Vol. I, No. 2 Spring 2011Columbia Economics Review

New York City Strikes OutThe Financing of Yankee Stadium

Stimulating Notions of the World EconomyInterview with the OECD

Paycheck TheoryTeleology and Commensurate Labor in Economic Theory

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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, opin-ions, and research papers. CER also holds the Columbia Economics Forum, a speaker series estab-lished to promote dialogue and encourage deeper insights on economic issues.

Spring 2011

21 | Sex Ratios and Savings Rates | The Puzzle of Postwar Japan

25 | Labor Pains | Gender Inequality and Female Life Satisfaction

Theory & Policy

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

Business & Finance

12 | Stimulating Notions of the World Economy | Interview with the OECD

14 | From Profitability to Sustainability | Applying Finance to Climate Change Models

Interviews & Events

2 | The Silk Road to Africa | Chinese Investment in Sub-Saharan Africa

6 | Paycheck Theory | Teleology and Commensurate Labor in Economic Theory

Features

C O L U M B I A E C O N O M I C S R E V I E WTA B L E O F C O N T E N T S

The Silk Road to AfricaChinese Investment in Sub-Saharan Africa

Varun Parmar

“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 bench-marks or preconditions.” Sahr Johnny, Sierra Leone Ambassador to China, 2005.

“China’s move into Africa is displacing tradi-tional 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 alto-gether different geographic region: since 2001, six of the world’s ten fastest grow-ing economies have been located in Sub-Saharan Africa. One explanation for the

sudden and rapid growth of these Afri-can 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 con-tinent can be overwhelming—for example, trade between China and Africa has sur-passed $100 billion per year—the experi-ences 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 promi-nent presence, a trend that represents the significant economic changes taking place

on the continent.These changes have come about as China

benefits greatly from its business engage-ments 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 simul-taneously 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 Af-rica, growing from less than $5 billion in 1995 to $50 billion in 2005. Similarly, Afri-can 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

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is popular with Africans not because Af-ricans “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 strength-ened 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, aver-age 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 sup-plying 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 con-tinent began to experience faster growth.

This is not to say that providing aid to Af-rica is a futile endeavor. Leading develop-ment 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 in-clude, for example, child mortality, which has declined from 22.9 percent in 1970 to

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

Sachs believes that while social condi-tions 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 “pov-erty trap,” he argues, is one of two conver-gence 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 de-preciation 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 sta-ble and more optimal convergence point which translates to a greater growth rate

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 organi-zations 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 appor-tioned as follows: $1.5 billion for emer-gency aid, $300 million for non-emergency food aid, $1.3 billion for debt forgiveness grants and $1.4 billion for technical as-sistance. Much of this aid is focused to-ward 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 Afri-can economic and business environment, many Western technical assistance pro-viders 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 gov-ernments 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 govern-ments and communities include key infra-structure 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 equilib-rium point.

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

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4 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 high-ly contentious historical issue is still the source of much political tension between the West and Africa because African coun-tries receiving debt forgiveness often find that their cycle of perpetual indebtedness to the West undermines their political sov-ereignty. Further exacerbating the political tension in aid is the widespread corruption in many African governments. Sudan’s President Omar al-Bashir, who was ac-cused 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.

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-i-Martin 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-i-Martin believes that aid is not allocated efficiently or productively in developing African countries. His commonly cited ex-ample of this is an incident that occurred during the 2005 World Economic Forum at Davos, where Sharon Stone rallied the au-dience to donate $1 million to buy mosqui-to bednets for Tanzanians at risk of malar-ia. 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 sec-tor.” 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 pri-vate investment as a better alternative for economic growth.

In response to such accusations against aid, development economist William East-erly retorts that for aid to be most effective, it must come under an ideal policy envi-ronment. 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 ex-ist, then aid will likely be ineffective. Since most underdeveloped countries do not operate in optimal policy environments, many of the foreign direct investment pro-jects in the continent are Greenfield invest-ments—investment projects in areas where no previous structures or constraints exist. Many of these Greenfield investments are undertaken in order to exploit the abun-dant natural resources of Africa. For exam-ple, Chinese corporations can and do enter African countries and establish facilities to extract resources without any participa-tion 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 op-portunity 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 ben-efit both African companies and foreign investors. Dambisa Moyo, an oft-quoted critic of aid, has advised African govern-ments to attract such investment by “creat-ing attractive tax structures and reducing the red tape and complex regulations for businesses.”

This has, in fact, already begun to hap-pen: 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 “state-led approach to foreign investment,” a practice where its government takes charge

of creating new economic opportunities for domestic investors and entrepreneurs, has led to a $700 million project for a spe-cial economic zone on the African island of Mauritius. Creating this economic zone involved not only fostering diplomatic re-lations but also, more importantly, busi-ness 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. Mau-ritius’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 entrepre-neurs with the necessary information, ex-pertise and capital needed to create a prof-itable business.

By helping countries in Africa overcome the poverty trap through direct invest-ments in crucial infrastructure projects, thus promoting the change to market-friendly business policies, the Chinese provide us with an excellent example of how investment in infrastructure and in-dustry can help overcome problems with aid. By building infrastructure to develop industries, mostly based around the ex-ploitation of natural resources, China has helped spur economic growth in much of the region. However, China’s ventures into African nations have largely depend-ed on African nations’ capacity to provide China with the raw materials and natu-ral 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.

