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An Econometric Model of the US Economy
John J. Heim
An Econometric
Model of the
US Economy
Structural Analysis in 56 Equations
John J. Heim
University at Albany-SUNY
Albany, New York, USA
ISBN 978-3-319-50680-7 ISBN 978-3-319-50681-4 (eBook)

DOI 10.1007/978-3-319-50681-4
Library of Congress Control Number: 2017940494
© The Editor(s) (if applicable) and The Author(s) 2017

This work is subject to copyright. All rights are solely and exclusively licensed by the
Publisher, whether the whole or part of the material is concerned, specifically the rights
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this publication does not imply, even in the absence of a specific statement, that such names
are exempt from the relevant protective laws and regulations and therefore free for general
use.
The publisher, the authors and the editors are safe to assume that the advice and information
in this book are believed to be true and accurate at the date of publication. Neither the
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Cover illustration: Lyroky / Alamy Stock Photo
Printed on acid-free paper
This Palgrave Macmillan imprint is published by Springer Nature

The registered company is Springer International Publishing AG
The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland
This book is dedicated to
Susan
who has given me so much
P REFACE
I left academic life in 1972, after getting my Ph.D. At that time large-scale
econometric modeling of the economy was the rage; everyone thought it
would be just a matter of time before we had “done enough science” to
allow economists to discuss economics in the classroom, not in terms of
the alphas and betas of theoretical models, but in terms of the real-world
coefficients they represent. Economics would become the next branch of
engineering, or so many thought.
Much to my surprise, when I returned to academic life 25 years later
things had not much progressed. Most economists were still using alphas
and betas to describe how one variable affects another in economics. For
lack of vigorous, concerted effort over those 25 years to pursue the hard
numbers underlying the theories, and their statistical significance, econom-
ists were still just discussing theories with the best “numbers” we had – the
abstract alphas and betas of pure theoretical discourse. Because we hadn’t
disciplined our presentation of theories to those scientifically proven to
work, even more theories abounded than was the case in 1972. Worse, the
overriding emphasis in economic theory was not on “what works?”, but
on “what’s new?”.
My engineering students knew the difference. When I tried to describe
macroeconomics as real science, and then described the coefficients that
connect one variable to another in alphas and betas, instead of real num-
bers, they just snickered. “Yes, but what is the real relationship?” they
would ask, meaning what are the real numbers? “And if you don’t have
them, why do you call this science?” they would ask. Certainly in their
vii
viii PREFACE
engineering courses, where every equation describes what actually works,

they were getting real numbers.
This book attempts to meet that very standard by focusing on what
works. It attempts to move forward the empirical efforts of Tinbergen,
Goldberger, Klein, Eckstein, and Fair the past 80 years to determine what
works. That is, the effort to convert economics from just theory to hard
(by which I mean reliable) science. Doing so requires three things.
First, it requires that the postulates we test have some economic mean-
ing, and not be just some collection of variables we are “running up the
flagpole,” to see what happens.
Second, it requires that the theory-based postulates we test are struc-
tured loosely enough so that the data determine what is real, i.e., the exact
shape and content of the theory being tested. It is not for us to say a
priori by how we structure the model we test, whether Keynes’ consump-
tion function, whose principal determinant is current income, is correct,
or whether Freidman’s, whose principal determinant is average income
(permanent income) is correct.
Third, it is not for us to claim some empirical result proves some theory
is correct, simply because it explains some variation in the economy, in some
time period, in some economic model. To be correct, it should explain most
variance, in most or all time periods, in most or all models.
This book tries to adhere to these three rules, we think successfully.
To meet the first condition, its model is built around the theory that we
found most consistent with the data. To meet the second, the shape (and
inclusion) of each equation in the model is data-determined, e.g., there are
no predetermined assumptions about what drives consumer or investment
spending. Third, a large-scale econometric model is needed to capture
all the sources of economic variation, and that’s what is used. Extensive
robustness testing was used to prove that any initial statistical finding was
real and not just some spurious artifact of the time period or particular
model tested.
I hope the reader will agree that the models developed in this book
adhere to these rules for good engineering science.
SUNY, Albany John J. Heim

A CKNOWLEDGMENTS
Most of all, I am indebted to Nobel Laureate Robert Solow for providing

review comments and suggestions on an earlier draft, as did David Colan-
der and Ray Fair. They were a source of inspiration and without their
involvement and support, especially Robert Solow’s, this book probably
would not have been finished.
I am also indebted to distinguished econometrician, Kajal Lahiri, for
bringing me to SUNY Albany and providing a place where I could work
on this book with a minimum of other distractions. He has provided a
very supportive and intellectually stimulating atmosphere within which to
work, and provided guidance on econometric issues through his careful
review of an earlier draft.
I would also be remiss if I did not mention the long line of earlier
economists who toiled long and hard as both macroeconomists and
econometricians to turn macroeconomics from philosophy into science.
These economists include Jan Tinbergen, Lawrence Klein, Frank deLeeuw,
Arthur Goldberger, and, more recently, Ray Fair. Fair has had the doubly
difficult job of keeping the strongly scientific Cowles tradition alive during
recent decades, when many economists turned to different, less scientific
approaches. We owe him much.
For similar reasons, we owe Greg Mankiw much. His 2006 article in
the Journal of Economic Perspectives convinced many that the detour in
the 1980s away from Cowles modeling and toward DSGE has proven
unproductive, and helped resurrect interest in Cowles modeling again.
Solow’s (2010) testimony to Congress reached the same conclusion about
DSGE and helped in the same way.
ix
x ACKNOWLEDGMENTS
Nor could the book have been written without the strong support of
my wife Sue. This book required 2 years full-time work, and before that,
considerable part-time work. The problems to be resolved required endless
long hours at work, and endlessly preoccupied my mind, even at home.
Sue was always willing to make the sacrifices necessary to cope with all
that.
Finally, I must acknowledge the secretarial assistance provided by
Annemarie Hebert. She has helped pull together, duplicate, and send out
endless drafts of this work.
C ONTENTS
1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Modern Macroeconomics: Moving from
the Methods of Economic Philosophy to Those of
Economic Science 5
1.2 Summary of Ways in Which This Large-
Scale Econometric Model Improves on Past Work 9
1.3 The 56-Equation Model: 30 Behavioral Equations,
15 Identities (Product Side of National Income
and Product Accounts (NIPA)), and 8 Behavioral
Equations, 3 Identities (Income Side of NIPA) 14
1.4 The 38 Behavioral Equations: Coefficients,
Significance, R2 , and Durbin Watson Tests:
(Summary of Results: Detailed Explanations of
Findings Presented in Chapters 4–20) 16
Part I Production of the GDP
2 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
2.1 General Methodological Issues 40
2.2 Choosing Between VAR, DSGE, and
Cowles Commission Models 48
3 Literature Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115

