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This Paper challenges two widely held views: first that trade performance has been the primary reason for the declining share of manufacturing employment in the United States and other industrial economies, and second that recent productivity growth in manufacturing has actually been quite rapid but is not accurately measured. The paper shows that for many decades, relatively faster productivity growth interacting with unresponsive demand has been the dominant force behind the declining share of employment in manufacturing in the United States and other industrial economies. It also shows that since 2010, however, the relationship has been reversed and slower productivity growth in manufacturing has been associated with more robust performance in manufacturing employment. These contrasting experiences suggest a tradeoff between the ability of the manufacturing sector to contribute to productivity growth and its ability to provide employment opportunities. While some blame measurement errors for the recently recorded slowdown in manufacturing productivity growth, spending patterns in the United States and elsewhere suggest that the productivity slowdown is real and that thus far fears about robots and other technological advances in manufacturing displacing large numbers of jobs appear misplaced.

This Working Paper challenges two widely held views: first that trade performance has been the primary reason for the declining share of manufacturing employment in the United States, and second that recent productivity growth in manufacturing has actually been quite rapid but is not accurately measured. The paper shows that for many decades, faster productivity growth interacting with unresponsive demand has been the dominant force behind the declining share of employment in manufacturing in the United States and other industrial economies. It also shows that since 2010, however, the relationship has been reversed and slower productivity growth in manufacturing has been associated with more robust performance in manufacturing employment. These contrasting experiences suggest a tradeoff between the ability of the manufacturing sector to contribute to productivity growth and its ability to provide employment opportunities. While some blame measurement errors for the recently recorded slowdown in manufacturing productivity growth, spending patterns in the United States and elsewhere suggest that the productivity slowdown is real and that thus far fears about robots and other technological advances in manufacturing displacing large numbers of jobs appear misplaced.

This paper puts forward a strategic view of what South African trade policy should be doing in relation to the future global trading environment. The future is uncertain, but if the past is prologue, South African trade policy needs to be positioned for a continuation of the commodity cycle, and to exploit markets in emerging economies, including Africa, more fully. Simultaneously, it needs policies to spur labour-intensive services and manufacturing exports, both because these will be needed if commodity markets are less robust and because of their employment-creating potential. South Africa's current strategy, however, is inflexible, heavily focused on domestic concerns and is in danger of placing South African exporters at a disadvantage in accessing the growing emerging economies. It also gives rise to an inherent tension between the interests of South Africa and the African region in trade negotiations. Having as the central tenet of trade policy a commitment to deal with tariffs on a case-by-case basis will not serve South Africa well in the global economy that is likely to emerge over the next 15 years. A simpler tariff structure would facilitate the conclusion of free trade agreements and actually make industrial policy more effective.

This paper seeks to review how globalization might explain the recent trends in real and relative wages in the United States. We begin with an overview of what is new during the last 10–15 years in globalization, productivity, and patterns of U.S. earnings. To preview our results, we then work through four main findings: First, there is only mixed evidence that trade in goods, intermediates, and services has been raising inequality between more- and less-skilled workers. Second, it is more possible, although far from proven, that globalization has been boosting the real and relative earnings of superstars. The usual trade-in-goods mechanisms probably have not done this. But other globalization channels—such as the combination of greater tradability of services and larger market sizes abroad—may be playing an important role. Third, seeing this possible role requires expanding standard Heckscher–Ohlin trade models, partly by adding insights of more recent research with heterogeneous firms and workers. Finally, our expanded trade framework offers new insights on the sobering fact of pervasive real-income declines for the large majority of Americans in the past decade.

