are responsible for institutional investments, prefer to keep funds close to home because of a combination of risk aversion, ignorance and a desire to show prudence in their investing behavior. The paper presents evidence on the capital mobility and on capital market segmentation. The role of hedging and the difference between gross and net capital movements for individual investors and borrowers are discussed. The special place of foreign direct investment is also considered. The segmentation of the global capital market affects the impact of capital income taxes and subsidies. This is discussed in the final section of the paper

Abstract:
We examine a system of Unemployment Insurance Saving Accounts (UISAs) as an alternative to the traditional unemployment insurance system. Individuals are required to save up to 4 percent of wages in special accounts and to draw unemployment compensation from these accounts instead of taking state unemployment insurance benefits. If the accounts are exhausted, the government lends money to the account. Positive accounts earn the return on commercial paper and negative accounts are charged that rate. Positive UISA balances are converted into retirement income or bequeathed if the individual dies before retirement age. Negative account balances are forgiven at retirement age. Money taken by an unemployed individual from a UISA with a positive balance reduces the individual's personal wealth by an equal amount. In this case, individuals fully internalize the cost of unemployment compensation. UISAs provide the same protection to the unemployed as the current UI system but with less of the adverse incentives. The key empirical question is whether accounts based on a moderate saving rate can finance a significant share of unemployment payments or whether the concentration of unemployment among a relatively small number of individuals implies that the UISA balances would typically be negative, forcing individuals to rely on government benefits with the same adverse effects that characterize the current UI system. To resolve this issue we use the Panel Study on Income Dynamics to simulate the UISA system over a 25 year historic period. Our analysis indicates that almost all individuals have positive UISA balances and therefore remain sensitive to the cost of unemployment compensation. Even among individuals who experience unemployment, most have positive account balances at the end of their unemployment spell. Although about half of the benefit dollars would go to individuals whose accounts are negative at the end of their working life, less than one third of the benefits go to individuals who also have negative account balances when unemployed. These facts suggest a substantial potential improvement in the incentives of the unemployed. The cost to taxpayers of forgiving the negative balances is substantially less than half of the taxpayer cost of the current UI system. Our analysis of the distribution of lifetime UISA payments and taxes of household heads shows the top quintile gaining a small cumulative amount while those in the bottom quintile lose a very small cumulative amount. Other quintiles are small net gainers.

Abstract:
A funded social security retirement program would imply a larger capital stock and a higher level of real income than an unfunded program that provides the same level of benefits. The transition from an unfunded program to a funded program that does not reduce the benefits of existing retirees or the present value of the benefit entitlements of existing employees would, however, require substituting explicit government debt for the equally large implicit debt of the unfunded program. This paper shows that such a debt financed transition from an unfunded program to a funded program is not just a change of form without economic effects. Such a debt financed transition would raise economic welfare if three conditions are met: (1) the marginal product of capital exceeds the rate of economic growth; (2) the capital intensity of the economy is below the welfare maximizing level (i.e., the marginal product of capital exceeds the appropriate consumption discount rate); and (3) the rate of economic growth is positive. Illustrative calculations based on U.S. experience since 1960 suggest that the present value of the gain from a debt financed transition to a funded program would substantially exceed the current level of GDP. More explicitly, even with a relatively high real consumption discount rate of 4.4 percent, the present value gain would be about 1.5 dollars per dollar of current net social security wealth or about $17 trillion.

Abstract:
The actual value added tax systems used in many countries differ significantly from the completely general VAT that has been the focus of most economic analyses. In practice, VAT systems exempt broad classes of consumer goods and services. This has important implications for the effect of the VAT on international trade.

A value added tax is sometimes advocated as a way of improving a country's international competitiveness because GATT rules permit the tax to be levied on imports and rebated on exports. This leads to political support for the VAT among exporters and producers of import-competing products. For a general VAT on all consumption, this argument is incorrect except in the very short run because exchange rates or domestic prices adjust to offset the effect of the tax on the relative prices of domestic and foreign goods. When prices or exchange rates have adjusted, a general value added tax will have no effect on imports and exports.

In practice, the value added tax frequently exempts housing and many personal services. The VAT thus raises the price of tradeables relative to nontradeables and induces a substitution of housing and services for tradeable goods. Since this implies a reduced consumption of imported goods, it also implies a decline in exports. The most likely effect of the introduction of a VAT would thus be a decline of exports.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
This paper reports new estimates of the sensitivity of taxable income to changes in tax rates based on a comparison of the tax returns of the same individual taxpayers before and after the 1986 tax reform. This comparison is done by using a panel of more than 4000 individual tax returns created by the Treasury that matches tax returns for the same taxpayers in different years. The analysis emphasizes that the response of taxable income is much more general than the response of traditional measures of labor supply and is likely to be much more sensitive to tax rates. The evidence shows a substantial response of taxable income to changes in marginal tax rates. The differences-of-differences calculations imply an elasticity of taxable income with respect to the marginal net-of-tax rate that is at least one and could be substantially higher. There is a brief discussion and simulation analysis of the implications of these estimates for the likely impact of the 1993 tax rate increases on tax revenues. Even the lowest estimated elasticity implies that the tax rate changes enacted in 1993 will lead to little additional personal income tax revenue.

Abstract:
This paper discusses a crucial cause of the failure of share prices to rise during a decade of substantial inflation. Indeed, the share value per dollar of pretax earnings actually fell from 10.82 in 1967 to 6.65 in 1976. The analysis here indicates that this inverse relation between higher inflation and lower share prices during the past decade was not due to chance or to other unrelated economic events. On the contrary, an important adverse effect of increased inflation on share prices results from basic features of the current U.S. tax laws, particularly historic cost depreciation and the taxation of nominal capital gains.

Abstract:
The traditional method of analyzing the distorting effects of the income tax greatly underestimates its total deadweight loss as well as the incremental deadweight loss of an increase in income tax rates. Deadweight losses are substantially greater than these conventional estimates because the traditional framework ignores the effect of higher income tax rates on tax avoidance through changes in the form of compensation (e.g., employer paid health insurance) and through changes in the patterns of consumption (e.g., owner occupied housing). The deadweight loss due to the increased use of exclusions and deductions is easily calculated. Because the relative prices of leisure, excludable income, and deductible consumption are fixed, all of these can be treated as a single Hicksian composite good. The compensated change in taxable income induced by changes in tax rates therefore provides all of the information that is needed to evaluate the deadweight loss of the income tax. These estimates using TAXSIM calibrated to 1994 imply that the deadweight loss per dollar of revenue of using the income tax rather than a lump sum tax is more than twelve times as large as Harberger's classic estimate. A marginal increase in tax revenue achieved by a proportional rise in all personal income tax rates involves a deadweight loss of nearly two dollars per incremental dollar of revenue. Repealing the 1993 increase in tax rates for high income taxpayers would reduce the deadweight loss of the tax system by $24 billion while actually increasing tax revenue.

Abstract:
This lecture discusses the economic losses that result from an unfunded social security retirement system and the potential gain from shifting to a funded system. The social security payroll tax distorts labor supply and the form in which compensation is paid. Although each individual's benefits are linked to that individual's previous payroll tax payments, the low equilibrium rate of return inherent in an unfunded system implies a `net' payroll tax that causes distortions. The resulting deadweight loss is 1% of each year's GDP in perpetuity, an amount equal to 20% of payroll tax revenue and a 50% increase in deadweight loss of the personal income tax. Also, there is the loss of investment income resulting from forcing employees to accept the low implicit return of an unfunded program rather than the much higher return paid on private saving or in a funded social security program. The present value of the annual losses from using an unfunded system exceeds the benefit to those who received windfall transfers when the program began and when it expanded. Shifting to a funded program cannot reverse the crowding out of capital that has already occurred. Recognizing the existing unfunded obligation only makes that piece of the national debt explicit, but shifting to a funded program limits crowding out of capital formation to the amount that already occurred. Future increases in annual saving that result from economic growth are able to earn the higher rate of return on real capital. The present value of these gains is equivalent to a perpetuity of more than 2% of GDP a year. The combi- nation of improved labor market incentives and higher real return on saving has a net present value gain of more than $15 trillion, an amount equivalent to three percent of each future year's GDP forever.

