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Abstract:
Much has been written about the national-security aspects of a potential conflict in Iraq, but there are no studies of the cost. A review of several past wars indicates that nations historically have consistently underestimated the cost of military conflicts. This study reviews the potential costs of a conflict including the postwar expenses that might be required for occupation, humanitarian assistance, reconstruction, nation-building, along with the implications for oil markets and macroeconomic activity. It considers two potential scenarios that span the potential outcomes, ranging from a short and relatively conflict-free case to protracted conflict with difficult and expensive postwar reconstruction and occupation. The estimates of the cost to the United States over the decade following hostilities range from $100 billion to $1.9 trillion.

Oil, Defense Spending, War, Iraq

Abstract:
Nations generally measure their economic performance using the yardstick of national output and income. It is not widely recognized, however, that conventional measures of national income and output exclude the value of improvements in the health status of the population. The present study develops a methodology and presents preliminary estimates of how standard economic measures would change if they adequately reflected improvements in health status. The study first discusses the theory of the measurement of national income, examines some of the shortcomings of traditional concepts, and proposes a new concept called 'health income' that can be used to incorporate improvements in health status. The study next discusses how the proposed measure fits into existing theories for measuring and valuing consumption and health status. The study applies the new concepts to data for the United States over the twentieth century and concludes that accounting for improvements in the health status would substantially increase the estimated improvement in economic welfare for the U.S. over the twentieth century.

Health, Income, Growth

Abstract:
Nations generally measure their economic performance using the yardstick of national output and income. It is not widely recognized, however, that conventional measures of national income and output exclude the value of improvements in the health status of the population. The present study develops a methodology and presents preliminary estimates of how standard economic measures would change if they adequately reflected improvements in health status. The study first discusses the theory of the measurement of national income, examines some of the shortcomings of traditional concepts, and proposes a new concept called 'health income' that can be used to incorporate improvements in health status. The study next discusses how the proposed measure fits into existing theories for measuring and valuing consumption and health status. The study applies the new concepts to data for the United States over the twentieth century and concludes that accounting for improvements in the health status would substantially increase the estimated improvement in economic welfare for the U.S. over the twentieth century.

Abstract:
This essay examines the state of the United States economy as it emerges from the 2001 recession. A comparison of several central economic variables indicates that the 2001 recession was the mildest recession in the postwar period. In light of highly differentiated characteristics of recessions, the paper suggests that we differentiate among downturns by a five-category "recession severity scale," analogous to the Saffir-Simpson Hurricane Scale. According to this approach, the 2001 recession fits in the least severe box, a "category I recession," along with the 1963 and 1967 non-recessions. The paper next examines the behavior of profits in recent years and shows that financial finagling has infected the aggregate profits numbers. Finally, the study constructs a measure of the forward-looking return on equities and concludes that the prospective real yield on equities in early 2002 is at its low point of the last half-century.

Recession, Profits, Stock Prices, Returns

Abstract:
This paper examines the state of the United States economy as it emerges from the 2001 recession. A comparison of several central economic variables indicates that the 2001 recession was the mildest recession in the postwar period. In light of highly differentiated characteristics of recessions, the paper suggests that we differentiate among downturns by a five-category 'recession severity scale,' analogous to the Saffir-Simpson Hurricane Scale. According to this approach, the 2001 recession fits in the least severe box, a 'category I recession,' along with the 1963 and 1967 non-recessions. The paper next examines the behavior of profits in recent years and shows that financial finagling has infected the aggregate profits numbers. Finally, the study constructs a measure of the forward-looking return on equities and concludes that the prospective real yield on equities in early 2002 is at its low point of the last half-century.