3.1 Lawrence Klein and Michael Evans (1968): The
Wharton Econometric Forecasting Model 116
xi
xii CONTENTS
3.2 Otto Eckstein’s (1983) The DRI Model of the U.S. Economy 125
3.3 Ray Fair’s Estimating How the Macroeconomy Works (2004) 131
3.4 Federal Reserve Board/U.S. Model (1996) 140
3.5 Literature Review Summary 144
4 The Consumption Models . . . . . . . . . . . . . . . . . . . . . . . . . . . 147

4.1 Total Consumer Spending on Both Domestically
Produced and Imported Consumer Goods 151
4.2 Spending on Imported Consumer Goods – OLS Estimates 157
4.3 Spending on Imported Consumer Goods – 2SLS Estimates 161
4.4 Consumer Spending on Domestically Produced
Consumer Goods (OLS) 162
4.5 Determinants of Consumer Borrowing – OLS Estimates 166
4.6 Determinants of Consumer Borrowing – 2SLS Estimates 168
4.7 Modeling the Major Components of Total Consumption 171
4.8 Determinants of Spending on Consumer Durables (OLS) 172
4.9 Determinants of Spending on Consumer Durables (2SLS) 172
4.10 Determinants of Spending on Consumer
Nondurables (OLS) 176
4.11 Determinants of Spending on Consumer
Nondurables (2SLS) 177
4.12 Determinants of Spending on Consumer Services (OLS) 180
4.13 Determinants of Spending on Consumer Services (2SLS) 181
5 Models Identifying the Determinants of Investment

Spending and Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
5.1 OLS Estimates of the Determinants of Total
Investment Spending 188
5.2 2SLS Estimates of the Determinants of Total Investment 189
5.3 OLS Estimates of the Determinants of Domestically
Produced Investment Goods 192
5.4 2SLS Estimates of the Determinants of
Domestically Produced Investment Goods 193
5.5 OLS Estimates of the Determinants of Imported
Investment Goods 197
5.6 2SLS Estimates of the Determinants of Imported
Investment Goods 198
5.7 An Alternative Method of Calculating Coefficients
in the Investment Imports Model 201
CONTENTS xiii
5.8 OLS Estimates of the Determinants of Investment

Borrowing 203
5.9 Determinants of Spending on Fixed Plant and
Equipment Investment (OLS) 207
5.10 Determinants of Spending on Fixed Plant and
Equipment Investment (2SLS) 208
5.11 Determinants of Spending on Residential
Investment (OLS) 212
5.12 Determinants of Spending on Residential
Investment (2SLS) 215
5.13 Determinants of Spending on Inventory
Investment (OLS) 215
6 The Exports Demand Equation . . . . . . . . . . . . . . . . . . . . . . 221

6.1 OLS Model of Export Demand 225
7 Statistically Estimated Real GDP Determination

Functions (“IS” Curves) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229
7.1 The GDP as a Function of the Determinants of
Domestically Produced Consumer and Investment
Goods and Services, Government Spending and
Exports (GDP = CD + ID + G + X) 230
7.2 The GDP as a Function of the Determinants of
Total Consumer and Investment Goods
and Services, Government Spending, and
Exports Minus Imports (GDP = CT + IT + G + X – M) 236
8 Real GDP Determination Function (“IS” Curve)

Coefficients Aggregated from Parameter
Estimates Obtained by Statistically Estimating the
Subcomponent Functions Comprising the GDP . . . . . . . . . 239
8.1 Using the GDP Determination Model
GDP = CD + ID + GD + X 239
8.2 Using the GDP Determination Model
GDP = CT + IT + GT + (X – M) 246
9 Determinants of the Prime Interest Rate: Taylor

Rule Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253
9.1 OLS Estimates 254
9.2 2SLS Estimates 255
xiv CONTENTS
10 Determinants of the Prime Interest Rate – LM

Curve Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259
10.1 OLS Models of the LM Curve 259
10.2 2SLS Models of the LM Curve 260
11 Determinants of Inflation – The Phillips Curve Model . . . . 265

11.1 Reconciling the Money Supply Variable
in the Taylor Rule and LM Equation Interest Rate
Models with the Money Supply Variable in the
Inflation (Phillips Curve) Equation 269
12 Determinants of Unemployment . . . . . . . . . . . . . . . . . . . . . . 273

12.1 A Simple OLS Model Based on Okun’s Law 273
12.2 The 2SLS Okun Model 276
12.3 The OLS Technological Change Model 279
12.4 The 2SLS Technological Change Model 280
13 The Savings Functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285

13.1 The Corporate Savings Function 285
13.2 The Depreciation Allowances Savings Function 291
13.3 Personal Savings 296
14 Determinants of Government Receipts . . . . . . . . . . . . . . . . . 303

