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The article presents a commentary on an earlier article published in this journal titled "Interest Rates and Prices In the Long Run," by Thomas J. Sargent. The author finds that Sargent's most convincing arguments come in the final, theoretical section of his paper, where he develops a simple macro model where stochastic error terms are added to the investment, consumption, money demand, and wage change equations. The author asks two questions of Sargent: why do predictions of inflation have such a modest impact on the interest rates in the sample period and why is postwar U.S. empirical evidence so different from the earlier sample period. The author explains his questions.

The article explores the declining growth of the U.S. economy despite continuous technological innovation in the 21st century and the dependence of productivity growth on innovation and the rate of increase in physical and human capital.

We examined the sexual health change process experienced by 26 college student sexual health educators from three geographic regions of the United States who participated in a multisite arts-based sexual health prevention program. We conducted eight focus groups and used a phenomenological approach to analyze data. We drew from social cognitive theory (SCT) to examine how sexual health knowledge, attitudes, self-efficacy, and communication shifted across the duration of participation. Findings suggest that the college student sexual health educators (a) developed enhanced sexual health awareness and critical consciousness, (b) questioned their own sexual health education and challenged previous beliefs, and (c) demonstrated self-efficacy related to intended behavior change and their perceived role as social justice advocates. We present both similarities and differences regarding the sexual health change process among the college student sexual health educators across the three sites. [ABSTRACT FROM PUBLISHER]

This paper summarizes the book and assesses the reviews contained in the four contributed papers. Gregory Clark provides convincing arguments that extend the book's forecast that future technological change will be slower. Nicholas Crafts shows declining mortality and shorter work hours greatly increase welfare-augmented TFP growth during 1929-50. Benjamin Friedman points out that optimism about future technological change casts doubt on future employment growth, while technological pessimism implies employment optimism. Daron Acemoglu and co-authors emphasize the institutional environment that influences the timing and magnitude of innovation. [ABSTRACT FROM AUTHOR]

Secular stagnation refers not to the literal stagnation, i.e., stopping of economic growth but rather to the slowing of U.S. potential real GDP growth to half or less of its historical pace. The retardation of potential real GDP growth matters both because of its direct impact on the standard of living and also because of its indirect effect on net investment, which in turn feeds back to slower productivity growth. During the decade ending in 2014:Q4, U.S. real GDP grew at only 1.55% per year, almost exactly half the growth rate of 3.12% per year achieved during the previous three decades, 1974-2004, and an even smaller fraction of the 3.62% per year performance of 1929-1974. This paper predicts that slow growth of around 1.5% per year will continue over the next decade or two. Part of the slowdown in output growth is due to a decline in the growth rate of the working-age population. A second reason is a shift in worker hours per capita from an increase due to the entry of women into the labor force during 1965-1995 to a future decrease due primarily to the retirement of the baby-boom generation. A third reason is an ongoing slowdown in the growth rate of output per hour, from 1.72% per year during 1974-2004 to 1.10% per year in 2004-2014 and to an even slower 0.55% per year during 2009-2014. The sources of the decline in productivity growth combine diminishing returns that have set in following the ICT revolution of the 1996-2004 "dot.com" era with a decline in business dynamism, as the entry of new business firms has steadily declined over the past three decades relative to the exit of existing firms. Moore's Law describing the steady exponential increase in the number of transistors on a chip became obsolete a decade ago. The historic rise of educational attainment has slowed to a crawl, and the declining share of children growing up in two-parent families may lead to a future decrease in highschool completion and an increase in criminal activity among youth. While future productivity growth will be slower than before 2004, it will still continue as in the past decade at a rate slightly in excess of one% per year. [ABSTRACT FROM AUTHOR]

While the early history of the Phillips curve up to 1975 is well known, less well understood is the post-1975 fork in the road. The left fork developed a theory of policy responses to supply shocks in the context of price stickiness in the non-shocked sector. Its econometric implementation interacts shocks with backward-looking inertia. The right fork approach emphasizes forward-looking expectations that can jump in response to anticipated policy changes. The left fork approach is better suited to explaining the postwar US inflation process, while the right fork approach is essential for understanding behaviour in economies with unstable macroeconomic environments. [ABSTRACT FROM AUTHOR]