Abstract:
Now that it has found Microsoft in violation of the Sherman Act, the Court faces its most important challenge. It must fashion a decree that promises to introduce effective competition in the market that Microsoft has monopolized ? Intel-compatible operating systems ? and to restrain Microsoft from projecting its current monopoly into adjacent markets. That monopoly has proved of enormous value to Microsoft: as shown below, in 1999 Microsoft's rate of return was 88 percent on its investments in capital and research and development ? a record of profitability exceeding the average return of other major corporations by a factor of more than thirteen.

Achieving the required remedy objectives is a heavy responsibility. Too often in the past, the government plaintiffs and the courts have devoted most of their attention to the liability phase of antitrust cases and have tended to breeze through the remedy phase. This case is too important and
the stakes for the nation are too high to allow such a course of action to be followed here. The Court has a unique opportunity not only to establish a clear record for appellate review of the remedy, but also to set an important precedent for the way in which remedy determinations are made in future antitrust actions.

In particular, this Court will establish in the process of setting a remedy in this matter the contours of relief in monopolization cases where the defendant's value arises primarily from intangible assets in the form of intellectual property rather than the tangible capital assets characteristic of such prior major monopolization cases as Standard Oil, Alcoa, and AT&T. In essence, this case provides an important test of how antitrust law and remedies should be applied in the "New Economy," where informational capital is the scarce and precious asset and physical assets are relatively minor and hardly unique. We argue that while the valuable assets underlying our economy may be new, the rules of antitrust remain just as valid as when the Sherman Act was first enacted: monopoly power is just as dangerous today when firms holding it have repeatedly demonstrated a willingness and ability to abuse that power. Dissolution of the kind proposed for Microsoft's operating-system monopoly was both impossible and irrelevant in many earlier major structural cases; dissolution here is the logical extension of physical or regional divestiture for companies based largely on tangible assets to a company whose value is based largely on intellectual and informational assets.

We submit this brief without the benefit of knowing what relief the government plaintiffs will seek. However, our understanding of the relevant legal standard is that this Court has broad discretion in fashioning an appropriate remedy. It need not be limited to the remedies the government plaintiffs may propose. Now that the Court has issued a broad legal Conclusions of Law, it has the authority ? indeed the responsibility within the contours of existing law ? to impose whatever remedy it finds most appropriate to address the violations it has found, regardless of what the government plaintiffs may propose. For this reason, we urge the Court, following its scheduled May 24 hearing, to establish procedures (including evidentiary hearings on the risks and benefits of alternative courses of action) for developing a record that will enable the Court to develop a remedy that will provide a reasonable chance for competition to work without the monopolistic distortions outlined in the Court's Findings of Fact and Conclusions of Law.

The Court has recognized the time-urgency of deciding this matter by suggesting that it may ask for immediate review of its Conclusions of Law and remedy order by the Supreme Court. There is certainly merit to this concept, especially in light of Microsoft's announced plans to extend Windows to the server and Internet access provider markets. Nonetheless, we believe that, because the underlying remedy issues are so complex, the key concern is the quality of the assessment rather than the speed of the resolution. Hence, a careful study and assessment of alternatives should not be sacrificed in the rush to resolve uncertainties surrounding the outcome of this case.

The need for a careful and thorough study of remedies is underlined if the Court contemplates a structural remedy with respect to the monopolized markets. We will argue that conduct and licensing remedies are unlikely to introduce workably competitive conditions into the market monopolized by Windows and that it will be necessary to impose a structural remedy if demonopolization is the goal. At the same time, however, the complexity and potential risks of a structural remedy along with the history of past structural cases underline the need to ensure a careful and thorough study and assessment of alternative approaches before a final remedy is ordered.

Abstract:
The present study examines the importance of Schumpeterian profits in the United States economy. Schumpeterian profits are defined as those profits that arise when firms are able to appropriate the returns from innovative activity. We first show the underlying equations for Schumpeterian profits. We then estimate the value of these profits for the non-farm business economy. We conclude that only a miniscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.