14.1 Contributions to Explained Variance 304
14.2 Robustness Over Time 304
14.3 Robustness to Model Specification Changes
(1960–2010 Data Set) 307
15 Endogeneity of Government
Spending Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309
15.1 The Model for Total Government Spending for All
Purposes: Goods, Services, and Transfers 309
15.2 The Model for Government Spending on Goods
and Services Only 313
16 Capacity of the Model to Explain Behavior

of the Macroeconomy Beyond the Period Used to
Estimate the Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 317
16.1 Model #1 Treating All Determinants of C, I, and X
as Exogenous 318
CONTENTS xv
16.2 Model 2: Treating C, I, and X Model Determinants

for Which We Have Explanatory Functions as Endogenous 322
17 Converting the Older Keynesian IS-LM Model to

the More Modern AS-AD Interpretation of the
Keynesian Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331
17.1 Short- and Long-Run Aggregate Supply Curves 331
17.2 The Aggregate Demand Curve and the Role of
Velocity In Aggregate Demand 332
17.3 OLS Tests of M1 Velocity’s Determinants 338
17.4 2SLS Tests of M1 Velocity’s Determinants 342
17.5 OLS Tests of M2 Velocity’s Determinants 346
17.6 Which Determinants of GDP Are Also
Determinants of Velocity 352
17.7 Stationarity Issues 359
17.8 Alternative Method: Calculating Impact of
Determinants of GDP on Velocity Using
Regression Coefficients Obtained Estimating
Consumption, Investment, and Export Functions 359
18 Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 363
18.1 Introduction 363
19 Summary and Conclusions (Production Side of the

NIPA Accounts) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 373
19.1 Other Major Findings 376
Part II Income Side of the NIPA Accounts
20 Determinants of Factor Shares . . . . . . . . . . . . . . . . . . . . . . . 381

20.1 Introduction, Theory of Factor Shares, and
Summary of Findings 381
20.2 Literature on Factor Shares 394
20.3 Methodology 397
20.4 Determinants of Labor, Profits, Rent, and Interest
Factor Shares and Income Levels 400
20.5 Summary and Conclusions (Income Side
of the NIPA Accounts) 441
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 445
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 451
L IST OF F IGURES
Fig. 4.1.1 Actual consumption compared to levels

calculated from Model 4.1.T 1960–2010 . . . . . . 153
Graph. 6.1.1 Equation 6.1 Graphed . . . . . . . . . . . . . . . . . . . . . 225
Graph. 12.2.1 The augmented Okun model (Eq.
12.4) model for explaining variation in
unemployment 1960–2010 . . . . . . . . . . . . . . . . . 276
Graph. 12.4.1 Technological change model of
determinants of unemployment (Eq. 12.4.1) . . . . 281
Graph. 13.1.1 Fifty years annual variation in corporate
saving (calculated from Eq. 13.1.1, then
compared to actual) . . . . . . . . . . . . . . . . . . . . . . 287
Graph. 13.2.1 Explained and actual depreciation
allowance savings the past 50 years . . . . . . . . . . . 293
Graph. 13.3.1 The explanatory power of the Eq. 13.3.1 model . 299
Graph. 17.4.1 Actual and fitted V1 values 1960–2010
(taken from Eq. 17.4.1.TR) . . . . . . . . . . . . . . . . 345
Graph. 17.5.1 Actual and fitted V2 values 1960–2010
(taken from Eq. 17.5.2.TR) . . . . . . . . . . . . . . . . 352
Graph. 20.1.2.1 MPK and MPL curves – constant slopes . . . . . . . 387
Graph. 20.1.2.2 MPK and MPL curves – varying slopes . . . . . . . . 389
Graph. 20.1.2.3 MPK and MPL curves – non – market wages . . . 390
xvii
xviii LIST OF FIGURES
Graph. 20.4.1.1 Model of only variables robust in at least

three of four sample periods (Eq. 20.4.1.2.TR) . . 407
Graph. 20.4.3.1 Graph of the initial profit’s share model
(Eq. 20.4.3.1) . . . . . . . . . . . . . . . . . . . . . . . . . . . 418
L IST OF TABLES
Table. 1.4.1 Determinants of consumption . . . . . . . . . . . . 18

Table. 1.4.2 Determinants of investment . . . . . . . . . . . . . . 21
Table. 1.4.3 Determinants of GDP (Cptr.8;
arithmetically calculated from IS curve
components) . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Table. 1.4.4 Is the prime interest rate determined
by the Taylor rule? . . . . . . . . . . . . . . . . . . . . . 25
Table. 1.4.5 Is the prime interest rate determined
by traditional Keynesian “LM” theory? . . . . . . 25
Table. 1.4.6 Determinants of savings . . . . . . . . . . . . . . . . . 26
Table. 1.4.7 Determinants of government receipts
and spending . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Table. 1.4.8 Determinants of unemployment and inflation . 29
Table. 1.4.9 Determinants of export demand . . . . . . . . . . . 31
Table. 1.4.10 Determinants of velocity robust
models only (where V1or2 = Y(P/M1or2) . . . . . . 32
Table. 1.4.11 Determinants of labor’s total income
and percentage share of NI . . . . . . . . . . . . . . . 33
Table. 1.4.12 Determinants of profits’ total income
Table. 1.4.13 Determinants of rent’s total income
xix
xx LIST OF TABLES
Table. 1.4.14 Determinants of interest total income

