Columbia Economics Review: Spring 2011

Columbia Economics Review Vol. I, No. 2

New York City Strikes Out The Financing of Yankee Stadium

Stimulating Notions of the World Economy Interview with the OECD Paycheck Theory Teleology and Commensurate Labor in Economic Theory

Spring 2011

COLUMBIA ECONOMICS REVIEW P U B L I C AT I O N I N F O R M AT I O N The Columbia Economics Review (CER) aims to promote discourse and research at the intersection of economics, business, politics, and society by publishing a rigorous selection of student essays, opinions, and research papers. CER also holds the Columbia Economics Forum, a speaker series established to promote dialogue and encourage deeper insights on economic issues.

2010-2011 EDITORIAL BOARD Editor-in-Chief Pooja Reddy Managing Editor Dasha Wise Senior Editors Ben Eckersley Hadi Elzayn Vighnesh Subramanyan John Ng

Associate Editors Rakhi Agrawal Rui Yu

Business Managers Skanda Amarnath Alex Millet

Art Editor Cindy Pan

Econ Forum Director Danni Pi

Layout Editor Kevin Zhang

Web Developer Stephen Pratt

R E L AT E D N O T E S

THE ARTS

Opinions expressed herein do not necessarily reflect the views of Columbia University or the Columbia Economics Review, its staff, sponsors, or affiliates.

Art by Cindy Pan Photography by Colin Sullivan

We welcome your comments. To send a letter to the editor, please email cer@columbia.edu. We reserve the right to edit and condense all letters.

Licensed under Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License

The Columbia Economics Review is sponsored in part by the Arts Initiative at Columbia University. This funding was made possible through a generous gift from The Gatsby Charitable Foundation.

Columbia Economics | Program for Economic Research Printed with generous support from the Columbia University Program for Economic Research

Columbia Economics Review

TA BL E O F C O N T E N T S

Features 2 | The Silk Road to Africa | Chinese Investment in Sub-Saharan Africa 6 | Paycheck Theory | Teleology and Commensurate Labor in Economic Theory

Interviews & Events 12 | Stimulating Notions of the World Economy | Interview with the OECD 14 | From Profitability to Sustainability | Applying Finance to Climate Change Models

Business & Finance 16 | New York City Strikes Out | The Financing of Yankee Stadium

Theory & Policy 21 | Sex Ratios and Savings Rates | The Puzzle of Postwar Japan 25 | Labor Pains | Gender Inequality and Female Life Satisfaction

Spring 2011

The Silk Road to Africa Chinese Investment in Sub-Saharan Africa Varun Parmar

Features

“We like Chinese investment because we have one meeting, we discuss what they want to do, and then they just do it … There are no benchmarks or preconditions.” Sahr Johnny, Sierra Leone Ambassador to China, 2005.

“China’s move into Africa is displacing traditional Anglo-French and U.S. interests on the continent.” Martyn Davies, Director of the Center for Chinese Studies at Stellenbosch University, South Africa, 2005.

Although the world watched with awe as previously underdeveloped countries such as China, India and Brazil began their steady ascent to economic power throughout the 1990s and the early 2000s, this past decade has seen a surprising new growth movement from an altogether different geographic region: since 2001, six of the world’s ten fastest growing economies have been located in SubSaharan Africa. One explanation for the

sudden and rapid growth of these African economies, following the stagnation that plagued these nations at the end of the European colonial period, is China’s burgeoning demand for raw materials to fuel its own economy.

While statistics regarding the presence of China in this largely underdeveloped continent can be overwhelming—for example, trade between China and Africa has surpassed $100 billion per year—the experiences of Serge Michel and Michel Beuret, co-authors of China Safari, a memoir based on their experiences in Africa, put the issue in a more relatable context. They recount that, upon meeting foreigners, Africans today are more likely to shout “Ni hao, ni hao!” in place of the expected “Hello!” or “Monsieur, monsieur!” The cultural effects of Western imperialism in Africa appear to have diminished due to China’s prominent presence, a trend that represents the significant economic changes taking place Spring 2011

3

on the continent.

These changes have come about as China benefits greatly from its business engagements in Africa. In exchange for building infrastructure in African countries, China contractually receives virtually unfettered access to the continent’s vast reserves of natural resources, particularly oil. Chinese negotiations with Africa are unlike those of the West in that, while China aggressively pursues its economic endeavors, it simultaneously fosters friendly ties with its “no strings attached” approach to projects. The mutually beneficial relationship between the two has resulted in an explosion of trade between China and Sub-Saharan Africa, growing from less than $5 billion in 1995 to $50 billion in 2005. Similarly, African foreign direct investment originating in China rose from $100 million in 2000 to $1 billion in 2006.

Former Minister of Finance of Nigeria, Ngozi Okonjo Iweala claims that China

4

is popular with Africans not because Africans “are stupid and China is coming to take resources,” as many critics of Chinese FDI might insinuate, but rather because “there’s a little more leverage in terms of the Chinese. If you tell them ‘We need a road here,’ they will help you build it.

They don’t shy away from infrastructure.”

Growing economic ties between China and African nations have been strengthened by both an influx of Chinese workers into Africa and higher numbers of native Africans studying in China in order to learn to communicate with the Chinese businessmen and workers in their home countries.

Before this influx of investment, African governments had been heavily reliant on aid inflows. Between 1970 and 1999, average aid to African countries as a percentage of African GDP rose more than threefold from 5 percent to 17 percent. To the unease of many Western countries who were supplying this aid to Africa, however, growth per capita in Africa fell from 2 percent to less than 1 percent within the same time period. It was only after investment flows increased in the past decade that the continent began to experience faster growth.

This is not to say that providing aid to Africa is a futile endeavor. Leading development economist Jeffrey Sachs claims that, although critics of aid are quick to point out the dismal correlations between aid and growth rates, these critics neglect to take into account improvements in many other indicators of development. These include, for example, child mortality, which has declined from 22.9 percent in 1970 to

Features

14.6 percent in 2007, adult literacy, which has increased from 27 percent to 62 percent in the same time period, and primary school enrollment, which has risen from 53 percent to 70 percent. These indicators represent a few of Sachs’s “Millennium Development Goals,” which are internationally agreed upon targets for improving social and economic conditions in underdeveloped countries and formally endorsed by the United Nations.

Sachs believes that while social conditions have improved due to aid, economic conditions—as indicated by low growth rates—have largely stagnated, because, in his words, “aid has never been properly resourced or targeted for a focused period to end the poverty trap and thereby to break the dependency on aid.” The “poverty trap,” he argues, is one of two convergence points between optimal capital stock and growth rate, as indicated by the two curves in Figure 1 (a graphical form of the Solow-Swan growth model, a neoclassical framework for understanding long-run economic growth). In the figure, f(k) is the production function of the economy, s is the savings rate, A is the technology level, n is the population growth rate and d is the depreciation rate of capital.

Sachs focuses on the intersection points of the two curves (n+d)k, the capital depreciation curve, and sAf(k), the savings curve, which are the points that represent the economy at a steady state. This steady state can be either stable or unstable: whereas in Figure 1 kE represents the stable and more optimal convergence point which translates to a greater growth rate Columbia Economics Review

and higher capital stock, kT represents the unstable steady state and renders lower optimal values of savings and growth. At kT a slight increase in capital will propel the country towards kE, but even a slight decrease in capital will move the country back into its poverty trap. Currently, many African economies have stagnated at the poverty trap point kT because aid organizations such as the World Bank have not been able to accurately determine how much aid is necessary to move the country towards kE. Sachs claims that misallocation of funds is another reason that aid has not proven successful in moving underdeveloped economies out of the poverty trap. In 2003, U.S. aid to Sub-Saharan Africa was apportioned as follows: $1.5 billion for emergency aid, $300 million for non-emergency food aid, $1.3 billion for debt forgiveness grants and $1.4 billion for technical assistance. Much of this aid is focused toward short-term help, as exemplified by the large portion set aside for emergency aid. Debt forgiveness, of course, does not help the economy in any visible way; it merely reduces the amount the African country in question owes to other nations and doesn’t increase the capital stock of the nation. Technical assistance can have long-term effects, yet due to the paucity of knowledge and experience in the African economic and business environment, many Western technical assistance providers do not have the same impact as Chinese entrepreneurs and investors who have a direct stake in the outcome of their ventures. Sachs further comments on the ineffectiveness of U.S. aid to Africa in 2003: “This distribution left only $118 million for U.S. in-country operations and direct support for programs run by African governments and communities—just 18 cents for each of the nearly 650 million people in low-income Sub-Saharan Africa.” These in-country operations and direct support programs managed by African governments and communities include key infrastructure projects in critical sectors such as healthcare, education, power and utilities.

If aid were apportioned correctly in order to build a solid economic base for African countries, such as more funding toward infrastructure-related projects, then the capital stock of these aid recipient nations might move above kT (as per Figure 1) and go on to converge to the optimal equilibrium point.

Currently, however, African aid is a highly politicized issue. Although aid should ideally be concerned with purely humanitarian goals, it seems to depend more on political necessities on both the Western

Features and African fronts. For example, although a total of $1.3 billion of aid was allocated toward debt forgiveness, many Africans, as Iweala points out, believe that due to the damaging consequences of Western colonialism, they should not be indebted to the United States or Europe. This highly contentious historical issue is still the source of much political tension between the West and Africa because African countries receiving debt forgiveness often find that their cycle of perpetual indebtedness to the West undermines their political sovereignty. Further exacerbating the political tension in aid is the widespread corruption in many African governments. Sudan’s President Omar al-Bashir, who was accused of siphoning away nearly $9 billion of his country’s funds, and Zimbabwe’s President Robert Mugabe, who was also accused of stealing up to 90 percent of the aid from the European Union, are merely two examples of this immense problem in governance.

Chinese corporations can and do enter African countries and establish facilities to extract resources without any participation from African workers.

Although corruption is often claimed as the primary cause of the inefficiency of aid, development economist and professor at Columbia University, Xavier Sala-i-Martin brings to light the overwhelming problem of benign aid efforts gone awry. Sala-iMartin summarizes his concern: “The rich and the famous tend to be more interested in raising money than making sure it is spent productively.” Like Sachs, Sala-iMartin believes that aid is not allocated efficiently or productively in developing African countries. His commonly cited example of this is an incident that occurred during the 2005 World Economic Forum at Davos, where Sharon Stone rallied the audience to donate $1 million to buy mosquito bednets for Tanzanians at risk of malaria. This decision was made without regard for distribution costs, which amounted to more than the manufacturing costs of the bednets. After the incident, The Economist reported that the “Tanzanian government has a sensible policy of not giving bednets away. To do so might crowd out the com-

mercial sellers of bednets, who distribute them more efficiently than the public sector.” Consequently, the million dollars, which might have been put toward vital infrastructure projects in Tanzania, was altogether squandered. As the number of these wasted aid efforts increase, many are beginning to blame aid itself for Africa’s continued economic problems, thus giving credence to the movement supporting private investment as a better alternative for economic growth.

In response to such accusations against aid, development economist William Easterly retorts that for aid to be most effective, it must come under an ideal policy environment. The primary goal of aid money is to create economic infrastructure that will help attract investors; if pre-existing policies such as reasonable regulations on businesses, openness to foreign investment and efficient governance do not already exist, then aid will likely be ineffective. Since most underdeveloped countries do not operate in optimal policy environments, many of the foreign direct investment projects in the continent are Greenfield investments—investment projects in areas where no previous structures or constraints exist.

Many of these Greenfield investments are undertaken in order to exploit the abundant natural resources of Africa. For example, Chinese corporations can and do enter African countries and establish facilities to extract resources without any participation from African workers. Although these recipient African countries may acquire the factories, roads and telephone wires that Chinese workers on work visas built, Africans do not participate in the process of development and thereby lose the opportunity to gain real profit and expertise.

Such a situation is all too reminiscent of the West’s widespread exploitation of the continent during the scramble for Africa in the late 1800s. An ideal policy environment would attract investors interested in joint ventures or licensing agreements, which are types of investments that would benefit both African companies and foreign investors. Dambisa Moyo, an oft-quoted critic of aid, has advised African governments to attract such investment by “creating attractive tax structures and reducing the red tape and complex regulations for businesses.”

This has, in fact, already begun to happen: many African states have modified their strategies to deal more effectively with the increased presence of Chinese companies and workers. The Financial Times reported in 2010 that China’s “stateled approach to foreign investment,” a practice where its government takes charge Spring 2011

5 of creating new economic opportunities for domestic investors and entrepreneurs, has led to a $700 million project for a special economic zone on the African island of Mauritius. Creating this economic zone involved not only fostering diplomatic relations but also, more importantly, business relations, which are quickly changing domestic policies in order to create a more friendly business environment. Deputy Prime Minister Ramakrishna Sithanen of Mauritius has made it a point to engage in talks with President Hu Jintao of China in order to maintain Mauritius’s sovereignty in the geographic zone by buttressing his nation’s rather weak political might with the weight of China’s economic power.