Schumpeter, profits, innovation

Abstract:
The present study examines the importance of Schumpeterian profits in the United States economy. Schumpeterian profits are defined as those profits that arise when firms are able to appropriate the returns from innovative activity. We first show the underlying equations for Schumpeterian profits. We then estimate the value of these profits for the non-farm business economy. We conclude that only a minuscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.

Abstract:
The present study examines the importance of Schumpeterian profits in the United States economy. Schumpeterian profits are defined as those profits that arise when firms are able to appropriate the returns from innovative activity. The paper derives the underlying equations for Schumpeterian profits. It then estimates the value of these profits for the non-farm business economy and for major industries. It concludes that only a miniscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers. These results indicate that the bubble of new-economy stocks in the 1990s resulted from the alchemist fallacy.

Schumpeter, profits, innovation

Abstract:
The present study analyzes computer performance over the last century and a half. Three results stand out. First, there has been a phenomenal increase in computer power over the twentieth century. Performance in constant dollars or in terms of labor units has improved since 1900 by a factor in the order of 1 trillion to 5 trillion, which represent compound growth rates of over 30 percent per year for a century. Second, there were relatively small improvements in efficiency (perhaps a factor of ten) in the century before World War II. Around World War II, however, there was a substantial acceleration in productivity, and the growth in computer power from 1940 to 2001 has averaged 55 percent per year. Third, this study develops estimates of the growth in computer power relying on performance rather than on input-based measures typically used by official statistical agencies. The price declines using performance-based measures are markedly higher than those reported in the official statistics.

Productivity, Hedonic Pricing, History of Computing

Abstract:
In a series of papers, Martin Weitzman has proposed a Dismal Theorem. The general idea is that, under limited conditions concerning the structure of uncertainty and preferences, society has an indefinitely large expected loss from high-consequence, low-probability events. Under such conditions, standard economic analysis cannot be applied. The present study is intended to put the Dismal Theorem in context and examine the range of its applicability, with an application to catastrophic climate change. I conclude that Weitzman makes an important point about selection of distributions in the analysis of decision-making under uncertainty. However, the conditions necessary for the Dismal Theorem to hold are limited and do not apply to a wide range of potential uncertain scenarios.

Dismal theorem, Uncertainty, Climate change, Catastrophes

Abstract:
As we understand it, the D.C. Circuit did not allow the EPA to consider the costs of complying with ozone and PM NAAQS. As we further understand it, this legal ruling can be overturned only by this Court. As economists, we believe that the D.C. Circuit's ruling not allowing the EPA to consider important information relating to the consequences of its regulatory actions is economically unsound. Without delving into the legal aspects of the case, we present below why we think the Court should allow the EPA to consider costs in setting standards. In particular, we believe that, as a general principle, regulators should be allowed to consider explicitly the full consequences of their regulatory decisions. These consequences include the regulation's benefits, costs, and any other relevant factors.

EPA, D.C. Circuit, regulatory actions

Abstract:
How much and how fast should the globe reduce greenhouse-gas emissions? How should nations balance the costs of the reductions against the damages and dangers of climate change? This question has been addressed by the recent Stern Review on the Economics of Climate Change, which answers these questions clearly and unambiguously. We need urgent, sharp, and immediate reductions in greenhouse-gas emissions. An analysis of the Stern Review finds that these recommendations depend decisively on the assumption of a near-zero social discount rate. The Review's unambiguous conclusions about the need for extreme immediate action will not survive the substitution of discounting assumptions that are consistent with today's market place.

Abstract:
The 2004 election has been interpreted as a resounding victory for conservative values. Was it in fact a mandate? The present analysis examines recent electoral outcomes and the 2004 election with particular reference to economic and political fundamentals. Looking at both aggregate results and exit polls since 1972, it examines three models of performance relative to economic and political fundamentals. Additionally, it identifies the trends for different socio-economic groups. It concludes that the Republican candidate in 2004 did significantly worse than would be predicted based on economic and political fundamentals.