Table. 2.2.3.1.1 DSGE model inflation forecast accuracy . . . . . 53
Table. 2.2.3.1.2 DSGE model GDP growth forecast accuracy . . 54
Table. 2.2.3.2.1(1) Current and four future year annual
changes in income
(real GDP) (Billions of 2005 Dollars) . . . . . . . 61
Table. 2.2.3.2.2(1) Yearly variation in consumer spending
1960–2010. Explained by yearly
variation in TFP compared to other
determinants of consumption . . . . . . . . . . . . . 64
Table. 2.2.3.2.3(1) Robustness over time: (2SLS
detrended model; subsamples of
1960–2010 data set) . . . . . . . . . . . . . . . . . . . . 66
Table. 2.2.3.2.3(2) Robustness over time: (2SLS model
5.2, 1960–2010 data) . . . . . . . . . . . . . . . . . . . 67
Table. 2.2.3.2.4(1) Forecasts of observable variables . . . . . . . . . . . 71
Table. 2.2.3.2.5(1) Error of fit of a model similar
to FRB/US’S nondurables and
nonhousing services consumption
model compared to Cowles model
(yearly change in ND&S consumption
as a % of total ND&S consumption) . . . . . . . . 79
Table. 2.2.4.3.1 Comparison of % error of GDP
estimates of VAR with structural
models for the 10 years after their
1960–2000 estimation period
(absolute value of error % used) . . . . . . . . . . . . 92
Table. 2.2.4.4.1 Time period robustness of SVAR
model results . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Table. 2.2.4.4.2 Out-of-sample fit comparisons:
Structural models vs. SVARs . . . . . . . . . . . . . . 101
Table. 4.0.1 Determinants of consumption
assumed endogenous when applying
endogeneity tests . . . . . . . . . . . . . . . . . . . . . . 148
LIST OF TABLES xxi

or investment initially assumed
exogenous or lagged, and used as
regressors in the first-stage regression
in Hausman of endogeneity tests
(subscripts denote lags) . . . . . . . . . . . . . . . . . . 149
Table. 4.1.1 Explained variance – total consumption . . . . . . 154
Table. 4.1.2 Robustness over time – (2SLS
detrended model, Eq. 4.1.T) . . . . . . . . . . . . . . 155
Table. 4.2.1 Explained variance – consumer imports . . . . . . 159
Table. 4.2.2 Robustness over time – consumer imports . . . . 160
Table. 4.4.1 Explained variance – domestically
produced consumer goods . . . . . . . . . . . . . . . 163
Table. 4.4.2 Robustness over time – domestically
produced consumer goods . . . . . . . . . . . . . . . 164
Table. 4.6.1 Explained variance – consumer borrowing . . . . 169
Table. 4.6.2 Robustness over time – consumer
borrowing, 2SLS Model 4.6 . . . . . . . . . . . . . . 169
Table. 4.9.1 Explained variance – consumer durables . . . . . 174
durables, 2SLS Model (Eq. 4.9) . . . . . . . . . . . 174
Table. 4.11.1 Explained variance – nondurables . . . . . . . . . . 178
Table. 4.11.2 Robustness over time – nondurables,
2SLS Model (Eq. 4.11) . . . . . . . . . . . . . . . . . . 179
Table. 4.13.1 Explained variance – consumer services
(Eq. 4.12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
services, 2SLS model (Eq. 4.12) . . . . . . . . . . . 182
and investment initially assumed
endogenous when applying
endogeneity tests . . . . . . . . . . . . . . . . . . . . . . 186
and investment initially assumed
xxii LIST OF TABLES
exogenous or lagged in their effect

when applying endogeneity tests . . . . . . . . . . . 187
Table. 5.2.1 Explained variance – total investment . . . . . . . 190
Table. 5.2.2 Robustness over time – total
investment, 2SLS Model 5.2 . . . . . . . . . . . . . . 190
Table. 5.4.1 Explained variance – domestically
produced investment goods . . . . . . . . . . . . . . 194
Table. 5.4.2 Robustness over time: (domestically
produced investment goods, 2SLS
Model 5.4) . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
Table. 5.6.1 Explained variance – imported
investment goods . . . . . . . . . . . . . . . . . . . . . . 199
Table. 5.6.2 Robustness over time: – investment
imports, 2SLS . . . . . . . . . . . . . . . . . . . . . . . . . 200
Table. 5.8.1 Explained variance – business borrowing . . . . . 205
Table. 5.8.2 Robustness over time – business
borrowing, 2SLS . . . . . . . . . . . . . . . . . . . . . . 206
Table. 5.10.1 Explained variance –
plant and equipment
investment . . . . . . . . . . . . . . . . . . . . . . . . . . . 209
Table. 5.10.2 Robustness over time – plant and
equipment, 2SLS Model 5.10 . . . . . . . . . . . . . 210
Table. 5.11.1 Explained variance – residential investment . . . 213
Table. 5.11.2 Robustness over time – residential
investment, OLS Model 5.11 . . . . . . . . . . . . . 213
Table. 5.13.1 Explained variance – inventory investment . . . 216
Table. 5.13.2 Robustness over time – inventory
investment 2SLS Model 5.13 . . . . . . . . . . . . . 217
Table. 6.0.1 Import/export relationships among
U.S. trading partners . . . . . . . . . . . . . . . . . . . . 223
Table. 6.1.1 Explained variance – exports . . . . . . . . . . . . . . 226
Table. 6.1.2 Robustness over time – exports . . . . . . . . . . . . 227
LIST OF TABLES xxiii
Table. 7.1.1 Comparison of PR –2 effects in GDP,

