Books in the National Bureau of Economic Re series

In 1986, the National Bureau of Economic Research initiated a research project on the economics of aging under the direction of David A. Wise. The goal of the program is to further our understanding of both the determinants of the economic well-being and health of the elderly, and the consequences for the elderly and for the larger society of an increasingly older population. This third volume to result from the project contains nine essays addressing new issues, some of international scope, as well as research that continues work introduced in the previous volumes. Topics include retirement and saving for retirement; living arrangements and family support of the elderly; the aged in developing countries, including Thailand and Cote d'Ivoire; social security reform, with an analysis of the Japanese system; and the relation between the duration of nursing home stays and the source of payment for care. Each paper is accompanied by critical commentary. Robin L. Lumsdaine, James H. Stock, and David A. Wise find that although complex models are better predictors of actual retirement behavior, the most complex does not provide significantly more information. In a paper offering startling evidence likely to be of wide interest, Thomas E. MaCurdy and John B. Shoven report that the long-term rate of return on stocks is higher than that on bonds but, despite this difference in returns, fewer than twenty percent of TIAA-CREF participants choose to put more than half their retirement savings into stocks. Axel Borsch-Supan, Vassilis Hajivassiliou, Laurence J. Kotlikoff, and John N. Morris develop a model of living arrangements that promises easier implementation than past models, and confirm thatincreasing age and decreasing functional ability are the most important factors influencing the decision to enter a nursing home. Borsch-Supan, Jagadeesh Gokhale, Kotlikoff, and Morris consider the time that children spend with their parents, concluding that this time is determined primarily by demographic factors, with economic factors such as income and wealth playing an insignificant role. Using data from the Retirement History Survey, Michael D. Hurd argues that wealth, excluding housing, declines about three percent a year during retirement; average consumption expenditures also decrease by two to four percent a year, findings consistent with the life-cycle theory. Angus Deaton and Christina H. Paxson consider aging issues in less developed countries, finding that older people in Thailand and Cote d'Ivoire tend to live with younger relatives in multigenerational households and that economic status is less variable over the life cycle in these countries. The pay-as-you-go Japanese social security system is examined by Tatsuo Hatta and Noriyoshi Oguchi, as are the implications of changing from the current system to one that is actuarially fair. Alan M. Garber and Thomas E. MaCurdy explore the relation between the duration of nursing home stays and the source of payment for nursing home care. They conclude that the incentive effects of the subsidies of nursing home care may play an important role in what type of nursing home care is most often used. Finally, transitions in and out of nursing homes are considered by Edward C. Norton, who analyzes data from an experiment that tested the effects of performance-based reimbursement on the quality and cost of nursing home care.

In the late 1990s, economic and financial crises raged through East Asia, devastating economies that had previously been considered among the strongest in the developing world. The crises eventually spread to Russia, Turkey, and Latin America, and impacted the economies of many industrialized nations as well. In today's increasingly interdependent world, finding ways to reduce the risk of future crises--and to improve the management of crises when they occur--has become an international policy challenge of paramount importance. This book rises to that challenge, presenting accessible papers and commentaries on the topic not only from leading academic economists, but also from high-ranking government officials (in both industrial and developing nations), senior policymakers at international institutions, and major financial investors. Six non-technical papers, each written by a specialist in the topic, provide essential economic background, introducing sections on exchange rate regimes, financial policies, industrial country policies, IMF stabilization policies, IMF structural programs, and creditor relations. Next, personal statements from the major players give firsthand accounts of what really went on behind the scenes during the crises, giving us a rare glimpse into how international economic policy decisions are actually made. Finally, wide-ranging discussions and debates sparked by these papers and statements are summarized at the end of each section. The result is an indispensable overview of the key issues at work in these crises, written by the people who move markets and reshape economies, and accessible to not just economists and policymakers, but also to educated general readers. Contributors: Montek S. Ahluwalia, Domingo F. Cavallo, William R. Cline, Andrew Crockett, Michael P. Dooley, Sebastian Edwards, Stanley Fischer, Arminio Fraga, Jeffrey Frankel, Jacob Frenkel, Timothy F. Geithner, Morris Goldstein, Paul Keating, Mervyn King, Anne O. Krueger, Roberto Mendoza, Frederic S. Mishkin, Guillermo Ortiz, Yung Chul Park, Nouriel Roubini, Robert Rubin, Jeffrey Sachs, Ammar Siamwalla, George Soros