Abstract:
International economic crises will continue to occur in the future as they have for centuries past. The rapid spread of the 1997 crisis in Asia and of the 1982 crisis in Latin America showed how shifts in market perceptions can suddenly bring trouble to countries even when there has been no change in objective conditions. More recently, the sharp jump in emerging market interest rates after Russia's August 1998 default underlined the vulnerability of all emerging market economies to increases in investors' aversion to risk. Emerging market countries that want to avoid the devastating effects of such crises must protect themselves. They cannot depend on the International Monetary Fund or other international organizations nor expect that a new global financial architecture' will make the world economy less dangerous. Taking steps to protect themselves requires more than avoiding those bad policies that make a currency crisis inevitable. The process of contagion makes even the virtuous vulnerable to currency runs. Liquidity is the key to self-protection. A country that has substantial international liquidity -- large foreign exchange reserves and a ready source of foreign currency loans -- is less likely to be the object of a currency attack. Substantial liquidity also permits a country that is attacked from within or without to defend itself better and to make more orderly adjustments. The challenge is to find ways to increase liquidity at reasonable cost.

Abstract:
The large trade and current account deficits of the United States cannot continue indefinitely because doing so would constitute a permanent gift to the U.S. economy. The process that will cause this gift to shrink and that will eventually cause it to reverse is a fall in the dollar. The dollar will fall as private investors and governments become unwilling to accept the risk of increasing amounts of dollars in their portfolios, especially in a context in which they realize that the dollar must fall to reduce the trade imbalance. Although a more competitive dollar is the mechanism that will cause the U.S. trade deficit to decline, the fundamental requirement for a lower trade deficit is an increase in the U.S. national saving rate. So a rise will be driven by higher household savings of the coming years as the two primary forces that depressed savings in recent years are reversed: the exceptionally rapid rise in household wealth and the high level of mortgage refinancing with equity withdrawal.

Abstract:
The Feldstein-Horioka study of 1980 found that OECD countries with high saving rates had high investment rates and vice versa, contrary to the traditional theory of global capital market integration. This capital market segmentation view, which has been verified in various studies over the past several decades, has important implications for tax and monetary policy.More recently, Alan Greenspan and John Helliwell have shown that the link between domestic saving and domestic investment became substantially weaker after the mid-1990s. The research reported in the current paper suggests that this is true of the smaller OECD countries but not of the larger ones. When observations are weighted by each country's GDP, the savings-investment link (i.e., the savings retention coefficient) remains relatively high.This paper also examines the recent capital flows to the United States. The Treasury International Capital (TIC) reports are generally misunderstood. When they are properly interpreted, they do not indicate that they U.S. has an excess of capital flows to finance the current account deficit. The TIC data also cannot be relied on the distinguish private and government sources of the capital flow. The persistence of these flows is therefore uncertain.The paper discusses the implications for monetary and fiscal policy of the changes in capital flows that may be happening.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
The 1993 tax legislation raised marginal tax rates to 36 percent from 31 percent on taxable incomes between $140,000 and $250,000 and to 39.6 percent on incomes above $250,000. This paper uses recently published IRS data on taxable incomes by adjusted gross income class to analyze how the 1993 tax rate increases affected taxable income, tax revenue, and economic efficiency. Our estimates are based on a difference-in-difference procedure comparing growth of taxable incomes among taxpayers with AGIs over $200,000 to the growth of incomes of lower income taxpayers. We use the NBER TAXSIM model to adjust for interyear differences in the composition of the two taxpayer groups. The results show that high income taxpayers would have reported 7.8 percent more taxable income in 1993 than they did if their tax rates had not increased. Because of the high threshold for the increase in tax rates, this decline in taxable income caused the Treasury to lose more than half of the extra revenue that would have been collected if taxpayers had not changed their behavior. The deadweight loss caused by the higher marginal tax rates (including the effects on labor supply and on consumption of goods and services favored by deductions and exclusions) is approximately twice as large as the $8 billion in revenue raised by the 1993 tax rate. Several possible statistical biases could cause the estimated effect of the tax changes to either underestimate or overestimate the true long-run effect. The paper concludes with a discussion of these problems and of plans for future analysis.

Abstract:
The ageing of the population presents a major fiscal challenge for the countries of Europe. The combination of increased longevity and a reduced birth rate will directly reduce the growth rates of the European economies by slowing the growth of the capital stock and by weakening the productivity of the labor force. This slower growth of GDP means a smaller tax base and less tax revenue. In addition, the current tax-financed systems of social pensions and health care will require substantial increases in the already high tax rates. The analysis in this paper shows that the common prescription of increased immigration would do little to reduce the future fiscal burden. The increased revenue from a large rise in immigration would finance only a small part of the coming rise in the cost of pension and health benefits. The only alternative to significantly higher tax rates or substantially lower retirement income is to shift from a pure tax-financed system to a mixed system that supplements the tax financed benefits with benefits based on increased saving financial investment.

Abstract:
This paper analyzes the transition from the existing pay-as-you-go Social Security program to a system of funded Mandatory" Individual Retirement Accounts (MIRAs). Because of the high return on real capital relative to the very low return in a mature pay-as-you-go program, the benefits that can be financed with the existing 12.4 percent payroll tax could eventually be funded with mandatory contributions of only 2.1 percent of payroll. A transition to that fully funded program could be done with a surcharge of less than 1.5 percent of payroll during the early part of the transition. After 25 years, the combination of financing the pay-as-you-go benefits and accumulating the funded accounts would require less than the current 12.4 percent of payroll. The paper also discusses how a MIRA system could deal with the benefits of low income employees and with the risks associated with uncertain longevity and fluctuating market returns.

Abstract:
This paper discusses how the effects of taxes on economic behavior are important for revenue estimation, for calculating efficiency effects, and for understanding short-term macroeconomoic consequences. The primary focus is on taxes on labor income but some attention is given to taxes on income from saving. Specific calculations illustrate the importance of behavioral responses for accurate calculation of the revenue effects and deadweight losses of tax changes.

Abstract:
In this paper we study the distributional impact of a change from the existing pay-as-you-go Social Security system to one that combines both pay-as-you-go and investment-based elements. Critics of investment-based plans have been concerned that such plans might reduce the retirement income of low-paid workers or of surviving spouses relative to what they would get from Social Security, and might therefore increase the extent of poverty among the aged. Our analysis in this paper shows that this is generally not the case, even in plans that make no special effort to maintain or increase redistribution. Our principal finding is that virtually all of the demographic groups that we examine would receive higher average benefits under a mixed system with an investment-based component than the benefits that they would receive under current Social Security rules. There would also be a smaller share of individuals with benefits below the poverty line even though the total cost of funding the mixed system -- a three percent saving contribution rather than a six percent rise in the tax rate -- is substantially lower than that of funding the pay-as-you-go system. Our individual-level data permit us to go beyond comparing group means to analyze the full distribution of the benefits that individuals would receive under the two different systems. These comparisons show that the overwhelming majority of individuals would have higher benefits with the investment-based system than with the pure pay-as-you-go system. The relatively small number of individuals who would receive less from the investment-based system is further reduced when the effects of the Supplementary Security Income program is taken into account. These basic conclusions remain true even if the future rate of return in the investment-based component of the mixed system is substantially less than past experience implies.

Abstract:
This paper describes the risks implied by a mixed system of Social Security pension benefits with different combinations of pay-as-you-go taxes and personal retirement account (PRA) saving. The analysis shows how these risks can be reduced by using alternative private market guarantee strategies. The first such strategy uses a blend of equities and TIPS to guarantee at least a positive real rate or return on each year's PRA saving. The second is an explicit zero-cost collar that guarantees an annual rate of return by giving up all returns above a certain level. One variant of these guarantees uses a two stage procedure: a guaranteed return to age 66 and then a separate guarantee on the implicit return in the annuity phase. An alternative strategy provides a combined guarantee on the return during both the accumulation and the annuity phase. Simulations are presented of the probability distributions of retirement incomes relative to the 'benchmark' benefits specified in current law. Calculations of expected utility show that these risk reduction techniques can raise expected utility relative to the plans with no guarantees. The ability to do so depends on the individual's risk aversion level. This underlines the idea that different individuals would rationally prefer different investment strategies and risk reduction options.

Abstract:
This paper was prepared for a session of the 2009 American Economic Association meeting devoted to examining the views of American economists about the euro and the European Economic and Monetary Union on the tenth anniversary of the euro. I had written an article in 1992 in the Economist and subsequent articles in the Journal of Economic Perspecties and in Foreign Affairs. I begin by reviewing the arguments that I offered at that time about the claimed advantages of a single currency and about what I regarded as the disadvantages. I then discuss my claims that the primary motivation for the creation of the euro was political, not economic and that the creation of the euro could lead to increased conflict within Europe and with the United States. I conclude with a discussion of the implications for the EMU of the current recession and the likely future economic conditions in Europe.