South African trade policy has exerted a major influence on the composition and aggregate growth of trade. In the Apartheid period, trade protection seriously impeded both exports and imports, and the economy depended on favorable global commodity price trends to avoid running into an external constraint. South Africa developed a comparative advantage in capital-intensive primary and manufactured commodities partly because of its natural resource endowments but also because the pattern of protection was particularly detrimental to exports of non-commodity manufactured goods. High and opaque tariffs seriously impeded export growth. When global commodity markets were weak, in combination with declining gold exports, this seriously constrained aggregate growth and dulled the response of exports to the weaker rand in the late 1980s. On the other hand, surcharges were effective in reducing imports. By contrast, trade liberalization in the 1990s not only increased imports but, by reducing both input costs and the relative profitability of domestic sales, also boosted exports. The growth in non-commodity manufactured sectoral exports as a result of liberalization was actually faster than sectoral imports. This evidence suggests that additional trade liberalization could well be part of the strategy to enhance export diversification. It points to the importance of policies that afford South African firms with access to inputs at world prices as well as a competitive real exchange rate.

This paper estimates the adjustment costs of the Trans-Pacific Partnership (TPP) on workers and compares these costs with the agreement's benefits. It also estimates the TPP's impact on the distribution of income across US households. Between 2017 and 2026, when most of the adjustment to the TPP occurs, the costs to workers who will be displaced, both from unemployment and lower future wages, will amount to about 6 percent of the agreement's benefits. For the full adjustment period (2017-30) that Peter Petri and Michael Plummer (2016) consider, the benefits are more than 100 times the costs. The benefits from the agreement will be widely shared. The percentage gains for labor income from the TPP will be slightly greater than the gains to capital income. Households in all quintiles will benefit by similar percentages, but once differences in spending shares are taken into account, the percentage gains to poor and middle-class households will be slightly larger than the gains to households at the top. Thus the agreement will confer net benefits to households at all levels of income and will certainly not worsen income inequality. While the United States as a whole would benefit from the TPP, there is a case for an assistance program that would compensate those who lose.

In Fair Trade for All: How Trade Can Promote Development, Stiglitz and Charlton prescribe what a multilateral trade agreement—that promotes development and is fair for all—would include. This review appraises their prescriptions and offers some alternatives. Many of their ideas about what developed countries should do (opening markets, especially of labor intensive goods and services and cutting farm subsidies) are quite familiar and sensible. More controversially, however, they propose that all WTO members (both developed and developing) completely open their markets to all developing countries poorer and smaller than themselves. They also stress the importance of preserving domestic policy space, dropping intellectual property rules from the WTO and keeping restrictive rules off the agenda. Among its criticisms of the book, the review points out that the liberalization proposal contradicts their own arguments favoring individually tailored policies in developing countries and is likely to maximize trade diversion. In addition, their prescriptions for more policy space neglects the more desirable possibility of a WTO in which members accept differentiated commitments.

As shown in the 1930s by Hicks and Robinson, the elasticity of substitution () is a key parameter that captures whether capital and labor are gross complements or substitutes. Establishing the magnitude of  is vital, not only for explaining changes in the distribution of income between factors but also for undertaking policy measures to infl uence it. Several papers have explained the recent decline in labor’s share in income by claiming that  is greater than 1 and that there has been capital deepening. Th is paper presents evidence that refutes these claims. It shows that despite a rise in measured capital-labor ratios, labor-augmenting technical change in the United States has been suffi ciently rapid that eff ective capital-labor ratios have actually fallen in the sectors and industries that account for the largest portion of the declining labor share in income since 1980. In combination with estimates that corroborate the consensus in the literature that  is less than 1, these declines in the eff ective capital-labor ratio can account for much of the recent fall in labor’s share in US income at both the aggregate and industry level. Paradoxically, these results also suggest that increased capital formation, ideally achieved through a progressive consumption tax, would raise labor’s share in income.