The author argues that, with proper adjustments, the conventional view about the rise in inequality has been exaggerated. Indeed, in recent periods, most of the inequality can be attributed to gains by a small proportion of very high-income individuals. He proposes a variety of aggressive policies to counteract the levels of inequality found by his analysis. [ABSTRACT FROM AUTHOR]

The article discusses the issues related to the increase in income inequality in the U.S. It was suggested that the primary contributor of increased inequality is skill-biased technological change. According to a survey, the share of employees belonging to unions declined rapidly from 27% in 1979 to 19% in 1986, and then more slowly to 14% in 2005. David Card, Thomas Lemieux and Craig Ridell explained that the decline in unionization presents a 14% of growth in the variance of male wages between 1973 and 2001. The survey also indicate that half of the total increase in equality since 1966 reflects the 90th percentile gaining relative to the 10th percentile, and that the other half has occurred within the top 10th percentile.

This article focuses on the report of the treasurer from Econometric Society's (ES) annual reports. For several decades, the financial objective of ES has been to maintain its ratio of net worth (NW) to adjusted total revenue (ATR), that is, NW/ATR, equal to 50 percent. Starting with the volume year 2004, the structure of institutional prices and membership dues for the journal "Econometrica" will experience its most significant change in the history of ES. For the first time, electronic access will be available to all institutional subscribers, and a compulsory extra charge for electronic access will be included in all institutional prices. Mid-2003 circulation figures displayed in the top portion of data table I of the Secretary's report show a continuing erosion of institutional members but a sharp jump in regular and student members. Many, if not most, nonprofit institutions have experienced a decline in their net worth over the past two years as a result of the decline in the U.S. and foreign stock markets. In May 2003, ES's office marked the fourteenth anniversary of the Society's administrative assistant Maryann Semer's association with ES.

The article reports that many if not most nonprofit institutions have experienced a decline in their net worth over the past two years as a result of the decline in U.S. and foreign stock markets. For instance, the American Economic Association (AEA) experienced a 25 percent decline in its net unrestricted assets from year-end 2000 to year-end 2001, and presumably another substantial decline has occurred thus far in 2002. The unrestricted net worth of the Econometric Society (ES) has also declined over the past two years (between end-1999 and end-2001) but for an entirely different reason. Despite the decline in the stock market, the return on the ES unrestricted investment portfolio has actually been positive between August 1, 2000 and August 1, 2002, thanks to a well timed exit from domestic U.S. equities in February and May 2000. Instead, the decline in the net worth of the ES has been the result of a deliberate policy to spend the fruits of the stock market gains of the 1990s in ways that benefit our members, as detailed below.

This article analyzes the effect of information technology on the U.S. economy as of November 2000. There is no dispute that the national economy is awash in computer investment, that productivity is revived, and that the late 1990s were extremely good years for the economy. The acceleration in the price decline of computers since 1995 has been accompanied by a revival of productivity growth in the aggregate company which is impressive in comparison with the U.S. historical record dating back more than a century. There are a number of differences between the computer and the great inventions of the Second Industrial Revolution, but perhaps the largest difference is the unprecedented rate of decline in the price of computer power. One of the reasons that computers run into diminishing returns is that there are real limitations to the replacement of human beings by computers. However, computers are actually less pervasive in the economy than is generally thought, because some tasks are resistant to replacement of human beings by computers. The benefits of electronic commerce include the provision of vast amounts of free information that was formerly expensive or inconvenient to obtain, including travel and sports schedules.

Presents information on the economy of the United States. Details on the nonaccelerating inflation rate of unemployment (NAIRU); Basic data and the extent of the inflation surprise; Actual and simulated values of price and wage changes, using alternative indexes and constant NAIRU.

The research on input composition and quantity summarized in this article replaces the 'big wave' symmetry with a flatter profile of corrected and adjusted multi-factor productivity (MFP) growth which proceeds at roughly 1 percent per annum during the periods 1891-1950 and 1972-1979. The author believes that the inventions of the late 19th century and early 20th century were more fundamental creators of productivity than the electronic/internet era of today. He notes that the more research that emerges on specific questions, the less is learned about the underlying structure of the 'big wave.'

