Lawrence H. Summers

Hysteresis and the European Unemployment Problem

European unemployment has been steadily increasing for the last fifteen years and is expected to remain very high for many years to come. In this paper, we argue that this fact implies that shocks have much more persistent effects on unemployment than standard theories can possibly explain. We develop a theory that can explain such persistence, and that is based on the distinction between insiders and outsiders in wage bargaining. We argue that if wages are largely set by bargaining between insiders and firms, shocks which affect actual unemployment tend also to affect equilibrium unemployment. We then confront the theory with both the detailed facts of the European situation as well as those of earlier periods of high persistent unemployment, such as the Great Depression in the United States.

EFFICIENCY WAGES AND THE INTER-INDUSTRY WAGE STRUCTURE

This paper uses cross-sectional and longitudinal data to examine differences in pay for equally-skilled workers in different ind ustries. The major finding is that there is substantial dispersion in wages across industries, even after allowing for measured and unmeas ured labor quality, working conditions, fringe benefits, transitory d emand shocks, the threat of union-ization, union bargaining power, fi rm size, and other factors. In addition, evidence is presented demons trating that turnover has a negative relationship with industry wage differentials. These findings suggest that workers in high-wage indus tries receive noncompetitive rents. Copyright 1988 by The Econometric Society.

Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence

This note uses information on a sample of sixteen OECD countries to assess the relationship between central bank independence and macroeconomic performance. As previous work suggests, politically controlled central banks are more likely to pursue policies that lead to high and variable inflation. However, the authors find little evidence that political control of central bank policy has any impact on measures of the level or variability of growth, unemployment, or the ex ante real interest rate. Copyright 1993 by Ohio State University Press.

Wealthier is healthier

With cross-country, time series data on health (infant and child mortality, and life expectancy) and per capita income, the authors estimate the effect of income on health. They use instrumental variables estimation to identify the effect of income on health that is structural and causal, isolated from reverse causation (healthier workers are more productive and hence wealthier) or incidental association (some other factor may cause both better health and greater wealth). The long-run income elasticity of infant and child mortality in developing countries lies between 0.2 and 0.4. Using those estimates, they calculate that in 1990 alone, more than half a million child deaths in the developing world could be attributed to poor economic performance in the 1980s.

Taxation and Corporate Investment: A q-Theory Approach

THE PAST DECADE has witnessed increasing concern over the level of business capital formation in the United States. By some measures there has been a sharp decline in the rate of capital forma:tion, accompanied by a drastic reduction in the stock markets valuation of corporate assets. Measured in 1981 dollars, the Dow Jones average stood at almost 2000 in 1965. This decline in investment and market valuation has occurred in conjunction with the substantial changes in the effective taxation of capital income brought on by inflation. Although causal links among these developments have not been clearly established, a consensus in favor of some sort of tax incentive for business capital formation has emerged. At present, however, there is no solid basis for assessing the likely impact of any given menu of tax policies on the level of investment or on the distribution of income.

Global health 2035: a world converging within a generation

Prompted by the 20th anniversary of the 1993 World Development Report a Lancet Commission revisited the case for investment in health and developed a new investment frame work to achieve dramatic health gains by 2035. The report has four key messages each accompanied by opportunities for action by national governments of low-income and middle-income countries and by the international community. Conclusion 1: there is a very large payoff from investing in health. Conclusion 2: a grand convergence is achievable within our lifetime. Conclusion 3: scale-up of low-cost packages of interventions can enable major progress in NCDs and injuries within a generation. Conclusion 4: progressive universalism is an effi cient way to achieve health and fi nancial protection.

Tax policy and the economy

The Tax Policy and Economy series presents new research bearing on the effects of taxation on economic performance and analyzing the effects of potential tax reforms. Research results are, presented in a timely and accessible fashion.Volume 4 includes contributions by Glenn Hubbard, Lawrence Goulder, Lawrence Summers, Daniel Feenberg, and Eytan Sheshinski.Lawrence H. Summers is Professor of Economics at Harvard University and Research Associate at the National Bureau of Economic Research.

Good policy or good luck

Abstract Much of the new growth literature stresses country characteristics, such as education levels or political stability, as the dominant determinant of growth. However, growth rates are highly unstable over time, with a correlation across decades of 0.1 to 0.3, while country characteristics are stable, with cross-decade correlations of 0.6 to 0.9. Shocks, especially those to terms of trade, play a large role in explaining variance in growth. These findings suggest either that shocks are important relative to country characteristics in determining long-run growth, or that worldwide technological change determines long-run growth while country characteristics determine relative income levels.

Fiscal Policy in a Depressed Economy

In a depressed economy, with short-term nominal interest rates at their zero lower bound, ample cyclical unemployment, and excess capacity, increased government purchases would be neither offset by the monetary authority raising interest rates nor neutralized by supply-side bottlenecks. Then even a small amount of hysteresis—even a small shadow cast on future potential output by the cyclical downturn—means, by simple arithmetic, that expansionary fiscal policy is likely to be self-financing. Even if it is not, it is highly likely to pass the sensible benefit-cost test of raising the present value of future potential output. Thus, at the zero bound, where the central bank cannot or will not but in any event does not perform its full role in stabilization policy, fiscal policy has the stabilization policy mission that others have convincingly argued it lacks in normal times. Whereas many economists have assumed that the path of potential output is invariant to even a deep and prolonged downturn, the available evidence raises a strong fear that hysteresis is indeed a factor. Although nothing in our analysis calls into question the importance of sustainable fiscal policies, it strongly suggests the need for caution regarding the pace of fiscal consolidation.

When Financial Markets Work Too Well : A Cautious Case For A Securities Transactions Tax

Unlike most major industrialized nations, the United States does not impose an excise tax on securities transactions. This article examines the desirability and feasibility of implementating a U.S. Securities Transfer Excise Tax (STET) directed at curbing excesses associated with short-term speculation and at raising revenue. We conclude that strong economic efficiency arguments can be made in support of a STET that throws “sand into the gears,” in James Tobins (1982) phrase, of our excessively well-functioning financial markets. Such a tax would have the beneficial effects of curbing instability introduced by speculation, reducing the diversion of resources into the financial sector of the economy, and lengthening the horizons of corporate managers. The efficiency benefits derived from curbing speculation are likely to exceed any costs of reduced liquidity or increased costs of capital that come from taxing financial transactions more heavily. The examples of Japan and the United Kingdom suggest that a STET is administratively feasible and can be implemented without crippling the competitiveness of U.S. financial markets. A STET at a .5% rate could raise revenues of at least