This would mean that the investments in this economic zone would no longer be classified as strictly Greenfield; instead, they would include entrepreneurs and businesses from Mauritius in the growth and development process through joint ventures, mergers and acquisitions. Mauritius’s initiative in creating this zone with the support of the Chinese will allow it to build the necessary infrastructure needed to attract other investors, both domestic and foreign. Chinese expertise and capital will then help provide African entrepreneurs with the necessary information, expertise and capital needed to create a profitable business.

By helping countries in Africa overcome the poverty trap through direct investments in crucial infrastructure projects, thus promoting the change to marketfriendly business policies, the Chinese provide us with an excellent example of how investment in infrastructure and industry can help overcome problems with aid. By building infrastructure to develop industries, mostly based around the exploitation of natural resources, China has helped spur economic growth in much of the region. However, China’s ventures into African nations have largely depended on African nations’ capacity to provide China with the raw materials and natural resources that the Chinese economy requires. So while oil- and resource-rich countries such as Nigeria and Angola have managed to receive much investment from China, other countries that lack resource endowments have not. Western nations, with seemingly more benign intentions than just trade volumes, can mitigate this problem by supporting infrastructure investment in non-resource rich African nations to aid the development of other industries. This solution, unlike the long history of largely futile aid efforts, could bring tangible growth and progress to the nations of Africa.

Paycheck Theory Teleology and Commensurate Labor in Economic Theory Mallika Narain

Features The Greek telos is that which is entire, perfect, complete; something that is teleogical is explained by its ends rather than by its means. This abstract concept was an important component of the works of Aristotle. This notion of an end was applied in the historical sense by G. W. F. Hegel and Karl Marx. History, to these philosophers, had a clear end. For Hegel, the means to this end was the abstract geist, or spirit that guided history toward its destiny.

Marx rejected the spirit as a means and instead considered material needs as the means toward the end; the ensuing conflict between capital and labor over the material needs would push society closer to its end goal.

Material needs imply problems of scarcity and allocation, and consequently, the question of telos becomes an economic problem. Contemporary to Marx, the classical economists Malthus and Mill also addressed the notion of telos in economics.

They came to different conclusions but both centered their arguments around the notion of a steady state, one in which the rate of economic growth has decreased to zero since the returns to inputs are offset entirely by depreciation and population growth.

Yet the question of a telos and a steady state is not a simple, independent inquiry: both involve definitions and assumptions of other concepts. In a historical context, the genealogy of these corollary ideas is an insight into their content. In a sense, the definition of the steady state is influenced by the assumptions under which it is posited. One of the most important assumptions for Malthus and Mill was the commensurability of labor – that all forms of labor can be measured by the same standard. Moreover, Aristotle’s inability to address it fully and Marx’s frustration with it emphasize this assumption’s importance.

Perhaps the ends do not merely justify the means; it might create them as well.

Aristotle and Teleology Aristotle’s philosophical method was defined by his attitude towards the telos of everything he observed around him. The very nature of a thing—be it an action or an object—lies, for Aristotle, in its end.

For example, all natural things exist for the benefit of man. As he explains in his Politics, animals can be viewed as existing for this purpose: In like manner we may infer that, after the birth of animals, plants exist for their sake, and that the other animals exist for the sake of man, the tame for use and food, the wild, if not all at

least the greater part of them, for food, and for the provision of clothing and various instruments. Now if nature makes nothing incomplete, and nothing in vain, the inference must be that she has made all animals for the sake of man.

This passage reveals Aristotle’s perspective on the natural world: his understanding of phenomena as intelligible based on their end goal, no matter how abstract or long-term these goals are. The ultimate telos for mankind is the state of happiness, which is guided by an individual’s pursuit of the virtuous life. Aristotle seems to make the inference in his writing that each action has a single distinct telos, rather than multiple possible or simultaneously achievable endpoints.

Perhaps the ends do not merely justify the means; it might create them as well.

This, in turn, is important for the understanding of telos in future iterations as well as to emphasize Aristotle’s use of the natural rather than the unnatural in economic thought. There is a distinction between nomos (that which is constructed, like law) and phusis (that which is intrinsic to an object’s nature, the natural) that Aristotle makes in his work. The natural path that an object takes towards its telos is guided by its phusis, and any variation from this path is open to evaluation by the observer. By defining one endpoint or teleological outcome for each entity evaluated, Aristotle is creating a space for value judgments regarding those things that stray from what he deems a ‘natural’ path.

Aristotle’s Politics broaches the subject of economic goods and makes a delineation between what are now known as “use value” and “exchange value.” The use value is the natural telos of an object and produces the good or happiness for the person using it. The exchange value is the value received upon sale or ‘exchange’ of the good. It is derived from use value and is thus further removed from the nature and telos of the object. In fact, Aristotle scholars have recognized the need to expand his notion of exchange value to render it more comprehensive. In particular, it is widely recognized that Aristotle’s explanation of exchange value is poorly applicable in the case of labor – the comSpring 2011

7 modification of human beings and their work. Scott Meikle of the University of Glasgow explains: “According to Aristotle’s theory of action, labours are natural activities which differ from each other in each having a different aim, end or telos.

His general principle is that an action is ‘defined by its end.’ … Labours or actions cannot be therefore added up or aggregated, and so they could not constitute the uniform substance of … exchange value.”

As Aristotle seeks to find some universal commensurability to use as a basis for standardizing exchange value, he suggests both money and human needs as potential sources for this necessity to create measure. Nevertheless, his analysis is incomplete, as he sees the impossibility of making commensurable objects that he has defined as having completely different teleological directions.

Meikle does not consider Aristotle’s discussions of value and labor in Politics as economic: “The controlling principle of [Aristotle’s] discussion is the good for man, and the judgments he arrives at … are determined in relation to that principle. It is therefore an inquiry about ends … Aristotle’s discussion is ethical not economic. Economics does not consider ends, and indeed it [Aristotle’s discussion] makes a virtue out of this.”

There is another position toward Aristotle’s work that emphasizes the importance of his conceptions about use and exchange value in relation to modern economists’ understanding of labor, particularly in the work of Marx. Aristotle’s teleological views of labor led him to essentially question whether labor can be commensurable, which is a more fundamental question than those raised by the classical economists. His ideas are nonetheless still valuable in comparison with their thought. This interpretation of Aristole has two uses. First, his conception of the telos can be interpreted economically as an alternative to the assumptions of the classical economists about the steady state.

Second, it suggests that a telos can be created in an inquiry not pertaining to ethics, which had been Aristotle’s first purpose.

Mill and Malthus recognized the possibilities of the steady state interpreted as a telos. This conception of the telos is based on the outcome of material limitations rather than abstract direction, as implied

by Aristotle. Still, the telos is still perceived as inevitable, although it can intentionally be worked toward or maintained by conscious effort.

Dialectical Materialism in Marx Like Aristotle’s conception of the telos

8

of an object, Marx’s application of telos guides his theory in its entirety, including its economic, sociological, and political components. Marx’s ideas in his works center on one extremely long-term goal or telos: the achievement of the emancipation of humanity in its totality. Emancipation is the result of revolution, which is engendered by class conflict in the capitalist system. The process by which this takes place is dialectical materialism, where material thesis and antithesis come into conflict and create a new synthesis for society. Marx’s theory incorporates the Hegelian notion regarding the direction of history. By viewing human emancipation from classism as the specific telos for the outcome of society, Marx legitimizes his own views about how history should proceed. Specifically, his telos underlies his concerns about how resources should be distributed. Labor is central to Marx’s understanding of both class and conflict, as, for him, “history … is a process of the continuous creation and satisfaction of men’s needs through labor.” His historicized goal of total freedom for society, while similar, is nevertheless distinct from Aristotle’s all-encompassing teleological

Features

explanation of nature and its elements.

Marx’s idea of the telos of society as freedom is an inevitable outcome of the seemingly unconscious but nonetheless oriented path of society. As such, it is similar to Hegel’s “spirit,” which mysteriously guides the conflict and synthesis of opposing forces throughout history, and Aristotle’s phusis, which itself helps to achieve the goal or natural outcome of an object.

As M.C. Howard of the University of Waterloo explains: Stated at the most abstract level, the purpose of political economy for Marx was to aid the realization of human freedom. Human freedom was considered synonymous with a state of affairs where men live in conformity with their nature … Essentially, the distinctive character of man’s humanity, for Marx, lies in his ability to engage in consciously planned action directed towards the realization of his ends … Freedom is a situation which exists in so far as men have the power consciously to create what they are and what they will become.

Columbia Economics Review

Hence for Marx, telos is something that is homogeneous for all peoples and societies; it can be summed up within this precise notion of human freedom. For Aristotle, on the other hand, everything in nature has a specific telos, and therefore teleological outcomes can be heterogeneous.

It is by concentrating on this distinct and singular telos that Marx can create a progressive, stage-based conception of history. As Jurg Niehans of Johns Hopkins University explained, Marx’s “[mechanism] is determined by the interplay of three levels of circumstances. The basis is provided by what Marx calls the ‘productive forces’ … natural resources and technology.

The second level is formed by the ‘mode of production,’ which a modern reader is inclined to call the economic system…. At the third level we find the ‘ideological superstructure.’”

Although it may appear that Marx is propounding a never-ending progression of conflicts and renewals, his telos is achieved in a classless stage of society that will follow a final revolution. This is the communist state, which is achieved only after all the previous stages of eco-

Features nomic development reach fruition. Instead of the asymptotic endpoints that lassical economists foresaw for capitalist societies—i.e., in the form of a falling profit rate and the movement towards a steady or stationary state—Marx explains in Das Kapital that social forces will overthrow the current economic system and replace it with the aforementioned communist state, where ultimate human freedom is achieved for each individual. This human freedom is achieved precisely because of the end of class distinctions and monopoly over capital by the bourgeoisie. Howard explains, Capitalism does not stagnate [for Marx] … It transforms itself, through social conflict, into a classless society. It is in this sense that Marx refers to capitalism as the last period of the ‘pre-history of human society.’ And this transformation is not due to the existence of natural barriers to the expansion of production but to the ‘social conditions of existence’ characteristic of capitalism itself.

Capitalism is consequently an undesirable but necessary stage in the progression of history.

Marx’s idea of the telos of society as freedom is an inevitable outcome of the seemingly unconscious but nonetheless oriented path of society.

Mechanistic Models and Teleological Outcomes In Adam Smith’s The Wealth of Nations, the prospect of unlimited growth based on a capitalist system appears to shun the concept of a telos, although this is a contentious topic in itself. The standing definition here has specified a telos as having a tangible endpoint, in addition to a goaloriented path. Smith does not specify an inevitable endpoint for the economy in the form of a specific final stage of evolution. As Richard A. Kleer at the University of Regina explains, neither does it seem plausible to consider the commercial or capitalist society as Smith’s version of a telos precisely because there is no element of inevitability about achieving the capitalist state in Adam Smith’s description:

Rather than posit a conundrum, my inclination is to conclude that Smith’s brand of teleology was exceedingly loose. Nature intends population growth and human happiness, and these goals are indeed realised [sic] more effectively in a commercial than in say a pastoral society. But actual human societies can easily fail to reach this stage or, having once reached it, may regress again to some less happy state. Smith foresees no final, stable stage of human history.

Another approach to seeing Smith’s idea as teleological is to read into the proclamations about his ‘all-wise Being,’ an omniscient, godlike figure who is purportedly interested in maximizing the happiness of the population. This is the approach that Kleer promotes, but it is a controversial one that relies on a few specific statements in Smith’s work. Major criticisms of this idea of Smith’s telos center on the continuing lack of a set endpoint to the unconstrained maximization problem posited here. As James E. Alvey explains: Is there any foundation for this notion of ‘an end’ in Smith? A fundamental piece of evidence … is Smith’s statement that the ‘all-wise Being’ directs nature so as to produce ‘the greatest possible quantity of happiness’. Thus far, I am not convinced by this evidence. The context of the quotation given above seems to me merely to suggest that ‘at all times’ God seeks to maximise happiness; there is no mention of God being limited by any constraint.

This is consistent for Smith and the original definition of telos established. Nonetheless he had some understanding of the constraints that would eventually inhibit the growth of the progressive state; these constraints would be directly linked to the scarcity of natural resources available.

This would point to the necessity of carrying out a constrained maximization problem, with a single constraint and a single end, as it would be necessary to show that the stationary or steady state—where the scarcity of resources comes to a head with growth of labor—is a desirable endpoint and therefore can be considered a telos.

If “happiness” is once more used as a measure, one might consider that if the level of happiness achieved in the stationary state (where growth stagnates) is actually higher than that in the progressive state, then this can be perceived as the Spring 2011

9 telos of Smithian economic theory, as it agrees with the earlier definition of telos.

Of course, this is to rely heavily on the few references to happiness maximization in Smith’s writing that Kleer picks up on and therefore, must be based on a legitimization of this assumption of Smith’s goals for society. One must arguably take any claims to teleology in Smith’s work with caution, particularly in the case of the steady state. Similar to most of the classical economists, Smith was far more optimistic about the progressive state than he was about the stationary state.

As Malthus explains, the steady state is the theoretical end point of society, where growth and progress are zero.