The treasurer of the Econometric Society reports on the expenditures and finances of the Society in 1997. Since 1980 the financial objective of the society has been to stabilize the ratio of end-of-year net worth to adjusted total revenues. As a result of the buoyant performance of the U.S. stock market, the Society's net worth has surged upward in 1995 to 1996 and at end-1996 has reached 108 percent, despite the provision of substantial travel grants to the 1995 World Congress, suspension of dues increases and publication of Members' Directories.

The article presents the annual report of the treasurer of the Econometric Society for the year 1981. The society did rather better than predicted in 1982. It posted an actual profit of $10,300. The higher profit was the result on an excess revenues over predicted revenues partly offset by an excess of actual expenses over predicted expenses. The projections for 1982 are extremely rosy. The predicted profit of almost $50,000 is already adjusted for the cost of a seventh issue of "Econometrica."

This article comments on a paper by Andreas Hornstein and Per Krusell which investigated the implications of rapid technological change for the measurement of the U.S. economy's productivity performance. The authors document the productivity-growth slowdown, which began in the late 1960s and exhibits a sharp transition to slower growth around 1972-1973. Unfortunately, their tables are based on official data that were made obsolete by important revisions released in early 1996. The effect of the revisions is to decrease substantially the growth rate of labor productivity and total-factor productivity (TFP) after 1987 and increase both rates prior to 1987. The revisions change the growth rate of TFP in the manufacturing sector relative to the total private economy. Another measurement contribution is the so-called formula bias in the CPI. There are two different points, both of which may be understood by assuming a society entirely devoid of change. First, the official price indexes may err in measuring the prices of goods of constant quality for a host of reasons. Second, the official price indexes may err by neglecting quality change in a technologically stagnant society.

This article comments on the article "Assessing the Federal Reserve's Measures of Capacity and Utilization," by Matthew Shapiro in U.S. industry. From a broader perspective, Shapiro is unconvincing in making his case that the Federal Reserve "should avoid giving a structural interpretation to high capacity utilization." As you shall see, Shapiro steps into the fatal pitfall of confusing changes in absolute prices, which the Federal Reserve should care about, with changes in relative prices, about which it should not. The main problem with the measurement part of Shapiro's paper is that he does not make an adequate distinction between measurement issues and conceptual issues, as he could have by examining more closely industries with good measures of physical output and capacity. In such industries, it becomes clear that, even when the measurement issues are completely absent, it is impossible to interpret a given level of a utilization index as indicating a given degree of "tightness." Shapiro's central policy objective is to evaluate the conventional view that "if capacity constrains real output growth, inflation must increase."

This article it attempts to identify elements of continuity and change in the inflation data regarding the U.S. within the context of some earlier research, and it contains no review of the literature. It also follows up a 1984 paper by the author, which created a measure of potential GNP that corresponds to a series for the natural rate of unemployment developed in the earlier research. In the article potential GNP has been referred to as natural GNP to emphasize its correspondence with the natural unemployment rate. In the series the natural unemployment rate starts at about 5 percent in the 1950s, and rises in response to demographic changes to about 6 percent beginning in the early 1970s. Rather than start from scratch with another investigation of alternative unemployment concepts, this paper takes as its basic measure of aggregate demand pressure the ratio of actual real GNP to the natural GNP series developed in 1984. A major purpose here is to determine whether the natural GNP series understates or overstates the economy's noninflationary operating level.

This article comments on the article Productivity and Profits in the 1980s: Are They Really Improving?, by Peter K. Clark which was published in the January 1984 issue of the journal Brookings Papers on Economic Activity. Clark's paper contains new findings on three inter-related topics: the behavior of productivity growth, the price-cost markup and the share of capital. A general reservation about the paper is that too much of the analysis and conclusions rests on highly constrained specifications. The same data could be explained in a much less constrained way and Clark shows that he recognizes this alternative methodology by presenting a set of Granger and vector autoregression test results in an appendix. However, the appendix is not integrated with the tightly specified equations in the main body of the paper and leaves us wondering which of the imposed constraints would be supported by formal statistical tests. The regressions in the paper address productivity and price markup behavior while the time path of the net capital share is treated as a residual. Another step beyond the present analysis would divide the post-1979 behavior of nonfarm private productivity into its manufacturing and nonfarm nonmanufacturing components.

