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Series:New England Economic Review  Bank:Federal Reserve Bank of Boston 

Journal Article
Why has productivity growth declined? Productivity and public investment
The decline in United States productivity has been widely identified as one of the major economic problems facing the nation. This concern is understandable; productivity growth is the major determinant of the future standard of living. Economists have gone to great lengths to try to identify the reasons for the slowdown, and David Aschauer recently introduced the notion that the stock of public infrastructure, as well as the stock of private capital, may be a key to explaining changes in output from the private sector. ; This study builds upon Aschauers insight and explores whether changes in the amount of public capital, combined with the growth of private capital and labor, can explain most of the slowdown. The author concludes that the main causes of the productivity slowdown could be behind us, as long as public infrastructure receives badly needed attention.
AUTHORS: Munnell, Alicia H.
DATE: 1990

Journal Article
How natural is the natural rate of unemployment in Europe?
European economic performance has been disappointing in the 1980s. High unemployment has been a dominant policy issue, but in order to react properly, government authorities had to determine the causes of this unemployment. If inadequate aggregate demand were the source, expansionary fiscal or monetary policy could help to solve the problem; on the other hand, if movements in labor supply were to blame, traditional macro policy would be ineffective. European officials clearly leaned toward the labor supply explanation, as aggregate deman policy remained conservative throughout the decade. ; The predominant empirical literature in the mid-1980s seemed to prescribe this conservative approach. This article updates these studies. Using their methodology, the author shows that labor supply movements alone cannot explain the unemployment that occurred over most of the decade. An alternative approach suggests one possible answer, that the formation in 1979 of the European Monetary System unexpectedly tightened macroeconomic policy throughout Europe.
AUTHORS: Tootell, Geoffrey M. B.
DATE: 1990

Journal Article
The U.S. professional sector: 1950 to 1988
The United States economy, over the course of the twentieth century, has taken on a highly professional cast. By 1988, professional, technical, and kindred workers made up 20 percent or more of the labor force in industries ranging from health care and education, to high tech manufacturing and business services, to government and entertainment. In terms of international competitiveness, income per worker, and technical advance, this group of professionalized industries forms perhaps the most successful sector of the U.S. economy. ; This article provides an overview of the professionalization of the U.S. economy in the years since 1950. It looks at pace and timing of the professionalization process, paying special attention to recent changes, and examines its industrial source and demographic structure.
AUTHORS: Sass, Steven A.
DATE: 1990

Journal Article
Taking charge: should New England increase its reliance on user charges?
New England relies less on user charges for its state and local revenues than any other region of the country. As a result, some policymakers maintain that increases in user charges would correct an "imbalance" in the regions revenue mix. However, the national mix of state and local revenues is not necessarily the best mix for the states of New England. The degree to which a state should rely on u. ser charges depends on the priorities of its policymakers among competing principles of taxation, the conditions under which each principle favors user charges over taxes, and the extent to which these conditions exist within the state. Since each state has its own distinctive values and traits, the role of user charges in financing state and local government should vary across states. ; This article explores the conditions under which user charges compare favorably to taxes according to the principles of efficiency, equity, and exportability. The author finds that, given conditions peculiar to New England, the regions low dependence on user charges makes sense in terms of ~11 three principles. Moreover, in several instances where New England states do rely heavily on user charges to finance a particular public service, circumstances favor user charge financing.
AUTHORS: Tannenwald, Robert
DATE: 1990

Journal Article
Are the distinctions between debt and equity disappearing? An overview
uring the 1980s, the proportion of business assets financed by debt exceeded that of any other period since World War II. The characteristics of financial securities also changed, as junk bonds, variants of preferred stock, warrants, and other forms of mezzanine financing became more common in credit markets and in private loan contracts. Furthermore, the potential risks and returns offered by all securities have been altered as otherwise familiar financial instruments increasingly contain novel options. ; These innovations have challenged the traditional financial and legal distinctions between debt and equity. To examine the changes in business financing, their causes and the implications for public policy, the Federal Reserve Bank of Boston in the fall of 1989 sponsored a conference of academics, lawyers, investment bankers, economists, and government officials. This article offers an overview of the conference papers and the discussants remarks.
AUTHORS: Rosengren, Eric S.; Kopcke, Richard W.
DATE: 1990