Malthus, too, was unlikely to view the stationary state as a pleasurable stage of inhabitance. Although there is continued controversy amongst critics about whether or not Malthus truly had a conception of the stationary state or, relatedly, of the law of diminishing returns, it cannot be doubted that his work, “An Essay on the Principle of Population,” explained that there was an endpoint that societies must drift toward. This mechanism is, in Malthusian theory, the result of the tendency of population (and, therefore, labor) to increase geometrically while food supply increases arithmetically. In periods of relative economic success, the population of a nation or society will increase in response and ultimately end up equalizing back to the initial proportion of labor to food supply or wealth—to a stagnant and seemingly inescapable state, given Malthus’s views on human biology and resource cultivation.

The reverse mechanism is true in times of relative impoverishment. Malthus explains that while population increases geometrically, income (in the form of food) will increase arithmetically. Food will have to be divided among a larger population, leading to a per capita decrease in income. Simultaneously, the increase in population implies an increase in the supply of labor. This decreases the price of labor (the wage) and the two effects lead to a “season of distress” for the laboring portion of the population. Malthus goes on to say that the cheap cost and high supply of labor combined with “the necessity of an

10 increased industry” induces capitalists to employ more labor until income is once again in its original proportion with labor (population). Implicit in Malthus’s analysis is the idea that a specific proportion of variable resources is ideal, and a violation of this proportion results in decreased rates of production—which has been interpreted as the precursor to the law of diminishing returns. More importantly, perhaps, is the recognition that resources are limited, both in their fungibility and in the most basic sense. Malthus’s utilization of Smith’s canonical notion of supply and demand to explain real wage rates is ultimately contingent on the commensurability of labor.

In the view of emancipation as telos, segmenting and de-equalizing labor... were strictly dehumanizing processes.

Mill is arguably one of the first economic theorists to view the stationary or steady state as a possible telos for society; in Principles of Political Economy, Mill discusses the classical conception of the steady state, but puts a decidedly positive spin on the idea previously regarded by Smith, Malthus and other classical economists as a miserable state of being. As Malthus explains, the steady state is the theoretical end point of society, where growth and progress are zero (as measured, for the most part, by the growth of capital). The steady state concept is regarded by Mill in the same way as other philosophical theories of teleology—that is, as a conclusive state that is important for its qualitative meanings for the society in question. As explained previously, classical economists have viewed it as a period of stagnation out of which society can never escape.

Mill, on the other hand, decides to refute the negative approach to the steady state using Malthus’s own language, and, in particular, by addressing the latter’s theory of population.

For Mill, the economic competition implied in Smith’s writing is not ideal; rather, he feels that heedlessly touting the advantages of high rates of progress (‘progress for progress’s sake’) is foolish: “the best state for human nature is that in which, while no one is poor, no one desires to be richer, nor has any reason to

Features fear being thrust back by the efforts of others to push themselves forward.” He feels that the prospect of infinite progress may actually detrimentally incite people to reproduce without concern for its effects on society. On the other hand, the advent of the steady state will be taken into consideration by the population at hand, and this will stem population growth simply out of necessity. In addition, he brings up environmental and other non-economic concerns as interesting arguments against unhindered progress and ends by considering intellectual and moral culture (art, etc.) as providing a channel for human energies that does not correspond with economic growth.

So long as the population of a society does not grow at a pace faster than capital, Mill explains, available laborers will be able to find employment, and therefore, society will continue to maintain continuing levels of comfort. The population has the ability, then, to both anticipate and direct its needs, through the recognition of the problems of unhindered population growth in relation to resource constraints.

The steady state could be seen as a telos, and would possess the optimal proportion of labor (population) to resource or income use.

Understanding Attitudes Towards Labor Viewing classical economics through the lens of philosophy generates important questions about the legitimacy of foundations of oft-used mechanisms. It would seem that underlying Mill’s previously established understanding of the telos for society is a crucial recognition of the unusual qualities of labor, in contrast with other inputs to production. By revisiting the concepts of teleological structure discussed above, one can construct some vision of each theorist’s attitude toward using humans as resources and realize that these may be less obvious than they initially seem.

As previously established, Aristotle had trouble reconciling his ideas about use value and exchange value with the concept of labor and this arose from his notion of the telos of the action; this, arguably, led to the difficulty of generalizing or quantifying the work of an individual. As Meikle explains: The term ‘labour’, however, collects activities as commensurable items, and therefore does so without regard to ends in principle. In Aristotle’s theory, this is impossible in principle. A labour theory of value is, for that reason … remote from Aristotle’s thought …

Columbia Economics Review

When Aristotle himself seems to have most need of the concept of labour, when he is looking for something common to all … products, he fails to come up with it. The idea of abstract activity, to which ends are simply irrelevant rather than generalized over, can make no sense in Aristotelian philosophy.

Meikle is disputing the claim that Aristotle had something resembling a labor theory of value, as the classical economists did, but he is simultaneously referring to how the gulf between exchange value and use value (a less pressing concern for the Classical Economists) grows out of viewing the latter as a natural endpoint of an action and the former as being attached to an action but not being linked to its telos.

What does this reveal about Aristotle’s view of humans as resources? He attempted to adapt labor into his general theory of substance and action, but it was clear that he simultaneously recognized its uniqueness when he tried to conceive of a way to make labor commensurable. Indeed, other actions did not need to be equalized in Aristotelian theory, and so the problem of measuring exchange value for labor is a unique one in Aristotle’s work. He does not make value judgments on the use of labor; however, it is clear that his teleological set-up makes him confront and problematize labor, which as an action bridges the space between natural resources and finalized product.

Attitudes towards humans as resources fundamentally influenced the Marxist notion of human emancipation as the telos of society.

In the works of Marx, attitudes toward humans as resources fundamentally influenced the Marxist notion of human emancipation as the telos of society. In the view of this emancipation as the telos, segmenting and de-equalizing labor (into bourgeoisie and proletariat) were strictly dehumanizing processes. Meikle explains that, for Marx, these sorts of contentions about labor arise because the market renders them economic realities. These economic realities to him were perversions, which supplanted human beings (natural things) with abstractions. Therefore, questions of humans as labor may not have had the

Features

11 cannot be made commensurate by any means. In Marx’s work, as in Aristotle’s, the labor theory of value is questioned for its general applicability. In many ways, labor has immeasurable qualities for Marx, and these lead him to his conception of the telos of human freedom only in a society without class and therefore without unequally differentiated labor.

Malthus and Mill were aware ... that humans possess qualities that make them less predictable than... other measurable commodities or inputs of production.

same assumptive quality for the Classical Economists. For Malthus and Mill, an application of the Aristotelian conception of the telos reveals ex-post some of the inconsistencies of their assumptions. It anticipates the need for further development of the idea of humans as labor in economics that has yielded many advances in the discipline and continues to be a fundamental question.

For Malthus and Mill, the labor theory of value definitely applied. The commensurability of labor was crucial to the mechanisms of supply and demand and the determination of the wage rate. In Smith’s work, the idea of the division of labor and its efficiency is brought up, with the additional attempt to categorize heterogeneous labor. Marx, too, emphasizes the labor theory of value in his works, but brings up the possibility of differentiating wages based on quality of labor—i.e., if a laborer

demonstrates above-average skill, then he is paid a greater wage than the average wage rate. This is tied to the training, which has in itself cost time and labor, that this higher-skilled laborer has received.

There are nonetheless outstanding problems with Marx’s attempts to make heterogeneous labor commensurable through the labor theory of value. As Howard points out: “There are two hidden assumptions involved [here]. The first is that all skills can be acquired through training, and none is restricted to those possessing uncommon natural abilities. The second is that workers are indifferent between different kinds of work … In either case the prices of different types of labour power seem to depend on ‘supply and demand.’”

This highly problematic way of looking at labor is often reflected even in contemporary society, where extreme heterogeneity in labor skills and divisions often Spring 2011

In the cases of Malthus and Mill, the generalization of labor at some level—making laborers of different capabilities homogeneous and assuming they are substitutable for one another—becomes vital in order to make statements about the inevitability of the steady state. Yet both Malthus and Mill were aware of the idea that humans possess qualities that make them less predictable than, and therefore set them apart from, other measurable commodities or inputs of production.

It is interesting to note that while Marx’s labor theory of value was overturned in the late 19th century by the Marginal Revolution (where relative prices of goods are calculated simultaneously using marginal rates of substitution, based on marginal utility), the assumption of the commensurability of labor remained. The history of economics, like that of any science, is often written as the narrative of its paradigm shifts, but perhaps there is a history to be written underneath it—of that which has not changed and is uniform across opinions. Aristotle and Marx were frustrated with the commensurability of labor, but over time it became widely accepted as a plausible and useful assumption. Therefore, despite classical economists’ general adoption of the assumption of the commensurability of labor, the problems with this assumption, raised as early as with Aristotle’s first postulation of the telos, remain worthy of an ex-post philosophical examination of economic theory. It remains questionable, even today, whether humans, and specifically human labor, truly can be generalized and utilized in economic models.

12

Interviews & Events

I N T E R V I E W

Stimulating Notions of the World Economy Interview with the OECD

Kathleen DeBoer joined the Organization for Economic Co-operation and Development (OECD) in June 2006 as Deputy Head of the Washington, D.C. Center. She is responsible for the dissemination of OECD publications and data in the North American market. As part of the OECD’s 50th anniversary outreach she developed and launched the OECD Student Ambassador Program in the spring of 2010. Kathleen is also an adjunct faculty member at George Washington University. The Columbia Economics Review sat down with DeBoer to discuss the changing role of the OECD.

DeBoer: The organization began as the group of developed countries to work together after WWII. Over the past 50 years membership has expanded to include 34 member countries. In fact, the OECD works with over 100 countries and plays an active role in the G8 and G20. Just recently India became the third key emerging economy to join the OECD system for the Mutual Acceptance of Data (MAD) in the Assessment of Chemicals, ensuring that the results of non-clinical chemical safety testing done there will be accepted in all other participating countries.

The OECD Mutual Acceptance of Data system is a multilateral agreement which saves governments and chemical producers around €150 million every year by allowing the results of a variety of non-clinical safety tests done on chemical products, such as industrial chemicals and pesticides, to be shared across the OECD and other countries that adhere to the system. India’s engagement in the OECD’s work on chemical safety and its membership in our MAD system is indicative of the mutual benefit of the ever-closer relationship between the OECD and major emerging economies.

The organization anticipates more countries joining in the future.

Columbia Economics Review: The OECD largely works in an advising and consulting capacity. How, then, do you try to ensure that your policy prescriptions are implemented?

CER: What lessons do you think can be gleaned from the sovereign debt crises in Greece and Ireland when analyzing the recent developments in Portugal’s debt?

Kathleen DeBoer: [We do this] By disseminating and promoting OECD policy recommendations among parliamentarians through a variety of mechanisms. But ultimately it is up to each country to decide which policies it will adopt. However, there are some specific conventions that our members have developed and signed, such as the Anti-bribery and Model Tax Conventions. If there is non-compliance by a signatory, the OECD will exercise its role to bring the country into compliance.

DeBoer: In our recent Economic Policy Reform report, Going for Growth, the OECD had this to say about Portugal: strictly implementing consolidation measures and promptly correcting any slippages in order to meet those targets are essential to reduce the cost of external financing and thus stave off the major downside risk of a credit contraction. Reforming the budgetary framework is key to reinforcing the sustainability of consolidation. Reducing the duality of the labor market should help boost potential growth.

CER: The OECD has often been criticized for being excessively exclusive. How do you respond to this criticism and how does the OECD plan on expanding?

CER: What do you think the prospects are for the euro given the rise of right wing parties in many countries that wish to leave the Eurozone?

Columbia Economics Review

Interviews & Events

DeBoer: Based on everything I have read, the governments of EU countries remain committed to the euro. So it will be an ongoing challenge for some European governments to convince their citizens that sticking with the euro is better than the alternative. But clearly we are in a period of global economic rebalancing and the BRICs have their own issues with the existing global financial system.

CER: Should policymakers be more concerned about structural or cyclical unemployment given the lack of major improvements in labor markets in developed countries?

DeBoer: Both. The recovery in advanced economies remains too slow to make large reductions in unemployment. Some of this is the result of continued weak aggregate demand but some is also structural. The OECD has recommended active labor market policies, particularly those that would help youths find their first job and the long-term unemployed to re-enter the workforce. Countries with high levels of unemployment should reform benefits systems and shift taxation away from labor.

CER: How does the OECD view the cap-and-trade policies instituted in Europe. Is there a reason to expect regional or global agreement on climate change policies?

DeBoer: No single policy instrument will be sufficient to tackle the wide range of sources and sectors emitting GHG (greenhouse gases) and to achieve ambitious mitigation objectives at a reasonable cost. A broad policy mix is needed, potentially including emissions trading or cap-and-trade schemes, carbon taxes, standards and technology support policies (e.g. support to research and development and clean technology deployment). A cost-effective policy mix will need to meet three criteria: static efficiency, dynamic efficiency and an ability to cope effectively with climate and economic uncertainties. Meeting these criteria requires overcoming many market imperfections and political obstacles. In this regard, carbon taxes or emissions trading schemes turn out to be more effective and comprehensive than other policy tools. However, their cost-effectiveness could be enhanced by complementing them with other instruments to create a mixed climate policy package. So, although multiple policy instruments are needed to mitigate climate change, there are also risks that poorly-designed policy mixes result in undesirable overlaps, which would undermine cost-effectiveness and, in some cases, environmental integrity. As a general rule, therefore, different instruments should address different market imperfections and/or cover different emission sources.