This article examines the performance of a price-wage model in tracking the inflation in the U.S. in the 1970s. Most econometric models base their inflation forecasts on structural price and wage equations, either a single pair for the aggregate economy, or a larger set of disaggregated equations. The paper is divided into three sections, one on the price equation, one on the wage equation and one on dynamic simulations in which the two equations interact. Considerable experimentation with lag structures suggests that the effect of the commodity market on wages can be represented by a pair of proxies for excess demand: (1) the gap between actual and potential output and (2) the first difference in the gap. A dynamic simulation of the wage and price equations, which allows for the effects of wages on prices and prices on wages, provides an assessment of the inflationary implications of alternative paths of economic recovery and of the required duration of a stable prices at any cost policy that prevents recovery and maintains the output gap. Policy simulations with a two-equation wage-price model have both disadvantages and advantages as compared to simulations using the large-scale forecasting models.

This article focuses on the balance-sheet position of U.S. households during the 1973-1975 economic recession in the U.S. Because other developments in the economy influence it, the balance sheet of U.S. households must be viewed as endogenous. In the absence of money illusion, the consumer would be concerned with his balance-sheet position in terms of the goods and services he could but, and thus balance-sheet items that are deflated to real terms should be most relevant to consumer spending decisions. Two basic approaches to consumer behavior postulate that changes in the household balance sheet affect consumer spending decisions. The life-cycle hypothesis of saving concentrates on the consumer's consumption decisions with regard to nondurable goods and services, while the liquidity hypothesis centers on the consumer's decision to acquire tangible assets such as consumer durables or housing. A problem arises because the use of a distributed lag on household holdings of stock-market assets--a practice without strong theoretical justification--may be responsible for the appearance of balance-sheet effects. Toward the end of the recession, balance-sheet effects operated more through net-wealth, life-cycle channels.

This article examines the impact of aggregate demand on prices in the U.S. Differing implicit assumptions regarding the response of the aggregate price level to changes in aggregate demand underlie many of the most important disputes in the field of macroeconomics, both at the abstract level of theoretical discussion and at the practical level of policy recommendation. When aggregate demand shifts in either direction, so does the market-clearing aggregate price level at which output remains fixed. A perfectly flexible actual price level shifts instantaneously to the market-clearing level in response to a shift in demand, but an imperfectly flexible price level changes only gradually toward the market-clearing level, thus allowing real output to vary in the same direction as the demand shift during the transition to complete price adjustment. The resolution of several important issues depends on the speed of price adjustment. Some have applied the theory of rational expectations to stabilization policy to conclude that the monetary authority cannot affect real output by systematic policy reactions if these depend in a regular way on past events and thus can be anticipated by economic agents. When policymakers inherit an inflation rate well above the optimum as in 1969-1970, they must compare the long-term benefits of lower inflation with the short-run costs of the recession required to bring it about. Inflation can be culminated instantaneously without recession when the aggregate price level is perfectly flexible, but the recession that occurs with imperfect flexibility may impose short-run costs sufficient to restrain policy-makers from attempting to reduce inflation all the way to its optimum rate.

This article analyzes the policy issues posed by an inflation initiated by commodity shortages in the U.S. during the 1970s. For any given supply of farm products, an increase in nonfarm output raises the demand for farm products, and hence the relative price, by an amount that depends positively on the income elasticity and negatively on the price elasticity. The relative price depends, in part, on the level of nonfarm output, except in the special case of a zero income elasticity. Nonfarm output is assumed to be produced with labor and some other fixed factor, like capital. If a lower real wage causes workers to reduce their labor input, either by withdrawing from the labor force or by working fewer hours per week a crop failure must reduce nonfarm output. Whether or not the labor supply shrinks in the flexible-price case, the welfare of nonfarm workers is reduced. Not only does a crop failure reduce total real output, but also, as long as the demand for farm products id price inelastic, it transfers income from workers to farmers, who enjoy a windfall. In the case of perfect price flexibility, nonfarm output is either fixed or determined by workers' decisions about labor policy, leaving the nonfarm price level to be determined by stabilization policy. If, on the other hand, the nonfarm wage rate is rigid and nonfarm prices are marked up over the wage rate by a constant fraction, then nonfarm prices are fixed and nonfarm real output is determined by stabilization policy.