The loss of manufacturing jobs and hundreds of thousands of service jobs over the past few years, and the threat of the loss of millions more to offshore outsourcing, is a clear call to our business and political leaders that our trade policies simply are not working. At the least, not in the national interest. (1) ********** THE BUSINESS CYCLE recovery of the past few years has been an unusual one. In particular, payroll employment since the trough of the 2001 recession has been remarkably weak compared with previous recessions--a point illustrated in figure 1. (2) The decline in payroll employment from the peak in March 2001 to the trough in November of the same year was modest, but employment continued to fall for the next twenty-one months, ending up just over a million jobs below the trough before starting to recover. This contrasts with most previous recessions, in which job growth following the trough was strong. The aftermath of the previous recession, that of 1990-91, was also characterized by relatively weak job performance, as figure 1 also shows. But the jobs picture since 2001 has been much weaker even than that "jobless recovery." [FIGURE 1 OMITTED] In many press reports and in the minds of many Americans, much of the weakness in the labor market is the fault of foreign competition. As the quotation above indicates, there is uneasiness that manufacturing and services sector jobs have been, or will be, moved abroad. Partly because of technological change and partly because of trade agreements, so the argument goes, U.S. workers now have to compete against a huge low-wage global labor pool, and the sustained weakness in employment since 2000 is a sign that this competition is undermining the great U.S. job machine. Most economists dismiss these concerns as showing a misunderstanding of how international trade works and of the ability of the U.S. economy to reemploy workers displaced by trade. Indeed, most economists would argue that, over the long run, the United States will have to reduce its trade deficit, and that this could create more opportunities for blue-collar workers in export industries. Similarly, the more services the United States imports, the larger U.S. exports of both goods and other services will eventually have to be to pay for them. But economists' reassurances on this point have not carried a lot of weight in the popular debate--or even at times in the policy debate. Putting the role of trade in the U.S. economy in perspective is not simply a matter of setting the record straight. Misperceptions on the part of workers may discourage them from acquiring the skills they need in order to get good jobs. Misperceptions on the part of voters and elected officials can lead to bad policies. In this paper, therefore, we try to put trade and electronic offshoring concerns in the right perspective, in a way that is easily understandable. We estimate the size of the first-round job dislocation that trade and electronic offshoring may have caused between 2000 and 2003. (3) The approach we use, and several assumptions we make along the way, have the effect of exaggerating the impact on trade and offshoring on the U.S. labor market. Nevertheless, the results show that the weakness in U.S. payroll employment since 2000 has not been caused by a flood of imports of either goods or services. It should certainly not be attributed to any trade agreements the United States has signed. (4) Rather, the weakness of employment is primarily the result of inadequate growth of domestic demand in the presence of strong productivity growth. The paper also goes beyond this basic result in several ways and makes the following additional findings: First, to the extent that trade did cause a loss of manufacturing jobs, it was the weakness of U.S. exports after 2000 and not the strength of imports that was responsible--the share of imports in the U.S. market actually declined. …

As shown in the 1930s by Hicks and Robinson, the elasticity of substitution (σ) is a key parameter that captures whether capital and labor are gross complements or substitutes. Establishing the magnitude of σ is vital, not only for explaining changes in the distribution of income between factors but also for undertaking policy measures to influence it. Several papers have explained the recent decline in labor's share in income by claiming that σ is greater than 1 and that there has been capital deepening. This paper presents evidence that refutes these claims. It shows that despite a rise in measured capital-labor ratios, labor-augmenting technical change in the United States has been sufficiently rapid that effective capital-labor ratios have actually fallen in the sectors and industries that account for the largest portion of the declining labor share in income since 1980. In combination with estimates that corroborate the consensus in the literature that σ is less than 1, these declines in the effective capital-labor ratio can account for much of the recent fall in labor's share in US income at both the aggregate and industry level. Paradoxically, these results also suggest that increased capital formation, ideally achieved through a progressive consumption tax, would raise labor's share in income.

