James D. Gwartney

Institutions and the Impact of Investment on Growth

The literature on institutions and economic growth shows a close relationship between the quality of institutions and prosperity. This paper examines the impact of institutions on investment, and the resulting impact of investment on growth. The private investment rate of countries with better institutional quality is higher, and the productivity of any given level of investment is greater in countries with better institutions. Models that include various indicators of institutional quality along with inputs such as physical and human capital will generally underestimate the impact of institutional quality on growth because they do not account for the indirect impact of institutions on investment, as is done here. The paper also examines the direction of causality to show that higher institutional quality causes more investment, rather than the other way around. Further, future institutional improvements are more likely to occur against a background of poor economic performance than one of sustained growth.

The concept and measurement of economic freedom

Abstract Since 1996, the Economic Freedom of the World (EFW) reports have presented an index that measures the consistency of a nations policies and institutions with economic freedom. The key ingredients of economic freedom are personal choice, voluntary exchange, freedom to compete, and protection of person and property. Earlier versions of the EFW index have been based almost exclusively on objective quantifiable data. However, some important elements of economic freedom, particularly those dealing with property rights and regulatory restraints, are difficult to capture with objective measures. This paper integrates survey data on legal structure and government regulation into the EFW index and uses it to develop a more comprehensive measure of economic freedom.

The relative earnings of blacks and other minorities

Analyzes the relative earnings of a number of racial and ethnic minorities in the urban labor force from several countries. Purpose of estimating a human capital model of earnings for each racial group; Information on white/minority earning differentials in 1969; Changes in earnings in 1960. (Abstract copyright EBSCO.)

THE ECONOMIC APPROACH

Publisher Summary This chapter discusses the economic approach. Scarcity and choice are the essential ingredients of an economic topic. Goods are scarce because desire for them outstrips their availability from nature. Scarcity and poverty are not the same thing. Absence of poverty implies that some basic level of need has been met. Absence of scarcity would mean that all of the desires for goods have been met. Someday, poverty could be eliminated, but scarcity would always be there. Economics is a method of approach and a way of thinking. Individuals make decisions purposefully, always seeking to choose the option they expect to be most consistent with their personal goals. Purposeful decision making leads to economizing behavior. Economizing individuals would seek to accomplish an objective at the least possible cost.

Measurement of Employment Discrimination according to Sex

Women have become an increasingly prominent part of the labor force in the United States. As their participation rate has grown, their market work and earnings have gained in social, political, and economic importance. Surface investigation of the economic status of females relative to males reveals two rather startling facts. First, income differences according to sex are large indeed, much larger than income differences on the basis of color. Second, the data reveal not only a large differential but they also show that income differences according to sex have been expanding. This paper presents evidence suggesting that differences in employee preferences according to sex contribute to the explanation of both of these phenomena. Section I develops a theoretical framework for investigating the importance of preferences as an explanatory variable of differences in money income and wages according to sex. Evidence is presented which suggests that the employment preferences of males and females are most similar for singles and most divergent for those married with spouse present. To isolate the importance of the employee preference factor, Section II presents evidence on female/ male (F/M) adjusted income ratio according to marital status. The F/M income ratio is highest for never-married persons, the group expected to possess the most simi-

THE IMPACT OF TAX POLICY ON ECONOMIC GROWTH, INCOME DISTRIBUTION, AND ALLOCATION OF TAXES

There is considerable disagreement about how taxes, especially high marginal tax rates on those with high incomes, influence economic performance and the distribution of income. This essay uses cross-country data on changes in marginal tax rates since 1980 to examine this topic. Section II uses economic theory to analyze the linkage between marginal tax rates and economic performance and considers a number of factors that complicate the measurement of that impact. Section III presents data on the top marginal tax rates during 1980–2002 for seventy-seven countries with a personal income tax and analyzes how changes in these rates influenced economic growth during 1990–2002. Section IV focuses on how reductions in marginal tax rates, particularly the highest rates, influence income inequality and the share of the personal income tax paid by various income groups. The final section summarizes the findings of this study.

THE ENERGY MARKET

Publisher Summary This chapter discusses the energy market. Prices influence the level of energy consumption. In the long run, the demand for energy is elastic than it is in the short run. Thus, the short-run relationship between price and energy consumption is likely to be a misleading indicator of how price influences the uses of energy over a longer period of time. The vertical demand for energy is a myth that is refuted by economic reasoning and by careful inspection of the empirical evidence. Prices influence the production of energy. The gestation period of production for energy resources is 3–5 years. Therefore, the supply of most energy resources is highly inelastic. However, higher prices attract additional exploration and capital investment. Thus, the supply of energy resources is more elastic than it is during the short run. The major determinants of the quantity demanded of a product are its price, income in the market area, and the price of closely related products. According to the first law of demand, the quantity of a product consumed is negatively related to its price. According to the second law of demand, the adjustment in consumption that is made in response to a price change is greater in the long run than during the immediate time period. The demand for energy products is not an exception to these general rules.

Public Choice, Market Failure, and Government Failure in Principles Textbooks

Public choice uses the tools of economics to analyze how the political process allocates resources and impacts economic activity. In this study, the authors examine twenty-three principles texts regarding coverage of public choice, market failure, and government failure. Approximately half the texts provide coverage of public choice and recognize the presence of both government and market failure. The coverage of market failure is nearly six times that of government failure. Given the size and scope of government, analysis of the strengths and weaknesses of both market and political allocation is important to student understanding of modern economies.

What Should We Be Teaching in Basic Economics Courses

Advanced Placement economics leaves thousands of high school students with a misleading impression of modern economics. The courses fail to cover key sources of growth and prosperity, including private ownership, dynamic competition, and entrepreneurship. The tools of public choice economics are totally ignored. Government is modeled as a corrective device available to impose ideal solutions. Market failure is covered, but there is no such thing as government failure. The macroeconomics course reflects the simplistic 1960s Keynesian view of stabilization policy. Time lags, incentive effects, secondary effects of budget deficits, and other factors that complicate effective use of stabilization policy are almost entirely ignored. In contrast, the 20 Voluntary National Content Standards in Economics of the Council for Economic Education illustrate what a balanced course in modern economics would look like.

Economic Freedom and Global Poverty

Over the period 1980–2005 many developing countries achieved remarkable increases in economic growth. Real per capita income increased substantially in countries that had experienced only modest increases in living standards for a century or more prior to 1980. Recent scholarship has pointed to the adoption of institutional and policy changes more consistent with economic freedom as an important, if not the most important, explanatory factor underlying the recent economic growth of developing countries.1 But economic growth and increases in real per capita GDP only provide information on how average income figures are changing. They may be a misleading indicator of what is happening to the living standards of the poor. Did the rapid growth of 1980–2005 lead to lower poverty rates? How does economic freedom affect poverty? What can be done to accelerate reductions in poverty rates? This chapter will address all of these issues.