13

CER: What is your view of Germany’s recent policy to shut down all nuclear power plants given climate change concerns and the recent events in Japan?

DeBoer: At the OECD there is concern that countries that put a hold on nuclear power will fall behind in reducing carbon emissions. Ultimately the voters in a democracy have to decide which paths they want to pursue. Certainly the recent events in Japan are a tragedy and a wake-up call.

CER: Given the wealth of many states in the Middle East, what is the reason for their exclusion?

DeBoer: The reason is largely historical. The OECD engages with many countries through a program called MENA (Middle East and North Africa). OECD membership requires that the country be a transparent market democracy and a developed country. Turkey has been a member since the outset and Israel recently joined.

CER: The OECD is celebrating its 50th anniversary as an organization this year. How has it evolved since its inception and how do you expect it to change in the next 50 years?

DeBoer: The organization has evolved to add both new members and new areas of work. The OECD works on policies that benefit from a cooperative approach such as standard setting in international trade, tax, anti-corruption and looking at issues such as water, global pandemics, climate change, new technologies, etc.

The structure and governance of the OECD allow member countries to set priorities on a biennial basis. Our secretariat employs approximately 1000 socioeconomists drawn from all our member countries. It is a powerful think tank with very rich intellectual resources including datasets and policy analysis on a broad range of issues with time series going back in some cases over 50 years.

These are very valuable to anyone studying or working on policy development. We have a relationship with the BRICs called enhanced engagement which allows them to benefit from much of our work. Some of those countries may want to become members of the OECD as well.

CER: What advice would you give to students aspiring to work in economic development and policy?

DeBoer: Spend some significant time living and working in another country where the culture is different from your own. It is life changing and life affirming and you will develop a kind of cultural sensitivity that you simply can’t acquire any other way.

Spring 2011

14

Interviews & Events

E C O N O M I C S

F O R U M

From Profitability to Sustainability Applying Finance to Climate Change Models

The Columbia Economics Review, in collaboration with Consilience: The Journal of Sustainable Development, held its second Economics Forum on March 29th, 2011 in Alfred J. Lerner Hall. Students sat down with professor Satyajit Bose, a faculty member at the School of International and Public Affairs (SIPA) currently teaching an undergraduate class titled “Economic and Financial Methods for Sustainable Development,” for an intimate discussion on a range of topics including the computational difficulties of discount rates in climate change research and the challenges of using economic and financial tools in studying topics of sustainable development.

A few years after graduating from Columbia College, during which he worked for a boutique investment firm, professor Bose found his way back to Columbia University to pursue a doctorate in environmental economics. Beginning the discussion on a reminiscent tone, he remarked on his experience on Wall Street: “not much has changed, I’m afraid, but you do write your own presentations now. There were only a few of those word

processing people back then and they would have to write your presentations for you.” Those 100-hour weeks are definitely still a typical aspect of working in investment banking, and as Bose points out, it has its benefits: working 100-hour weeks means one can obtain the equivalent of six years of work experience within the typical two analyst years.

It makes sense to study global warming by using the best technology and techniques from sources like investment banks.

His Ph.D. dissertation focused on the economic impact of climate change, particularly non-linear changes in temperature, but upon completing his doctorate, Bose found himself unable to find a job in the field of environmental economics. The Columbia Economics Review

problem was that when he started looking for work around 2000, most companies, governments and individuals were not yet interested in the problem of climate change. Bose returned to Wall Street, a transition he considered smooth because the skills that one learns in a graduate program are quite useful to hedge funds, banks and other companies in the financial services sector. Companies like to look for college and Ph.D. graduates because they have applicable research experience and necessary skills in programs such as MATLAB. He began his post-graduate career by working first for an emerging market hedge fund and then a convertible arbitrage hedge fund.

So how has professor Bose’s career in finance helped him with his current research on climate change? His experience in valuing options has helped his global warming research substantially. “What happens when you do cost-benefit analysis of something like climate change is a problem with a long horizon impact.

Thus, you use discount rates and any discount rate you use will impact today’s

Interviews & Events present value. Now, if you use a single discount rate, then you have an easy discount equation.” On the other hand, on Wall Street, the valuations of bonds depend on the interest rate. However, one cannot simply make the assumption that the interest is the same; most of these firms deal with billions of dollars at a time, and any miscalculation of these interest or discount rates could lead to a loss of millions within seconds. Thus, one would never assume that the interest rate is fixed because the loss would be so

quick and substantial. Therefore, for bond valuation, there has already been a substantial amount of research undertaken in order to create the software to make these bond valuations expeditious and use direct computational algorithms. However, according to Bose, “no one has done this for climate change yet because there isn’t an immediate loss of millions. Thus, it makes sense to study global warming by using the best technology and techniques from sources like investment banks.”

It is this very idea that motivated him to come back to Columbia University to teach the Master’s Program in Environmental Science and Policy. Professor Bose currently teaches working professionals financial and economic methods for sustainable development. He believes that the underlying philosophy for his classes is to use the best available techniques, processes and disciplines that come from standard areas of training like accounting, finance and economic theory to address sustainability problems. As he puts it, the intention of the class is “to break down barriers that might exist between academ-

ia and Wall Street.” In his class, he has taught students to read balance sheets, income statements and other financial documents of clean tech companies such as REC Solar or First Solar. Then, the students learn to analyze how these companies should further develop in terms of investment strategies.

Some of our traditional economics indicators do not have the capability to take into account important sustainability issues Professor Bose is also careful to address the problems associated with using traditional economic definitions or financial tools to study sustainable development.

“With the recession in 2008 and 2009, the economists were all down because consumption and GDP was down,” Bose points out. “On the other hand, the environmentalists were happy because sustainability was up!” Thus, some of our traditional economic indicators do not have the capability to take into account important sustainability issues. This is why an understanding of disciplines like economics and finance is important; students studying sustainable development need to understand the extent to which these traditional disciplines can help them. If Columbia University is to successfully teach sustainable development as a program of instruction, the department will need to imbibe the core methods of these fields. Economic activity is, after all, the primary determinant of the quality and sustainability of the natural environment. Thus, we need to explain to people that our economy is but a subset of our entire ecosystem and define it as such.

During the talk, some students questioned how one can determine the right discount rates to use for projecting climate change. However, Professor Bose argues that the problem is not in determining which discount rate is the right rate: even in finance, for example, one works under the assumption that one can never know the correct rate. Instead, it is important to know the likelihood with which each projected rate is likely to occur. The point is therefore to incorporate the range of these probabilities and that is where the problem becomes computationally difficult.

After all, economists Nicholas Stern and William Nordhaus (both prolific writers Spring 2011

15 on climate change models) have had vastly different ideas on which discount rate is correct. In addition, it is important to note that the discount rate is composed of two building blocks: time preference and an element that results from the marginal reference of the elasticity of income. Different ethical views and expected growth rates all have the ability to affect this discount rate. For example, if we think that the economy will currently grow very quickly, future generations can afford to make more sacrifices in their consumption levels than we can.

After discussing the ways in which applications of finance can help us to predict aspects of climate change, professor Bose moved on to talk about how the recent debates on climate change have impacted the firms on Wall Street. When asked why investment banks such as Deutsche Bank, have now taken steps to create and publicized “climate change advisory teams” Bose answered that, according to him, the steps taken by these companies to incorporate aspects of climate change into their business are just part and parcel of doing good business. They understand that aspects of climate change will affect commodities, impact GDP growth and thus have the ability to largely affect their investments.

Economic activity is, after all, the primary determinant of the quality and sustainability of the natural environment.

The students in attendance at this Forum left with a better understanding of the economics of climate change, the important role of discount rates and most importantly, the gains from using the best available techniques, processes and disciplines that come from standard areas of training like accounting, finance and economic theory to address sustainability problems. Professor Bose described our growing knowledge on these issues as a small circle on a big blackboard: “As the area of the circle grows and as our knowledge expands, the circumference and the things that we know we do not know also grows—that is the beauty in learning.”

To subscribe to the Economics Forum mailing list, please send an email to cer@columbia.edu.

New York City Strikes Out The Financing of Yankee Stadium Maria Kucheryavaya

Business & Finance

On March 29, 2007, the Congress Subcommittee on Government Reform met in Washington D.C. to discuss the validity of public financing for sports stadiums in the United States. Just one year earlier, the New York Yankees had issued over $900 million in tax-exempt bonds to finance the construction of the new Yankee Stadium through a program referred to as payment in lieu of taxes, or PILOT. By January 2009, the Yankees had issued a total of $1.2 billion in PILOT bonds that were exempt from federal and in some cases even state and local taxes.

The Committee’s findings over these four hearings, along with many others held at a local level, provided evidence to show that the financing structure used by the Yankees in funding stadium construction was an improper use of federal funds.

Historically, federal tax exemptions were granted in order to benefit their issuers (generally state and local governments) by providing a sort of capital subsidy in order to ensure that state and local undertakings would not suffer from capital shortages. While the typical recipients

of public funding in the United States are hospitals, airports, water and sewer companies and electric cooperatives – all organizations that serve the publicgood – the Yankees are a successful for-profit organization.

The New York Yankees’ PILOT deal is emblematic of the broadening of the recipient base for tax exemptions.

Indeed, from 1997 to 2005, attendance at Yankees games rose by 58 percent and revenues more than doubled. The team’s wealth and financial stability, along with its sound cash flows, point to its likely ability to fund its expenditures without external assistance. With net worth of $1.6 billion in 2010 and annual revenues that have been increasing steadily since Spring 2011

17

2001, the Yankees are the most valuable team in baseball. Hence, government support seems to be in excess of what is needed by the team.

Given that the House of Representatives has politically scrutinized stadium PILOT financing for nearly three years, understanding the means by which these PILOT bonds were structured, as well as their ultimate net effect on the surrounding economy, may provide a more definitive assessment of their value. Initial findings from this assessment support the viewpoint of a number of economists and public officials that financing the construction of the new Yankee Stadium through PILOT issuance was not a justified use of federal funds PILOT Bonds and Tax-Exempt Debt A bond is a debt instrument in which the borrower repays the initial debt amount through a series of previously agreed-upon interest and principal payments. These payments continue until the bond reaches its maturity date. Government entities and non-profit institutions are eligible

18 to issue a certain type of bond whose interest earnings are exempt from federal (and sometimes even state) income tax in order to raise capital for projects that fund the public good. These projects can include the financing of campus dormitories by higher education institutions, hospitals by healthcare companies, bridges by government infrastructure agencies and even museum construction by cultural institutions. Recently, stadium financing projects have also been able to issue tax-exempt bonds. The New York Yankees’ PILOT deal is emblematic of the broadening of the recipient base for tax exemptions.

PILOTs for stadiums, however, are distinct from other types of tax-exempt stadium financing. The main difference between stadium PILOTs and the commonly used tax-exempt sales tax revenue bonds is the burden of payment: stadiums that issue PILOTs are responsible for making PILOT payments in order to pay off the bonds and fund debt service, while stadiums that issue sales tax revenue bonds through an authority rely on that authority to collect the tax revenues necessary to fund the bonds and debt service. Therefore, PILOT bonds place a lower burden on the government for bond security, although there still exist costs to the government due to the tax exemption.

While PILOTs cost the government less than do tax revenue bonds, PILOTs are nevertheless inferior in this regard to taxable bonds. As in the construction financing of New Meadowlands Stadium (the home of the New York Giants, as well as the New York Jets), a taxable debt issuance has no public component; as a result, the entire burden of the construction financing is taken on by the team or by private parties. Though the general characteristics of the bonds are comprehensible, the reasons for this structure may be partially explained by their origin.

Motivations for PILOT Bond Issuance The state of Yankee Stadium in 2006 made it necessary to rebuild the stadium rather than simply renovate it. The stadium was “physically obsolete” in that it suffered from alarming dilapidation and may have contained a combination of leadbased paint and asbestos. In addition, the experience of fans and players alike was worsened by what the New York City Department of Parks & Recreation considered the “too small and narrow” seats, aisles and corridors in both the player and fan seating sections. In addition, the kitchen space at the old stadium was not considered adequate for the provision of

Business & Finance

Table 1. Land Value Assessment Calculating the market value Typical MV land /MV property on land : 15-25% Acreage * 2

x Ft Per Acre x Median Cost ** Land Value

17 43,560 $275.00 $203,643,000.00

+ Property Value

$1,025,000,000.00

Total Market Value

$1,228,643,000.00

* including garage ** per ft 2 in comparable NYC neighborhood

food and beverages during games. Many complained that space allotted to the media was too limited for the team’s needs.