Chinese corporations can and do enter African countries and establish

facilities to extract resources without any

participation from African workers.

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Paycheck TheoryTeleology and Commensurate Labor in Economic Theory

Mallika Narain

The Greek telos is that which is entire, per-fect, complete; something that is teleogical is explained by its ends rather than by its means. This abstract concept was an im-portant component of the works of Aris-totle. 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 con-flict between capital and labor over the material needs would push society closer to its end goal.

Material needs imply problems of scar-city and allocation, and consequently, the question of telos becomes an economic problem. Contemporary to Marx, the clas-sical economists Malthus and Mill also ad-dressed 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 pos-ited. One of the most important assump-tions for Malthus and Mill was the com-mensurability of labor – that all forms of labor can be measured by the same stand-ard. Moreover, Aristotle’s inability to ad-dress 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 TeleologyAristotle’s philosophical method was de-fined 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, af-ter 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 noth-ing in vain, the inference must be that she has made all animals for the sake of man.

This passage reveals Aristotle’s perspec-tive on the natural world: his understand-ing 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 pur-suit 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.

This, in turn, is important for the un-derstanding 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 intrin-sic 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 evalu-ated, 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 deline-ation 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 na-ture and telos of the object. In fact, Aris-totle scholars have recognized the need to expand his notion of exchange value to render it more comprehensive. In particu-lar, it is widely recognized that Aristotle’s explanation of exchange value is poorly applicable in the case of labor – the com-

modification of human beings and their work. Scott Meikle of the University of Glasgow explains: “According to Aristo-tle’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 aggre-gated, 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 sug-gests both money and human needs as potential sources for this necessity to cre-ate 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 princi-ple. 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 Aristo-tle’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 teleologi-cal views of labor led him to essentially question whether labor can be commen-surable, which is a more fundamental question than those raised by the classi-cal 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 clas-sical economists about the steady state. Second, it suggests that a telos can be cre-ated in an inquiry not pertaining to ethics, which had been Aristotle’s first purpose. Mill and Malthus recognized the possi-bilities 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 con-scious effort.

Dialectical Materialism in MarxLike Aristotle’s conception of the telos

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

well.

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of an object, Marx’s application of telos guides his theory in its entirety, includ-ing its economic, sociological, and politi-cal 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 en-gendered 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 emancipa-tion 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 histori-cized goal of total freedom for society, while similar, is nevertheless distinct from Aristotle’s all-encompassing teleological

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 simi-lar to Hegel’s “spirit,” which mysteriously guides the conflict and synthesis of oppos-ing forces throughout history, and Aristo-tle’s phusis, which itself helps to achieve the goal or natural outcome of an object. As M.C. Howard of the University of Wa-terloo explains:

Stated at the most abstract level, the purpose of political economy for Marx was to aid the realization of hu-man freedom. Human freedom was considered synonymous with a state of affairs where men live in conform-ity with their nature … Essentially, the distinctive character of man’s hu-manity, 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.

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

It is by concentrating on this distinct and singular telos that Marx can create a pro-gressive, stage-based conception of histo-ry. As Jurg Niehans of Johns Hopkins Uni-versity explained, Marx’s “[mechanism] is determined by the interplay of three levels of circumstances. The basis is provided by what Marx calls the ‘productive forc-es’ … 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 su-perstructure.’”

Although it may appear that Marx is propounding a never-ending progres-sion 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-

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nomic development reach fruition. In-stead of the asymptotic endpoints that lassical economists foresaw for capital-ist 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 over-throw the current economic system and replace it with the aforementioned com-munist state, where ultimate human free-dom is achieved for each individual. This human freedom is achieved precisely be-cause of the end of class distinctions and monopoly over capital by the bourgeoi-sie. Howard explains,

Capitalism does not stagnate [for Marx] … It transforms itself, through social conflict, into a classless soci-ety. 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 ex-pansion of production but to the ‘so-cial conditions of existence’ character-istic of capitalism itself.

Capitalism is consequently an undesir-able but necessary stage in the progression of history.

Mechanistic Models and Teleological OutcomesIn Adam Smith’s The Wealth of Nations, the prospect of unlimited growth based on a capitalist system appears to shun the con-cept of a telos, although this is a conten-tious topic in itself. The standing defini-tion here has specified a telos as having a tangible endpoint, in addition to a goal-oriented path. Smith does not specify an inevitable endpoint for the economy in the form of a specific final stage of evolu-tion. 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 capi-talist 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 hu-man 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 proclama-tions about his ‘all-wise Being,’ an omnis-cient, 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 continu-ing lack of a set endpoint to the uncon-strained maximization problem posited here. As James E. Alvey explains:

Is there any foundation for this no-tion of ‘an end’ in Smith? A funda-mental piece of evidence … is Smith’s statement that the ‘all-wise Being’ directs nature so as to produce ‘the greatest possible quantity of happi-ness’. Thus far, I am not convinced by this evidence. The context of the quo-tation 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 orig-inal definition of telos established. None-theless 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 carry-ing out a constrained maximization prob-lem, 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 station-ary state (where growth stagnates) is ac-tually higher than that in the progressive state, then this can be perceived as the

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 legitimiza-tion 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 classi-cal economists, Smith was far more opti-mistic about the progressive state than he was about the stationary state.