Used properly, the term 'new e-conomy' is warranted. Since 1995, there has been a wave of innovation associated with both the production and use of information technology that has been translated into improved US economic performance. In particular, there has been a substantial acceleration in trend total factor productivity growth. Most of this acceleration actually took place outside of the computer sector. Almost none of the acceleration was cyclical. There is now clear supportive evidence of an acceleration of productivity in service industries that are major purchasers of information technology such as finance and wholesale and retail trade. These gains reflect not only increased investment in information technology but also complementary innovations in business organization and policy. To be sure, as evidenced by recent financial market volatility, there have been speculative excesses, but these should not obscure the fundamental gains that have been made.

There is a broad consensus among US opinion leaders that our economic problem is largely one of failures of international competition -- that trade deficits have eroded our manufacturing base, that inability to sell on world markets has been a major drag on economic growth, and that imports from low-wage countries have caused a widening of income inequality. This paper summarizes recent evidence on these issues, and shows that while there may be a grain of truth to each complaint, in each case the effect is quantitatively minor. The arithmetic of 'competitiveness' just doesn't work.

Many claim that although formal trade barriers have been removed at the border, Japanese markets remain unusually closed because of non-tariff barriers. After describing Japan's development strategy and the debate over the sources of Japanese growth, we consider current trade barriers. Recent research has made some headway investigating the impact of one of the alleged “invisible” barriers. In particular, efforts have been made to test if the behavior of Japanese corporate groups, known as keiretsu, creates a barrier to trade. Finally we consider whether private sector trade restrictions warrant a public response; what, if anything, should be done about keiretsu?

While exports of clothing from Africa to the United States responded impressively to the preferences they were granted under the African Growth and Opportunity Act (AGOA), this performance was not accompanied by some of the more dynamic benefi ts that might have been hoped for. Benefi ciary countries still do not have viable internationally competitive industries that could survive without the preferences, or that have diversifi ed horizontally into new products and markets or vertically into greater domestic value addition. In this paper we demonstrate that this outcome is a predictable consequence of incentives under the Multi-Fiber Arrangement (MFA) quotas and the AGOA trade preferences. Th e paper fi rst extends standard trade models and predicts that, in equilibrium, the MFA encouraged exports of low quality and low value added products by AGOA countries and higher quality and higher value added products by quotaconstrained countries. AGOA preferences further encourage specialization in clothing products with high fabric cost shares in the least developed countries receiving the preference. Th e paper then tests these theoretical predictions using diff erence-in-diff erences estimations by looking at changes in the value-added and fabric intensity of AGOA apparel exports in response to the ending of the MFA in January 2005 and the granting of AGOA preferences from 2001. Th e results show that MFA quotas and AGOA preferences caused least developed AGOA recipients to specialize in fabricintensive products with low value added as well as rising fabric content.

Conventional trade theory, which combines the Heckscher-Ohlin theory and the StolperSamuelson theorem, implies that expanded trade between developed and developing countries will increase wage equality in the former. This theory is widely applied. It serves as the basis for estimating the impact of trade on wages using two-sector simulation models and the net factor content of trade. It leads naturally to the presumption that the rapid growth and declining relative prices of US manufactured imports from developing countries since the 1990s have been a powerful source of increased US wage inequality. In this study we present evidence that suggests the presumption is not warranted. We highlight the sensitivity of conventional theory to the assumption of incomplete specialization and find evidence that is not consistent with it. Since 1987, although US domestic relative effective prices in industries with relatively high shares of manufactured goods imports from developing countries have declined, effective unskilled-worker weighted prices have actually risen relative to skilled- worker-weighted prices. If anything this suggests pressures for increased wage equality. Also in apparent contradiction to theory, the (six-digit NAICS) US manufacturing industries with high shares of manufactured imports from developing countries are actually more skill-intensive than the industries with high shares of imports from developed countries. Finally, applying a two-stage regression procedure, we find that developing country import price changes have not mandated increased US wage equality. While these results conflict with standard theory, they are easily explained if the US and developing countries have specialized in products and tasks that are imperfect substitutes. If this is the case, the impact of increased trade with developing countries on US wage inequality is far more muted than standard theory suggests. Also methodologies such as the net factor content of trade using US production coefficients and simulation models assuming perfect substitution between imports and domestic products could be highly misleading.