Journal Article
Is leverage a tax dodge--or not?
In passing the Tax Reform Act of 1986, policymakers wanted to ensure that corporations would pay their fair share of tax. Congress broadened the corporate tax base, rescinded the investment tax credit, and instituted a new minimum tax. The issue of adequate tax payments has not gone away, however, because corporations have been taking larger interest deductions as a result of having substituted debt for equity on their balance sheets. ; This study begins by measuring the aggregate tax consequences of corporate leverage decisions. It also examines the tax implications of recent transactions in which corporations effectively increased their leverage, not by changing their financing of new investment projects, but by reducing their outstanding net worth. The author argues that policymakers concerned with stemming further revenue losses should look to responses other than outlawing certain controversial forms of restructuring or restricting interest deductions that appear to be excessive. At most, they should consider altering tax laws to provide more neutral treatment of income from debt and equity capital.
AUTHORS: Henderson, Yolanda K.
DATE: 1990

Journal Article
Why do New Englanders work so much?
Because of the softening of the New England economy in the past two years, the availability of labor has become a less pressing issue for New England businesses. However, projections of slower growth in the working-age population in the 1990s, attributable to changes in the age structure, hold out the possibility of tight labor markets and difficulties finding suitable workers in the future. ; This article focuses on the fraction of the working-age population that chooses to work, called the participation rate, and its responsiveness to economic conditions. New England has had persistently high participation rates despite a relatively large population over age sixtyfive. Although regional variations in participation have been remarkably durable, the author finds that participation rates do tend to respond positively to favorable economic conditions and to some extent at least, a strong demand for labor creates its own supply.
AUTHORS: Browne, Lynn E.
DATE: 1990

Journal Article
A call to ARMs: adjustable rate mortgages in the 1980s
Adjustable rate mortgages, long-term loans that provide for interest rate changes at regular intervals over their lifetimes, have recently become a major source of residential mortgage financing in this country. Today adjustable rate mortgages probably account for close to 25 percent of total home mortgage debt. ; While adjustable rate mortgages (ARMs) have grown to be an important factor in mortgage lending, their variety and complexity have led to confusion. This article discusses their advantages and disadvantages to both borrowers and lenders, and highlights the nature of the risks involved. The author concludes that while lenders have enthusiastically embraced the concept of ARMs, borrowers have been reluctant in their response, forcing lenders to provide low initial interest rates and restrictions on interest-rate movements in order to sell their product.
AUTHORS: Peek, Joe
DATE: 1990

Journal Article
Central bank flexibility and the drawbacks to currency unification
Recently, the benefits to monetary unification have been widely heralded. Advocates of European, as well as East and West German, monetary integration point repeatedly to the advantages the United States derives from possessing a single currency. Yet, the losses resulting from this policy have too often been ignored. ; This article briefly reviews the costs and benefits of currency integration as articulated in the traditional optimal currency area literature. For the first time a full-employment model is used to examine the cost to currency unification derived from diversity among countries distaste for unemployment and inflation. Furthermore, arguments for European monetary integration that highlight the benefits gained by the U.S. currency area are shown to be misleading; not only does the United States suffer significant losses because of its unified currency, but the magnitudes of these costs and benefits will differ between the United States and Europe. Finally, U.S. monetary policy is examined in light of the optimal currency area analysis.
AUTHORS: Tootell, Geoffrey M. B.
DATE: 1990

Journal Article
Commerce with the newly liberalizing countries: promised land, quicksand, or what?
As liberalization takes on convincing shape and substance in Eastern Europe and the Soviet Union, international entrepreneurs the world over are entertaining visions of capitalizing on new business opportunities. No doubt the transformation of heretofore centrally directed economies into more nearly market economies will bring such opportunities, and will entail significant, if not dramatic, changes in the international commerce of these economies. ; is article presents an overview of trade between the "newly liberalizing countries," or NLCs, and the rest of the world, and tenders some suggestions on how that trade might develop. Special attention is given to commerce between the United States and the NLCs. Some general observations on the creditworthiness of the NLCs are also presented
AUTHORS: Fieleke, Norman S.
DATE: 1990

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