Malthus, too, was unlikely to view the stationary state as a pleasurable stage of inhabitance. Although there is continued controversy amongst critics about wheth-er 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 Mal-thusian theory, the result of the tendency of population (and, therefore, labor) to increase geometrically while food supply increases arithmetically. In periods of rela-tive 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 sup-ply or wealth—to a stagnant and seem-ingly inescapable state, given Malthus’s views on human biology and resource cultivation.

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

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 Malthus explains, the steady state is the

theoretical end point of society, where growth and

progress are zero.

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Features 9

increased industry” induces capitalists to employ more labor until income is once again in its original proportion with labor (population). Implicit in Malthus’s analy-sis 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 in-terpreted 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 ulti-mately contingent on the commensurabil-ity of labor.

Mill is arguably one of the first economic theorists to view the stationary or steady state as a possible telos for society; in Prin-ciples 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, Mal-thus and other classical economists as a miserable state of being. As Malthus ex-plains, 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 theo-ries 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 theo-ry 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 de-sires to be richer, nor has any reason to

fear being thrust back by the efforts of oth-ers 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 con-sideration 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 consid-ering intellectual and moral culture (art, etc.) as providing a channel for human en-ergies that does not correspond with eco-nomic 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 continu-ing levels of comfort. The population has the ability, then, to both anticipate and di-rect 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 propor-tion of labor (population) to resource or income use.

Understanding Attitudes Towards LaborViewing classical economics through the lens of philosophy generates important questions about the legitimacy of founda-tions 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 dis-cussed above, one can construct some vi-sion of each theorist’s attitude toward us-ing humans as resources and realize that these may be less obvious than they ini-tially seem.

As previously established, Aristotle had trouble reconciling his ideas about use value and exchange value with the con-cept of labor and this arose from his no-tion of the telos of the action; this, argu-ably, 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 theo-ry, this is impossible in principle. A la-bour theory of value is, for that reason … remote from Aristotle’s thought …

When Aristotle himself seems to have most need of the concept of labour, when he is looking for something com-mon 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 Ar-istotle 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 view-ing 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 attempt-ed to adapt labor into his general theory of substance and action, but it was clear that he simultaneously recognized its unique-ness 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 teleolog-ical set-up makes him confront and prob-lematize labor, which as an action bridges the space between natural resources and finalized product.

In the works of Marx, attitudes toward humans as resources fundamentally influ-enced the Marxist notion of human eman-cipation as the telos of society. In the view of this emancipation as the telos, segment-ing and de-equalizing labor (into bour-geoisie and proletariat) were strictly dehu-manizing 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

In the view of emancipa-tion as telos, segmenting and de-equalizing labor... were strictly dehumaniz-

ing processes.

Attitudes towards humans as resources

fundamentally influenced the Marxist notion of human emancipation as

the telos of society.

Columbia Economics Review

10 Features

same assumptive quality for the Classical Economists. For Malthus and Mill, an ap-plication of the Aristotelian conception of the telos reveals ex-post some of the incon-sistencies of their assumptions. It antici-pates the need for further development of the idea of humans as labor in economics that has yielded many advances in the dis-cipline and continues to be a fundamental question.

For Malthus and Mill, the labor theory of value definitely applied. The commensu-rability of labor was crucial to the mecha-nisms of supply and demand and the de-termination of the wage rate. In Smith’s work, the idea of the division of labor and its efficiency is brought up, with the ad-ditional attempt to categorize heterogene-ous 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 aver-age 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 prob-lems with Marx’s attempts to make heter-ogeneous labor commensurable through the labor theory of value. As Howard points out: “There are two hidden as-sumptions 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 dif-ferent 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 contem-porary society, where extreme heteroge-neity in labor skills and divisions often

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, la-bor 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 un-equally differentiated labor.

In the cases of Malthus and Mill, the gen-eralization of labor at some level—making laborers of different capabilities homoge-neous 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 pre-dictable 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 Rev-olution (where relative prices of goods are calculated simultaneously using marginal rates of substitution, based on marginal utility), the assumption of the commensu-rability of labor remained. The history of economics, like that of any science, is of-ten 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 opin-ions. Aristotle and Marx were frustrated with the commensurability of labor, but over time it became widely accepted as a plausible and useful assumption. There-fore, despite classical economists’ general adoption of the assumption of the com-mensurability 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 philosophi-cal examination of economic theory. It re-mains questionable, even today, whether humans, and specifically human labor, truly can be generalized and utilized in economic models.

Malthus and Mill were aware ... that humans possess qualities that

make them less predictable than... other measurable commodities or inputs of

production.

Spring 2011

Features 11

Stimulating Notions of the World EconomyInterview 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 publica-tions and data in the North American market. As part of the OECD’s 50th anniversary outreach she developed and launched the OECD Stu-dent Ambassador Program in the spring of 2010. Kathleen is also an ad-junct faculty member at George Washington University. The Columbia Economics Review sat down with DeBoer to discuss the changing role of the OECD.

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

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 de-cide 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-com-pliance by a signatory, the OECD will exercise its role to bring the country into compliance.

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?

DeBoer: The organization began as the group of developed coun-tries to work together after WWII. Over the past 50 years member-ship 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 emerg-ing 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 ac-cepted in all other participating countries.

The OECD Mutual Acceptance of Data system is a multilater-al agreement which saves governments and chemical producers around €150 million every year by allowing the results of a vari-ety 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.