Abstract:
A desirable system for providing and financing health care would achieve three goals: (1) preventing the deprivation of care because of a patient's inability to pay; (2) avoiding wasteful spending; and (3) allowing care to reflect the different tastes of individual patients. Although it is not possible to realize fully all three of these goals, they can condition and inform the design of a good system for financing health care. This paper discusses the application of these goals in more detail and use them to consider a reform of the system of Health Savings Accounts that was enacted as part of the 2003 Medicare legislation and, separately, the challenge posed by the very expensive treatments for rare diseases that are becoming more common.

Abstract:
Although the link between the U.S. budget deficit and trade deficit in the 1980s was so clear that the two were popularly labeled the twin deficits, it is wrong to generalize from the American experience of the 1980s to the conclusion that budget deficits and trade deficits are two sides of the same coin.

An increased budget deficit (or other reduction in national saving) must reduce either private investment or net exports but the division between them depends on certain key parameters and on changes in the external environment. Although more than 90 percent of the savings decline in the United States in the first half of the 1980s was offset by an increase in the international deficit and the associated capital inflow, this was not an inevitable result. Without the powerful incentives for business investment in the 1981 tax legislation, there might have been less investment and a smaller increase in the trade deficit.

The response to a reduction in national saving is not likely to be the same in the long run as in the short run. In my earlier studies with Charles Horioka and Phillipe Bacchetta I found that sustained differences in saving rates among developed countries lead to similar differences in investment rates. This paper updates the earlier analyses to the decade of the 1980s and shows that among the G-7 countries the decade-average savings retention coefficient was 0.73, implying that nearly three-fourths of each additional dollar that was saved in a country remained in that country.

The United States now appears to be moving from the "short run" in which the capital inflow offsets a decline in national saving to the "long run" in which lower domestic saving reduces domestic investment. Although national saving in 1990 was an even smaller fraction of GNP than in 1986 (because of the decline in private saving), the capital inflow fell from a peak of 3.5 percent of GNP in 1987 to 1.7 percent of GNP in 1990. As a result, net private domestic investment was reduced to only about 3 percent of GNP in 1990.

Abstract:
The U.S. Social Security Administration, in cooperation with similar agencies in other countries, recently developed estimates of social security benefits for twelve major industrial countries. The present paper uses these data to estimate the effects of social security benefits on saving and retirement in an extended life cycle model. The parameter estimates indicate that, with retirement behavior given, social security significantly reduces private saving: an increase of the benefit-to-earnings ratio by 10 percentage points reduces the saving rate by approximately 3 percentage points.

Abstract:
The evidence presented in this paper indicates that changes in government spending, transfers and taxes can have substantial effects on aggregate demand. The estimates also indicate that the promise of future social security benefits significantly reduces private saving. Each of the basic implications of the so-called "Ricardian equivalence theorem" is contradicted by the data. The results are consistent with the more general view of the effects of fiscal actions and fiscal expectations that is described in the paper.

Abstract:
In an earlier paper we analyzed a method of combining traditional tax financed pay-as-you-go Social Security benefits with annuities financed by Personal Retirement Accounts. We showed that such a combination could maintain the level of retirement income projected in current Social Security law while avoiding a future increase in the payroll tax rate. The current paper extends the earlier analysis in four ways: (1) We now specify that the funds deposited in the Personal Retirement Accounts come from allocating 2 percent of the 12.4 percent payroll tax instead of being additional funds provided from outside the system. (2) We discuss the effects of the uncertain return on investment based annuities. (3) We provide estimates of the cost of permitting bequests if individuals die either before retirement or during the first twenty years after retirement. (4) We update the statistical basis for our estimates to be consistent with the 2000 Social Security Trustees Report. Our analysis shows that a program of Personal Retirement Accounts funded by allocating 2 percent of the 12.4 percent payroll tax collections can maintain the retirement income projected in current law while avoiding any increase in the 12.4 percent payroll tax. The combination of the higher return on the assets in the Personal Retirement Accounts and the use of the additional corporate profits taxes that result from the increased national saving in Personal Retirement Accounts is sufficient to maintain the solvency of the Social Security Trust Fund even though the tax payments to the fund are reduced from 12.4 percent of taxable payroll to 10.4 percent of taxable payroll. Although there is a period of years when the Trust Fund must borrow, it is able to repay this borrowing with interest out of future tax collections. In the long run, the Trust Fund becomes very large, implying that it would be possible to reduce the payroll tax further or to increase retirement incomes above the levels projected in current law.

Abstract:
Experience in private pension plans and recent policy discussions about investment-based reforms of Social Security suggest that some form of bequest is likely to be part of any such reform that is enacted. This paper provides a first examination of the potential magnitudes of such bequests and of their effect on retirement annuities and asset accumulation. The most likely form of bequest, the preretirement bequest' made when employees die before normal retirement age, reduces the funds available for post-retirement annuities by about 16 percent or, equivalently, requires a one-sixth increase in the Personal Retirement Account saving rate to maintain the same level of post-retirement annuities. We also analyze a variety of post-retirement bequest options. The least costly option that we consider is adding a ten-year-certain' feature to the life annuity, thereby providing a bequest whenever the retiree dies before age 77. This would reduce annuities, relative to providing only preretirement bequests, by about 6 percent. The most costly option that we consider would provide a bequest equal to the remaining actuarial value of the PRA annuity at the time of death and would require reducing all annuities by about 23 percent unless the PRA saving rate is raised. We analyze the size distribution of bequests that would result under different bequest rules and consider the implications for aggregate capital accumulation.

Abstract:
No abstract is available for this paper.

Abstract:
The Medicare program of health care for the aged now costs more than $5,000 per enrollee, a national cost of more than $200 billion a year. The official projections that these costs will rise rapidly from 2.5% of GDP now to 5.5% of GDP in 2030 and 7% of GDP in 2070 assume that structural changes in health care will prevent the even more rapid growth of spending that would occur if past trends continue. These GDP shares are equivalent to increasing the payroll tax rates that rise from 5% of total wages now to 14% of total wages by 2070. Alternatively, if the increased Medicare spending is financed by an across-the-board increase in income tax rates, all tax rates would rise by 46 percent (e.g., from 28% to 41%). If Medicare costs continue to be tax financed, the sharp increase in Medicare costs would cause a substantial increase in the deadweight loss of the tax system. Even with quite favorable assumptions, the increased deadweight loss is likely to be almost as large as the direct increase in the health care costs themselves. This paper analyzes an alternative life cycle approach to paying for the cost of health care of the aged: a system of investment-based individual Retiree Health Accounts (RHAs) to which the government deposits funds during individuals' working years. At retirement the individual could use the accumulated fund to purchase a fee-for-service plan like the current Medicare package, to pay for membership in an HMO, or to establish a medical savings account with a high deductible insurance policy. Using data from the Social Security administration, I estimate that annual RHA deposits equal to about 1.4% of total payroll would eventually be enough to pay for the full increase in the cost of Medicare, obviating a nine percentage point payroll tax increase.

Abstract:
No abstract is available for this paper.

Abstract:
This paper evaluates the welfare gain from achieving price stability and compares it to the cost of the transition. In calculating the gain from price stability, the paper emphasizes the distortions caused by the interaction of inflation and capital income taxes. Because inflation exacerbates the tax distortions that would exist even with price stability, the annual deadweight loss of a two percent inflation rate is a surprisingly large one percent of GDP. Since the real gain from shifting to price stability grows in perpetuity at the rate of growth of GDP, its present value is a substantial multiple of this annual gain. Discounting the annual gains at the rate that investors require for risky equity investments (i.e., at the 5.1 percent real net-of-tax rate of return on the Standard and Poors portfolio of equities from 1970 to 1994) implies a present value gain equal to more than 35 percent of the initial level of GDP. Since the estimated cost of shifting from two percent inflation to price stability is about five percent of GDP, the gain substantially outweighs the cost of transition.

Abstract:
Although the return to capital is a focus of research in both macroeconomics and public finance, each specialty has approached this subject with an almost total disregard for the other`s contribution. Macroeconomic studies of the effect of inflation on the rate of interest have implicitly ignored the existence of taxes and the problems of tax depreciation. Similarly, empirical studies of the incidence of corporate tax changes have not recognized that the effect of the tax depends on the rate of inflation and have ignored the information on the rate of return that investors receive in financial markets. Our primary purpose in this paper is to begin to build a bridge between these two approaches to a common empirical problem.