C, I, G, and (X–M) functions (i.e., all
components of GDP) . . . . . . . . . . . . . . . . . . . 234
Table. 9.2.1 Explained variance – Taylor rule
model, using 2SLS . . . . . . . . . . . . . . . . . . . . . 256
Table. 9.2.2 Robustness over time – Taylor rule
model: 2SLS model 9.2 . . . . . . . . . . . . . . . . . . 257
Table. 10.2.1 Explained variance LM curve interest
rate model . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261
Table. 10.2.2 Robustness over time: LM curve
interest, 2SLS model . . . . . . . . . . . . . . . . . . . . 262
Table. 11.1 Explained variance – Phillips curve . . . . . . . . . 267
Table. 11.2 Robustness over time: Phillips curve . . . . . . . . 268
Table. 12.2.1 Explained variance – Okun
unemployment model . . . . . . . . . . . . . . . . . . . 277
Table. 12.2.2 Robustness over time: (Okun
unemployment 2SLS model) . . . . . . . . . . . . . . 277
Table. 12.4.1 Explained variance – technological
progress unemployment model . . . . . . . . . . . . 281
Table. 12.4.2 Robustness over time: (tech. progress
unemployment, 2SLS model) . . . . . . . . . . . . . 282
Table. 13.1.1 Explained variance – corporate savings
(as % of GDP) . . . . . . . . . . . . . . . . . . . . . . . . . 288
Table. 13.1.2 Robustness over time – corporate
savings, Eq. 13.1.2 2SLS Model . . . . . . . . . . . 289
Table. 13.2.1 Explained variance depreciation
allowance savings . . . . . . . . . . . . . . . . . . . . . . 293
Table. 13.2.2 Robustness over time – depreciation
allowance savings . . . . . . . . . . . . . . . . . . . . . . 294
Table. 13.3.1 Explained variance – personal savings model . . 300
Table. 13.3.2 Robustness over time – Personal
savings model . . . . . . . . . . . . . . . . . . . . . . . . . 301
Table. 14.1 Explained variance – government receipts . . . . 304
xxiv LIST OF TABLES
Table. 14.2 Robustness over time – government

receipts (assumes 1993 tax increase
repealed by 2001 tax cut) . . . . . . . . . . . . . . . . 305
Table. 14.3 Alt robustness over time (assumes
1993 tax increase continues through 2010) . . . 306
Table. 15.1.1 Explained variance – total government spending 311
Table. 15.1.2 Robustness over time – total
government spending . . . . . . . . . . . . . . . . . . . 311
Table. 15.2.1 Explained variance – government
spending model (goods and services only) . . . . 314
Table. 15.2.2 Robustness over time – government
spending (goods and services only) . . . . . . . . . 315
Table. 16.1.1 Model 1 How well the model fits the
data for the 10 periods following the
1960–2000 period used to estimate
the modela (billions of 2005 dollars) . . . . . . . . 321
Table. 16.2.1 How well models 1 and 2 fit the
1960–2000 estimation period (billions
of 2005 dollars) . . . . . . . . . . . . . . . . . . . . . . . 327
Table. 16.2.2 How well models 1 and 2 fit the
1960–2000 estimation period (nine
additional equations substituted for
variables treated as exogenous in
Model 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329
Table. 17.4.1 Explained variance – V1 velocity . . . . . . . . . . . 343
Table. 17.4.2 Robustness over time – M1 velocity,
2SLS Eq. 17.4.1 . . . . . . . . . . . . . . . . . . . . . . . 344
Table. 17.5.1 Explained variance – V2 velocity . . . . . . . . . . . 349
Table. 17.5.2 Robustness over time – M2 velocity,
2SLS Eq. 17.5.1.2 . . . . . . . . . . . . . . . . . . . . . 350
Table. 17.7.1 Variables significant in stepwise models . . . . . . 360
Table. 18.1 Dynamic Effects of Stimulus Programs
on the GDP . . . . . . . . . . . . . . . . . . . . . . . . . . 368
LIST OF TABLES xxv
Table. 18.2 Dynamic Effects of Stimulus Programs

on the GDP (Detailed effects on other
key economic variables after 33 periods) . . . . . 369
Table. 19.1 Determinants of consumption,
investment, government spending,
interest rates, and exports . . . . . . . . . . . . . . . . 374
Table. 20.1.1.1 Index of real profit and labor income
growth 1929–2010 (1960 = 1.00) . . . . . . . . . . 384
Table. 20.1.1.2 Nominal income levels and shares for
labor, profit, rent, and interest 1930–2010 . . . 385
Table. 20.4.1.1 Stepwise estimate of individual
variable’s contributions to total
explained variance . . . . . . . . . . . . . . . . . . . . . . 405
Table. 20.4.1.2 Coefficient stability in Eq. 20.4.1.2:
2SLS labor share model . . . . . . . . . . . . . . . . . . 405
Table. 20.4.1.3 Comparisons of GDP and labor
productivity growth rates . . . . . . . . . . . . . . . . 411
Table. 20.4.1.4 Effects of counterfactuals on labor’s share . . . . 412
explained variance in profit’s share . . . . . . . . . . 419
Table. 20.4.3.2 Determinants of profit’s share of
national income coefficient stability
over time . . . . . . . . . . . . . . . . . . . . . . . . . . . . 420
Table. 20.4.3.3 Simulation of effects on profit’s share
of counterfactuals . . . . . . . . . . . . . . . . . . . . . . 425
Table. 20.4.4.1 Summary of factors affecting profit’s %
share and level of real national income . . . . . . . 428
explained variance in interest share
model 20.4.5.1 . . . . . . . . . . . . . . . . . . . . . . . . 430
Table. 20.4.5.2 Determinants of rent’s share of
over time in Eq. 20.4.5.1 . . . . . . . . . . . . . . . . 430
xxvi LIST OF TABLES
Table. 20.4.6.1 Summary of factors affecting profit’s %