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

DeBoer: In our recent Economic Policy Reform report, Going for Growth, the OECD had this to say about Portugal: strictly imple-menting consolidation measures and promptly correcting any slip-pages 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: 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?

I N T E R V I E W

Columbia Economics Review

12 Interviews & Events

I N T E R V I E W

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 citi-zens 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 sys-tem.

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 poli-cies, particularly those that would help youths find their first job and the long-term unemployed to re-enter the workforce. Coun-tries 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 in-stituted 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 reason-able cost. A broad policy mix is needed, potentially including emissions trading or cap-and-trade schemes, carbon taxes, stand-ards 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, dy-namic efficiency and an ability to cope effectively with climate and economic uncertainties. Meeting these criteria requires overcom-ing many market imperfections and political obstacles. In this re-gard, carbon taxes or emissions trading schemes turn out to be more effective and comprehensive than other policy tools. How-ever, their cost-effectiveness could be enhanced by complement-ing 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 under-mine cost-effectiveness and, in some cases, environmental integ-rity. As a general rule, therefore, different instruments should address different market imperfections and/or cover different emission sources.

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 emis-sions. 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. Tur-key has been a member since the outset and Israel recently joined.

CER: The OECD is celebrating its 50th anniversary as an organi-zation 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 interna-tional trade, tax, anti-corruption and looking at issues such as wa-ter, global pandemics, climate change, new technologies, etc.

The structure and governance of the OECD allow member coun-tries 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 en-hanced 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 anoth-er 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

Interviews & Events 13

From Profitability to SustainabilityApplying Finance to Climate Change Models

The Columbia Economics Review, in col-laboration 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 study-ing topics of sustainable development.

A few years after graduating from Co-lumbia College, during which he worked for a boutique investment firm, profes-sor Bose found his way back to Colum-bia University to pursue a doctorate in environmental economics. Beginning the discussion on a reminiscent tone, he re-marked 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 defi-nitely 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 equiva-lent of six years of work experience within the typical two analyst years.

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

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 finan-cial 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 re-search on climate change? His experience in valuing options has helped his global warming research substantially. “What happens when you do cost-benefit analy-sis 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

E C O N O M I C S F O R U M

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

like investment banks.

Columbia Economics Review

14 Interviews & Events

E C O N O M I C S F O R U Mpresent value. Now, if you use a sin-gle 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 assump-tion 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 sub-stantial amount of research undertaken in order to create the software to make these bond valuations expeditious and use di-rect 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 Environ-mental Science and Policy. Professor Bose currently teaches working professionals financial and economic methods for sus-tainable 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 stu-dents learn to analyze how these compa-nies should further develop in terms of investment strategies.

Professor Bose is also careful to address the problems associated with using tra-ditional 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 envi-ronmentalists were happy because sus-tainability 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; stu-dents studying sustainable development need to understand the extent to which these traditional disciplines can help them. If Columbia University is to suc-cessfully teach sustainable development as a program of instruction, the depart-ment will need to imbibe the core meth-ods 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 ques-tioned 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 pro-jected rate is likely to occur. The point is therefore to incorporate the range of these probabilities and that is where the prob-lem becomes computationally difficult. After all, economists Nicholas Stern and William Nordhaus (both prolific writers

on climate change models) have had vast-ly 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. Dif-ferent ethical views and expected growth rates all have the ability to affect this dis-count rate. For example, if we think that the economy will currently grow very quickly, future generations can afford to make more sacrifices in their consump-tion levels than we can.

After discussing the ways in which ap-plications 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 pub-licized “climate change advisory teams” Bose answered that, according to him, the steps taken by these companies to in-corporate 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.

The students in attendance at this Fo-rum left with a better understanding of the economics of climate change, the im-portant 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 knowl-edge 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.

Economic activity is, after all, the primary determi-nant of the quality and

sustainability of the natural environment.

Some of our traditional economics indicators do

not have the capability to take into account impor-tant sustainability issues

Spring 2011

Interviews & Events 15

New York City Strikes OutThe Financing of Yankee Stadium

Maria Kucheryavaya

On March 29, 2007, the Congress Sub-committee 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 ear-lier, 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 re-ferred 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 is-suers (generally state and local govern-ments) by providing a sort of capital sub-sidy in order to ensure that state and local undertakings would not suffer from capi-tal 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.

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

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 Representa-tives 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 surround-ing economy, may provide a more de-finitive 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 justi-fied 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-up-on interest and principal payments. These payments continue until the bond reach-es its maturity date. Government entities and non-profit institutions are eligible

The New York Yankees’ PILOT deal is emblematic of the broadening of the

recipient base for tax exemptions.

Spring 2011

Business & Finance 17

to issue a certain type of bond whose in-terest 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 dormito-ries by higher education institutions, hos-pitals by healthcare companies, bridges by government infrastructure agencies and even museum construction by cul-tural institutions. Recently, stadium fi-nancing 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 dis-tinct from other types of tax-exempt sta-dium financing. The main difference be-tween 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 sta-diums that issue sales tax revenue bonds through an authority rely on that author-ity to collect the tax revenues necessary to fund the bonds and debt service. There-fore, PILOT bonds place a lower burden on the government for bond security, although there still exist costs to the gov-ernment due to the tax exemption.