The new stadium is claimed to have resolved the above issues by expanding the existing facility and making overall structural changes that include the addition of marketing and function facilities.

A few days before leaving office, Mayor Rudy Giuliani negotiated a deal for the Yankees that would involve New York City funding the new Yankee Stadium.

Considering these facts, a new stadium for the Yankees was in order. However, that this new stadium would come at an enormous expense to the city’s own finances is an extremely contentious reality. A few days before leaving office, Mayor Rudy Giuliani negotiated a deal with the Yankees that would involve New York City funding the new Yankee Stadium almost completely from the city’s own capital funds; the tentative 2001 agreement with the Yankees involved an initial payment from New York City of $800 million of the overall $1.6 billion in tax-exempt bonds to cover the costs of a retractable roof stadium, with the Yankees having to pay 4 percent of gate receipts. Using the 2010 gate receipts from the current stadium, the Yankees’ contribution would amount to $12.76 million. This is slightly more than 1 percent of the total cost of construction to the Yankees under the Columbia Economics Review

PILOT deal and so Giuliani’s agreement would have been a much more wasteful use of public funds.

Mayor Bloomberg, however, was able to opt out of Guiliani’s deal, which would have cost New York City $800 million.

Given the highly unfavorable terms of the deal, Mayor Bloomberg’s ability to negotiate in the city’s favor was limited. Therefore, PILOTs may not have been agreed upon as the most appropriate means of financing Yankee Stadium construction; instead, they may have simply been the best option given the circumstances.

The Threat of Relocation as Leverage In the case of Yankee Stadium, the issuance of tax-exempt debt was made possible partly by the monopoly status of Major League Baseball (MLB), one of the largest sports leagues in North America.

As a result of the antitrust exemption granted to the MLB in 1922, the organization is able to limit the number of baseball teams in the league nationwide.

In an undated memorandum sent by then-director of the New York City Industrial Development Agency (NYCIDA), David Alper, to Mayor Michael Bloomberg, the NYCIDA claimed that the Yankees would relocate their stadium outside of New York City if NYCIDA did not issue tax-exempt debt on behalf of the team. This threat of relocation, based on the ability of the MLB to halt any other team from moving to New York City to replace the Yankees, is said to have been the reason for the NYCIDA’s ultimate concession.

Team relocation has been discussed not only in news sources and academic papers but also in Congress. In the last of four hearings on the legitimacy of public subsidies to the private, for-profit sports industry, the Subcommittee on Domestic Policy of the House Committee on Oversight and Government Reform probed the issue specifically through the case of Yankee Stadium. When Congressman Elijah Cummings asked Randy Levine, the president of the New York Yankees, where the Yankees could possibly move if they were to leave New York City, Levine replied that “there was no lack of suitors for the New York Yankees.” Despite this definitive view presented to Congress, others believe that the Yankees would not have moved from the most profitable media market in the country, supporting the view of commentator Charles V. Bagli that “there is no credible threat that [the Yankees] are going anywhere.” Rather, the threat made by the Yankees seemed to be a continuation of their struggle to

Business & Finance build a new stadium, a process that began in the 1980s.

Threats of relocation were likely unwarranted, and therefore, New York City was not likely at a disadvantage in the negotiation process to build the new stadium. Nevertheless, other arguments in favor of rebuilding the stadium had to be taken into consideration

The costs associated with the PILOT program represent costs to public welfare... yet the project lacks a comparable public benefit.

The Importance of Land Valuation Another component of the analysis related to the PILOT bonds is the valuation of the land which the stadium would occupy. If the value of that land was inflated, the projected property tax payments on that land would also have been inflated, and as a result, the projected PILOT payments would be greater.

The market value of the stadium property was one of the criteria used to calculate projected payments in lieu of property taxes. The exact calculation of PILOTs, then, necessarily involves a fair and thorough assessment of the value of the land.

The calculation involves multiplying the market value, or replacement value, of a property by an equalization ratio of 45 percent. Although the equalization ratio

on its own does not hold any significance in the finance industry, the value is obtained by multiplying the assessed value by the property tax, and this represents the amount of funds in excess of annual debt service. PILOT payments are designed to be greater than required bond payments in order to ensure that bondholders are paid the entirety of interest and principal according to schedule.

Every year, the Department of Finance (DOF) recalculates the the value of all properties in New York City. The higher the assessment of the market value of the land, the higher is each projected property tax payment, and consequently, the higher is the total value of the bonds that the Yankees are permitted to issue.

Since the tax exemption to the Yankees is a percentage of the total notional of the bonds, that value may also have been inflated. Therefore, the issue is twofold: whether the land valuation was too high and whether tax exemption was justified in the first place.

According to DOF commissioner and former property lawyer Martha Stark, the market value of the Yankee Stadium property was assessed using the cost method, one of three universally accepted methods of property valuation. Stark described that, through this method, a property is valued at its estimated cost of construction. Yankee Stadium was said to be worth $1.025 billion under the assumption that it would be completed in January 2006. Since that time, significant controversy has surrounded the estimates of Yankee Stadium land value, which ranged from $26.8 million to $204 million. Stark noted that initially the Finance Department valued the land as a

19 vacant parcel but upon review, altered this valuation to reflect the land value under the assumption that the stadium would be built on it.

PILOT Costs and Benefits A cost-benefit analysis is useful both for quantifying the components of the PILOT bonds and related development and for directly comparing the positive and negative implications of the project from the perspectives of equity as well as efficiency. The most comprehensive analysis of the Yankees’ PILOT deal has been presented by the Independent Budget Office (IBO) of New York City. Separating the values calculated by the IBO into the costs and benefits accrued to the public realm provides us with a novel means by which to calculate and adjust the parameters of a cost-benefit analysis. The social benefit here will be defined as the public benefit, which is the aggregate social welfare net of the corporate benefit.

The costs of the project can be separated into three categories based on the bearer of burden: U.S. federal government, the New York state government and the New York City municipal government. As is typically the case, the federal government is responsible for paying the costs related to tax exemption of the bonds. The state and city governments share in the remaining costs, with the greatest cost to the city related to the community redevelopment project associated with the PILOT. The IBO uses the Yankees’ total savings accrued due to PILOT as a proxy for the total benefits of the project. The Yankees save a total of $786.8 million as a result of the PILOT project. The highest savings to the Yankees is $416.6 million from

Figure 1.

5: Market Value and Property Tax of Yankee Stadium Property $1,800 $1,500

Millions Millions

$1,200 Market Value

$900

Assessed Value

$600

Property Tax

$300 $0

Spring 2011

20 stadium property tax exemption; the city is said to save money on net in rent and maintenance but the Yankees’ exemption from paying rent on the stadium is arguably a cost to the city government. Ultimately, the net effect of a decrease in rent and an increase in maintenance savings is uncertain, as pointed out by the IBO and therefore is assumed here to be zero.

If no tax exemptions had been granted to the Yankees by the state, city and federal governments, the total savings to the government would be $763.2 million inclusive of the property tax exemption and $346.6 million otherwise. Both are significant sums; if the governmental units had firmly decided to forgo exemption, these values would represent the net increase in public welfare.

The costs associated with the PILOT project represent costs to public welfare, or public costs, yet the project lacks a comparable public benefit. Benefits to the Yankees trickle down to their fans only by means of an improved team image and better performance. The public benefit associated with the PILOT project can therefore be assumed to be only a fraction of the Yankees’ savings. This value may represent a floor on the public benefit, since fans that do not attend games, who may be considered free riders, may still benefit from enjoyment of the team’s improved performance. To partially compensate for this, some values are assumed to be slightly higher than comparable assumptions.

The adjusted social benefit can be calculated by using a multiplier that represents the portion of Yankees’ benefits that trickles down to their fans. This value is estimated to be 8.02 percent through several assumptions and calculations based on population data.

For more than a decade, public subsidies for stadium construction have repeatedly been found to be unfavorable to cities.

Finally, the social benefit multiplier is calculated by dividing the total number of Yankees fans in 2049 by the total population in each region in 2049. However, using all of the regions would result in double-counting the New York City

Business & Finance population so the sum of New York state and New Jersey populations is used. Individuals from these two areas combined represent 81 percent (the vast majority) of fans. By multiplying the Yankees’ savings by the 40-year social benefit multiplier, we obtain a social benefit projection of $61.3 million. This value may account for some of the free-rider problem because the assumed 40-year fan estimate of 3.001 million is slightly more than the 3 million projected in the official statement of the PILOT agreement for Yankee Stadium.

New York City... could likely have been better off if the City government had been more persistent in negotiations with the Yankees.

Since multiple assumptions were made in calculating these estimates and applied along a long time period, the social benefit multiplier may not be entirely reflective of the actual benefit to society from the PILOT project. In addition, one value that could not be readily accounted for is the sum of costs and benefits that could be seen as positive or negative externalities. These values, which have not been estimated to date, may include business and community development in the surrounding area. Nevertheless, given that the assumptions were made based on informed projections, this value should fall somewhat close to the actual social benefit. Compared to the social cost of $882.5 million, the $61.3 million projected social benefit is less than a tenth of the cost. Therefore, from a cost-benefit perspective, the PILOT project for Yankee Stadium is not justified.

Conclusion Following adjustments for the social benefit and inclusion of opportunity costs related to property tax exemption by New York City, the social cost of the PILOT project far outweighs the social benefit.

The values calculated for the social cost ($882.5 million) and social benefit ($61.3 million) differ by more than a multiple of ten. Taking into account that the public, vis-à-vis the New York City government, could likely have been better off if the City government had been more persistent in negotiations with the Yankees, Columbia Economics Review

the cost to society of this PILOT bond issuance is even greater. Keeping in mind that the Yankees likely had few, if at all any, realistic alternatives for relocation destinations, one can envision a situation by which New York City only allowed the issuance of taxable bonds by the Yankees. Utilizing this money for other, more critical expenditures would have been extremely valuable, such as providing capital for projects that deliver direct social benefits. Therefore the marginal benefit to the city of the PILOT program is much smaller than their marginal cost, an indication that such funds would be better used in an alternate public project.

While the Yankees PILOT deal may not be perfectly emblematic of stadium taxexempt financing in general, it is indicative of an issue that is evident on a larger scale. For more than a decade, public subsidies for stadium construction have repeatedly been found to be unfavorable to cities. In the 1990s, researchers Robert A. Baade and Richard F. Dye found no significant relationship between the construction of a new stadium and the economic growth of the city in which it is built; they write, “the presence of a new or renovated stadium has an uncertain impact on the levels of economic activity and possibly a negative impact on local development relative to the region.”

John J Siegfried and Andrew Zimbalist agree: spending by owners and players is prone to leakages since money can be spent in the proximity of their home, which is often far from the stadium itself.

Further, the majority of stadium revenues go toward paying the team members and owners; yet these individuals have a high marginal propensity to save and as a result do not spend generously in the surrounding community. The overall change in the local community in added welfare, according to Siegfried and Zimbalist, is estimated to be “virtually zero.”

Empirical research has shown that economists do not find stadium construction to be a net positive contributor to the local economy surrounding the stadium in consideration. The standard measures of economic development and expansion— net income, spending multipliers and job creation—are not significantly affected by stadium construction and development.

Thus, a government subsidy to a sports team is foregone government spending on essential infrastructure and societal components that could more convincingly be identified as public goods. Private enterprises flush with funds need not – and indeed should not – rely on public revenues for supplementary funding.

Sex Ratios & Savings Rates The Puzzle of Postwar Japan Vighnesh Subramanyan

22

Theory & Policy Figure 1. Percentage Change in National Savings

Percentage Change

300 Percentage Change in National Savings from Previous Year

200 100

Trendline

0 1944 -100

1946

1948

1950

1952

1954

1956

Year

The Second World War had a devastating effect on the Japanese economy. With cities flattened, industries destroyed and its population decimated, Japan lost one third of its total wealth and one half of its potential income. In the cities living standards plummeted to 35 percent of pre-war levels. At its close in 1945 the war had set the economy back to 1918 levels of development, not regaining 1937 levels of gross national product until 1952. For the civilian population the immediate postwar years were a period of incredible privation: many food commodities were in short supply, 3.7 million families remained homeless even in 1948, and high unemployment rates were aggravated by the dismantling of war industries and the influx of Japanese returning from former colonies.

But a remarkable fact about the postwar Japanese economy is its unexpectedly high household savings rate. National savings burgeoned from 45.1 billion yen in 1944 to 2.2 trillion yen in 1956. The growth in the savings rate largely remained positive throughout the first postwar decade, 19451956, remaining above 100 percent until 1948. This left the amount of total net savings substantially above that of the prewar period. This high savings rate is puzzling, especially since Japanese families were spending an inordinately high percentage of their income on food, with one estimate claiming 70 percent. In situations of poverty, consumption is generally high as families spend a large portion of their income securing bare necessities so the resulting marginal disposable income saved is very low.

Moreover, in the first few years after the war and until 1950, the Japanese economy experienced an extraordinary period of hyperinflation with one estimate claiming an inflation rate of 400 percent in 1946.