Abstract:
The appropriate size and role of government depends on the deadweight burden caused by incremental transfers of funds from the private sector. The magnitude of that burden depends on the increases in tax rates required to raise incremental revenue and on the deadweight loss that results from higher tax rates. Both components depend on the full range of behavioral responses of taxpayers to increases in tax rates. The first part of this paper explains why the official method of revenue estimation used by the Treasury and the Congress underestimates the tax rate increases required to raise additional revenue. This is closely related to the on-going debate about the use of `dynamic' revenue estimation. The second part of the paper emphasizes that the deadweight burden caused by a tax rate increase depends not just on the response of labor force participation and average working hours but also on other dimensions of labor supply, on the forms in which compensation is paid, on the individuals' spending on tax favored (deductible or excludable) forms of consumption, and on the intertemporal allocation of consumption. Recent econometric work implies that the deadweight burden caused by incremental taxation (the marginal excess burden) may exceed one dollar per dollar of revenue raised, making the cost of incremental government spending more than two dollars for each dollar of government spending.

Abstract:
In a 1974 paper in the "Journal of Political Economy" I
discussed the theoretical ambiguity of the effect of social
security on private saving and presented statistical evidence
that social security does on balance depress saving. Recently,
an error was detected in the computer program that was used to
construct the "social security wealth" variable. I have now
corrected that error and reestimated the original consumer
expenditure equation. I have also updated the analysis by
including the five years of additional data that have become
available since the original study was completed. The new
estimates, presented in the current note, continue to indicate
that social security substantially depresses private saving. The
point estimates of this effect are somewhat lower than before
but nevertheless imply that social security depress saving by
about fifty percent of its current value. The estimated
reduction in saving is more than two-thirds of the concurrent
"contributions" of employees and employers to the social security
retirement and survivors fund.

Abstract:
The optimal level of Social Security benefits depends on balancing the protection that these benefits offer to those who have not provided adequately for their own old age against the welfare costs of distorting economic behavior. The primary such cost is the distortion in private saving. The present paper derives the level of Social Security benefits that is optimal in three basic cases. In the first section of the paper, the optimal level of benefits is derived for an economy in which all individuals do not anticipate retirement at all and therefore do not save. The second and third sections then derive the optimal benefits for economies with two different definitions of attitudes toward retirement and saving.

Abstract:
This paper analyzes the ways in which substituting a consumption tax for the existing personal and corporate income taxes would affect equilibrium pretax interest rates. The analysis indicates that whether the pretax rate of interest rises or falls depends on the strength of the personal saving response, the nature of the capital market equilibrium between debt and equity yields, and the response of the owner-occupied housing sector. A formal two-sector model with endogenous saving, housing and corporate capital is presented. With plausible parameter values, the analysis suggests that the shift from an income tax to a consumption tax is more likely to raise rates than to lower them.

Abstract:
This paper analyzes the effect of outbound foreign direct investment (FDI) on the domestic capital stock. The first part of the paper shows that only about 20 percent of the value of assets owned by U.S. affiliates abroad is financed by cross-border flows of capital from the United States. An additional 18 per cent represents retained earnings attributable to U.S. investors. The rest is financed locally by foreign debt and equity. The second part of the paper analyzes data for the major industrial countries of the OECD and finds that each dollar of cross- border flow of foreign direct investment reduces domestic investment by approximately one dollar. This dollar for dollar displacement of domestic investment by outbound FDI is consistent with the Feldstein-Horioka picture of segmented capital markets. It suggests that while portfolio funds are largely segmented into national capital markets, direct investment can achieve cross-border capital flows. A dollar outflow of direct investment reduces domestic investment by a dollar and this is not offset by a change in international portfolio investment. This ability of foreign direct investment to circumvent the segmented national capital markets also appears in the expanded use of foreign debt and equity capital to finance the capital accumulation of foreign affiliates of U.S. firms. Taken together, these estimates suggest that each dollar of foreign assets acquired by U.S. foreign affiliates reduces the U.S. domestic capital stock by between 20 cents and 38 cents.

Abstract:
This paper is an analytic comment on two chapters of the Economic Report of the President for 2006. Chapter One deals with the economy in 2005 and the outlook for the future. The chapter provides a detailed analysis of the expansion in 2005 but not an explanation of why the expansion occurred despite the sharp rise in oil prices. I discuss the role of easy money in stimulating mortgage borrowing which generated negative savings in 2005. Looking ahead, I comment on the risk to inflation implied by the rising unit labor costs over the past four years. Chapter six deals with the international position of the United States. It provides a useful analysis of capital flows to the United States and the reasons why other countries have current account surpluses. It does not deal with the role of the dollar or the nature of the adjustment that might occur to reduce the US current account deficit. I present some comments on those issues.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
No abstract is available for this paper.

Abstract:
This paper examines three sources of the fluctuations in real interest rates during the past three decades: changes in budget deficits, changes in tax rules, and changes in monetary policy. The evidence indicates that budget deficits and monetary policy have had a strong influence on the level of long-term interest rates but fails to identify any effect of changes in corporate tax rates and investment incentives.

The analysis shows that it is projected future budget deficits rather than the current level of the actual or structural deficit that influence long-term interest rates. Each percentage point increase in the five-year projected ratio of budget deficits to GNP raises the long-term government bond rate by approximately 1.2 percentage points while the ratio of the current deficit to GNP (either actual or structural) has no significant effect. The specific parameter estimates imply that the increase in projected budget deficits was responsible for about two-thirds of the rise in the interest rates between 1977-78 and 1983-84.

Abstract:
No abstract is available for this paper.

Abstract:
This paper discusses the nature of the uncertainty faced by central banks and considers three approaches to dealing with uncertainty (1) formal optimization models and robust rules based on such models; (2) informal rules like the Taylor rule and inflation targeting; and (3) a case by case approach based on an informal Bayesian logic. The latter case requires considering the asymmetric nature of the risks that the central bank often faces.

Abstract:
The evidence and analysis in this paper support the earlier findings of Feldstein and Horioka (1980) that sustained increases in domestic savings rates induce approximately equal increases in domestic rates of investment. New estimates for the post-OPEC period 1974-79 imply that each extra dollar of domestic saving increases domestic investment by approximately 85 cents in a sample of 17 OECD countries.

An explicit analysis of the problems of identification and simultaneous equations bias suggests that the regression estimates are more relevant as a guide to the long-run response of international capital flows than to their short-run behavior. Coefficient estimates based on annual variations in savings and investment are subject to potentially severe simultaneous equations bias that is not present when annual observations are averaged over a decade or more and the regression is estimated with a cross-country sample of these averages.

A portfolio model of international capital allocation that is presented in the paper indicated that the short-run change in the rate of net foreign investment in response to a sustained increase in domestic saving is likely to be substantially greater than the ultimate steady state response.

Abstract:
A program of Personal Retirement Accounts (PRAs) funded by deposits equal to 2.3 percent of earnings (up to the Social Security maximum) would permit retirees to receive more income in retirement than with the current Social Security program while at the same time making it unnecessary to increase the 12.4 percent payroll tax in response to the aging of the population. The gross cost of these deposits, approximately 0.9 percent of GDP, could be financed for more than a decade out of the budget surpluses currently projected by the Congressional Budget Office. By the year 2030, the additional corporate tax revenue that results from the enlarged capital stock financed by PRA assets would be able to finance fully these personal tax credits. During the intervening years (about 2020 to 2030), a reduction of other government spending or an increase in taxes would be needed if budget deficits are to be avoided. If implemented, the PRA program would not only increase retirement income and stabilize the Social Security payroll tax, but would also substantially increase national saving and GDP. NOTE: This is a revised version of "Two Percent Personal Retirement Accounts: Their Potential Effects on Social Security Tax Rates and National Saving," by Martin Feldstein and Andrew Samwick, issued in April, 1998 as working paper 6540.

Abstract:
This paper examines the implications of a 'major-risk' approach to health insurance using data from the National Medical Expenditure Survey. We study the impact of switching from existing coverage to a policy with a 50 percent coinsurance rate and 10 percent of income limit on out-of-pocket expenditures, as well as several alternative combinations of a high-coinsurance rate with a limited out-of-pocket payment. Our analysis is limited to the population under age 65. Although 80 percent of spending on physicians and hospital care is done by the 20 percent of families who spend over $5,000 in a year, our analysis shows that shifting to a major risk policy could reduce aggregate health spending by nearly 20 percent. The reductions would be greatest among higher income individuals. By reducing excess consumption of health services, the major risk policy increases aggregate economic efficiency. With modest values of both demand sensitivity and risk aversion we find that shifting to a major risk policy would raise aggregate national efficiency by $34 billion a year. Government provision of a major risk policy" to those under 65 could be financed with a premium of about $150 per person because of the increased tax revenue and reduced Medicare outlays that would result from the provision of universal major risk insurance for the population under age 65. Even without government provision, individuals might be induced to select major risk policies by changing existing tax rules to eliminate the advantage of insurance, either by including employer provided insurance in taxable income or by permitting a tax deduction for out-of-pocket medical expenditures.