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

Motivations for PILOT Bond IssuanceThe 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 lead-based paint and asbestos. In addition, the experience of fans and players alike was worsened by what the New York City Department of Parks & Recreation con-sidered 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

food and beverages during games. Many complained that space allotted to the me-dia was too limited for the team’s needs. The new stadium is claimed to have re-solved the above issues by expanding the existing facility and making overall struc-tural changes that include the addition of marketing and function facilities.

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 fi-nances is an extremely contentious reali-ty. A few days before leaving office, May-or Rudy Giuliani negotiated a deal with the Yankees that would involve New York City funding the new Yankee Stadium al-most completely from the city’s own cap-ital funds; the tentative 2001 agreement with the Yankees involved an initial pay-ment 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 sta-dium, 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

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 nego-tiate in the city’s favor was limited. There-fore, PILOTs may not have been agreed upon as the most appropriate means of fi-nancing Yankee Stadium construction; in-stead, they may have simply been the best option given the circumstances.

The Threat of Relocation as Leverage In the case of Yankee Stadium, the issu-ance of tax-exempt debt was made pos-sible 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 organiza-tion is able to limit the number of base-ball teams in the league nationwide.

In an undated memorandum sent by then-director of the New York City Industrial Development Agency (NY-CIDA), 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 pa-pers 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 Over-sight 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

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.

Columbia Economics Review

18 Business & Finance

Typical MV land /MV property on land : 15-25%

17

x Ft2 Per Acre 43,560

x Median Cost ** $275.00

$203,643,000.00

+ Property Value $1,025,000,000.00

$1,228,643,000.00

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

Table 1. Land Value AssessmentCalculating the market value

Acreage *

Total Market Value

Land Value

build a new stadium, a process that be-gan in the 1980s.

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

The Importance of Land ValuationAnother component of the analysis relat-ed to the PILOT bonds is the valuation of the land which the stadium would occu-py. 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 pay-ments would be greater.

The market value of the stadium prop-erty was one of the criteria used to calcu-late projected payments in lieu of proper-ty taxes. The exact calculation of PILOTs, then, necessarily involves a fair and thor-ough 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 ob-tained 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 de-signed to be greater than required bond payments in order to ensure that bond-holders 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 prop-erty 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 accept-ed 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 as-sumption that it would be completed in January 2006. Since that time, signifi-cant controversy has surrounded the es-timates of Yankee Stadium land value, which ranged from $26.8 million to $204 million. Stark noted that initially the Fi-nance Department valued the land as a

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 BenefitsA cost-benefit analysis is useful both for quantifying the components of the PI-LOT bonds and related development and for directly comparing the positive and negative implications of the project from the perspectives of equity as well as ef-ficiency. The most comprehensive analy-sis of the Yankees’ PILOT deal has been presented by the Independent Budget Of-fice (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 param-eters of a cost-benefit analysis. The social benefit here will be defined as the public benefit, which is the aggregate social wel-fare 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 remain-ing 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 sav-ings to the Yankees is $416.6 million from

The costs associated with the PILOT program

represent costs to public welfare... yet the project lacks a comparable public

benefit.

Spring 2011

Business & Finance 19

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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 argu-ably a cost to the city government. Ulti-mately, 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 fed-eral governments, the total savings to the government would be $763.2 million in-clusive of the property tax exemption and $346.6 million otherwise. Both are signifi-cant 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 ben-efit associated with the PILOT project can therefore be assumed to be only a frac-tion of the Yankees’ savings. This value may represent a floor on the public ben-efit, 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 com-pensate for this, some values are assumed to be slightly higher than comparable as-sumptions.

The adjusted social benefit can be cal-culated by using a multiplier that repre-sents the portion of Yankees’ benefits that trickles down to their fans. This value is estimated to be 8.02 percent through sev-eral assumptions and calculations based on population data.

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

population so the sum of New York state and New Jersey populations is used. In-dividuals 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.

Since multiple assumptions were made in calculating these estimates and applied along a long time period, the social ben-efit multiplier may not be entirely reflec-tive 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 externali-ties. These values, which have not been estimated to date, may include business and community development in the sur-rounding 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 per-spective, the PILOT project for Yankee Stadium is not justified.

Conclusion Following adjustments for the social ben-efit and inclusion of opportunity costs re-lated 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 pub-lic, vis-à-vis the New York City govern-ment, could likely have been better off if the City government had been more per-sistent in negotiations with the Yankees,

the cost to society of this PILOT bond is-suance 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 Yan-kees. Utilizing this money for other, more critical expenditures would have been ex-tremely valuable, such as providing capi-tal 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 in-dication that such funds would be better used in an alternate public project. While the Yankees PILOT deal may not be perfectly emblematic of stadium tax-exempt financing in general, it is indica-tive 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 Rob-ert 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 activ-ity and possibly a negative impact on lo-cal development relative to the region.” John J Siegfried and Andrew Zimbalist agree: spending by owners and play-ers 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 re-sult do not spend generously in the sur-rounding 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 econ-omists do not find stadium construction to be a net positive contributor to the lo-cal 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 com-ponents that could more convincingly be identified as public goods. Private enter-prises flush with funds need not – and in-deed should not – rely on public revenues for supplementary funding.

For more than a decade, public subsidies for

stadium construction have repeatedly been

found to be unfavorable to cities.

New York City... could likely have been better off

if the City government had been more persistent in negotiations with the

Yankees.

