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Modern growth theory suggests that more than three-quarters of growth since 1950 reflects rising educational attainment and research intensity. As these transition dynamics fade, US economic growth is likely to slow at some point. However, the rise of China, India, and other emerging economies may allow another few decades of rapid growth in world researchers. Finally, and more speculatively, the shape of the idea production function introduces a fundamental uncertainty into the future of growth. For example, the possibility that artificial intelligence will allow machines to replace workers to some extent could lead to higher growth in the future.

A key question that has arisen during recent debates is whether government spending multipliers are larger during times when resources are idle. This paper seeks to shed light on this question by analyzing new quarterly historical data covering multiple large wars and depressions in the United States and Canada. Using Jorda's (2005) method for estimating impulse responses, we find no evidence that multipliers are greater during periods of high unemployment in the United States. In every case, they are below unity. We do find evidence of higher multipliers during periods of slack in Canada, with some multipliers above unity.

A Monetary History of the United States 1867 to 1960 published in 1963 was written as part of an extensive NBER research project on Money and Business Cycles started in the 1950s. The project resulted in three more books and many important articles. A Monetary History was designed to provide historical evidence for the modern quantity theory of money. The principal lessons of the modern quantity theory of the long-run neutrality of money, the transitory effects of monetary policy on real economic activity, and the importance of stable money and of monetary rules have all been absorbed in modern macro models. A Monetary History , unlike the other books, has endured the test of time and has become a classic whose reputation has grown with age. It succeeded because it was based on narrative and not an explicit model. The narrative methodology pioneered by Friedman and Schwartz and the beautifully written story still captures the imaginations of new generations of economists.

The hundredth anniversary of the founding of the Federal Reserve is a natural time to reflect on the record of US monetary policy. It is widely agreed that this record is far from perfect, and that there have been some major failures of monetary policy over the past century. Our thesis is that overly pessimistic views about the power of monetary policy have been a critical source of these failures. There is little doubt that the opposite problem—an overinflated belief in the power of monetary policy—has also contributed to important policy errors. Most famously, policymakers in the mid-1960s believed that they faced a longrun inflation-unemployment trade-off, and thus that monetary policy could move the economy to a sustained path of very low unemployment and low inflation. This belief led them to pursue highly expansionary policy, starting the economy down the road to the inflation of the 1970s (for example, Romer and Romer 2002 and Primiceri 2006). The record of such errors has led some to argue that perhaps the most impor tant attribute of a successful central banker is humility (for example, Booth 2012). In this paper, we present evidence that an unduly pessimistic view of what monetary policy can accomplish has been a more impor tant source of policy errors and poor outcomes over the history of the Federal Reserve. At various times in the 1930s, faced with the Great Depression, Federal Reserve officials believed that the power of monetary policy to combat the downturn or stimulate recovery was minimal. In

This paper investigates the impact of tax changes on economic activity. We use the narrative record, such as presidential speeches and Congressional reports, to identify the size, timing, and principal motivation for all major post war tax policy actions. This analysis allows us to separate legislated changes into those taken for reasons related to prospective economic conditions and those taken for more exogenous reasons. The behavior of output following these more exogenous changes indicates that tax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes. (JEL E32, E62, H20, N12) Tax changes have been a major public policy issue in recent years. The tax cuts of 2001 and 2003 were passed amid firestorms of debate about their likely effects. Some policymakers claimed that the cuts would both stimulate the economy in the short run and increase normal output in the long run. Others argued that they would raise interest rates and lower confidence and thereby reduce output in both the short run and the long run. That views of the effects of tax changes vary so radically largely reflects the fact that measuring these effects is very difficult. Tax changes occur for many reasons. Some legislated tax changes are passed for philosophical reasons or to reduce an inherited budget deficit. Others are passed because the economy is weak and predicted to fall further, or because a war is in progress and government spending is rising. And many tax changes are not legislated at all, but occur automatically because the tax base varies with the overall level of income, or because of changes in stock prices, inflation, and other nonpolicy forces. Because the factors that give rise to tax changes are often correlated with other developments in the economy, disentangling the effects of the tax changes from the effects of these underlying factors is inherently difficult. There is pervasive omitted variable bias in any regression of output on an aggregate measure of tax changes. This paper suggests one way of dealing with this omitted variable bias. There exists a vast narrative record describing the history and motivation of tax policy changes. We first use this narrative history to separate legislated tax changes from those arising from nonpolicy develop ments. We then use the information on motivation to separate the legislated tax changes into those that are likely to be contaminated by other developments affecting output, and those that can legitimately be used to measure the macroeconomic effects of tax changes. Finally, we use the legitimate observations to derive estimates of the effects of tax changes on output that are likely to be less biased than previous estimates. Section I of the paper elaborates on the conceptual framework for this study. It emphasizes that what we seek to identify from the narrative record are tax changes that are not systematically