2004 election, exit poll, political equations

Abstract:
The present study is the third in a series of three papers devoted to issues in the measurement of productivity and productivity growth. The major findings are as follows. First, this study shows that the new data set used here, which develops data on total output, business sector output, and 'well-measured' output, and relying on income-side data, provides a useful supplement to existing data sets. Second, there has clearly been a rebound in labor-productivity growth in recent years. All three sectoral definitions show a major acceleration in labor productivity in the last three years of the period (1996 98) relative to the 1978 95 period. The rebound was 1.2 percentage points for GDP, 1.8 percentage points for business sector, and 2.1 percentage points for well-measured output. Third, productivity growth in the new economy sectors has made a significant contribution to economy-wide productivity growth. For the business sector, of the 1.82 percentage point increase in labor-productivity growth in the last three years, 0.65 percentage point was due to the new-economy sectors. Finally, for all three output measures, there has been a substantial upturn in labor-productivity growth outside the new economy. After removing the direct effect of new economy sectors, the productivity acceleration was 0.54 percentage points for total GDP, 0.65 percentage points for business output, and 1.18 percentage points for well-measured output. It is clear that the productivity rebound is not narrowly focused in a few new-economy sectors.

Abstract:
Much has been written about the national-security aspects of a potential conflict with Iraq, but there are no studies of the cost. A review of several past wars indicates that nations historically have consistently underestimated the cost of military conflicts. This study reviews the potential costs of a conflict including the postwar expenses that might be required for occupation, humanitarian assistance, reconstruction, nation-building along with the implications for oil markets and macroeconomic activity. It considers two potential scenarios that span the potential outcomes, ranging from a short and relatively conflict-free case to protracted conflict with difficult and expensive postwar reconstruction and occupation. The estimates of the cost to the United States over the decade following hostilities range from $100 billion to $1.9 trillion.

Abstract:
The present study reviews the "productivity slowdown" of the 1970s and 1980s. The study also develops a new data set - industrial data available back to 1948 - as well as a new set of tools for decomposing changes in productivity growth. The major result of this study is that the productivity slowdown of the 1970s has survived three decades of scrutiny, conceptual refinements, and data revisions. The slowdown was primarily centered in those sectors that were most energy-intensive, were hardest hit by the energy shocks of the 1970s, and therefore had large output declines. In a sense, the energy shocks were the earthquake, and the industries with the largest slowdown were near the epicenter of the tectonic shifts in the economy.

Productivity, economic growth

Abstract:
The present study is a contribution to the theory of the measurement of productivity growth. First, it examines the welfare-theoretic basis for measuring productivity growth and shows that the ideal welfare-theoretic measure is a chain index of productivity growth rates of different sectors which uses current output weights. Second, it lays out a technique for decomposing productivity growth which separates aggregate productivity growth into three factors -- the pure productivity effect, the effect of changing shares, and the effect of different productivity levels. Finally, it shows how to apply the theoretically correct measure of productivity growth and indicates which of the three different components should be included in a welfare-oriented measure of productivity growth. The study concludes that none of the measures generally used to measure productivity growth is consistent with the theoretically correct measure.

Abstract:
This study reviews different approaches to the political and economic control of global public goods like global warming. It compares quantity-oriented control mechanisms like the Kyoto Protocol with price-type control mechanisms such as internationally harmonized carbon taxes. The pros and cons of the two approaches are compared, focusing on such issues as performance under conditions of uncertainty, volatility of the induced carbon prices, the excess burden of taxation and regulation, potential for corruption and accounting finagling, and ease of implementation. It concludes that, although virtually all discussions about economic global public goods have analyzed quantitative approaches, price-type approaches are likely to be more effective and more efficient.