Columbia Economics Review

20 Business & Finance

Sex Ratios & Savings RatesThe Puzzle of Postwar Japan

Vighnesh Subramanyan

The Second World War had a devastating effect on the Japanese economy. With cities flattened, industries destroyed and its pop-ulation decimated, Japan lost one third of its total wealth and one half of its potential income. In the cities living standards plum-meted 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 re-gaining 1937 levels of gross national prod-uct until 1952. For the civilian population the immediate postwar years were a peri-od of incredible privation: many food com-modities were in short supply, 3.7 million families remained homeless even in 1948, and high unemployment rates were aggra-vated 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, 1945-1956, remaining above 100 percent until 1948. This left the amount of total net sav-ings 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 pover-ty, consumption is generally high as fami-lies 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 claim-ing 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 ex-istence 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 peo-ple 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 govern-ment 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 sav-ings rates high. The wartime government campaign to increase savings meant that, on average, 39 percent of household in-comes were siphoned away by various tax-es and savings programs. But the need for such government austerity policies ended with the close of the war when commodi-ties became more readily available during reconstruction, so these factors cannot ac-count for the continued increase in the sav-ings 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., sav-ings by households and firms) during this period, which suggests that household be-havior is the primary driver of the national savings phenomenon. Ohkawa et al. sug-gest that per capita personal consumption may seem subdued in the postwar period due to high population growth as increas-es in total consumption were spread across a wider population. However, this con-jecture still does not explain the large in-crease in the per capita savings rate, which is an altogether separate matter.

The boom in per capita savings in post-war Japan is a veritable mystery. Though the puzzle has been noted in the literature, there does not seem to be an accepted rea-son 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 espe-cially household savings, we may probe this conundrum by investigating the incen-tives driving high household savings rates. In particular, we look at four explanations ranging in breadth from permanent in-come and labor market effects to returns to capital and demographic competition.

Permanent Income and Property BoomsMilton Friedman’s Permanent Income Hy-pothesis could provide one possible expla-nation 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. Es-sentially, the individual attempts to main-tain a target level of consumption in each period of her life, and may forgo consump-tion in the current period in order to make

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Columbia Economics Review

22 Theory & Policy

the investments that would allow her to reach this target later on. Applying this hy-pothesis 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 purchas-es that would enable them to do so.

We can test this hypothesis by observ-ing 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. How-ever, 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 be-tween 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 ex-pense of lending to individuals. Between 1946 and 1953 residential investment ac-counted for only 2 percent of GNP, out of the 26 percent of GNP that constituted gross capital formation. Thus, this expla-nation 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 Mod-igliani suggests that there is a strong cor-relation between lower labor force partici-pation rates and decreased savings ratios. This is because older people and children tend to be in the dis-savings stage of their

life. Thus, an increase in the ratio of de-pendents (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. Ini-tially, the postwar savings rate increased despite the large number of dependents, whereas Modigliani’s model would pre-dict an extremely low savings rate in such a situation. Indeed, as the younger gen-eration 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 hypoth-esis.

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 invest-ment. 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 percent-age change over time (Figure 4). The in-crease in capital formation must have been funded by domestic savings given that in-ternational inflows of funds were restrict-ed 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 reconstruc-tion. Given that inflation in this period re-mained over 100 percent for many years, real interest rates were strongly negative. Thus, there do not appear to be high re-turns 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 com-plications, it is difficult to conclude in fa-vor of this hypothesis.

Marriage Market MalfunctionsBesides 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 ramifica-tions 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 outnum-bered that of men; for instance, in the 15-25 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 situa-tion in China and the consequences of the one-child policy, suggests that a gender ra-tio 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 mar-ket. He claims that this is also applicable to Korea. We may be able to apply this theory to postwar Japan, even though the gen-der ratio is skewed in the other direction.

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Spring 2011

Theory & Policy 23

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

A preliminary analysis of the data [by graphing the time trends for the marry-ing 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 un-equivocally shows that in the ten years since the end of the war, there was a down-ward trend in GNS/GNE that was corre-lated 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 pri-vate 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 per-centage change in private savings.

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

holds would show any differences in sav-ings if one household differed only in hav-ing 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.

Demographic DeterminismOur investigation of various explanations for the large increase in savings rates sug-gests 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 afflict-ing 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 log-ic, 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 imbal-ance are also more likely to produce entre-preneurs 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 in-expensive 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 specu-late 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 it-self, while the gender imbalance in China continues to grow today. While we have yet to analyze the possible long-term eco-nomic 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 gen-der imbalance, is taking the country into uncharted territory. We can be sure that the consequences of China’s demographic policies will continue to magnify them-selves in the future, creating an unpredict-able and potentially volatile economic and political situation. The fundamental eco-nomic 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 econo-mists as well as sociologists. The link be-tween demography, economics and policy is a deep and fundamental one, and policy-makers would do well to consider its long-term ramifications.

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Columbia Economics Review

24 Theory & Policy

Labor PainsGender Inequality and Female Life Satisfaction

Dilan Mizrakli(Dartmouth College)

IntroductionOver the past few decades, women have been steadily gaining a more advanta-geous position in society, along with in-creased bargaining power. This positive change has been brought about by a num-ber of trends including increasing gender equality, higher average education rates and more freedom and rights for women. In addition, the female labor force par-ticipation 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.

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 ap-proaches. 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 re-spect 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 hypoth-esis that a given hours gap would be as-sociated with a more negative effect on satisfaction as women’s labor force partic-ipation, education levels and legal rights increased. In my second approach, I repli-cate 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 differ-ent men and women in these countries. Adding men to the sample better allows

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 sat-isfaction.