Concerns that (1) growth in developing countries could worsen the US terms of trade and (2) that increased US trade with developing countries will increase US wage inequality both implicitly reflect the assumption that goods produced in the United States and developing countries are close substitutes and that specialization is incomplete. In this paper we show on the contrary that there are distinctive patterns of international specialization and that developed and developing countries export fundamentally different products, especially those classified as high tech. Judged by export shares, the United States and developing countries specialize in quite different product categories that, for the most part, do not overlap. Moreover, even when exports are classified in the same category, there are large and systematic differences in unit values that suggest the products made by developed and developing countries are not very close substitutes-developed country products are far more sophisticated. This generalization is already recognized in the literature but it does not hold for all types of products. Export unit values of developed and developing countries of primary commodity-intensive products are typically quite similar. Unit values of standardized (low-tech) manufactured products exported by developed and developing countries are somewhat similar. By contrast, the medium- and high-tech manufactured exports of developed and developing countries differ greatly. This finding has important implications. While measures of across product specialization suggest China and other Asian economies have been moving into high-tech exports, the within-product unit value measures indicate they are doing so in the least sophisticated market segments and the gap in unit values between their exports and those of developed countries has not narrowed over time. These findings shed light on the paradoxical finding, exemplified by computers and electronics, that US-manufactured imports from developing countries are concentrated in US industries, which employ relatively high shares of skilled American workers. They help explain why America’s nonoil terms of trade have improved and suggest that recently declining relative import prices from developing countries may not produced significant wage inequality in the United States. Finally they suggest that inferring competitive trends based on trade balances in products classified as "high tech" or "advanced" can be highly misleading.

Biofuels have become big policy and big business. Government targets, mandates, and blending quotas have created a growing demand for biofuels. Some say that the U.S. biofuels industry was created by government policies. But recently, biofuels have become increasingly controversial. In this paper Lawrence argues that the growing list of concerns about the impact of biofuel targets and mandates - are the predictable result of a failure to follow the basic principles of good policy-making. Good policy-making requires developing a policy goal or target (i.e., reducing greenhouse gas emissions, reducing oil consumption, or increasing rural economic development) and designing an instrument to efficiently meet that particular goal. The more precise the goal, the better. In addition, for each target, there should be at least one policy instrument. You cannot meet two goals with only one instrument. Lawrence argues that the current U.S. biofuels mandates do not represent the most efficient or precise instrument to meet any of the policy’s stated goals. While this paper argues against mandates, it should not be understood as an attack on all biofuels policies. Three are especially worthy of consideration. First, there are good reasons for the government to subsidize research on different alternative sources of energy such as biofuels. Second, there may be a role for government coordination and investment in biofuels infrastructure which are essentially public goods that private actors cannot undertake on their own. And third, there are also good reasons for removing the tariffs that are imposed by both the European Union and the United States on imported ethanol and biodiesel. These trade barriers not only reduce any potential environmental benefits that could be achieved from using these products, but also limit the development benefits than poor countries might enjoy from producing them.