This article examines the stock market's changing valuation of corporate patentable assets between 1910 and 1939. It shows that the value of knowledge capital increased significantly during the 1920s compared to the 1910s as investors responded to the quality of technological inventions. Innovation was an important driver of the late 1920s stock market runup, and the Great Crash did not reflect a significant revaluation of knowledge capital relative to physical capital. Although substantial quantities of influential patents were accumulated during the post-crash recovery, high technology firms did not earn significant excess returns over low technology firms for most of the 1930s. (JEL G14, N12, N22, O30)

What ended the Great Depression in the United States? This paper suggests that the recovery was driven by a shift in expectations. This shift was triggered by President Franklin Delano Roosevelt’s (FDR) policy actions. On the monetary policy side, Roosevelt abolished the gold standard and announced an explicit policy objective of inflating the price level to pre-Depression levels. On the fiscal policy side, Roosevelt expanded real and deficit spending which helped make his policy objective credible . The key to the recovery was the successful management of expecta tions about future policy . Roosevelt’s rise to power is modeled as a policy regime change , as in Thomas Sargent (1983) and Peter Temin and Barry Wigmore (1990). This paper formalizes Temin and Wigmore’s argu ment in a repeated game setting using a dynamic stochastic general equilibrium (DSGE) model and argues that the regime change can account for the recovery. In the model, a regime change means the elimination of certain “policy dogmas” that constrain the actions of the government. The regime change generates an endogenous shift in expectations due to a coordination of mon etary and fiscal policy. This coordination ended the Great Depression by engineering a shift in expectations from “contractionary” (i.e., the private sector expected future economic contrac tion and deflation) to “expansionary” (i.e., the public expected future economic expansion and inflation). The expectation of higher future inflation lowered real interest rates, thus stimulating demand, while the expectation of higher future income stimulated demand by raising permanent income.

This paper examines the ability of a simple stylized general equilibrium model that incorporates nominal wage rigidity to explain the magnitude and persistence of the Great Depression in the United States. The impulses to our analysis are money supply shocks. The Taylor contracts model is surprisingly successful in accounting for the behavior of major macroaggregates and real wages during the downturn phase of the Depression, i.e., from 1929:3 through mid-1933. Our analysis provides support for the hypothesis that a monetary contraction operating through a sticky wage channel played a significant role in accounting for the downturn, and also provides an interesting refinement to this explanation. In particular, both the absolute severity of the Depression's downturn and its relative severity compared to the 1920-21 recession are likely attributable to the price decline having a much larger unanticipated component during the Depression, as well as less flexible wage-setting practices during this latter period. Another finding casts doubt on explanations for the 1933-36 recovery that rely heavily on the substantial remonetization that began in 1933.

Robert A. Mundell held his Prize Lecture December 8, 1999, at Aula Magna, Stockholm University. He was presented by Lars E.O. Svensson, Chairman of the Prize Committee.(This abstract was borrowed from another version of this item.)