BackgroundThe literature shows how women’s hap-piness levels have steadily declined over the last 35 years, both absolutely and rela-tive to those of men. Stevenson and Wolf-

ers asked respondents to evaluate their own current levels of overall happiness in addition to satisfaction in areas includ-ing 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, demo-graphic groups and industrialized coun-tries.” As a result, a gender gap in happi-ness is emerging, and these same trends are also evident across other industrial-ized countries for which data exist. In the European Union, the authors’ findings do

The increasing power of women has not prevented women’s happiness from

declining relative to that of men.

Columbia Economics Review

26 Theory & Policy

not indicate that women’s absolute hap-piness 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 Europe-an 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 inequal-ity in the division of housework. Focus-ing 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 happi-ness into ‘between country’ and ‘within country’ components. Their first general finding is that women doing a lower por-tion of housework are happier than wom-en 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 por-tion 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 ef-fect”: 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 une-qual division of housework is responsible for much marital strife. While doing re-petitive and routine housework is associ-ated with an increased chance of depres-sion 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 au-thors’ paper, women on average do the majority of housework.

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

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

Examining trends in time use, econo-mist 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. Krue-ger 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 engag-ing activities decreased about 3 percent-age points. Instead, the proportion of time spent on neutral downtime (e.g., watch-ing television) increased by approximate-ly three percentage points. According to Krueger, these changes “do not suggest significant improvements in affective ex-perience for women over this entire 40 year time span,” while men have seen such an increase.

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

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%Poland 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%

Table 1. Gap in HouseworkHour differences between men and women in housework for 24 European countries

Although the female labor force participation

rate has significantly increased... men’s involve-

ment in housework has not increased in

proportion.

Spring 2011

Theory & Policy 27

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 differ-ences among the various countries are partly explained by religion and techno-logical 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 contra-ception has caused a decline in “shotgun marriages” (i.e., marriage brought about by pregnancy), which has caused wom-en’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 re-lationships. Ironically, contraception’s elimination of shotgun marriages has caused women to lose some of their bar-gaining power relative to men.

Data and Descriptive FindingsTwo sets of data were used in this analy-sis. One set is the Eurobarometer data that was used to examine people’s well-being as well as other demographic and socio-logical patterns in European countries. The other data source is a paper by Ma-lina Voicu et al. (2008), whose estimates were used to rank relative gender equal-ity among European countries.

Eurobarometer surveyed the citizens of 24 European countries on various demo-graphic, sociological and political ques-tions. 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 satis-fied,” and the happiness measure does the same for life happiness. Because of greater data availability, increased grada-tion of response choice, and more precise wording, I chose to focus on the life satis-faction measure.

Data on gender inequality in house-work 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 ex-cluding for unmarried, homosexual and at least one non-working or retired part-ner cases. Housework is defined as “cook-ing, washing, cleaning, caring for clothes, shopping, maintenance of property, but not including childcare.” The respond-ent 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 incre-ments.

The results show that, throughout these 24 countries, women spend more time on housework than their partners. The aver-age 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

Equation 1

LifeSat = α + β1(Female) + β2(Female*Hr_Gap) + β3(Controls) + ε

Columbia Economics Review

28 Theory & Policy

Cohabiting & Working

Only Cohabiting

Single

1994-2002 1973-2002 1973-1978 1994-1996 2000-2002 1994-2002 1994-2002 1994-2002Female 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]Female x Hour Gap -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]Age -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]

Age2 -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]

Education 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]

White Collar 0.136*** 0.0438[0.0261] [0.0472]

Manual Worker -0.0875*** -0.187***[.0258] [0.0451]

Observations 157,646 496,187 57,889 23,680 80,263 92,718 102,652 157,646

*** p<0.01, ** p<0.05, * p<0.1 Standard Errors in Brackets

Table 2. Ordered Logit ModelRelationship between hours gap and female life satisfaction

All Females and Males

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 Ta-ble 1) In addition, I converted these val-ues 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 Ire-land, 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’ cat-egory. Clearly, there is a significant gap between the life satisfaction of people liv-ing in traditional and liberal countries re-gardless 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 differ-ence in the percentage of very satisfied females and the percentage of very satis-fied 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 sam-ple from 4, meaning “very satisfied,” to 1, meaning “not at all satisfied.“

MethodologyI took two approaches while analyzing the data. In the first, I performed a cross-sectional analysis, comparing male and female satisfaction levels across European countries with different hours gap vari-ables to examine the relationship between the hours gap and female life satisfaction as well as the temporal trend of this re-lationship. 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 lo-gistic probabilities to ordered categories, in order to examine the relationship be-tween 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”) be-tween females and males across European nations. (See Table 1) In order to have a

clearer understanding of the results, I re-centered and normalized the hours gap variable from 0 to 1 in each country, 0 be-ing 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 rep-resented below.