Conventional trade theory, which combines the Heckscher-Ohlin theory and the Stolper-Samuelson theorem, implies that expanded trade between developed and developing countries will increase wage inequality in the developed countries. This theory is widely applied. It serves as the basis for estimating the impact of trade on wages using two-sector simulation models and the net factor content of trade. It leads naturally to the presumption that the rapid growth and declining relative prices of US manufactured imports from developing countries since the 1990s have been a powerful source of increased US wage inequality. In this study we present evidence that suggests the presumption is not warranted. We highlight the sensitivity of conventional theory to the assumption of incomplete specialization and find evidence that is not consistent with it. Since 1987, although US domestic relative effective prices in industries with relatively high shares of manufactured goods imports from developing countries have declined, effective unskilled worker-weighted prices have actually risen relative to skilled worker-weighted prices. If anything, this suggests pressures for increased wage equality. Also in apparent contradiction to theory, the (six-digit North American Industry Classification System [NAICS]) US manufacturing industries with high shares of manufactured imports from developing countries are actually more skill intensive than the industries with high shares of imports from developed countries. Finally, applying a two-stage regression procedure, we find that developing-country import price changes have not mandated increased US wage inequality. While these results conflict with standard theory, they are easily explained if the United States and developing countries have specialized in products and tasks that are highly imperfect substitutes. If this is the case, the impact of increased trade with developing countries on US wage inequality is far more muted than standard theory suggests. Also methodologies such as the net factor content of trade using US production coefficients and simulation models assuming perfect substitution between imports and domestic products could be highly misleading.

This paper reviews China's multilateral and preferential trade policies. It reviews the demanding terms of China's WTO accession, its current tariff and trade regime and its participation in the Doha Round negotiations and the institution's regular activities. The analysis concludes that China's trade policies are broadly supportive of a rules based multilateral trading order and its behavior at the WTO is that of a status quo power rather than one seeking major systemic changes. The discussion then turns to China's regional trade initiatives. China has been extremely active in negotiating these and their implications remain uncertain. Concerns about an East Asian fortress, though, appear misplaced. Directly, and through their impact in inducing others to respond, these FTAs could provide a powerful impetus to the process of competitive global liberalization. Countries that do implement agreements with China will find it relatively easy to open their markets to other developing countries. There is also a risk however that the proliferation of FTAs will lead to web of overlapping agreements that could make the trading system unnecessarily complex.

This paper evaluates the US initiative to establish a Free Trade Agreement with countries in the Middle East by signing bilateral agreements with the countries individually and then combining them into a single arrangement. These agreements present new opportunities for Arab countries, but to take full advantage, they will have to complement the agreements with additional policy measures, both individually, and together. The promise comes from the ability to use the agreements as a catalyst for improving regulatory rules and systems at home and facilitating integration with the rest of the region and the world. But the agreements also present problems for Arab countries, first in relating these US agreements to agreements with other trading partners - most importantly the EU; second in creating political difficulties associated with closer relations with the USA given problems in the region, and third, in undertaking the necessary economic and political policies that are necessary to realize the benefits.

The Doha Round is intended to advance the interests of developing countries but it has run into problems because additional liberalization in sectors of interest to some developing countries could erode the preferences of others. None of the current proposals to deal with the issue, either through delaying liberalization or providing compensation have found widespread support. In this paper we explore a proposal to backload the phase-in of MFN tariff reductions in sensitive sectors and use the revenues generated to provide compensation for preference erosion. We argue that the approach would be both equitable and effective.

This paper compares the responses of intra- and extra-firm trade to exchange rate changes. It does so both to inform the debate on whether these responses are qualitatively different and to improve understanding of the microfoundations of features of trade behavior such as long adjustment lags, the large impact of distance, and the presence of significant home bias. We argue that the informational problems posed by search (acts identifying potential exchange partners) and deliberation (acts assessing their reliability and trustworthiness) play a key role in explaining these features and suggest that multinationals should have advantages in overcoming these problems. Indeed we find that the responses of multinationals to exchange rate changes are both larger and more rapid.