This is a perfect time to discuss inequality. After a period of three decades when wage inequality among men in the United States grew to approximate pre-World War II levels, measured inequality apparently has stabilized and may, in fact, be decreasing (Claudia Goldin and Robert A. Margo, 1992). It is, therefore, a good time to assess the changes, to compare the gains and losses. I choose this topic, not to offend, but because I believe inequality is an economic "good" that has received too much bad press. I also think you will agree that it is a good, which like any other, can be scarce or overly abundant. I am neither trying to praise nor defend poverty, and I hope it is understood that the link between wages and income is not especially close, particularly at lower incomes where nonemployment dominates. Wages play many roles in our economy; along with time worked, they determine labor income, but they also signal relative scarcity and abundance, and with malleable skills, wages provide incentives to render the services that are most highly valued. Further, we all buy and sell labor either directly or indirectly as labor is embodied in products. To reverse one of the themes of Milton Friedman's introductory theory class, "one man's poison can be another's meat." Together with rising relative wages, the post-1950 increase in the job-market employment of women is one of our major accomplishments, but it is an accomplishment that has been fueled in part by the low wages earned by those the Census classifies as private household workers, childcare workers, workers in laundries and cleaning establishments, food service workers, etc. As the population ages, the prospect of increasing dependence on personal assistance looms. For the most part, personal assistants and aides earn low wages, wages that extend the services we can afford. Friedman's actual observation is, however, that "one man's meat is not necessarily another's poison" (Friedman, 1976). The relatively high wages earned by physicians, scientists, and university professors have attracted many immigrants to the United States. Would we be better off if they had not immigrated? We could in fact reduce wage inequality by simply proscribing immigration, because the wage distribution of immigrants is U-shaped relative to that of natives (see J. P. Smith and B. Edmonston, 1997 p. 180 [table 5.4] ). My guess is that most economists, faced with such an option, would respond by directing attention to the services immigrants provide. My objective is to examine the recent period of increasing wage inequality with an eye toward the positive. I describe some of the changes that have occurred, speculate about the causes, and wrap up with illustrations of consequences. I contend that growing inequality has created opportunities that have been exploited by many and that the gains are not restricted to the traditional elite. Moreover, when we have adopted policies to mitigate the downside of increasing inequality, which is falling real wages in the lower parts of the distribution, a surprising number of individuals have also capitalized on those opportunities in ways that are not productive. Before turning to the data, I want to make a few general observations. * Department of Economics, Texas A&M University, College Station, TX 77843-4228. I am indebted to Martin Gritsch for assistance in extracting the data and to Barbara Charlton for secretarial support. I am also indebted to participants in the UCLA/RAND Labor Workshop and especially to Janet Currie and James P. Smith for comments and suggestions on an earlier draft. I have drawn heavily on my previous work, much of it in collaboration with Kevin M. Murphy.

It is now 25 years since the growth rate of labor productivity and of multi-factor productivity (MFP) decelerated sharply both in the United States and in most other industrialized nations. This ‘‘productivity slowdown’’ has eluded many attempts to provide single-cause explanations. Slow productivity growth in the past 25 years echoes slow productivity growth in the late 19th century. Perhaps both were normal, and what needs to be explained is not the post-1972 slowdown, but rather the post1913 ‘‘speedup’’ that ushered in the glorious 60 years between World War I and the early 1970’s in which U.S. productivity growth was much faster than before or after. This paper makes a sharp distinction between MFP growth calculated from inputs that combine simple measures of labor hours and the capital stock and growth based on measures that adjust for the changing composition of labor and capital. The first step toward an understanding of long-term trends is to compare like with like, splicing MFP data based on unadjusted inputs prior to 1950 with post1950 data based also on unadjusted inputs, as contrasted to the composition-adjusted inputs that are now desirably incorporated into our official MFP measures. The MFP record prior to 1929 still rests largely on the monumental work of John Kendrick (1961) which, however, is based almost entirely on input quantities that lack any adjustment for changes in composition. Edward Denison ( 1962, 1985 ) and Zvi Griliches (1960) pioneered the development of composition adjustments for labor input. Dale Jorgenson and Zvi Griliches (1967) introduced a framework that treats the problem of composition adjustment in both labor and

Technological progress comes in waves. The British Industrial Revolution ( 1760 – 1850) ushered in Cort’s puddling and rolling process for making iron, Crompton’s mule for spinning cotton, and the Watt steam engine. The Second Industrial Revolution ( 1890 – 1930) witnessed the rise of electricity, the internal-combustion engine, and the chemical industry. The birth of information technology (IT) may herald the start of a Third Industrial Revolution. A new technology or product is often developed by the single entrepreneur who initially finds it hard to get funds, develop the product, and find customers. But if the product is good, customers eventually line up, and investors flock in. Other firms then move in to make the product and may drive the innovator out or acquire him. Whether he reaches the initial public offering (IPO) stage or is acquired by a listed firm, though, it takes time for the innovator to add value to the stock market. Indeed, the innovation may, at first, reduce the market’s value because some firms, usually large or old, will cling to old technologies that have lost their momentum. Figure 1 plots the market value of U.S. equity relative to GDP. This paper argues that (a) the market declined in the late 1960’s because it felt that the old technologies either had lost their momentum or would give way to IT, and that (b) IT innovators boosted the stock market’s value only in the 1980’s. If the stock market provides a forecast of future events, then the recent dramatic upswing represents a rosy estimate about growth in future profits for the economy. This translates into a forecast of higher output and productivity growth, holding other things equal (such as capital’s share