Abstract:
This paper examines the risk aspects of a fully phased-in investment-based defined contribution Social Security plan. Individuals save a fraction of wages in a Personal Retirement Account (PRA) invested in a 60:40 equity-debt mix and receive a similarly invested variable annuity from age 67. The value of the portfolio follows a random walk with historic (1946-1995) mean log real return of 5.5 percent and standard deviation of 12.5 percent. We study 10,000 stochastic distributions of this process for the 80 year experience from 1998 to 2077. With a nonstochastic 5.5 percent rate of return, individuals could purchase the future benefits promised in the current Social Security law (the benchmark' level of benefits) by saving 3.1 percent of earnings, just one-sixth of the payroll tax that Social Security actuaries project will be needed in the paygo system. A higher saving rate provides a cushion' that reduces the risk of unacceptably low benefits. For example, saving 6 percent implies a median annuity at age 67 or 2.1 times the benchmark benefits and only a 17 percent chance that the annuity is less than the benchmark. In 95 percent of the potential investment experience the annuity exceeds 61 percent of the benchmark benefit. With a 9 percent saving rate (half of the tax rate required in a pay- as-you-go system), there is only a 6 percent chance that the annuity is less than the benchmark and in 95 percent of the potential investment experience the annuity exceeds 92 percent of the benchmark benefit. We also study a modified plan in which retirees face no risk of receiveing less than the benchmark benefit because the government provides a conditional pension transfer to any retiree whose annuity is less in any year than the benchmark level of benefits. With a six percent saving rate, a conditional transfer is required in only about 40 percent of the simulations. The expected value of the transfers is substantially less than the expected incremental corporate tax revenue that results from the Personal Retirement Account saving. Additional tax revenue is needed in fewer than one percent of the simulations. In short, a pure defined contribution plan, with a saving rate equal to one third of the long-run projected payroll tax, invested in a 60:40 equity-debt Personal Retirement Account could provide a retirement annuity that is likely to be substantially more than the benchmark benefit while exposing the retiree to relatively little risk that the annuity will be less than the benchmark. Even this risk can be completely eliminated by a conditional guarantee plan that imposed only a very small risk on future taxpayers.

Abstract:
Traditional theory implies that the relative price of consumer goods and of such real assets as land and gold should not be permanently affected by the rate of inflation. A change in the general rate of inflation should, in equilibrium, cause an equal change in the rate of inflation for each asset price The experience of the past decade has been very different from the predictions of this theory: the prices of land, gold, and other such stores of value have increased by substantially more than the general price level. The present paper presents a simple theoretical model that explains the positive relation between the rate of inflation and the relative price of such real assets. More specifically, in an economy with an income tax, an increase in the expected rate of inflation causes an immediate increase in the relative price of such 'store of value' real assets. The behavior of real asset prices discussed in this paper is thus a further example of the non-neutral response of capital markets to inflation in an economy with income taxes.

Abstract:
Our paper begins with the relatively simple problem of optimal taxation as viewed by the capital-exporting ("home") country when it can assume that its actions do not alter the tax rate in the host country. Section I also shows that when foreign investment accounts for a significant fraction of production in the host country, the capital-exporting country should tax foreign source investment income more heavily than is implied by the "full taxation after deduction" rule. The important question of tax rate interdependence is developed in Section II. In the third section we replace the assumption that all foreign investment is financed by a transfer of equity capital from the home country with the more realistic description that subsidiary firms borrow in the host country. Although this raises the profitability to the home country of investment by its foreign subsidiaries, we show that this need not alter the conclusions of the previous sections. We regard the present paper as only a first step in a proper analysis of the complex issue of optimal taxation of foreign source investment income. . The static analysis of the present paper should be extended to consider investment paths in growing economics. Finally, the purely nationalistic optimality criterion could be generalized to give some weight to the real income of the rest of the world.

Abstract:
This short note emphasizes and illustrates two basic points:

(1) The private costs of unemployment, i.e., the costs borne by the unemployed themselves, vary substantially and are often extremely low. This low private cost is an important cause of the permanently high unemployment rate in the United States.

(2) The social costs of unemployment, i.e., the costs of unemployment to the nation as a whole regardless of how they are distributed, must be judged by considering the specific policy by which a worker would be reemployed. It is wrong to regard unemployment as either without cost (because the unemployed enjoy the opportunity for job search and leisure) or as having a cost equal to lost output. Examples are given to show that output may overstate or understate true social cost, depending on the options available for reemployment.

Abstract:
This detailed examination of the effect of inflation on the taxation of capital used by nonfinancial corporations considers not only the tax paid by the corporations them- selves but also the tax paid by the individuals and institutions that provide capital to the corporate sector. Although corporations deduct nominal interest payments that exceed real interest, the additional taxes that lenders pay slightly exceed the tax saving by corporate borrowers. Our calculations indicate that inflation raised the 1977 tax burden on corporate sector capital income by more than $32 billion, a 50 percent increase in the total tax burden.

Abstract:
The present paper introduces a new index of the real value of the dollar relative to 80 other currencies. The individual exchange rates are combined with weights that reflect the recent (1984) multilateral pattern of trade. This new index confirms that the dollar rose very sharply between January 1980 and February 1985 and that about two-thirds of that appreciation was reversed by July 1986. This is true for both our multilateral and bilateral real indices. The analysis also shows that any index that fails to adjust for differences in inflation rates will give a very misleading impression of the dollar`s evolution in the 1980s.

Abstract:
This paper presents a detailed analysis of the economics of prefunding benefits for the aged, focusing on Social Security but indicating some of the analogous magnitudes for prefunding Medicare Benefits. We use detailed Census and Social Security information to model the transition to a fully funded system based on mandatory contributions to individual accounts. The funded system we examine would permanently maintain the level of benefits now specified in current law and would require no new government borrowing (other than eventually selling the bonds in the Social Security trust fund). During the transition, the combined rate of payroll tax and mandatory saving rises at first by 2 percentage points (to a total of 14.4 percent) and then declines so that in less than 20 years it is less than the current 12.4 percent payroll tax. We estimate the impact of such prefunding on the growth of the capital stock and the level of national income and show that the combination of higher pretax wages and lower payroll taxes could raise wages net of income and payroll taxes by more than 35 % in the long run. We also discuss distributional issues and the way that the poor can be at least as well off as under Social Security. A stochastic simulation shows that a small increase in the mandatory saving rate would reduce the risk of receiving less than the scheduled level to less than one percent. Separate calculations are presented of the value of the 'forward-looking recognition bonds' and 'backward-looking recognition bonds' which the government might issue if it decides not to pay future social security benefits explicitly.

Abstract:
This paper examines empirically the effect of unfunded pension obligations of corporate share prices and discusses the implications of these estimates for national saving, the decline of the stock market in recent years, and the rationality of corporate financial behavior. The analysis uses the information on ifnlation-adjusted income and assets that large firms were required to provide for 1976 and subsequent years.

The evidence for a sample of nearly 200 manufacturing firms is consistent with the conclusion that share prices fully reflect the value of unfunded pension obligations. Since the conventional accounting measure of the unfunded pension liability has a number of problems (which we examine in the paper), it would be more accurate to say that the data are consistent with the conclusion that shareholders accept the conventional measure as the best available information and reduce share prices by a corresponding amount.

The most important implication of the share price response is that the existence of unfunded private pension liabilities does not necessarily entail a reduction in total private saving. Because the pension liability reduces the equity value of the firm, shareholders are given notice of its existence and an incentive to save more themselves. For this reason, unfunded private pensions differ fundamentally from the unfunded Social Security pension and the other unfunded federal government civilian and military pensions.

Abstract:
No abstract is available for this paper.