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:
Productivity has rebounded in the last decade while manufacturing employment has declined sharply. The present study uses data on industrial output and employment to examine the sources of these trends. It finds that the productivity rebound since 1995 has been widespread, with approximately two-fifths of the productivity rebound occurring in New Economy industries. Moreover, after suffering a slowdown in the 1970s, productivity growth since 1995 has been at the rapid pace of the earlier 1948-73 period. Finally, the study investigates the relationship between employment and productivity growth. It finds that the relevant elasticities indicate that more rapid productivity growth leads to increased rather than decreased employment in manufacturing. The results here suggest that productivity is not to be feared - at least not in manufacturing, where the largest recent employment declines have occurred. This shows up most sharply for the most recent period, since 1998. Overall, higher productivity has led to lower prices, expanding demand, and to higher employment, but the partial effects of rapid domestic productivity growth have been more than offset by more rapid productivity growth and price declines from foreign competitors.

Abstract:
Learning or experience curves are widely used to estimate cost functions in manufacturing modeling. They have recently been introduced in policy models of energy and global warming economics to make the process of technological change endogenous. It is not widely appreciated that this is a dangerous modeling strategy. The present note has three points. First, it shows that there is a fundamental statistical identification problem in trying to separate learning from exogenous technological change and that the estimated learning coefficient will generally be biased upwards. Second, we present two empirical tests that illustrate the potential bias in practice and show that learning parameters are not robust to alternative specifications. Finally, we show that an overestimate of the learning coefficient will provide incorrect estimates of the total marginal cost of output and will therefore bias optimization models to tilt toward technologies that are incorrectly specified as having high learning coefficients.

Abstract:
Learning or experience curves are widely used to estimate cost functions in manufacturing modeling. They have recently been introduced in policy models of energy and global warming economics to make the process of technological change endogenous. It is not widely appreciated that this is a dangerous modeling strategy. The present note has three points. First, it shows that there is a fundamental statistical identification problem in trying to separate learning from exogenous technological change and that the estimated learning coefficient will generally be biased upwards. Second, we present two empirical tests that illustrate the potential bias in practice and show that learning parameters are not robust to alternative specifications. Finally, we show that an overestimate of the learning coefficient will provide incorrect estimates of the total marginal cost of output and will therefore bias optimization models to tilt toward technologies that are incorrectly specified as having high learning coefficients.

Learning by doing, Experience curves, Energy models, Technological change

Abstract:
The present study is the second is a series of three papers devoted to issues in the measurement of productivity and productivity growth. The contributions of the present paper are three. First, it introduces a new approach to measuring industrial productivity based on income-side data that are published by the Bureau of Economic Analysis (BEA). The data are internally consistent in that both inputs and outputs are income-side measures of value added, whereas the usual productivity measures combine expenditure-side output measures with income-side input measures. Second, because of interest in the 'new economy,' we have also constructed a set of new-economy accounts. For the purpose of this study, we define the new economy as machinery, electric equipment, telephone and telegraph, and software. Finally, because of concerns about poor deflation in the current output measures, this study constructs a new output concept called 'well-measured output,' which includes only those sectors for which output is relatively well measured. We present a brief summary of the behavior of the alternative measures.

Abstract:
The present paper examines several issues involved in expanding national economic accounts and quantitative social indicators to include the 'consumption' of time. The first part examines this question in the context of the standard national economic accounts. It derives equilibrium conditions for consumer behavior with market and non-market consumption along with intrinsic values of time in different activities. Using a standard index-number approach, it shows that the growth of real income can be approximated by a weighted average of productivity growth rates in market and non-market productivity and that the valuation of hours drops out of the formula. The second part of the paper examines the role of quantitative social indicators using the approach of hedonic psychology to value time in different activities. It concludes that hedonic measures do not meet the standards for a interpersonally cardinal variable that are required to construct a meaningful quantitative social indicator.

time use, Hedonic measures, national accounts, index numbers

Abstract:
The present study analyzes the "productivity slowdown" of the 1970s. The study also develops a new data set - industrial data available back to 1948 - as well as a new set of tools for decomposing changes in productivity growth. The major result of this study is that the productivity slowdown of the 1970s has survived three decades of scrutiny, conceptual refinements, and data revisions. The slowdown was primarily centered in those sectors that were most energy-intensive, were hardest hit by the energy shocks of the 1970s, and therefore had large output declines. In a sense, the energy shocks were the earthquake, and the industries with the largest slowdown were near the epicenter of the tectonic shifts in the economy.