share and level of real national income . . . . . . . 433
explained variance in interest share
model 20.4.7.2 . . . . . . . . . . . . . . . . . . . . . . . . 435
Table. 20.4.7.2 Determinants of interest’s share of
over time in Eq. 20.4.7.2 . . . . . . . . . . . . . . . . 436
explained variance in interest level
model 20.4.8.2 . . . . . . . . . . . . . . . . . . . . . . . . 439
Table. 20.4.8.2 Determinants of interest’s share of
over time in Eq. 20.4.8.2 . . . . . . . . . . . . . . . . 439
Table. 20.4.9.1 Summary of factors affecting interest’s
% share and level of real national income . . . . . 440
S UMMARY
The book has two parts: Part I contains 45 equations describing in detail
the “product side” of the National Income and Product Accounts (NIPA).
It contains tested models of the GDP and its major components, and the
determinants of their level of production (Chapters 4–19). Part II provides
11 additional equations describing how the value of the product generated
producing the GDP is distributed among the factors of production. For
each factor of production there are two equations. The first describes the
variables that were found to determine each factor’s percentage share of
national income. The second describes the variables found to determine
the total amount (the level) of each factor’s total income. These models
describe the variables whose own changes cause the distribution of income
among factors to shift from one factor to another over time (Chapter 20).
Chapter 19 provides a summary of the substantive findings as to the
determinants of GDP and its components. Chapter 20, Section 20.5,
summarizes the determinants of factor shares and levels of income.
THE PRODUCTION SIDE MODEL

Production is treated as a response to aggregate demand (AD). Hence
the key determinants of GDP production are expressed as determinants
of AD. Supply shortages can also affect the level of production, but the
empirical evidence indicates that demand is far more commonly the driv-
ing factor. Fully 85–95% of the variation of GDP over the 50-year period
1960–2010 appears to stem from variation in AD. Demand-driven models
are commonly thought of as Keynesian models, and to that extent this is
xxvii
xxviii SUMMARY
a Keynesian model. However, when a variable to measure “crowd out” is

added to standard Keynesian consumption and investment equations, this
model’s conclusions about the effectiveness of fiscal policy in stimulating
the economy are just the opposite of Keynes’. Its conclusions about mon-
etary policy conclusions are also not the same. The model indicates the
stimulus effects of changes in the money supply to be modest at best.
The 45-equation first part (the production side) includes 30 behavi-
oral equations and 15 identities. The identities connect the behavioral
equations into a comprehensive model of the real U.S. economy. The
behavioral equations were generally estimated applying strong instrument
2SLS to 1960–2010 data. The model includes eight consumption and nine
investment equations, including three for personal, corporate, and depre-
ciation allowance savings. Two interest rate determination models based
on the Taylor rule or the Keynesian LM curve are included. Also included
are two unemployment determination models, a Phillips curve model, one
export function, and two “IS” curve functions determining GDP. Other
behavioral models are provided for taxes and government spending, recog-
nizing that part of these variables levels is endogenously determined by the
state of the economy. Two functions describe the determinants of M1 and
M2 velocity. These are included to show mathematically how fiscal policy
can shift the AD curve. Extensive efforts were made to ensure that all iden-
tification issues were resolved by replacing Hausman-endogenous variables
with Wald-strong instruments which were Sargan-tested to ensure they
also were not endogenously determined.
There are 75 variables (or different lags of the same variables) in the
45 equations. Robustness testing, a non-negotiable requirement of good
science, was exhaustive. All models were tested in four different time peri-
ods to ensure estimated effects were consistent over time, i.e., immune to
Lucas critique. All coefficients were also tested for robustness to changes in
the model being tested, i.e., to see how additions and subtractions of vari-
ables from the model affected the remaining variables estimated effects.
Because of the pervasiveness of the multicollinearity problem, this type
of robustness testing is also a non-negotiable requirement of good sci-
ence. Finally, almost all were tested using OLS as well as 2SLS techniques
to allow comparisons with literature of an earlier day, which sometimes
used OLS.
DSGE and VAR methodologies are currently more popular methodolo-
gies for macroeconomic modeling. Therefore, a lengthy section is included
in Chapter 2 discussing the advantages of the older Cowles methodology
SUMMARY xxix
and why it is used here. Chapter 2 is literally a paper within a paper. It

deals with what may be the most pressing unresolved methodological
issue facing macroeconomic modelers today: how to successfully model
the macroeconomy the way it actually works, so that models can be reliably
used by policy makers to predict consequences of decision-making. Early
models designed to do this were referred to as Cowles Commission mod-
els and were very good at explaining the data, though not always 100%
successful. Cowles models dominated model building from the advent of
the econometric revolution up to the mid-1980s. However, in the last 30
years, many economists have turned away from Cowles types of modeling
in favor of DSGE and VAR.
Which of these three methods for discerning economic reality is to be
preferred? To shed some light on this question, the statistical perform-
ance of several VAR and DSGE models are compared with Cowles-type
structural models. Comparisons are made, or reported from other studies,
and include comparisons with a Sims (1980) VAR model, the Smets-
Wouters model, FRB/US, and a simplified version of the FRB/NY model.
These tests overwhelmingly indicate the more Keynesian (Cowles) struc-
tural models outperform the others in accurately modeling the actual
year-to-year fluctuations of the economy. Therefore, they should become
the models of choice in future macroeconomic studies analyzing the
consequences of changes in economic variables.
Nobel Laureate economist Robert Solow (2016) concurs; he has said
Cowles models far better explain the data than DSGE or VAR models:
after reviewing this paper’s analysis of the three methods, Solow wrote
. . . Your arguments in favor of Cowles-type models as against VAR and