Abstract:
If a specified amount of government spending must be financed, how should that finance be divided between taxes and government borrowing? In the case of a temporary increase in government spending, it has been argued that debt finance is optimal because the small increments in all future tax rates to finance interest payments involves a smaller excess burden than the single large tax rate increase that would be required to avoid an initial increase in the national debt. This argument ignores the excess burden of debt finance that results if the initial capital stock is smaller than optimal (e.g., because of taxes or capital income).The first section of the present paper shows how the debt-finance advantage of a small increase in tax rates can be explicitly balanced against the disadvantage of the excess burden that arises from additional debt. The analysis shows that, with plausible parameter values, the excess burden of debt finance is likely to outweigh the advantage of avoiding a large single tax change and therefore that financing a temporary increase in government spending by an immediate tax increase is likely to be preferable to debt financing.The second section examines the appropriate response to a permanent increase in government spending and shows that such spending cannot be financed by a permanent increase in government debt. Moreover, whenever the golden rule level of capital intensity is an optimality condition independent of the level of government spending, any increase in government spending should be matched by an equal increase in tax revenue.

Abstract:
The present paper shows how a negative fiscal multiplier is possible in a two-sector economy that is otherwise similar to the traditional one-sector Keynesian analysis. The key to this surprising possibility is that an increased budget deficit changes the sectoral balance of demand. A reduction of taxes or an increase in transfer payments raises the demand for consumer goods. At the same time, the rise in the interest rates that results from the deficit causes a fall in the demand for investment goods. In the one-good economy assumed in both Keynesian and monetarist theories, the intersectoral shift of demand is of no consequence. But when consumer goods and investment goods are explicitly distinguished, the change in the sectoral pattern of demand causes separate changes in the prices of the two kinds of goods. As a result, the overall price level can rise even if the total real volume of output declines. The rise in the overall pricelevel implies a reduction in the real value of the money stock. The contractionary effect of the decline in the real money stock can more than offset the direct expansionary effect of the increased deficit. The net effect of the increased deficit can therefore be to reduce real GNP. The paper analyzes the conditions which affect the likelihood that the fiscal multiplier is negative. It is important to distinguish this demand composition reason for a negative multiplier from two other possibilities that have previously been discussed: (1) the adverse effect of budget deficits on business "confidence" and (2) the contraction of current demand that occurs if anticipated future budget deficits raise real long-term interest rates.

Abstract:
The first two years of the economic expansion that began in 1983 were unusually strong and were accompanied by better inflation performance than would have been expected on the basis of experience in past recoveries.

Our evidence contradicts the popular view that the recovery was the result of a consumer boom financed by reductions in the personal income tax. We also find no support for the proposition that the recovery reflected an increase in the supply of labor induced by the reduction in personal marginal tax rates.

The driving force behind the recovery of nominal demand was the shift to an expansionary monetary policy. The rapid expansion of a nominal GNP can be explained by monetary policy without any reference to changes in fiscal and tax policy.

But the growth of real GNP was more rapid that would have been expected on the basis of the rise in total nominal spending and the increase in the price level was correspondingly less. The most likely cause of this favorable division of the nominal GNP increase was the sharp rise in the dollar that occurred at this time.

Although part of the dollar's rise can be attributed to the successful anti-inflationary monetary policy, the dollar also increased because of the rise in real interest rates that resulted from the combination of the increase in anticipated budget deficits and the improved tax incentives for investment in equipment and structures.

Thus, expansionary fiscal policy did contribute to the greater-than-expected rise of real GNP in 1983-84 but it did so through and unusual channel. The fiscal expansion raised output because it was a favorable supply shock to prices and not because it was a traditional stimulus to demand. The budget deficit and investment incentives were expansionary in the short run because, by causing a rise of the dollar, they reduced inflation and thus permitted a faster growth of real GNP.

Abstract:
This paper reexamines the results of my 1974 paper on Social Security and saving with the help of an additional twenty-one years of data. The estimates presented here reconfirm that each dollar of Social Security wealth (SSW) reduces private saving by between two and three cents. The parameter estimates for the postwar period and for the entire sample since 1930 are very similar. The correction of the error in the original SSW series between 1958 and 1971 therefore does not significantly affect the original results. The estimated effect of SSW is robust with respect to the addition of a variety of variables that have been suggested in previous critiques of the original study. In the aggregate, the parameter values imply that the Social Security program currently reduces overall private saving by nearly 60 percent.

Abstract:
No abstract is available for this paper.

Abstract:
This paper considers the following question: Would a "golden rule" capital accumulation policy of equating the marginal product of capital to the rate of growth of population be appropriate in a mixed economy in which the government does not have direct control over resource allocation but can use distortionary taxes to obtain resources for augmenting the private capital stock? The key result derived hereis that the golden rule level of capital intensity remains optimal if the tax structure that prevails at the equilibrium does not alter the individual labor supply. This is true even if the constancy of labor supply represents a balancing of income effects and substitution effects of a distortionary tax. In contrast, if the form of the tax and the nature of the utility function imply that labor supply is distorted, the optimal capital intensity will in general not correspond to the golden rule level.

Abstract:
Increasing the rate of saving is an important priority for many emerging market countries. This paper focuses on Mexico and discusses a variety of policies through which the government of Mexico could stimulate a higher rate of saving. These ideas are building blocks rather than an overall plan. Some are mutually exclusive but most are options that could be combined to achieve a higher rate of saving. Although the emphasis is on policy options that can be helpful in raising saving, the paper also discusses proposals that would be likely to reduce the rate of saving. The primary focus of the paper is on tax reforms, but there is also a discussion of financial regulation, government debt management, and the new system of retirement saving accounts.

Abstract:
This study presents time-series evidence indicating that capital gains taxation reduces the realization of capital gains. The "lock-in" effect is detectable once we divide individuals into categories on the basis of how much recent capital gains tax in- creases have affected them. Since the tax law changes, those individuals who are affected have realized significantly less capital gains relative to those not affected. This analysis, in addition to evidence from cross-sectional research reported in Feldstein and Yitzhaki (1978) and Feldstein, Slemrod and Yitzhaki (1978),indicates that estimates of the tax revenue change resulting from a reduction in capital gains taxation based on the assumption of unchanged realized gains may be misleading.

Abstract:
The present paper examines the reservation wages reported by a largesample of unemployed individuals in the United States in May 1976. The majorityof unemployedindividuals report reservation wages that are at least as highas the wage they were paid on their last job. Approximately one-fourth of alljob seekers required a wage that is at least 10 percent higher than the wage ontheir previous job.Our econometric evidence shows that the level of unemployment benefitsrelative to previous wages has a powerful effect on the individual`s reservation wage. A ten percent increase in the U.I. replacement ratio increases the reservation wage by about percent for job losers who are not on layoff and bysomewhat less for other unemployed groups. Separate regressions to analyze the high reservation wage per se show that a ten percent increase in the U.I. replacement ratio also increases by about four percentage points the probability that an unemployed individual will require a wage increase of 10 percent or more.These estimates imply that reducing net unemployment insurance benefits (by lowering gross benefits or by taxing unemployment benefits) could significantly lower the average duration of unemployment and the relative number of long duration spells of unemployment. Because of the non-linear response of the unemployment duration to the reservation wage, reducing a high unemployment insurance ratio by ten percentage points is likely to have a greater impact on unemployment than reducing a low unemployment insurance ratio by ten percentage points.

Abstract:
No abstract is available for this paper.

Abstract:
Although states and localities collect a substantial amount of revenue from corporate profits taxes and property taxes on corporate capital, these taxes have been inadequately reflected in previous calculations of the effective corporate tax rate and the pretax rate of return to corporate capital. The present study focuses on non-financial corporations and begins by estimating the profits taxes and property taxes which these corporations pay to state and local governments. These estimates are then used to calculate the pretax rate of return on non-financial corporate capital; the results suggest that the conventional omission of state-local property taxes leads to an understatement of this rate of return by about one percentage point. The effective tax rate on non-financial corporate profits is also computed, taking account of state-local taxes. These taxes amount to approximately sixteen percent of the pretax profits of non-financial corporations. The total effective tax rate on these corporations is shown to have risen substantially during the past two decades; it averaged more than seventy percent in the most recent five-year period. The series for the rate of return and effective tax rate are used to compute the real after-tax rate of return on non-financial corporate capital. The calculations show that this number has declined recently, reaching 2.3 percent in 1979. This is to be contrasted with after-tax returns of over five percent which prevailed during the mid-1960s.