This was due to the printing of money, an expedient which the government resorted to when the sale of bonds was found to be insufficient to finance large government

deficits. In this monetary climate, the existence of a high growth rate in national savings is counterintuitive: traditional economic models claim that inflation gives an incentive to spend, rather than save, as the purchasing power of any money saved will rapidly diminish. Additionally, if people expect inflation to remain high in the future, as they might well expect given large government deficits, they have an even greater incentive to spend sooner rather than later.

During the war, the Japanese government ran campaigns to promote austerity, encouraging people to aid in financing the war by saving their incomes. When cou-

pled with the shortage of commodities, this patriotic thriftiness helped keep savings rates high. The wartime government campaign to increase savings meant that, on average, 39 percent of household incomes were siphoned away by various taxes and savings programs. But the need for such government austerity policies ended with the close of the war when commodities became more readily available during reconstruction, so these factors cannot account for the continued increase in the savings rate during the postwar years.

The high postwar savings rate has been well noted in the academic literature on Japan. Economist Richard Beason calls it “exceptionally high” and “surprising,” and Kazushi Ohkawa et al. also describe this as a “secular trend of increase” driven by savings in the private sector. In fact, personal savings accounted for between 90 to 99 percent of private savings (i.e., savings by households and firms) during this period, which suggests that household behavior is the primary driver of the national savings phenomenon. Ohkawa et al. suggest that per capita personal consumption may seem subdued in the postwar period due to high population growth as increases in total consumption were spread across a wider population. However, this conjecture still does not explain the large increase in the per capita savings rate, which is an altogether separate matter.

The boom in per capita savings in postwar Japan is a veritable mystery. Though the puzzle has been noted in the literature, there does not seem to be an accepted reason for its cause. What, then, could account for the rapid increase in national savings during the immediate postwar period from 1945-1955? Given that medium-term fluctuations in the level of national savings are mainly a function of private, and especially household savings, we may probe this conundrum by investigating the incentives driving high household savings rates.

In particular, we look at four explanations ranging in breadth from permanent income and labor market effects to returns to capital and demographic competition.

Permanent Income and Property Booms Milton Friedman’s Permanent Income Hypothesis could provide one possible explanation for the large increase in the Japanese savings rate. One version of this hypothesis states that an individual aims to maintain a relatively constant level of consumption over the course of his or her lifetime. Essentially, the individual attempts to maintain a target level of consumption in each period of her life, and may forgo consumption in the current period in order to make

Columbia Economics Review

Theory & Policy the investments that would allow her to reach this target later on. Applying this hypothesis to Japan, we may posit that after the shock of the war individuals sought to return their consumption to prewar levels and counterbalanced their large reduction in wealth by increasing household savings in order to afford the large capital purchases that would enable them to do so.

We can test this hypothesis by observing whether there was indeed a high level of investment in consumer durables and residential property in the postwar years.

Investment in these goods would indicate that households were saving in order to make these large capital purchases. However, the data shows no boom in residential construction to make up for the heavy loss of property during the war until the 1960s, at which point it becomes hard to claim that it was due to savings from the 1940s.

Even if we assume that there is a lag between savings and property investments, the timeframe in question is much too long to draw any plausible conclusions. Indeed, in the postwar years banks’ allocation of investment was biased toward financing companies’ durable equipment at the expense of lending to individuals. Between 1946 and 1953 residential investment accounted for only 2 percent of GNP, out of the 26 percent of GNP that constituted gross capital formation. Thus, this explanation is not satisfactory.

An Overburdened Labor Market?

The war exacted a heavy toll on Japan’s working age population; perhaps wartime effects on the labor market could explain the savings increase? In fact, Franco Modigliani suggests that there is a strong correlation between lower labor force participation rates and decreased savings ratios.

This is because older people and children tend to be in the dis-savings stage of their

23

life. Thus, an increase in the ratio of dependents (i.e. people below 15 and over 60 year olds) to total population will lead to a lower savings ratio. However, in the case of Japan this hypothesis falls apart. Initially, the postwar savings rate increased despite the large number of dependents, whereas Modigliani’s model would predict an extremely low savings rate in such a situation. Indeed, as the younger generation grew and the ratio of dependents to the working age population stabilized, there was a large drop in growth of the savings rate. Thus, the data run counter to the theory and we may reject this hypothesis.

Returns to Capital: Real or Imagined?

Another potential explanation stems from the fact that the war destroyed a significant proportion of the Japanese capital stock.

Given this large negative wartime shock, the law of diminishing returns states that returns to capital in the postwar years should be (arithmetically) higher and, as such, a higher ‘price’ would be paid for the savings which financed this capital investment. This higher price for capital would translate into higher interest rates offered by private banks to households as they competed for their savings. The data show a clear upward trend in gross domestic capital formation over this period (Figure 3), with a downward trend in its percentage change over time (Figure 4). The increase in capital formation must have been funded by domestic savings given that international inflows of funds were restricted due to political reasons.

However, interest rates from this period do not indicate a large return to capital.

The Bank of Japan only gave 3.29 percent on its commercial bills in 1945, rising to 5.11 percent in 1950, as part of a policy to hold interest rates artificially low in order

to stimulate investment for reconstruction. Given that inflation in this period remained over 100 percent for many years, real interest rates were strongly negative.

Thus, there do not appear to be high returns to savings. Furthermore, there is also the issue of reverse causality, as it may be that the large volume of savings invested into capital kept the price of this capital, i.e. the interest rate, low. Given these complications, it is difficult to conclude in favor of this hypothesis.

Marriage Market Malfunctions Besides dealing a severe blow to Japan’s physical capital stock, the war also wiped out a large fraction of its human capital.

We have explored the possible ramifications of this on the labor market but there remains another, equally important and just as competitive arena to consider: the marriage market. The death of millions of young men in the war had far-reaching demographic effects. In 1945 the number of women of marrying age vastly outnumbered that of men; for instance, in the 1525 year old subgroup the ratio of men to women was only 0.73.

As it was primarily young men who were killed in the war, the postwar period provides an ideal “natural experiment” to test the theory of competitive saving.

Shang-Jin Wei, the N.T. Wang Professor of Chinese Business and History at Columbia Business School, writing about the situation in China and the consequences of the one-child policy, suggests that a gender ratio skewed sharply toward men may lead males to save and increase their wealth in order to compete more effectively for their scarcer counterparts in the marriage market. He claims that this is also applicable to Korea. We may be able to apply this theory to postwar Japan, even though the gender ratio is skewed in the other direction.

Figure 2. Marriageable Age Population Gender Ratio and National Savings Percentage Change After the War 1.2

225

0.9

150 0.6 75 0.3

0 1944

1946

1948

1950

1952

1954

-75

Spring 2011

Percentage Change in National Savings from Previous Year Gender Ratio Trendline - Pct Change National Savings Trendline - Gender Ratio

1956 0

Year

Gender Ratio

Percentage Change

300

24

Theory & Policy

GDCP (Billions of Yen)

3000 2250 1500 750 0 1944

1948

1952

1956

Year

Perhaps competition for males among the families of marrying age females may have led them to save more to increase the likelihood of their daughter’s marriage.

A preliminary analysis of the data [by graphing the time trends for the marrying age gender ratio and the ratio of Gross National Saving (GNS) to Gross National Expenditure (GNE)] suggests this might indeed be the case in postwar Japan. On an aggregate level the graph quite unequivocally shows that in the ten years since the end of the war, there was a downward trend in GNS/GNE that was correlated with an upward trend in the gender ratio. The jump in both measures during the 1945-1947 period suggests that a better approximation for the trend line may be parabolic rather than linear. If we look at Figure 2, which plots the time trends for marrying age gender ratio and percentage change in national savings (as opposed to the aggregate amount), we observe a similar story, where the time trends highly correlate the changes in gender ratio with percent changes in national savings. Given the strong correlation between changes in private savings and changes in national savings mentioned earlier, it comes as no surprise that the gender ratio correlates strongly with the percentage change in private savings. In fact, the data suggests an even stronger correlation as there seems to be some degree of synchronization in the movement of the gender ratio and the percentage change in private savings.

Nevertheless, this analysis remains limited and a more thorough investigation would help to establish causality by, for example, analyzing local area and household data to see if areas with a greater gender imbalance also have a higher savings rate. Alternatively, it would be useful to test whether otherwise identical house-

Demographic Determinism Our investigation of various explanations for the large increase in savings rates suggests that a situation of competitive saving, due to demographic imbalances, may have been at play in postwar Japan.

That ‘demography is destiny’ is both a cliché and a fundamental economic truth.

Indeed demography may help to explain a whole host of political and social issues that, at face value, have little to do with population structure. For example, Wei ties the phenomenon of competitive saving to a range of other economic variables afflicting present-day China. The large increase in the country’s aggregate savings helps to explain its gargantuan current account surplus as excess savings look abroad for better returns to capital, which then cause a further decline in the real exchange rate.

Indeed, at least some of the decline in the real exchange rate, according to Wei’s logic, can be traced back to imbalances in the Chinese marriage market.

Moreover, the gender imbalance not only affects savings rates but also exerts a substantial influence on entrepreneurship and regional economic growth. Wei shows that regions with a greater gender imbalance are also more likely to produce entrepreneurs and new private firms, exhibit a higher economic growth rate and have a labor force with a greater willingness to accept relatively dangerous or unpopular jobs. Basically, in order to increase their wealth men are willing to take more risks, whether these risks are entrepreneurial or physical in nature. Gender imbalances,

then, appear to be behind some of the most notable features of the Chinese economy, including its high savings rate and large current account surplus, its relatively inexpensive currency, and its high growth rates.

So is the gender imbalance good or bad?

This is a somewhat facile question, but the gender imbalance did promote savings at a time when Japan needed to rebuild its capital stock, and it appears to be driving Chinese growth today. We could speculate that high Japanese growth rates in the 1950s and 1960s had something to do with this gender imbalance, and as far as we can tell there were few negative long-term consequences. However, there is a limit to how far we can compare China and Japan.

Within ten years the Japanese gender ratio for marrying age people had corrected itself, while the gender imbalance in China continues to grow today. While we have yet to analyze the possible long-term economic implications of this imbalance in China, in Japan at least, it presented few permanent social problems.

The continuation of China’s one child policy, however, along with the sheer size and already considerable legacy of its gender imbalance, is taking the country into uncharted territory. We can be sure that the consequences of China’s demographic policies will continue to magnify themselves in the future, creating an unpredictable and potentially volatile economic and political situation. The fundamental economic effects of the gender imbalance on internal and external stability are hinted at not only in this paper but in the wealth of literature on this topic, written by economists as well as sociologists. The link between demography, economics and policy is a deep and fundamental one, and policymakers would do well to consider its longterm ramifications.

Figure 4. Private Savings Percentage Change and Gross Domestic Capital Formation After the War Percentage Change in Private Savings

600

Percentage Change

Figure 3. Gross Domestic Capital Formation After the War

holds would show any differences in savings if one household differed only in having a female child. However, since reliable local level economic data from this period is very hard to come by, this investigation is beyond the scope of this article.

450 Percentage Change in Gross Domestic Capital Formation

300

Trendline - Pct Change Private Savings

150 0 1944 -150

1946

1948

1950 Year

Columbia Economics Review

1952

1954

1956

Trendline - Pct Change GDCP

Labor Pains Gender Inequality and Female Life Satisfaction Dilan Mizrakli (Dartmouth College)

26 Introduction Over the past few decades, women have been steadily gaining a more advantageous position in society, along with increased bargaining power. This positive change has been brought about by a number of trends including increasing gender equality, higher average education rates and more freedom and rights for women.

In addition, the female labor force participation rate has significantly increased, which has helped women obtain higher levels of economic independence. Still, the increasing power of women has not prevented the happiness level of women from declining relative to that of men.

Economists Betsey Stevenson and Justin Wolfers found in 2009 that this relative decline in the well-being of females holds throughout much of the industrialized world.

Theory & Policy the analysis to elucidate the treatment effect of cross-country gender equality levels on male and female life satisfaction and thus determines the average effect of living in a more gender unequal country relative to a more gender equal country on levels of both male and female life satisfaction.

Background The literature shows how women’s happiness levels have steadily declined over the last 35 years, both absolutely and relative to those of men. Stevenson and Wolf-

The increasing power of women has not prevented women’s happiness from declining relative to that of men.

In this paper, I examine the relationship between gender inequality in housework and female life satisfaction levels using both the Eurobarometer and European Social Survey data through two new approaches. In my first approach, I perform a cross-sectional analysis, comparing male and female satisfaction levels across European countries with respect to the “hours gap,” the difference in hours of housework performed by females and males. Assuming that the hours gap is a good proxy and accurately reflects the gender equality level of countries with respect to housework, I apply my analysis to the time periods 1973-1978, 1994-1996 and 2000-2002 in order to understand the relationship between the hours gap and female life satisfaction. I test the hypothesis that a given hours gap would be associated with a more negative effect on satisfaction as women’s labor force participation, education levels and legal rights increased. In my second approach, I replicate and extend the results of researchers Maria Sironi and Letizia Mencarini (2010) by extending their analysis to men as well as women in the sample using propensity score matching to control for very different men and women in these countries.