DSGE models have real weight . . . I think that you get across that whatever
can be said for DSGE models . . . they are inferior at explaining the facts
. . . You do the same for general VAR models
After Keynes himself, Solow is arguably the greatest economist of the

twentieth century.
THE INCOME SHARES MODEL

Part II of this book (Chapter 20) describes how the income generated
producing the GDP is distributed. Four equations describe the variables
found to determine the level of income received as labor, profit rent, and
xxx SUMMARY
interest income. An additional four equations describe the variables found

to affect the percentage share of national income received by each of these
factors, that causes factor shares to vary from decade to decade. A summary
of findings is presented at the beginning of Chapter 20. The econometric
methodology used, including exhaustive robustness testing, was the same
as used in Part I of the book.
METHODOLOGY
Good science requires replicability of results. This chapter’s goal was to
provide, to the best extent possible, models whose results meet the rep-
licability standard. Largely, this goal appears to be achieved, though in
some areas more remains to be done. Hopefully, future generations of
researchers will find it worthwhile to take up where this study leaves off.
In particular, in some equations we were not able to fully resolve the “left
out” variables and multicollinearity problems that affects the credibility of
parameter estimates in any economic model.
In most models 85–95% of the variance is explained. However, in some
models, there are definitely some “left out” explanatory variables remain-
ing to be found. Less of the total variance in the model than we would
like is explained by the variables. Models with this problem are identified
in the text.
In addition, the problem of multicollinearity needs to be better
resolved. It is perhaps the most serious impediment to doing good science
in economics today. To mitigate the problem in this study, we use first dif-
ferencing, and careful selection of combinations of explanatory variables
used. In addition, we do extensive robustness testing, by adding and sub-
tracting explanatory variables to a model, to ensure (reasonable) model
changes do not cause marked changes in other parameter estimates. For
most of our parameter estimates we are able to show these techniques
achieved the desired level of stability, but not for all. For some models,
parameter estimates are still sensitive to exactly what other variables are
included in the model (these models are identified in the text). Economists
needs to develop better scientific methods for dealing with this problem.
CHAPTER 1
Introduction
The econometric model of the U.S. economy developed in this

chapter follows the demand-driven structural modeling approach used by
Lawrence Klein, and for which he received a Nobel Prize, as well as by
other major structural models developed by Eckstein, Goldberger, and De
Leeuw in the 1940–1980 period. This modeling tradition is carried on
today by Ray Fair, and by this model. This type of model is a modern ver-
sion of the “old” non-micro foundations Keynesian (i.e., demand driven)
model. It incorporates additional equations and variables to address issues
not dealt with in Keynes’ original work: for example, the crowd out prob-
lem resulting from government deficits, cost push inflation corrections to
the Phillips curve, the Samuelson accelerator, and the Taylor rule version
of the LM function. We show that these “Cowles Commission” models
can easily be extended to allow calculation of sector, industry, or even
individual product demand curves. That is, Cowles models can be struc-
tured to allow analysis of microeconomic as well as macroeconomic issues.
Hence, the description of “old” Keynesian models as not having micro
foundations seems somewhat inaccurate.
The production-side model contains 45 equations. Thirty are behavior
equations whose determinants describe what drives the demand for con-
sumer goods (8 equations), investment goods (9 equations), exports (1
equation), and the demand for government goods, services, and trans-
fers, and the supply of government receipts (3 equations). Two other
“IS curve” equations combine the preceding equations to determine the
© The Author(s) 2017 1

J. J. Heim, An Econometric Model of the US Economy,
DOI 10.1007/978-3-319-50681-4_1
Another random document with
no related content on Scribd:
like effect on all who have the time and patience to read what I have
here written.
Speech of Hon. John A. Logan,
On Self-Government in Louisiana, January 13 and 14, 1875.