Abstract:
Extending the traditional treatment of the corporate tax to an economy with a progressive personal tax fundamentally changes the analysis. While the corporate tax system (CTS) does increase the total tax rate on corporate source income for some investors, the exclusion of retained earnings implies that the CTS lowers the tax rate for high-income investors. Analyzing such an economy requires replacing the traditional "equal-yield" equilibrium condition with a more general portfolio balance model. In this model, introducing a CTS can actually increase the corporate share of the capital stock even though the relative tax rate on corporate income rises.

Abstract:
This paper discusses how private pension programs differ from public social security in their likely impact on aggregate saving. Although private pensions are likely to reduce direct saving by employees, this should be offset by the combination of companies` partial funding and the shareholders response to unfunded liabilities. In contrast to several earlier empirical studies that implied that social security does depress national saving, the current time series evidence suggests that the growth of private pensions has not had an adverse effect on saving and may have increased saving by a small amount.

Abstract:
In this paper we study the transition from a pay-as-you-go system of Social Security pensions to an investment-based system in an economy in which portfolio returns and capital profitability are both uncertain. The paper extends earlier studies by Feldstein and Samwick that modeled the transition process in a nonstochastic environment and by Feldstein and Ranguelova that examined the implication of portfolio risk after the transition to an investment-based system has been completed. We analyze transitions to a mixed system that maintains the current 12.4 percent pay-as-you-go tax rate as well as to a system that is completely investment-based. We model intergenerational guarantees and assess the risk of such guarantees to taxpayers. We find that transitions to either a completely investment-based system or a mixed system that maintains current law benefits can be done with little additional saving in the early years (a maximum of three percent) and substantially lower combinations of taxes and saving deposits in the later years. The extra risk to retirees and/or taxpayers is relatively small, making the investment-based plans preferable to a pure pay-as-you-go system for reasonable degrees of risk aversion.

Abstract:
No abstract is available for this paper.

Abstract:
With the existing "historic cost" method of depreciation, higher inflation rates reduce the real value of future depreciation deductions and therefore raise the real net cost of investment. The calculations in this paper show that this rise in the net cost can be quite substantial at recent inflation rates; e.g., the real net cost of an equipment investment with a 13-year tax life is raised 21 percent by an 8 percent expected inflation rate if the firm uses a 4 percent real discount rate.

The effects of inflation on the net cost of investment can be completely eliminated by indexing depreciation. A more accelerated depreciation schedule can also lower the net cost of investment and make that net cost less sensitive to the rate of inflation. The current paper examines a particular acceleration proposal and finds that, for moderate rates of inflation and real discount rates, the acceleration proposal and full indexation are quite similar. For low rates of inflation, high discount rates, or very long-lived investments, the acceleration proposal causes greater reductions in net cost than would result from complete indexing. Conversely, for high rates of inflation, low discount rates, or very short-lived investments, the acceleration method fails to offset the adverse effects of inflation.

Since the acceleration and indexation methods have quite similar effects under existing economic conditions, the choice between them requires balancing the administrative simplicity and other possible advantages of acceleration against the automatic protection that indexation offers against the risk of significant changes from the recent inflation rates and discount rates.

Abstract:
This paper uses the experience after the Tax Reform Act of 1986 to examine how taxes affect three aspects of individual taxpayer behavior: labor supply, total taxable income, and capital gains. The substantial sensitivity of married women's labor supply implies that the efficiency of the tax system could be increased significantly by reducing the marginal tax rates of these women relative to their husbands' marginal tax rates. More generally, the sensitivity of taxable income to the net of tax share implies that lower marginal tax rates would involve much less revenue loss than is traditionally assumed and would bring a much more substantial reduction in the deadweight loss of the tax system. The sharp fall in the real value of realized capital gains since the 1986 rise in tax rates on capital gains confirms earlier research indicating the substantial sensitivity of capital gains realizations to tax rates. A comparison with projections by the Treasury and Congressional Budget Office made in 1988 shows that the current official model greatly understates the sensitivity of capital gains to tax rates.

Abstract:
This paper studies the possibility of using the broad monetary aggregate M2 to target the quarterly rate of growth of nominal GDP. Our findings indicate that the Federal Reserve could probably guide M2 in a way that reduces not only the long-term average rate of inflation but also the variance of the annual rate of growth of nominal GDP. An optimal M2 rule, derived from a simple VAR, reduces the mean ten-year standard deviation of annual GDP growth by over 20 percent. Although there is uncertainty about this value because of both parameter uncertainty and stochastic shocks to the economy, we estimate that the probability that the annual variance would be reduced over a ten year period exceeds 85 percent. A much simpler policy based on a single equation linking M2 and GDP is shown to be almost as successful in reducing this annual GDP variance. Additional statistical tests indicate that M2 is a useful predictor of nominal GDP. Moreover, a battery of recently developed tests for parameter stability fails to reject the hypothesis that the M2 - GDP link is stable, but the M1 - GDP and monetary base - GDP relations are found to be highly unstable. This evidence contradicts those who have argued that the M2 - GDP relation is so unstable in the short run that it cannot be used to reduce the variance of nominal GDP growth.

Abstract:
This paper emphasizes the importance of the interaction between tax rules and the management of monetary policy. The monetary authorities' failure to recognize the implications of the tax structure has caused them to underestimate just how expansionary monetary policy has been. Moreover, because of our fiscal structure, attempts to encourage investment by an easy-money policy have actually had an adverse impact on investment in plant and equipment. The paper discusses the desirability of substituting a policy of tight-money and positive fiscal incentives for the traditional goals of easy money and fiscal restraint. More generally, the paper stresses the significance of the fiscal structure as a determinant of macroeconomic equilibrium.

Abstract:
This paper shows how the interaction of tax rules and expected inflation can decrease substantially the share price per dollar of pretax earnings. The current analysis extends my earlier study [Feldstein (1978)] by recognizing corporate debt, retained earnings, and the role of diverse shareholder investments. As before, the analysis separates household and institutional investors.

Abstract:
Three ways of averting "excess saving" have been emphasized in both theory and practice. The thrust of the Keynesian prescription was to increase the government deficit to provide demand for the resources that would not otherwise be used for either consumption or investment. In this way, aggregate demand would be maintained by substituting public consumption for private consumption. A second alternative prescription was to reduce the private saving rate. Early Keynesians like Seymour Harris saw the new Social Security program as an effective way to reduce aggregate saving. The third type of policy, developed by JamesTobin, relies on increasing the rate of inflation and making money less attractive relative to real capital. In Tobin`s analysis, the resulting increase in capital intensity offsets the higher saving rate and therefore maintains aggregate demand. This paper will examine ways of increasing capital intensity without raising the rate of inflation. The analysis will also show why, contrary to Tobin`s conclusion, a higher rate of inflation may not succeed in increasing investors` willingness to hold real capital.

Abstract:
This study provides the first econometric analysis of the effect of taxation on the realization of capital gains. The analysis thus extends and complements the earlier study by Feldstein and Yitzhaki [1978] of the effect of taxation on the selling of corporate stock. The present analysis, using a large, new body of data obtained from individual tax returns, supports the earlier finding that corporate stock sales are quite sensitive to tax rates and then shows that the effect on the realization of capital gains is even stronger.

Abstract:
This paper, which was presented as the 1979 Frank Paish Lecture to the British Association of University Teachers of Economics, provides a non-technical summary of the recent studies of the effects of social security on private saving. The first section discusses the theoretical indeterminacy of the effect of social security while the second part reviews the empirical studies. Although the traditional life cycle theory of saving clearly implies that the anticipation of social security benefits reduces private saving, a richer theoretical framework suggests several reasons why the saving response cannot be unambiguously established by theoretical reasoning. These reasons include the indirect effects of social security on retirement behavior, private pensions, and gifts and bequests. The econometric studies resolve this uncertainty and indicate that social security appears to reduce private saving substantially. These studies include(1) aggregate time series evidence on the U.S. saving rates over the past 50 years, (2) microeconomic evidence on the accumulation of wealth by a large sample of individual households, and (3) international comparisons of saving rates in major industrial countries.

Abstract:
No abstract is available for this paper.