Adding men to the sample better allows Columbia Economics Review

ers asked respondents to evaluate their own current levels of overall happiness in addition to satisfaction in areas including marriage, health and professional life. The finding that women’s happiness levels were declining relative to those of men was robust across “various datasets, measures of subjective well-being, demographic groups and industrialized countries.” As a result, a gender gap in happiness is emerging, and these same trends are also evident across other industrialized countries for which data exist. In the European Union, the authors’ findings do

Theory & Policy not indicate that women’s absolute happiness levels have fallen; however, men’s happiness levels have increased more than women’s, “leading to a decline in European women’s happiness relative to that of European men.” Of the 12 European countries examined by Stevenson and Wolfers, all but one exhibited the same magnitude of relative decline in women’s happiness levels.

Sironi and Mencarini (2010) examine “the extent to which gender inequality at the country level can explain variation in happiness at the individual level” for females in 26 European countries using data from the European Social Survey, which mainly focuses on gender inequality in the division of housework. Focusing on cohabiting women between ages 20 to 50, the authors introduce a two-level model in their analysis through which they decompose the variation in happiness into ‘between country’ and ‘within country’ components. Their first general finding is that women doing a lower portion of housework are happier than women doing a larger portion of housework.

They also find that there is no significant

difference in levels of happiness between housewives who complete a larger portion of housework and women who work up to 30 hours a week, but the authors find a slightly more negative effect for women who work more than 30 hours a week.

This seems to indicate a “second shift effect”: women who work one shift in the labor force and what amounts to a second one at home seem to be more sensitive to inequality in housework division.

Additional research confirms that unequal division of housework is responsible for much marital strife. While doing repetitive and routine housework is associated with an increased chance of depression for women, relationships in which men took a larger share of the housework are associated with greater feelings of relationship equity and thus fairness for both women and men. In one sense, a relatively greater level of gender equality makes both parties better off even though in all the countries examined in the authors’ paper, women on average do the majority of housework.

The most dramatic change in women’s participation in the labor force came in

Table 1. Gap in Housework Hour differences between men and women in housework for 24 European countries Mean

SD

Redefined Mean

Redefined Mean %

Ireland

25.2

28.1

1.00

100%

Greece

24.4

17.6

0.96

96%

Portugal

21.5

20.3

0.80

80%

Spain

20.4

21.8

0.74

74%

Luxembourg

18.2

19.7

0.63

63%

Switzerland

16.9

17.3

0.56

56%

Slovenia

16.8

25.4

0.55

55%

16

18.2

0.51

51%

Hungary

15.9

18.9

0.50

50%

Iceland

15.8

25.1

0.50

50%

Belgium

15.5

19.9

0.48

48%

Germany

14.7

16.2

0.44

44%

Austria

14.4

15.6

0.42

42%

Netherlands

13.7

15.2

0.39

39%

Slovakia

12.5

19.7

0.32

32%

United Kingdom

12.5

19

0.32

32%

Czech Republic

12.2

18.6

0.30

30%

France

11.8

13.8

0.28

28%

Ukaine

11.2

20.2

0.25

25%

Estonia

10.4

14.1

0.21

21%

Finland

8.3

12.7

0.10

10%

Denmark

7.4

11.8

0.05

5%

Sweden

6.5

12.9

0.00

0%

Total Average

14.3

18.1

0.47

47%

Poland

Spring 2011

27 the latter half of the 20th century. J. D. Vlasblom and J. J. Schippers (2005) study the increases in female labor force participation rates in several European countries. Examining the changes in six EU countries over the last decade, the authors conclude that the increases in female labor participation rates are “primarily explained by the changing effects of female labor supply.” According to the authors, these effects stem from progressive generational shifts in behavior; it seems that “norms and values in society changed in such a way that the working wife has become more and more the standard in all European countries.”

Although the female labor force participation rate has significantly increased... men’s involvement in housework has not increased in proportion.

Examining trends in time use, economist Alan Krueger in 2007 finds that for the general population, “changes in time allocation over the past 40 years have not led to a decrease in the amount of time people spend in activities associated with unpleasant feelings.” There is, however, a slight difference between genders. Krueger shows that for men, the proportion of time spent on unpleasant activities has fallen. For women, on the other hand, Krueger found no such trend. In other words, the changes in time allocation seen over the past decades have benefited men but not women.

Since 1965, women have increased the time spent on work-like activities by five percentage points “because of higher labor force participation.” Time spent on mundane chores fell by 7 percentage points, whereas the time spent on engaging activities decreased about 3 percentage points. Instead, the proportion of time spent on neutral downtime (e.g., watching television) increased by approximately three percentage points. According to Krueger, these changes “do not suggest significant improvements in affective experience for women over this entire 40 year time span,” while men have seen such an increase.

Bogdan Voicu, Malina Voicu and Katarina Strapcova’s (2006) examination of the effect of a country’s “level of tech-

28

Theory & Policy

Equation 1

LifeSat = α + β1(Female) + β2(Female*Hr_Gap) + β3(Controls) + ε nological development and of religious orientation” suggests that although the female labor force participation rate has significantly increased in recent decades, “men’s involvement in housework has not increased in proportion,” according to the authors. The considerable differences among the various countries are partly explained by religion and technological sophistication; most significantly, Catholicism appears related to a “less equalitarian [sic] sharing” of household chores, and people living in Catholic and Orthodox countries are “more inclined to support an inequalitarian [sic] pattern.”

Another example where greater options and more freedom for women benefited men more than women can be found in the research of George Akerlof, Lawrence Katz and Janet Yellen (1996). The authors show how wide-spread usage of contraception has caused a decline in “shotgun marriages” (i.e., marriage brought about by pregnancy), which has caused women’s bargaining power vis-à-vis men to decline. Although women now have more freedom, the availability of contraception

and abortion create pressure on women who would otherwise abstain from sex until marriage (or until the guarantee of marriage) to enter non-committal relationships. Ironically, contraception’s elimination of shotgun marriages has caused women to lose some of their bargaining power relative to men.

Data and Descriptive Findings Two sets of data were used in this analysis. One set is the Eurobarometer data that was used to examine people’s well-being as well as other demographic and sociological patterns in European countries.

The other data source is a paper by Malina Voicu et al. (2008), whose estimates were used to rank relative gender equality among European countries.

Eurobarometer surveyed the citizens of 24 European countries on various demographic, sociological and political questions. The sample utilized in this study is the Mannheim Eurobarometer Trend File 1970-2002, where the country samples are weighted to represent all of Europe. The life satisfaction measure asks respond-

ents to rate their life satisfaction on a scale from “not at all satisfied” to “very satisfied,” and the happiness measure does the same for life happiness. Because of greater data availability, increased gradation of response choice, and more precise wording, I chose to focus on the life satisfaction measure.

Data on gender inequality in housework for each country was taken from Voicu et al. (2008). Their analysis is based on 24 European countries, as well as the European Social Survey (2004-2005) data.

The sample includes 10,643 cases after excluding for unmarried, homosexual and at least one non-working or retired partner cases. Housework is defined as “cooking, washing, cleaning, caring for clothes, shopping, maintenance of property, but not including childcare.” The respondent is asked the amount of hours spent on each specific chore in the household and the fraction spent by each partner on a scale from zero to one with quarter increments.

The results show that, throughout these 24 countries, women spend more time on housework than their partners. The average gender difference in weekly hours by country is listed in Table 1 along with the mean and standard deviation. Rescaling the difference variable from zero to one

Table 2. Ordered Logit Model Relationship between hours gap and female life satisfaction All Females and Males

Female Female x Hour Gap Age Age

2

Education

Cohabiting &

Only

Working

Cohabiting

Single

1994-2002

1973-2002

1973-1978

1994-1996

2000-2002

1994-2002

1994-2002

1994-2002

0.180***

0.174***

0.189***

0.199***

0.0268***

0.130***

0.133***

0.180***

[0.0196]

[0.0114]

[0.0323]

[0.0548]

[0.0271]

[0.0263]

[0.0248]

[0.0196]

-0.175***

-0.0836***

-0.0405

-0.0862

-0.170***

-0.0179

-0.0811*

-0.177***

[0.0340]

[0.0191]

[0.0591]

[0.0905]

[0.0474]

[0.0451]

[0.0428]

[0.0340]

-0.0646***

-0.0720***

0.0227

0.0372

-0.0919***

0.103***

0.0680*

-0.0625***

[0.0214]

[0.0116]

[0.0336]

[0.0570]

[0.0304]

[0.0370]

[0.0349]

[0.0214]

-1.97E-05

0.000687***

-0.00188*

-.00304

0.00068

-0.00536***

-0.00536***

-0.000105

[0.000692]

[0.000383]

[0.00112]

[0.00187]

[0.000982]

[0.00118]

[0.00118]

[0.000692]

0.0516***

0.0531***

0.0620***

0.0546***

0.0539***

0.0490***

0.0490***

0.0508***

[0.00219]

[0.00123]

[0.00405]

[0.00566]

[0.00308]

[0.00287]

[0.00287]

[0.00219]

23,680

80,263

92,718

102,652

157,646

White Collar Manual Worker Observations

157,646

0.136***

0.0438

[0.0261]

[0.0472]

-0.0875***

-0.187***

[.0258]

[0.0451]

496,187

57,889

*** p<0.01, ** p<0.05, * p<0.1

Standard Errors in Brackets

Columbia Economics Review

Theory & Policy

29

Table 3. Traditional Countries OLS Regression and Propensity Score Matching PSM OLS Regression

Top Quintile

2nd Quintile

3rd Quintile

4th Quintile

Last Quintile

-0.455***

-0.428***

-0.500***

-0.432***

-0.476***

-0.594***

[0.0238]

[0.0604]

[0.0532]

[0.0534]

[0.0621]

[0.0930]

-0.0839***

-0.107***

-0.0661***

-0.0998***

-0.169***

0.0981

[0.0171]

[0.0246]

[0.0311]

[0.0383]

[0.0482]

[0.0842]

Traditional Female Traditional x Female

-0.0632***

-0.0958

0.0389

-0.0861

-0.146

-0.098

[0.0246]

[0.0636]

[0.0550]

[0.0554]

[0.0645]

[0.0958]

48,025.00

8,406.00

9,647.00

10,241.00

10,121.00

9,610.00

0.148

0.138

0.111

0.137

0.198

0.228

Observations R-squared *** p < 0.01, ** p < 0.05, * p < 0.1

Robust standard errors in [brackets]

allowed me to create a proxy measure for gender equality levels. The country with the smallest hours gap, Sweden, received a measure of 0, and the country with the highest gap, Ireland, received a 1. (See Table 1) In addition, I converted these values to percentages in Table 1 so as to more easily compare gender equality levels.

For a preliminary view of the data and using Table 1 data from Voicu’s research (2008), I categorized the three most and least gender equal countries. The most gender equal European countries were Sweden, Denmark and Finland, which I will refer to as ‘liberal countries,’ and the most gender unequal ones were Ireland, Greece and Portugal, which I will refer to as ‘traditional countries.’ The data shows that 94.87 percent of females and 94.85 percent of males in liberal countries were either in the ‘very satisfied’ or ‘fairly satisfied’ category, whereas 74.54 percent of females, and 74.19 percent of males in ‘traditional countries’ were either in the ‘very satisfied’ or ‘fairly satisfied’ category. Clearly, there is a significant gap between the life satisfaction of people living in traditional and liberal countries regardless of gender. Therefore, it is crucial to compare women’s responses to those of men’s in their own country in order to avoid bias due to country demographics and culture that vary between liberal and traditional countries but may affect life satisfaction. The responses of men in each country can thus be used as the control group.

In addition, I also graphed the difference in the percentage of very satisfied females and the percentage of very satisfied males. It shows that females are still more satisfied than males in spite of the overall decline in female life satisfaction.

In my analysis below, I included everyone with any satisfaction category in the sample from 4, meaning “very satisfied,” to 1, meaning “not at all satisfied.“ Methodology I took two approaches while analyzing the data. In the first, I performed a crosssectional analysis, comparing male and female satisfaction levels across European countries with different hours gap variables to examine the relationship between the hours gap and female life satisfaction as well as the temporal trend of this relationship. In the second, I examined the treatment effect of being from a relatively gender unequal country (traditional) on male and female life satisfaction.

Ordered Logit Regression Modeling In my first approach, I used the ordered logit model, which assigns non-linear logistic probabilities to ordered categories, in order to examine the relationship between the hours gap and the female life satisfaction across European countries. I coded the results of Voicu et al’s research (2008), i.e., the mean difference in hours spent on housework (“hours gap”) between females and males across European nations. (See Table 1) In order to have a

Equation 2

LifeSat = α + β1 (Traditional ) + β 2 ( Female) + β 3 ( Female * Traditional ) + β 4 (Controls ) + ε

Spring 2011

clearer understanding of the results, I recentered and normalized the hours gap variable from 0 to 1 in each country, 0 being the most gender equal country in my sample, namely Sweden, and 1 being the most gender unequal, namely Ireland.

The ordered logit model that I used is represented below.