The twentieth century saw significant increases in both life expectancy and retirement rates-changes that have had dramatic impacts on nearly every aspect of society and the economy. Forecasting future trends in health and retirement rates, as we must do now, requires investigation of such long-term trends and their causes. To that end, this book draws on new data-an extensive longitudinal survey of Union Army veterans born between 1820 and 1850-to examine the factors that affected health and labor force participation in nineteenth-century America. Contributors consider the impacts of a variety of conditions-including social class, wealth, occupation, family, and community-on the morbidity and mortality of the group. The papers investigate and address a number of special topics, including the influence of previous exposure to infectious disease, migration, and community factors such as lead in water mains. They also analyze the roles of income, health, and social class in retirement decisions, paying particular attention to the social context of disability. Economists and historians who specialize in demography or labor, as well as those who study public health, will welcome the unique contributions offered by this book, which offers a clearer view than ever before of the workings and complexities of life, death, and labor during the nineteenth century.

As the global economy continues to evolve, events such as the unification of European markets have prompted economists and policymakers to consider whether the current system of taxing income is inconsistent with the trend toward liberalized world financial flows and increased international competition. To help assess the effectiveness of existing tax policies and incentives, this volume presents new research on how taxes affect the investment and financing decisions of multinationals today. The authors examine international financial management, business investment, and international income shifting. The first three papers focus on financial management. Chapter 1 analyzes how tax and non-tax factors affect the relative importance of portfolio equity investments versus foreign direct investments and finds that the composition of equity flows differs dramatically according to tax differences. The authors of the second chapter look at the impact of U.S. and Canadian tax reforms on the financing of U.S. multinationals operating in Canada. Chapter 3 uses new data from 1986 corporate income tax returns to examine the effects of taxes on decisions by foreign subsidiaries to repatriate dividends to U.S. parent corporations. The next three chapters address international business investment. The authors of Chapter 4 consider why most models fail to show how tax policy affects foreign direct investment, and they offer improved models. Chapter 5 models U.S. tax incentives for the level and location of R&D performed by multinationals, and reveals that changes in the after-tax price of R&D have a significant effect on spending decisions of U.S. multinationals. Chapter 6 offers descriptive evidencefrom a careful field study of location and sourcing decisions in nine U.S. multinational manufacturing corporations. The final two papers examine income shifting. In chapter 7, the authors consider the fact that foreign-controlled companies in the United States pay lower taxes than do domestically-controlled companies. Unlike other studies, this one uses firm-level data files, including the actual tax returns filed by foreign-controlled companies. The eighth paper quantitatively assesses the importance of income shifting of U.S. multinationals, using Compustat data for 1984 through 1988 as well as information from annual reports. This volume will guide the development of new theoretical models in public finance and international economics, as well as inform the ongoing policy debate about reforming the taxation of multinational businesses in the United States and abroad.

Social security is one of the largest and one of the most popular programs administered by the United States government. It is also under significant pressure to reform: given projected increases in both individual life expectancy and the sheer number of retirees, the current system faces the possibility of an eventual overload. Alternative proposals have emerged, ranging from reductions in future benefits to a rise in tax revenue to various forms of investment-based personal retirement accounts. As this volume suggests, the distributional consequences of these proposals are substantially different, and may disproportionately affect those groups who depend on social security to avoid poverty in old age. Together, these studies persuasively demonstrate that appropriately designed investment-based social-security reforms could effectively reduce the long-term burden of an aging society on future taxpayers, increase the expected future income of retirees, and mitigate poverty rates among the elderly.

Our current social security system operates on a pay-as-you-go basis; benefits are paid almost entirely out of current revenues. As the ratio of retirees to taxpayers increases, concern about the high costs of providing benefits in a pay-as-you-go system has led economists to explore other options. One involves "prefunding," in which a person's withholdings are invested in financial instruments, such as stocks and bonds, the eventual returns from which would fund his or her retirement. The risks such a system would introduce--such as the volatility in the market prices of investment assets--are the focus of this offering from the NBER. Exploring the issues involved in measuring risk and developing models to reflect the risks of various investment-based systems, economists evaluate the magnitude of the risks that both retirees and taxpayers would assume. The insights that emerge show that the risk is actually moderate relative to the improved return, as well as being balanced by the ability of an investment-based system to adapt to differences in individual preferences and conditions.