It is commonly argued that Japanese trade protection has enabled the nurturing and development internationally competitive firms. The results in our paper suggest that when it comes to TFP growth, this view of Japan is seriously erroneous. We find that lower tariffs and higher import. volumes would have been particularly beneficial for Japan during the period 1964 to 1973. Our results also lead us to question whether Japanese exports were a particularly important source of productivity growth. Our findings on Japan suggest that the salutary impact of imports stems more from their contribution to competition than to intermediate inputs. Instead, this paper suggests that Japan's performance was perhaps even more of a miracle than we thought, since it occurred despite the maintenance of protectionist barriers. Furthermore our results indicate a reason for why imports are important. Greater imports of competing products spur innovation. Our results suggest that competitive pressures and potentially learning from foreign rivals are important conduits for growth. These channels are even more important as industries converge with the market leader. This suggests that further liberalization by Japan and other East Asian countries may result in future dynamic gains. While our analysis has principally focused on Japan, we have also provided corroborating evidence suggesting that our conclusions apply more broadly. Imports into the US seem to be an important factor in promoting productivity growth. The evidence for Korea suggests similar impacts from imports and tariffs and no evidence that exports promoted productivity. Our results thus call the views of both the World Bank and the revisionists into question and provide support for those who advocate more liberal trade policies.

To be effective an international organisation must (a) be given an appropriate mission; (b) be given the means to accomplish its mission; and (c) be viewed as legitimate when carrying out the mission. This paper explores the problems in achieving these prerequisites for success first in a general discussion and then in an application to the WTO. Ensuring these conditions are met is not easy because there is an inherent tendency for many international institutions to experience ‘mission creep’, particularly when accountability for burden sharing is weak. This leads to the central dilemma facing many international organisations. If missions are expanded, and organisations given insufficient means, they are likely to fail (or fall short of optimal behaviour) and be criticised for ineffectiveness. However, the more extensive the means they are given, the more likely that their legitimacy will be questioned. The paper argues that the best way for the WTO to deal with these tensions would be to adopt an approach built on a more variable geometry in which countries would not all be required to participate in a single undertaking.

THE AMERICAN DREAM IS THAT each generation should live twice as well as its predecessor. During the hundred years before 1973, real average hourly earnings rose by 1.9 percent a year. ' At that rate earnings doubled every thirty-six years, and the dream was realized. The dream no longer holds. Since 1973 the United States has failed to match its historic track record. In 1973 average real hourly earnings, measured in 1982 dollars by the consumer price index (CPI), were $8.55. By 1992 they had actually declined to $7.43-a level that had been achieved in the late 1960s. Had earnings increased at their pre-1973 pace, they would have risen by 40 percent to more than $12.00. Or consider average real hourly compensation. This is a more comprehensive measure of the payments to labor because it includes fringe benefits as well as earnings. Between 1973 and 1991, real hourly compensation rose by only 5 percent. However the growth of labor income is measured, it clearly has slumped since 1973. A second ominous development in the American economy has accompanied this slump: a dramatic increase in the inequality of earnings. In

American Living Standards contends that the central problem of the U.S. economy has been for some years now, and for the foreseeable future will continue to be, the slowdown in the growth of living standards. This decline began in the early 1970s, was masked by a resort to overseas borrowing in the early 1980s, and now threatens to get worse in the years immediately ahead as the foreign debt bills come due. The editors and contributes to this volume seek to advance our understanding of the causes and consequences of this potential slowdown in the growth of living standards. Equally important, the book examines what policy measure holds out the best hope for presenting, or at the very least, minimizing this slowdown. Various chapters explore the changes in the level and distribution of incomes that have occurred in recent years; changes in the quality and distribution of jobs among industries and regions; what economists do and do not know about recent trends in productivity growth and in the quality of education; and what events could trigger a recession.

This paper critiques the test which led Hans Genberg to the widely cited finding that the variance in inflation rates across OECD countries under fixed exchange rates was not significantly different from the variance in inflation rates across U.S. cities. It offers a more appropriate test which indicates that, in fact, there is a highly significant difference in the variance of inflation rates within and among countries.