Abstract:
The present study extends earlier research by presenting the results of a new and updated version of the RICE model (Regional Integrated model of Climate and the Economy), labeled the RICE-2009 model. The model is a regionalized, dynamic model that incorporates an end-to-end treatment of economic growth, emissions, climate change, damages, and emissions controls. The model allows projections of what will occur with no policies, with efficient policies be, how nations can undertake policies to limit climate change (in the current runs to 2°C), and the impacts of limited participation. These new estimates indicate that coordinated international policies have a substantial economic benefit. The optimal carbon tax is estimated to be $29 per ton carbon ($8 per ton CO_2) for 2010 in 2005 prices. The economic optimum would limit global temperature rise to an average of 2.5°C over 1900 levels for the 22nd and 23rd century.

climate change economics, environmental policy, economic growth

Abstract:
William Baumol and his co-authors have analyzed the impact of differential productivity growth on the health of different sectors and on the overall economy. They argued that technologically stagnant sectors experience above average cost and price increases, take a rising share of national output, and slow aggregate productivity growth. Using industry data for the period 1948-2001, the present study investigates Baumol's diseases for the overall economy. It finds that technologically stagnant sectors clearly have rising relative prices and declining relative real outputs. Additionally, technologically progressive sectors tend to have slower hours and employment growth outside of manufacturing. Finally, sectoral shifts have tended to lower overall productivity growth as the share of stagnant sectors has risen over the second half of the twentieth century.

Abstract:
Countries' military expenditures differ greatly across both space and time. This study examines the determinants of military spending, with particular reference to the importance of the external security environment. Using the liberal-realist model of international relations, we first estimate the probability that two countries will be involved in a fatal militarized interstate dispute. We then aggregate these ex ante estimates of the likelihood of dyadic conflict, calculating the annual joint probability that a country will be involved in a fatal dispute. This is our measure of the external threat. We then estimate the level of military spending by country and year as a function of the security environment, arms races with foes and the defense expenditures of friendly countries, states' involvement in actual military conflict, economic output, and various other political variables. In analyses of a panel of 165 countries, 1950 to 2000, we find that the security environment is a powerful determinant of military spending. Indeed, our prospectively measured estimate of the external threat is more influential than any of several influences known only ex post. Our best estimate is that a one percentage point rise in the probability of a fatal dispute leads to a 3 percent increase in military spending.

military spending, security threat, arms race, militarized disputes, democracy, alliances

Abstract:
The year 2005 brought record numbers of hurricanes and storm damages to the United States. Was this a foretaste of increasingly destructive hurricanes in an era of global warming? This study examines the economic impacts of U.S. hurricanes. The major conclusions are the following: First, there appears to be an increase in the frequency and intensity of tropical cyclones in the North Atlantic. Second, there are substantial vulnerabilities to intense hurricanes in the Atlantic coastal United States. Damages appear to rise with the eighth power of maximum wind speed. Third, greenhouse warming is likely to lead to stronger hurricanes, but the evidence on hurricane frequency is unclear. We estimate that the average annual U.S. hurricane damages will increase by $8 billion at 2005 incomes (0.06 percent of GDP) due to global warming. However, this number may be underestimated by current storm models. Fourth, 2005 appears to have been a quadruple outlier, involving a record number of North Atlantic tropical cyclones, a large fraction of intense storms, a large fraction of the intense storms making landfall in the United States, and an intense storm hitting the most vulnerable high-value region in the country.