Social Security Programs and Retirement around the World: Micro-Estimation represents the second stage of an ongoing research project studying the relationship between social security and labor supply. In the first volume, Jonathan Gruber and David A. Wise revealed enormous disincentives to continued work at older ages in developed countries. Provisions in many social security programs were shown to encourage retirement by reducing total compensation for work, thereby inducing older employees to leave the labor force early, magnifying the financial burden caused by population aging. At a certain age there simply is little financial benefit to continued work in many countries. In this volume, Jonathan Gruber and David A. Wise turn to a country-by-country analysis of retirement behavior based on micro-data. The result of research compiled by teams in twelve countries, the papers in this volume show a strong relationship between levels of social security incentives and retirement behavior in each country. Further, the estimates show that the effect is strikingly uniform in countries with very different cultural histories, labor market institutions, and other social characteristics. The key advantage of the micro-estimation approach of this volume is that in each country the effects on retirement of changes in social security provisions can be predicted. To demonstrate the effects of such changes, each of the papers here includes simulations of the effects of two illustrative reforms. One illustrative reform delays the benefit eligibility ages in each of the countries. A second illustrative reform assumes common provisions in each of the countries-reducing retirement incentives in some countries and increasing incentives in others. Utilizing the best methods, the conclusions to be drawn from Social Security Programs and Retirement around the World: Micro-Estimation will provide economists with the freshest and most provoking research yet in the ongoing debate regarding social security.

Studies in the Economics of Aging is the fourth book in a series from the National Bureau of Economic Research that addresses economic issues of aging and retirement. Building on the research in The Economics of Aging (1989), Issues in the Economics of Aging (1990), and Topics in the Economics of Aging (1992), this volume examines issues related to population aging and the health and well-being of the elderly. Chapters cover population aging and government spending, life expectancy and health, saving for retirement and the role of 401(k) plans, demographic transition and housing values, aging in Germany and Taiwan, and the utilization of nursing homes and other long-term care. Economists, policymakers, and professionals in gerontology will find this book a useful reference for understanding the demographic and economic trends that affect the elderly.

In the increasingly global economy, domestic tax policies have taken on a new importance for international economics. This unique volume compares the tax reform experiences of Canada and the United States, two countries with the world's largest bilateral flow of trade and investment. With the signing of the U.S.-Canada Free Trade Agreement and the tax reforms of the 1980s, there has been some harmonization of tax systems. But geographic, cultural, and political characteristics shape distinct national social policies that may impede harmonization. As the U.S. and Canadian economies become even more integrated, differences in tax systems will have important effects, in particular on the relative rates of economic growth. Scholars from both countries examine the extent to which conformity between these national programs has taken place, focusing on tax reforms of the 1980s, and assess the effects over the long term. The authors carefully consider the policy environment in which social programs are established and implemented, including such aspects as property rights, incentive structures, the degree and kind of economic freedoms, and the systems of private and public decision making. By comparing these environments, the authors show that certain aspects of the tax systems of Canada and the United States are converging, while in other respects they are diverging. For instance, both countries exhibit similar corporate tax structures and income tax systems, but they have very different approaches to sales taxes and social security taxes. Another interesting conclusion from these investigations is that although tax policies differ, outcomes are often quite similar. For example, they generateroughly the same amounts of revenue, produce similar costs of capital, and produce comparable distributions of income. The methodology and results of this research will have significant implications for the analysis and development of trade policies among other nations, as well as for understanding domestic social policy in a global economy.