The United States is enjoying one of its longest economic expansions of the postWorld War II period. Inflation, unemployment, and interest rates are all dramatically lower than at the beginning of the decade. Yet, the reviews of economic policy by many economists have been highly negative, with frequent predictions that recession lies around the corner. Most voters who have enjoyed substantial gains in their standards of living, at least as measured by their consumption, may conclude that the concerns expressed by economists are simply the rantings of negativists who have been wrong in the past and are probably wrong about the future. Most of the pessimistic economic assessments of the U.S. economy can be reduced to a single issue: the current expansion is based on an unprecedented consumption binge that cannot be supported in the future without a substantial increase in debt burdens. The consumption orientation of the current expansion is highlighted by an examination of the trends in the saving-investment balance, as shown in table 1. The most dramatic aspect is the collapse of the net national saving rate from an average of 7.7% of net national product in the 1970s to 2% in 1986-87. This is even more remarkable in light of the emphasis that was placed on increasing national saving at the beginning of the decade. The decline is evident in both the private and the public sector. The private saving rate, household plus business saving, has fallen from 9.7% to 6.6% national net product (NNP) despite the introduction of several new tax incentives in the early 1980s to promote private saving. Essentially, with the creation of Individual Savings Accounts (IRAs) and other measures, most taxpayers faced a zero tax rate on new saving. We also know that many Americans took advantage of the new saving instruments: tax returns indicate that the inflow of new funds into IRAs approached 1.5% of national income by 1985. Yet, the overall private saving rate, which had been slowly rising in prior decades, leveled out and declined sharply after 1984. Apparently, as is often the case with tax incentives, Americans took advantage of the opportunity to rearrange their savings in order to reduce their taxes without increasing their overall rate of saving. By far the largest blame for the decline in national saving, however, must lie with the federal government. The combination of expenditure increases and tax reductions has resulted in a budget deficit that peaked at 5.4% of NNP in 1986 and remains near 4% in 1988. The goverment budget deficit continues to absorb over half of all private saving. Deficits of this magnitude far exceed the historical experience. The problem for international economic relations is evident in comparing a 1987 national saving rate of 2% of NNP with a rate of domestic investment of 6%. To fill the gap, the United States borrowed 4% of its income annually overseas-foreign investors are financing more than half of U.S. investment. The 4% can be taken as a rough measure of the extent to which the United States is living beyond its means-borrowing abroad to support a level of domestic spending in excess of the nation's productive capacity. The result has been to shift the United States from a net creditor to the world's largest debtor nation. Contrary to the usual arguments about unfair foreign competition, the United States has a trade deficit because its saving is inadequate to finance investment. In addition, the low level of domest c investment, 5.8% of NNP in 1987, refutes the argument that the foreign financing is being used to finance a surge of investment in a revitalized America-clearly the borrowing is to finance a surge of domestic consumption. The extent to which the budget deficit translated into a trade deficit did surprise most American economists. It was not difficult to anticipate that the 1981 combination of a defense buildup and a large tax cut would result Barry P. Bosworth and Robert Z. Lawrence are senior fellows in economics at the Brookings Institution, Washington, D.C.

IN 1977, the merchandise trade accounts of the United States recorded the largest deficit to date-$31.4 billion. Viewed in historical perspective, any U.S. trade deficit is an unusual occurrence: until 1971, the U.S. trade balance had been in surplus throughout the twentieth century. In 1977, the United States had a deficit of 1.7 percent of the gross national product, or 11.5 percent of the combined value of merchandise exports plus imports. (By comparison, Italy's trade deficit in 1974 was 10.3 percent of trade value; the deficit of the United Kingdom was 4.7 percent in 1967 and 12.1 percent in 1974.) The U.S. invisibles account showed a substantial surplus, however, so that the estimated current-account deficit in 1977 of $19.3 billion was 7.1 percent of the value of merchandise trade. The present U.S. trade deficit is particularly conspicuous because the balance has declined precipitously since late 1975. In 1975:4, the trade balance (seasonally adjusted annual rate) was an $8.9 billion surplus; one year later it had become a deficit of $14.4 billion, and by 1977:4, the deficit had grown to $35.5 billion. This change in the trade balance resulted from a slow growth in the value of U.S. exports (an increase of 7.1