This paper reports on a component-by-component evaluation of the Consumer Price Index (CPI) and extrapolate research on bias from one category to another when the categories seem related. The difficulty created by quality change in existing products, and by the introduction of new products, is highlighted by returning to the definition of a cost-of-living index: a comparison in two time periods of the minimum expenditure required to achieve the same level of well-being. A cost-of-living index measures the effect of "pure" price movements relative to a particular reference period, trying to hold the average "utility" level and all other attributes of that period constant, including the level of governmental transfers and taxes, and the probability of various diseases and other disasters. Any change in the technology of consumption, in the qualities and list of existing products, can be evaluated on the basis of existing price relationships in the reference period or their estimated shadow-prices. Moreover, with patience, imagination, and additional research, it should be possible to quantify the benefits accruing from improved quality and new products well beyond the more limited focus of the current CPI.

The article focuses on the role of wages in the inflation process. Traditionally wage equations of the Phillips curve variety are the central element explaining inflation in large-scale Keynesian econometric models. Price changes are specified as determined by a "markup" price equation and have little life of their own, mainly mimicking wage changes. Such a view of the inflation process is rejected by this paper. A relatively unrestricted equation for price change can be converted into a form in which wage changes enter only in the form of lagged changes in labor's share. When the labor's share variable is statistically insignificant, wage behavior becomes irrelevant for inflation. Differences in the behavior of labor cost and inflation imply changes in labor's income share which alter the profit share of income in the opposite direction. The paper also concludes that price changes are irrelevant for wage changes, that is, that both prices and labor costs live a life of their own. No evidence is provided on the causes of such a new regime in wage behavior in which labor's share has fallen, nor indeed on the causes of the old regime in which labor's share rose from 1965 to 1978.

A macroeconomic supply "disturbance" or "shock" is any event which creates an autonomous shift in the aggregate supply curve relating the economywide price level to the level of output or utilization. The autonomous nature of such shifts distinguishes them from other movements in the supply curve that represent the consequences of a current or prior changes in aggregate demand. The distinction between supply and demand shocks is valid only with reference to their origin, whereas the consequences of supply shocks for output and inflation depend fundamentally on the aggregate demand policies that are pursued in their wake. This article is written almost a decade after the first attempts in 1974 to develop a theory of policy response to supply shocks. It provides a simple algebraic framework that facilitates a summary of the central issues posed by supply shocks for macroeconomic policy. Primary emphasis is placed on the case for and against monetary accommodation, on the nature and extent of wage indexation, and on the distinction between permanent and transitory shocks.

The article demonstrates that the last eighty-seven years of aggregate price behavior in the United States cannot be explained by the Expectational Phillips Curve (EPC) framework. The EPC explanation makes it clear that price change has not been closely related to the present rate of change of detrended output. A singularly consistent tendency to be related in annual data with a simultaneous change in the price level of about one-half as much was shown by a change in output. With a single equation, almost a century of price behavior can be explained unlike other historical studies. There is a coefficient on the "rate-of-change effect" in the single equation. There is a significant shift in the formation of expectations after the Korean War of 1950-53 regarding the price level and its rate of change. This shift has been consistent in overall timing but it representation differs. A significant role of three-year staggered-wage contracts, a unique American institution, is also emphasized by the shift.