In this model, I controlled for demo-graphic variations through nation dum-mies, age, age-squared, age-cubed, age to the fourth power, education (in years), marital status through marriage dum-mies, occupation status through occupa-tion dummies (in 27 categories) and year through year dummies. The female varia-ble represents the partial effect of being fe-male on life satisfaction. I did not include the hours gap variable by itself as each na-tion 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 re-lationship between the hours gap and fe-male 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 ChecksIn addition to regressing all females and males from 1994 to 2002, I applied some robustness checks to my sample. I re-stricted 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 phe-nomenon increase the negative effect of

εββββα +++++= )()*()()( 4321 ControlslTraditionaFemaleFemalelTraditionaLifeSat

Equation 2

OLS Regression Top Quintile 2nd Quintile 3rd Quintile 4th Quintile Last QuintileTraditional -0.455*** -0.428*** -0.500*** -0.432*** -0.476*** -0.594***

[0.0238] [0.0604] [0.0532] [0.0534] [0.0621] [0.0930]Female -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 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]Observations 48,025.00 8,406.00 9,647.00 10,241.00 10,121.00 9,610.00R-squared 0.148 0.138 0.111 0.137 0.198 0.228

*** p < 0.01, ** p < 0.05, * p < 0.1 Robust standard errors in [brackets]

PSM

OLS Regression and Propensity Score MatchingTable 3. Traditional Countries

Spring 2011

Theory & Policy 29

the hours gap on female life satisfaction. As another robustness check, I performed a separate regression to include only co-habiting people or only single people to examine how similar or different the re-lationship 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 satis-faction than single women (See Table 2).

Propensity Score Matching ModelThe propensity score-matching (PSM) method is a procedure to isolate the treat-ment effect from inherited differences by comparing dependent variable observa-tions to those of subjects with similar independent variables. In my second ap-proach, I used this method in order to rep-licate and extend the results of Sironi and Mencarini (2010), which showed that do-ing 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 in-cluded only women and limited control variables. In order to see how the results change when men were added to the sam-ple, I ran a similar regression but assigned the national mean hours gap to each in-dividual 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 coun-tries in order to gauge the relationship between belonging to a gender unequal country and the life satisfaction level us-ing 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 des-ignates 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” vari-able represented the effect of being from

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 lib-eral countries more comparable to those from traditional countries (i.e., to bal-ance 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 Tradi-tional 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 quin-tiles 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 esti-mated the difference in life satisfaction for people whose background characteristics most resembled those in traditional coun-tries, while in the lowest quintile, I esti-mated the difference in life satisfaction for people whose characteristics resembled those in traditional countries least. (See Table 3)

ResultsThe most general hypothesis that I con-firm 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

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 in-terval, implying that the maximum hours gap (25.2, or 1 in the re-defined scale) re-duces the probability of being very satis-fied by 17.5 percent for women. For in-stance, in liberal countries, 52.55 percent of the women are very satisfied, yet the maximum hours gap reduces the prob-ability of a given women being very sat-isfied 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 ana-lyze the trend in the relationship between hours gap and female life satisfaction. The maximum hours gap reduces the proba-bility 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 in-creased the probability of being very sat-isfied 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 be-ing very satisfied is less negative for co-habiting 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 disci-pline, this effect is consistent with much literature in which part-time and full-time working women report greater happiness

Being female relative to male increased the

probability of being very satisfied by 18.9 percent, from 1973 to 1978, while

increasing the same proba-bility by only 16.8 percent

from 2000 to 2002.

Columbia Economics Review

30 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 deter-mining their share of housework to their own preferences as compared with non-working housewives.

The coefficients reported in the seventh column were estimated by including only cohabiting men and women, and the co-efficients in the eighth column were esti-mated 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 cohabit-ing 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 satisfac-tion of women does not generally depend on marital status, which was unexpected. One potential explanation is that mar-ried women are a self-selecting group of women who expected a larger share of housework prior to marriage and thus ef-fectively chose to accept it, whereas single individuals were not similarly amenable to bearing a large hours gap on house-work.

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 work-ing 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 OLS-regression model and a PSM model by quintile, and reveals interesting results: under OLS, the coefficient on the tradi-tional 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 in-dicates the importance of controlling for cultural, sociological and demographic differences between countries through including men in the sample. The coeffi-cient on the Traditional*Female interac-tion variable shows that the effect of being a female from a traditional country rela-tive to a male from a traditional country decreases life satisfaction by 6.3 percent.

This finding is close to Sironi and Men-carini’s finding of 8.9 percent.

The PSM section provides a gradated model. The coefficient of the interaction variable Traditional*Female in the high-est 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 coeffi-cient implies that being a female from a traditional country relative to a male from a traditional country reduces life satis-faction 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-

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 find-ings of Sironi and Mencarini because it compares men and women, and propen-sity score matching balance the charac-teristics of people living in countries with low and high hour gaps.

The results from the two approaches are consistent even though they meas-ure slightly different things. The first ap-proach 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 low-er female life satisfaction relative to men. The second approach finds that women in traditional countries, where gender ine-quality 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 satisfac-

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 in-equality and female life satisfaction is negative.

Conclusion & ImplicationsThe key aim of this paper has been to in-vestigate 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 gen-der equality in household division of la-bor, 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 tradi-tional 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 aver-age. 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 impli-cations for policymakers and cohabit-ing couples alike. First and foremost, the findings show that although general poli-cies have positively influenced gender equality levels in Europe, in-house gen-der inequality and—as I have shown—fe-male life satisfaction have not progressed nearly as much as expected or desired. For policy makers, it is clear that exist-ing 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.

Although general policies have positively influenced gender equality levels in Europe, in-house gender

inequality and female life satisfaction have not pro-

gressed nearly as much.

Spring 2011

Theory & Policy 31

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