The contributors to this volume analyze the growth experiences of Japan, Korea, China, Hong Kong, Singapore, and Taiwan in light of the recently developed endogenous growth theory to provide an understanding of the economic boom in East Asia. The theory explored in this volume attributes the phenomenal economic success of these countries to, among other factors, the role of an outward orientation - a focus on exporting rather than on protecting home markets. In addition, the importance of exchange rate behavior, of the supportive role of government policy, and of the accumulation and promotion of physical and human capital are explored in detail. This collection also makes significant contributions to recent work examining the extent to which growth in each country became self-sustaining once it began. This fourth volume in the NBER-East Asia Seminar on Economics series demonstrates the relevance of endogenous growth theory for studying this important region and will be invaluable for economists and for those interested in East Asian affairs.

The rapid emergence of East Asia as an important geopolitical-economic entity has been one of the most visible and striking changes in the international economy in recent years. With that emergence has come an increased need for understanding the problems of interdependence. As a step toward meeting this need, the National Bureau of Economic Research joined with the Korea Development Institute to sponsor this volume, which focuses on the complexities of tax reform in a global economy. Experts from Taiwan, Korea, the Philippines, Japan, and Thailand, as well as the United States, Canada, and Israel examine the major tax programs of the 1980s and their domestic and international economic effects. The authors provide overviews, country studies, and analyses of the effect of taxes on specific economic behavior, including saving and economic growth. The overviews include an examination of the link between taxes and domestic capital formation in open economies, and a look at the similarities and differences in the tax structure of eight East Asian countries. Other papers address broad issues related to tax policy and economic performance. Contributors evaluate the effects of changing the marginal tax rate on income from capital; analyze the relation between Korea's tax structure and its rate of economic growth; study the impact of tax reform and the aging Japanese population on savings; compare and contrast the gift and estate tax systems of the United States and Japan; and examine whether the tax systems of Korea and Taiwan, particularly the taxation of foreign capital, distort resource allocation. Studies of the political and economic interactions that underlie tax reform in the UnitedStates, Japan, Korea, and Taiwan reveal that in au of these countries domestic political considerations were far more important than international issues when deciding on tax reforms. Economists, policymakers, and members of the business community will benefit from these studies.

During the first three decades following the Second World War, an increasingly open international trading system contributed to unprecedented economic growth throughout the world. But in recent years, that openness has been threatened by increased protectionism, regional trading arrangements - Europe 1992 and the U.S.-Canada Free Trade Agreement - and setbacks in negotiations on the General Agreement on Tariffs and Trade. In Trade and Protectionism, American and East Asian scholars consider the dangers of this trend for East Asian countries in particular and the world economy in general. The first two papers in the volume look at the context in which East Asian trading relations with the United States take place. The papers focus on the role of GATT, the importance of an open multilateral trading system, and the current threats to it. An analysis of the United States' regional trading arrangements is also included. The second set of papers addresses sensitive sectoral issues that have led to frictions in Japanese-American semiconductor trade and agricultural protection among Japan, Korea, and Hong Kong. In the third group of studies, the authors examine U.S.-Japanese trade issues, the impact of U.S.-administered protection on Korean exports, and the openness of the Japanese market to exports from other Asian countries. Next, aspects of international economic relations among Asian countries are considered. Two studies explore foreign direct investment relations between Japan and other Asian countries, and the relationship between Japanese foreign direct investment and trade flows among Asian countries. The final five papers analyze how political-economic interaction affects levels ofprotection, focusing on the political economy of protection in Korea and Taiwan. This is the second volume in the series to come from the National Bureau of Economic Research-East Asia Seminar on Economics. The first volume, The Political Economy of Tax Reform, addresses tax reform in the global economy.

This timely volume addresses important recent trends in the internationalization of equity markets. These trends include increasing securitization as many countries come to rely more than ever before on markets in equities and bonds, extensive market integration through foreign investment and resulting links among stock prices around the world, and the opening of national financial systems of newly industrializing countries to international financial flows and institutions as governments remove capital controls and other barriers. Eight essays examine such issues as the current extent of international market integration, gains to U.S. investors through international diversification, fundamental macroeconomic determinants of securities prices, home-country bias in investing, securities transactions taxes, the role of time and location around the world in stock trading, and the behavior of country funds. Other long-standing questions about equity markets are also addressed, such as market efficiency and the accuracy of models of expected returns, including a particular focus on variances, covariances, and the price of risk, as in the Capital Asset Pricing Model. The Internationalization of Equity Markets will interest academic and business economists concerned with stock market behavior around the world.