This paper is complementary to the recent cross-country studies of Jeffrey Sachs (1979), and William Branson and Julio Rotemberg (1980), which document the contrast between nominal wage inertia in the postwar United States and real wage inertia in Europe and Japan, and examine the theoretical and policy implications of this contrast. Here I begin with another procedure for documenting the difference in nominal wage behaviour among the United Kingdom, United States and Japan, and then concentrate on explaining its causes rather than its consequences. Real wage inertia plays no role in my analysis, reflecting my finding that the real wage rate in quarterly postwar data for the United Kingdom and Japan displays more variability than in the United States. The basic argument of this paper comes down to three main points: (1) Macroeconomic instability in the United States has been aggravated by the unusually sluggish behaviour of nominal wages during the postwar era. Whether measured as the standard deviation of wages relative to hours worked, or the ratio of the respective response coefficients of wages and hours worked to changes in nominal GNP, wages in Britain and Japan are five to ten times more responsive than in the United States. Thus, of any given fluctuation in aggregate nominal demand, a larger fraction takes the form of a change in real output and employment in the United States than in the United Kingdom or Japan. (2) The drastic decline of American wage responsiveness in the postwar period as compared to the years between 1892 and 1940, together with the 1948 invention of the three-year staggered wage contract in the American unionised industrial sector, seems to be more than coincidental. It is not only the long duration of US contracts, but also their staggered nature, that makes wage changes relatively unresponsive to expansions or contractions in nominal GNP growth. (3) Japanese labour market institutions look much more like those suggested a... [ABSTRACT FROM AUTHOR]

The author responds to comments made by Karl Brunner regarding the author's paper in the December 1975 issue of 'The Journal of Law and Economics,' on economic and political factors influencing inflation rates. Brunner's critique is divided into a rejection of the long-run Bailey analysis as irrelevant to the short-run political process, criticism of the cost-push framework for ignoring long-run constraints and skepticism regarding the relevance of the short-term Phillips curve. In his concentration on the postwar persistence of inflation as the sole phenomenon to be explained, Brunner ignores the contribution of the Bailey analysis to the understanding of episodic wartime inflations. Brunner also ignores the contribution of the Phillips Curve slope to an explanation of the persistence of postwar inflation.

The analysis of the political economy of inflation can be divided into two major sub-topics, namely, the demand for and supply of inflation. Pressures for the government to pursue or not to pursue a more inflationary policy emanates from entities such as taxpayers who resist tax increases made necessary by increases in expenditures, beneficiaries of government programs who resist expenditure reductions and groups attempting to obtain an increase in their share of national income. The main alternatives to the two-sided demand-supply approach to inflation theory are the hard-line monetarist and hard-line cost-push frameworks. Theoretical and empirical support for the political business cycle, or the deliberate generation by vote-buying politicians of election-synchronized economic expansion, is found as one of several determinants of the supply of inflation.

This paper introduces a new approach to the empirical testing of the Lucas-Sargent-Wallace (LSW) "policy ineffectiveness proposition," which compares the LSW hypothesis with an alternative that states that prices respond fully in the long run, but only gradually in the short run, to nominal aggregate demand disturbances. The empirical equations, estimated for a new set of quarterly data extending back to 1890, exhibit uniformly high responses of real output and low responses of price changes to anticipated changes in nominal GNP. The paper compares and tests three alternative methods of introducing "persistence effects" into the LSW framework. This paper presents new empirical test of the LSW policy ineffectiveness proposition that introduce three major improvements on previous studies. First and most important, unlike earlier papers that tested the LSW proposition in isolation from any plausible alternative, this paper explicitly compares the LSW characterization of price and output behavior with the major competing hypothesis underlying conventional analyses of monetary policy, that prices adjust gradually to nominal demand changes whether anticipated or not. A single reduced-form equation for the inflation rate is developed in which the LSW and gradual-price-adjustment hypotheses appear as special cases, which allows coefficient estimates to distinguish the two. The second innovation here is a much expanded set of U.S. quarterly time-series data extending over the entire period between 1890 and 1980. Unlike previous studies that have been limited to 30 years of postwar quarterly data, the sample space here is extended to 90 years. The characterization of price and output behavior in more than 200 new quarterly data observations is of independent interest outside of the context of the LSW debate. [ABSTRACT FROM AUTHOR]

In many different economic environments, across historical eras and national boundaries, changes in the nominal aggregate demand for goods and services have been accompanied by only a partial response of the aggregate price level. Because prices do not carry the full burden of adjustment in the short run, quantities must by definition carry part of the load. In this sense the phenomenon of gradual price adjustment is at the heart of fluctuations in output and employment and of the related debate over activist stabilization policy to control such fluctuations. The discipline of macroeconomics has been split apart in the past decade by the emergence of two dichotomous and incompatible paradigms of price adjustment. This article reviews the leading ideas that have emerged within each of the paradigms. Neither, it appears, provides a satisfactory theoretical scheme when taken in isolation. This article concludes that an attempt to merge the more convincing elements of each is needed and some suggestions for such a merger are put forward.