In this model, I controlled for demographic variations through nation dummies, age, age-squared, age-cubed, age to the fourth power, education (in years), marital status through marriage dummies, occupation status through occupation dummies (in 27 categories) and year through year dummies. The female variable represents the partial effect of being female on life satisfaction. I did not include the hours gap variable by itself as each nation dummy implicitly absorbs the effect.

The key variable that I am concerned with is the interaction variable of females with hours gap and it represents the expected partial effect of the hours gap on female life satisfaction relative to men.

Further on, in order to see how the relationship between the hours gap and female life satisfaction changed over time, I ran the ordered logit model for the years 1973-1978, 1994-1996 and 2000-2002 on all males and females in the sample.

Ordered Logit Model Robustness Checks In addition to regressing all females and males from 1994 to 2002, I applied some robustness checks to my sample. I restricted the sample to only cohabiting and working males and females to see the combined effect of the “second shift” in cohabitation and marriage on female life satisfaction, expecting to see this phenomenon increase the negative effect of

30 the hours gap on female life satisfaction.

As another robustness check, I performed a separate regression to include only cohabiting people or only single people to examine how similar or different the relationship between their life satisfaction measures and hours gap appears. Prior to analysis, I hypothesized that cohabiting women to be affected more negatively by the hours gap in terms of their life satisfaction than single women (See Table 2).

Propensity Score Matching Model The propensity score-matching (PSM) method is a procedure to isolate the treatment effect from inherited differences by comparing dependent variable observations to those of subjects with similar independent variables. In my second approach, I used this method in order to replicate and extend the results of Sironi and Mencarini (2010), which showed that doing more than 75 percent of the household work explains the variance of women’s subjective wellbeing by 8.9 percent, and that “accounting for gender gap explains 41.2 percent of variance across countries.”

Yet Mencarini and Sironi’s results included only women and limited control variables. In order to see how the results change when men were added to the sample, I ran a similar regression but assigned the national mean hours gap to each individual rather than a binary variable of zero or one to represent a strict cutoff of 75 percent of housework, as performed in Mencarini and Sironi. This helped me to evaluate the effect of gender inequality across countries for all levels of the hours gap variable, not just for women who do more than 75 percent of the housework.

Using Table 1 data, I categorized the three most and three least gender equal countries in order to gauge the relationship between belonging to a gender unequal country and the life satisfaction level using data from 1994 to 2002. As mentioned earlier, according to the data, the most gender equal European countries were Sweden, Denmark and Finland (“liberal countries”) and the most gender unequal ones were Ireland, Greece and Portugal (“traditional countries”). Comparison of these extreme countries demonstrates the real treatment effect of societal norms on the sample’s responses. My analysis designates the traditional countries as the treatment group and the liberal countries as the comparison group. The regression that I used is on the previous page in Equation 2.

I controlled for the same controls listed for Equation 1. The “Traditional” variable represented the effect of being from

Theory & Policy a traditional country relative to a “liberal” country on life satisfaction for males. The Female variable represented the effect of being a female relative to being a male in liberal countries on life satisfaction. The interaction variable, ‘Female*Traditional’, represented the extra effect of being both female and from a traditional country.

(See Table 3) In order to make men and women in liberal countries more comparable to those from traditional countries (i.e., to balance the characteristics of people in the countries with the highest and the lowest hours gap), I first estimated the normal probability (probit model) of the Traditional dummy variable (set to ”1” if the individual lives in a traditional country) on my controls listed above for predicted values. Afterwards, I estimated the above model separately, using OLS regression with life satisfaction as the dependent variable for people in five different quintiles of predicted value. By separating people into quintiles, I obtained a better balance of controls between traditional and liberal countries within each quintile.

In the highest probability quintile, I estimated the difference in life satisfaction for people whose background characteristics most resembled those in traditional countries, while in the lowest quintile, I estimated the difference in life satisfaction for people whose characteristics resembled those in traditional countries least. (See Table 3)

Being female relative to male increased the probability of being very satisfied by 18.9 percent, from 1973 to 1978, while increasing the same probability by only 16.8 percent from 2000 to 2002.

Results The most general hypothesis that I confirm through my first approach is that women who perform a larger portion of housework are less satisfied with their lives. Table 2 reports the estimations of ordered logit models of life satisfaction (Equation 1) that test whether women are less satisfied relative to men in countries with a larger housework hours gap. The coefficients reported in the first column Columbia Economics Review

were estimated including all women and men in the years between 1994 and 2002.

The coefficient on the Female*Hours Gap interaction variable given in this column is 0.175 with a 99 percent confidence interval, implying that the maximum hours gap (25.2, or 1 in the re-defined scale) reduces the probability of being very satisfied by 17.5 percent for women. For instance, in liberal countries, 52.55 percent of the women are very satisfied, yet the maximum hours gap reduces the probability of a given women being very satisfied to 43.35 percent. The coefficients reported in the second column imply that the maximum hours gap reduces the probability of being very satisfied by 8.4 percent. However, since this result is an average for a time span of 29 years, it likely underestimates the situation in the 2000s, due to the increasing negative trend effect of the hours gap on female life satisfaction.

The second hypothesis that I confirm is that the relationship between the hours gap and the level of life satisfaction for females has become more negative throughout the years. The coefficients on the third, fourth and fifth columns analyze the trend in the relationship between hours gap and female life satisfaction. The maximum hours gap reduces the probability of being very satisfied by 4.1 percent from 1973 to 1978 for females, yet by the year 1994, the negative effect reached a reduction in the probability of being very satisfied by 8.6 percent, and topped by 17 percent in 2000. Such a trend is clear and compelling.

Through these different time periods, I also confirm the results of Stevenson and Wolfers: being female relative to male increased the probability of being very satisfied by 18.9 percent from 1973 to 1978, while increasing the same probability by only 16.8 percent from 2000 to 2002. This is only possible if women are, at least in the long term, less satisfied relative to men than before.

The coefficients reported in the sixth column were estimated including only cohabiting and working men and women and do not include the negative effect of the second shift. The probability of being very satisfied is less negative for cohabiting women at -1.8 percent, (though this number is not significant even at the 10 percent level), as compared to -17.5 percent for all women. Though causal psychological explanation of this result would run into the realms of other discipline, this effect is consistent with much literature in which part-time and full-time working women report greater happiness

Theory & Policy in general relative to the housewives.

In addition to exogenous differences in worldview or cultural influences, the greater happiness of working women may stem from greater economic power and thus bargaining leverage in determining their share of housework to their own preferences as compared with nonworking housewives.

The coefficients reported in the seventh column were estimated by including only cohabiting men and women, and the coefficients in the eighth column were estimated by including only single men and women, using the years from 1994 to 2002 for both columns. The probability of being very satisfied is less negative for cohabiting women at -8.1 percent as compared to single women with a coefficient of -17.7 percent. It would appear that the impact of the hours gap on relative life satisfaction of women does not generally depend on marital status, which was unexpected.

One potential explanation is that married women are a self-selecting group of women who expected a larger share of housework prior to marriage and thus effectively chose to accept it, whereas single individuals were not similarly amenable to bearing a large hours gap on housework.

That job quality, education and age are highly correlated to life satisfaction would be reasonable. The effects of all are positive and show that on average, an individual can be up to 5 percent more satisfied with more education, up to 13.6 percent more satisfied if she/he is working at a white collar job, and as much as 8.7 percent less satisfied if she/he is a manual worker. On the other hand, age has a positive effect for cohabiting and married people, but has a negative effect on singles while age squared, age cubed, and age to the fourth degree power have almost no significant effect for all these aforementioned groups.

Table 3 is split into a general OLSregression model and a PSM model by quintile, and reveals interesting results: under OLS, the coefficient on the traditional variable shows that being a male from a traditional country decreases life satisfaction by 46 percent relative to being a male from a liberal country, which indicates the importance of controlling for cultural, sociological and demographic differences between countries through including men in the sample. The coefficient on the Traditional*Female interaction variable shows that the effect of being a female from a traditional country relative to a male from a traditional country decreases life satisfaction by 6.3 percent.

This finding is close to Sironi and Mencarini’s finding of 8.9 percent.

The PSM section provides a gradated model. The coefficient of the interaction variable Traditional*Female in the highest probability quintile represents the estimation of the difference in the life satisfaction for people whose data most closely matches that of individuals of more traditional countries. The coefficient implies that being a female from a traditional country relative to a male from a traditional country reduces life satisfaction by 9.5 percent. The coefficient on Traditional*Female is 9.8 percent for the lowest probability quintile, or individuals whose data matches more liberal coun-

Although general policies have positively influenced gender equality levels in Europe, in-house gender inequality and female life satisfaction have not progressed nearly as much. tries. These figures are very close, yet are not significant at the 10 percent level; in fact, the only significant figure for this interaction variable is in the 4th quintile, which has a value of 14.6 percent. We can conclude then that gender inequality, as well as other variables, reduces women’s life satisfaction in traditional countries by approximately 14.6 percent relative to men in traditional countries. This finding is a more accurate measure than the findings of Sironi and Mencarini because it compares men and women, and propensity score matching balance the characteristics of people living in countries with low and high hour gaps.

The results from the two approaches are consistent even though they measure slightly different things. The first approach finds that the maximum hours gap in the sample reduces the probability of being very satisfied by 17.5 percent, so the countries with larger hours gap have lower female life satisfaction relative to men.

The second approach finds that women in traditional countries, where gender inequality is more severe, are approximately 14.6 percent less satisfied relative to men in these countries.

In the second approach, however, the relationship between societal levels of gender inequality and female life satisfacSpring 2011

31 tion is explored instead of the relationship between gender inequality in housework and female life satisfaction as in the first approach. Even though the concepts are slightly different, both approaches show that the relationship between gender inequality and female life satisfaction is negative.

Conclusion & Implications The key aim of this paper has been to investigate the relationship between gender inequality in the division of housework and female life satisfaction, as well as the trend of this relationship throughout time, replicating and extending previous work on the subject. This paper finds that a large hours gap, used as a proxy for gender equality in household division of labor, reduces the probability of being very satisfied by 17.5 percent for females, and that there has been an increasing negative trend on this probability, starting from -4.1 percent in 1970s to its current level at -17.5 percent in 2000s. The analysis also shows that being a female from a traditional country, where gender inequality is more severe, relative to being a male from a traditional country decreases the female satisfaction level by 14.6 percent on average. The reasons for such a decrease are not investigated directly in the analysis; however, gender inequality is likely an important factor.

These findings have important implications for policymakers and cohabiting couples alike. First and foremost, the findings show that although general policies have positively influenced gender equality levels in Europe, in-house gender inequality and—as I have shown—female life satisfaction have not progressed nearly as much as expected or desired.

For policy makers, it is clear that existing measures are not enough to create gender equality and increase the welfare of all their citizens, and attention should be devoted to additional options. Though it is true that home and family situations tend to be more difficult settings within which to gather data than indicators such as workforce participation or education levels, and though the family is seen by many as a cell or unit that lies beyond the control of the state, understanding these dynamics should be prioritized. It can be troublesome to attempt to implement rules that remedy such matters as gender equality, yet these results provide even greater impetus; if no action is taken in the near future, the female and male life satisfaction gap will grow larger, leaving women in an ever more disadvantageous position.

32

Online at ColumbiaEconReview.com Read, share, and discuss | Keep up to date with web-exclusive content

UNIVERSITY HOUSEWARES

&

UNIVERSITY HARDWARE

2901 - 2905 Broadway @ 113th Street (212) 882-2798 (212) 662-2150

www.universityhousewares.com

“for all your hardware and houseware needs”

Looking for a positive aggregate demand shock?

Promote your product or service in our next issue!

For information and rates, please contact: (202) 309-5963 cer@columbia.edu

Columbia Economics Review

COLUMBIA ECONOMICS REVIEW

Call for Submissions The Columbia Economics Review is interested in your article proposals, senior theses, seminar papers, editorials, art and photography.

GUIDELINES CER is currently accepting pitches for its Fall 2011 issue. All students are encouraged to submit his or her article proposals, academic scholarship, senior seminar papers, editorials, art and photography broadly relating to the field of economics. You may submit multiple pitches. CER accepts pitches under 200 words, as well as complete articles.

Your pitch or complete article should include the following information: 1. Name, school, year, and contact information (email and phone number).

2. If you are submitting a pitch, please state your argument clearly and expand upon it in one brief paragraph. List sources and professors/industry professionals you intend to contact to support your argument. Note that a full source list is not required.

3. If you are submitting a completed paper, please make sure the file is accessible through MS Word.

Pitches will be accepted throughout the summer and are due by late September. contact us at cer@columbia.edu for the exact date, as well as for any questions regarding the submissions process. Please send all pitches to cer@columbia.edu with the subject â&#x20AC;&#x153;CER Pitch- Last Name, First Name.â&#x20AC;? We look forward to reading your submissions!

Columbia Economics Review 1022 IAB; 420 West 118th St; New York NY 10027 | (678) 472-0766 | ColumbiaEconReview.com | cer@columbia.edu

EXPLORE

THE FUTURE OF EDUCATION.

FASTER FORWARD. CAREERS http://edlab.tc.columbia.edu/careers