Abstract:
The analysis in this paper was motivated by the apparent puzzle that, despite substantial uncertainty about future inflation rates, private pensions are almost universally unindexed. Moreover, although a variable annuity invested in short-term money market instruments provides a good inflation hedge, almost all private pensions provide a fixed annuity. The results of the analysis indicate that the existence of unindexed pensions and fixed annuities is not at all surprising. Even without Social Security, it may be optimal to have a completely unindexed private pension and it is generally not optimal to have a completely indexed pension. The availability of an optimal (or greater than optimal) amount of Social Security generally reduces the desired degree of indexing and, under a variety of conditions, makes it optimal to have no indexing at all in the private pension. Because unexpected changes in the price level do not alter the value of Social Security pensions, the existence of inflation uncertainty makes a Social Security pension optimal when it would not otherwise be and an increase in inflation uncertainty is likely to increase the optimal reliance on Social Security. But despite these conclusions, the analysis shows that including some Social Security in an overall pension program is necessarily optimal only when both money market instruments and Social Security have rates of return that are known with certainty. When the real yield on money market instruments is uncertain, the optimal pension arrangement may be a partially indexed private pension even though Social Security is risk-free and has a return that is higher than the expected rate on the money market instruments. Similarly, when Social Security is risky, the optimal arrangement my be to exclude Social Security and to use a partially indexed private pension. In all cases, an individual who has a low enough degree of risk aversion will prefer no Social Security and a completely unindexed private pension.

Abstract:
This paper presents evidence that the corporate stock owned by high income investors appreciates substantially faster than the stock owned by investors with lower incomes. Those with very high incomes enjoy the greatest success on their investments while those with incomes under $20,000 have the least success. The evidence indicates that the differences are large and that they have persisted for a long time.

Abstract:
This paper shows that when earnings are uncertain the substitution of deficit finance for tax finance or the introduction of an unfunded social security program will raise consumption even if all bequests reflect intergenerational altruism. Thus, contrary to the theory developed by Barro and a number of subsequent writers, an operative bequest motive need not imply Ricardian equivalence. Since there is no uncertainty in the present analysis about the date of each individual`s death, this conclusion does not depend on imperfections in annuity markets. Nor does it depend on the existence of non-lump-sum taxes and other distortions. Rather it follows from the result derived in the paper that, when an individuals future earnings are uncertain, his future bequest is also uncertain and his consumption therefore rises more in response to an increase in his current disposable income than to an equal present value increase in the disposable income of his potential heirs.

Abstract:
The purpose of the present study is to measure the extent to which an increase in the total capital stock induces an increase in the stock of residential capital, i.e., to measure the marginal propensity of additional capital to be absorbed in residential capital. A knowledge of this propensity is important to evaluate the national return on additional saving and to understand the impact that an increased capital stock could have on labor productivity and on the composition of national output. The present paper provides both a theoretical and an empirical examination of this question.

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No abstract is available for this paper.

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No abstract is available for this paper.

Abstract:
The most basic characteristic of any government's budgetary process is the way in which final decision-making responsibility is divided between the political level and the bureaucratic level of government. At a sufficiently aggregate level of budgetary allocation, the politically responsible agent decides the amount of expenditure in each broad category. In contrast, at a more disaggregated level of the budgeting process, the political authority decides only a total amount of expenditure and then delegates responsibility for its allocation among subcategories to the bureaucracy. The interesting econometric problem is to decide whether any given stage in the budget process is an example of the "political" or the "bureaucratic" model. As far as we know, there has been no attempt to solve this type of problem.

The current paper presents a method of deciding this question and then uses it to study local government spending on education. The basis for our method is the important difference between the effect of intergovernmental aid that is implied by the political budget model and by the bureaucratic budget model. According to the bureaucratic model, the effect of intergovernmental aid on each category of educational input (e.g., teachers' salaries, books, etc.) depends only on the change in total educational spending induced by the aid and not on the type of aid that causes the change in spending. In contrast, the political budget model implies that the overall expenditure increase is the result of separate decisions on each of the expenditure categories and that the changes in these expenditure categories will depend on the form of the intergovernmental aid. Our method of exploiting this difference is presented in detail below.

Abstract:
Any arrangement that is to serve as a long-term framework for international debt management must permit a politically acceptable rate of economic growth in the debtor countries while gradually improving the financial positions of the creditor banks. In addition, a realistic debt management strategy must maintain enough new lending to the debtor countries to provide an incentive for continued compliance with debt service responsibilities. This paper establishes the conditions under which these three goals are compatible. The analysis indicates that Argentina, Brazil and Mexico are now all capable of achieving significant rates of economic growth without debt write-downs or interest rate reductions. They do require additional amounts of credit but the resulting increases in the absolute size of their debts is compatible with declining ratios of debt to their own exports and to the total earnings of the creditor banks. Stated differently, limiting the ratio of debt service payments to GNP to country-specific standards, whether by long-term agreements or by annual negotiations, can achieve economic growth while improving the financial conditions of the creditor banks.

Abstract:
This paper reviews the studies by Robert Barro, Michael Darby, and Alicia Munnell, as well as my own earlier time-series study and presents new estimates using the revised national income-account data. The basic estimates of each of the four studies point to an economically substantial effect that is very unlikely to have been observed by chance alone. Although including variables like the Government surplus (Barro) or a measure of real money balance (Darby) can lower the estimated coefficient of the social security wealth variable, this paper explains their inappropriateness in the aggregate consumption function. Use of new data on national income and its components from the Department of Commerce improves my earlier estimates and shows that the unemployment variable does not belong in the consumption function once the level of income and its rate of change are included.

Abstract:
Going from low inflation to price stability involves a short term loss (associated with the higher unemployment rate required to reduce the inflation) and results in a series of welfare gains" in all future years. The primary source of these gains is the reduction in the distortions that result from the interaction of tax rules and inflation. The paper quantifies the gains associated with reducing the distortion in favor of current consumption rather than future consumption and in favor of the consumption of owner occupied housing. These tax effects are much larger than the effect on the demand for money that is generally emphasized in studies of the distorting effect of inflation. The seignorage gains are also small in comparison to other effects of the tax-inflation interaction. The estimates imply that the annual value of the net benefits of going from two percent inflation to price stability are about one percent of GDP. Discounting this growing stream of benefits at a real discount rate of five percent implies a net present value of about more than 30 percent of GDP. All estimates of the short-run cost of going from low inflation to price stability are less than this.

Abstract:
The effect of outbound foreign direct investment (FDI) on the national income of the parent firm's country depends on the relative importance of two countervailing factors: the loss of tax revenue to the foreign government and the increased use of foreign debt. The present paper develops an explicit analysis of these two factors in the context of the segmented international capital market in which most national saving remains in the country in which the saving is done. The analysis is applied with realistic parameter values for U.S. outbound foreign direct investment. The calculations imply that an increase in outbound FDI raises the present value of U.S. national income by a rather substantial amount. Traditional analyses that conclude that the foreign tax credit causes excess outbound FDI fail to take into account the fact that firms that invest abroad increase their use of foreign debt as they increase the extent of their FDI.

Abstract:
The level of productivity doubled in the U.S. nonfarm business sector between 1970 and 2006. Wages, or more accurately total compensation per hour, increased at approximately the same annual rate during that period if nominal compensation is adjusted for inflation in the same way as the nominal output measure that is used to calculate productivity. Total employee compensation as a share of national income was 66 percent of national income in 1970 and 64 percent in 2006. This measure of the labor compensation share has been remarkably stable since the 1970s. It rose from an average of 62 percent in the decade of the 1960s to 66 percent in the decades of the 1970s and 1980s and then declined to 65 percent in the decade of the 1990s where it has again been from 2000 until the most recent quarter.

Abstract:
The explosion in the 21st century of terrorist activities by Islamic radicals in the United States, Europe and Asia requires reforming the institutions for domestic counterterrorism (CT) and new international relations among individual national CT organizations. This paper discusses the institutional reforms for CT in the United States, focusing particularly on the changes in the FBI. These changes are compared with the way that the British CT activities of the MI5 and MI6 have evolved in response to terrorism in Britain. The paper also discusses the reasons why there is strong cooperation among the CT activities of all the major governments and with the United States in particular, even when those governments do not agree about military cooperation or about the use of economic sanctions.

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No abstract is available for this paper.

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No abstract is available for this paper.

Abstract:
This paper examines the record of employment and unemployment between 1982 and 1986 and discusses a variety of cyclical and structural employment policies that were considered but not implemented during the years 1982-84 when I served as chairman of the Council of Economic Advisers. Employment rose by 11 million jobs during the cyclical recovery of those four years, lowering the unemployment rate from 10.8 percent to 6.6 percent. Even before the recovery was visible, the Reagan administration supported the tight Federal Reserve policy to reverse the high inflation at the end of the 1970s. The policies to reduce structural unemployment that were considered but not enacted at the time have become law in later years: a gradual decline in the real minimum wage, the full taxation of unemployment insurance, and a work requirement for those on welfare.

Abstract:
No abstract is available for this paper.

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No abstract is available for this paper.