The article performs a statistical appraisal of the impact of the wage-price controls in the U.S. The condition of the U.S. economy improved in almost every respect after the initiation of the wage-price control program on August 15, I971. Real gross national product grew rapidly, unemployment finally began to decline, and the rate of inflation moderated. But the coincidence of timing does not necessarily mean that controls are an essential condition for prosperity, or that the August 1971 message was the key that unlocked the floodgates behind which real aggregate demand had been restrained. The determination of the four basic macroeconomic magnitudes--nominal (current dollar) income, real output, prices, and unemployment--is usefully separated into three subproblems: (1) the determination of nominal income, (2) the division of that nominal income between real output and prices, and (3) the relationship between real output and unemployment. Before the achievement of the control program can be evaluated, a criterion for its success should be established. By my standard, controls can be judged successful if the value to society of the reduction in inflation they achieve relative to that which would have occurred without them is greater than the direct and indirect costs imposed by the control program.

This article argues that the institutions of the U.S. economy do adapt to inflation, once it becomes fairly steady, and thus automatically offer protection against the costs associated with accelerating inflation. Full employment and price stability do not deserve equal primacy as stabilization goals. Most of the evils commonly associated with inflation occur only when the actual inflation rate deviates from that which is expected, that is, when the inflation is a surprise. The welfare costs of a fully anticipated inflation, although a popular subject in economics journals and graduate theory exams, are not widely discussed or understood elsewhere. The article first discusses the cost of maintaining a steady inflation at a rate similar to the 5 percent annual average that has obtained in the U.S. since the beginning of 1968. This analysis does not depend on the existence of a long-run tradeoff between the expected rate of inflation and the unemployment rate. The accelerationist position that no long-run tradeoff exists is relevant for the choice of the optimal unemployment rate, not the inflation rate: In the absence of a long-run tradeoff, steady inflation can be maintained only at a single natural rate of unemployment, whereas a negatively sloped long-run tradeoff allows the choice among many alternative unemployment rates.

This article examines disaggregated evidence to determine whether the peculiar behavior of aggregate prices in the U. S. has been widespread or confined to specific misbehaving sectors as of 1970. If the beginning of the present recession is dated from the peak of industrial production in the third quarter of 1969, four quarters of recession have now passed without any decline in the rate of advance of the nonfarm private deflator (NPD). There is no historical precedent for this, since the rate of increase of the NPD had fallen from 5.9 percent in the last four expansion quarters. Abstracting from the effects of the automobile strike, the near-term prospect for the NPD depends no the interpretation of the recent surge in prices of structures. The price indexes for structured do not measure actual prices but rather a weighted average of wage rates and materials costs. In the price equation, changes in prices relative to wages are explained by the growth of unit labor cost relative to standard unit labor cost and by changes in the total employment rate of manhours and in the ratio of new orders of durables to shipments. If the rate of change of wages is no faster in 1971 than in 1970, and if the productivity rebound continues at anything like its present pace, a slackening in inflation in 1971 is very likely if statistical relationships fitted to earlier periods of the postwar economy have any validity at all.

Reports on the acceleration of inflation in the U.S. in 1969. Annual rates of change for selected price indicators; Quarterly pattern of inflation in nonfarm private deflator from 1964 to 1969; Standard and actual unit labor costs; Ratio of new orders to shipments.

This article suggests that the U.S. federal government should attach some urgency to the task of constructing government investment and capital accounts. The demand by economists for government capital data has not been very high in the past, because the absence of meaningful government output figures has precluded productivity studies of the government sector. But the article suggests that many government assets are important inputs in the private sector. Much of the apparent decline in the U.S. private capital-output ratio may have been due to the gradual replacement of privately owned railroad assets by government-owned highways and airports. The existence of a substantial stock of government financed assets used by private firms, particularly in manufacturing, suggests a number of interesting topics for further research. For instance, the rate of return on corporate assets in manufacturing during and immediately after World War II was considerably higher than in the 1950s and 1960s. While this was partly due to high utilization rates and the inflation of sales prices relative to asset values, a further factor may have been the substantial profits earned with government financed assets which did not enter into the capital base on which the rate of return was calculated.

In their original study "The Shifting of the Corporate Income Tax," by M. Krzyzaniak and R.A. Musgrave (K-M) claimed that indeed manufacturing corporations have succeeded in doing so, while in his paper the author of this article found no evidence that the burden of the corporation income tax has been shifted. He suggested that K-M had been led astray by ignoring a fundamental economic phenomenon, that the productivity of corporate assets in manufacturing increased by more than 60 per cent between the late 1920's and the 1950's and, by almost any theory of pricing, this would have allowed a substantial increase in the rate of return on assets even if the corporate tax had never been introduced. In the author's regressions the productivity of capital entered as an independent variable explaining the rate of return and reduced the co-efficient on the tax variable nearly to zero. In K-M's regressions, on the other hand, nothing like the productivity of capital appeared, and hence the only variable with a positive secular trend, the tax rate, was called upon to provide the entire explanation of high postwar profits and therefore appeared with a coefficient significantly greater than one.

The best-known empirical study of the shifting of the corporation income tax is that of economists, M. Krzyzaniak and R.A. Musgrave (K-M), who conclude that in the short run in the U.S. manufacturing more than 100 per cent of the burden of the corporation income tax is shifted forward to consumers. In the K-M study the coefficient on the tax variable is positive and significantly greater than 100 per cent, implying that corporations respond to an increase in tax liabilities by raising pit-tax profits by more than the tax liability. This article presents a result opposite to that of K-M and finds that on the average the corporation income tax is not shifted in the short run in the U.S. manufacturing. The tool of analysis, as in the K-M study, is a set of time-series regression equations in which the corporation profit rate is the dependent variable. A firm maximizing profits as in traditional theory would not react to the imposition of a corporation income tax by raising prices, because its price is set by equating marginal revenue and marginal cost, and the tax affects neither marginal revenue nor marginal cost. Instead of maximizing profits most of the businessmen attempts to maintain some target ratio of profits to sales.

The official U.S. price deflators for investment goods continue to be based on defective methodology, despite frequent criticism in recent years. This paper contributes new price information, which is combined with the empirical results from other studies to yield a revised investment deflator for the 1954-1963 period which (a) rises much more slowly than the official index and (b) declines relative to a revised price index for consumption expenditures. [ABSTRACT FROM AUTHOR]

This article presents comments by the author on an article titled "Understanding Inflation in the 1980s," by Robert Gordon and published in the January 1985 issue of the journal Brookings papers on Economic Activity. According to the author, the only part of the theory called into question by recent experience is markup pricing, which seems to fail in the case of imports. U.S. prices have fallen less than predicted by a simple model in which the U.S. price of imported goods is a simple markup over the foreign price restated in dollars at the prevailing exchange rate. The U.S. pricing of imports seems to be quite sensitive to conditions in U.S. markets, less sensitive to costs of production. That makes good economic sense, but it goes against the spirit of the markup hypothesis, in which costs are the predominant determinant of price. The heart of Gordon's paper is a set of regressions of the rate of price inflation on various determinants. It is a good idea to ask what, in principle, can be learned from these regressions. In general, a regression of one endogenous variable on another tells nothing about the structural relations of the two variables.

The article presents the article authors' appeal to the U.S. President George Bush, members of the U.S. Congress, and Chairman of Federal Reserve Board to expedite vigorous economic recovery in 1992-93 and at the same time to speed up productivity growth over the years ahead. The U.S. economy faces both a short-run problem and a long-run problem. Expansionary Federal Reserve monetary policies have the virtue of stimulating spending in the short run on investments that pay off over the long run. As Congress and the Administration decide on such policies, it is of overriding importance that they do it in a way that will not worsen the long-run problem. Long before the recession wages had been falling behind inflation, far behind the aspirations of American workers. It is tempting to try to compensate for these disappointments by lowering taxes. One measure that could help the economy in both short and long runs is the restoration of an investment tax credit, which served the economy well from 1962 to 1986.