The Senate having under consideration the resolution submitted
by Mr. Schurz on the 8th of January, directing the Committee of the
Judiciary to inquire what legislation is necessary to secure to the
people of the State of Louisiana their rights of Self-government
under the Constitution Mr. Logan said:
Mr. President: I believe it is considered the duty of a good sailor
to stand by his ship in the midst of a great storm. We have been told
in this Chamber that a great storm of indignation is sweeping over
this land, which will rend asunder and sink the old republican craft.
We have listened to denunciations of the President, of the
republicans in this Chamber, of the republican party as an
organization, their acts heretofore and their purposes in reference to
acts hereafter, of such a character as has seldom been listened to in
this or in any other legislative hall. Every fact on the side of the
republican party has been perverted, every falsehood on the part of
the opposition has been exaggerated, arguments have been made
here calculated to inflame and arouse a certain class of the people of
this country against the authorities of the Government, based not
upon truth but upon manufactured statements which were utterly
false. The republican party has been characterized as despotic, as
tyrannical, as oppressive. The course of the Administration and the
party toward the southern people has been denounced as of the most
tyrannical character by men who have received clemency at the
hands of this same party.
Now, sir, what is the cause of all this vain declamation? What is
the cause of all this studied denunciation? What is the reason for all
these accusations made against a party or an administration? I may
be mistaken, but, if I am not, this is the commencement of the
campaign of 1876. It has been thought necessary on the part of the
opposition Senators here to commence, if I may use a homely phrase,
a raid upon the republican party and upon this Administration, and
to base that upon false statements in reference to the conduct of
affairs in the State of Louisiana.
I propose in this debate, and I hope I shall not be too tedious,
though I may be somewhat so, to discuss the question that should be
presented to the American people. I propose to discuss that question
fairly, candidly, and truthfully. I propose to discuss it from a just,
honest, and legal standpoint. Sir, what is that question? There was a
resolution offered in this Chamber calling on the President to furnish
certain information. A second resolution was introduced, (whether
for the purpose of hanging on it an elaborate speech or not I am not
aware,) asking the Committee on the Judiciary to report at once
some legislation in reference to Louisiana. Without any facts
presented officially arguments have been made, the country has been
aroused, and some people have announced themselves in a manner
calculated to produce a very sore feeling against the course and
conduct of the party in power. I say this is done without the facts;
without any basis whatever; without any knowledge officially
communicated to them in reference to the conduct of any of the
parties in the State of Louisiana. In discussing this question we ought
to have a standpoint; we ought to have a beginning; some point from
which we may all reason and see whether or not any great outrage
has been perpetrated against the rights of the American people or
any portion of them.
I then propose to start at this point, that there is a government in
the State of Louisiana. Whether that government is a government of
right or not is not the question. Is there a government in that State
against which treason, insurrection, or rebellion, may be committed?
Is there such a government in the State of Louisiana as should
require the maintenance of peace and order among the citizens of
that State? Is there such a government in the State of Louisiana as
requires the exercise of Executive authority for the purpose of
preserving peace and order within its borders? I ask any Senator on
this floor to-day if he can stand up here as a lawyer, as a Senator, as
an honest man, and deny the fact that a government does exist?
Whether he calls it a government de jure or a government de facto, it
is immaterial. It is such an organization as involves the liberties and
the protection of the rights of the people of that State. It will not do
for Senators to talk about the election of 1872. The election of 1872
has no more to do with this “military usurpation” that you speak of
to-day than an election of a hundred years ago. It is not a question as
to whether this man or that was elected. The question is, is there
such a government there as can be overturned, and has there been an
attempt to overturn it? If so, then what is required to preserve its
status or preserve the peace and order of the people?
But the other day when I asked the question of a Senator on the
other side, who was discussing this question, whether or not he
indorsed the Penn rebellion, he answered me in a playful manner
that excited the mirth of people who did not understand the
question, by saying that I had decided that there was no election, and
that therefore there was no government to overturn. Now I ask
Senators, I ask men of common understanding if that is the way to
treat a question of this kind; when asked whether insurrection
against a government recognized is not an insurrection and whether
he endorses it, he says there is no government to overturn. If there is
no government to overturn, why do you make this noise and
confusion about a Legislature there? If there is no State government,
there is no State Legislature. But I will not answer in that manner. I
will not avoid the issue; I will not evade the question. I answer there
is a Legislature, as there is a State government, recognized by the
President, recognized by the Legislature, recognized by the courts,
recognized by one branch of Congress, and recognized by the
majority of the citizens by their recognition of the laws of the State;
and it will not do to undertake to avoid questions in this manner.
Let us see, then, starting from that standpoint, what the position of
Louisiana is now, and what it has been. On the 14th day of
September last a man by the name of Penn, as to whom we have
official information this morning, with some seven or ten thousand
white-leaguers made war against that government, overturned it,
dispersed it, drove the governor from the executive chamber, and he
had to take refuge under the jurisdiction of the Government of the
United States, on the soil occupied by the United States custom-
house, where the exclusive jurisdiction of the United States
Government extends, for the purpose of protecting his own life.
This then was a revolution; this then was a rebellion; this then was
treason against the State, for which these men should have been
arrested, tried, and punished. Let gentlemen dodge the question as
they may; it may be well for some men there who engaged in this
treasonable act against the government that they had Mr. Kellogg for
governor. It might not have been so well for them, perhaps, had there
been some other man in his place. I tell the Senator from Maryland if
any crowd of armed men should undertake to disperse the
government of the State of Illinois, drive its governor from the
executive chamber, enter into his private drawers, take his private
letters, and publish them, and act as those men did, some of them
would pay the penalty either in the penitentiary or by dancing at the
end of a rope.
But when this rebellion was going on against that State, these
gentlemen say it was a State affair; the Government of the United
States has nothing to do with it! That is the old-fashioned secession
doctrine again. The government of the United States has nothing to
do with it! This national government is made up of States, and each
State is a part of the Government, each is a part of its life, of its body.
It takes them all to make up the whole; and treason against any part
of it is treason against the whole of it, and it became the duty of the
President to put it down, as he did do; and, in putting down that
treason against the Kellogg government, the whole country almost
responded favorably to his action.
But our friend from Maryland, not in his seat now, [Mr.
Hamilton] said that that was part of the cause of the elections going
as they did. In other words, my friend from Maryland undertook in a
roundabout way to endorse the Penn rebellion, and claim that people
of the country did the same thing against the government of the State
of Louisiana, and on this floor since this discussion has been going
on, not one Senator on that side of the chamber has lisped one word
against the rebellion against the government of the State of
Louisiana, and all who have spoken of it have passed it by in silence
so as to indicate clearly that they endorse it, and I believe they do.
Then, going further, the President issued his proclamation
requiring those insurgents to lay down their arms and to resume
their peaceful pursuits. This morning we have heard read at the
clerk’s desk that these men have not yet complied fully with that
proclamation. Their rebellious organization continued up to the time
of the election and at the election. When the election took place, we
are told by some of these Senators that the election was a peaceable,
and a fair election, that a majority of democrats were elected. That is
the question we propose to discuss as well as we are able to do it.
They tell us that there was no intimidation resorted to by any one in
the State of Louisiana. I dislike very much to follow out these
statements that are not true and attempt to controvert them because
it does seem to me that we ought to act fairly and candidly in this
Chamber and discuss questions without trying to pervert the issue or
the facts in connection with it.
Now, I state it as a fact, and I appeal to the Senator from Louisiana
to say whether or not I state truly, that on the night before the
election in Louisiana notices were posted all over that country on the
doors of the colored republicans and the white republicans, too, of a
character giving them to understand that if they voted their lives
would be in danger; and here is one of the notices posted all over that
country:
2×6
This “2 × 6” was to show the length and width of the grave they
would have. Not only that, but the negroes that they could impose
upon and get to vote the democratic ticket received, after they had
voted, a card of safety; and here is that card issued to the colored
people whom they had induced to vote the democratic ticket, so that
they might present it if any white-leaguers should undertake to
plunder or murder them:
New Orleans, Nov. 28, 1874.
This is to certify that Charles Durassa, a barber by occupation, is a

Member of the 1st Ward Colored Democratic Club, and that at the late
election he voted for and worked in the interests of the Democratic
Candidates.
WILLIAM ALEXANDER,
President 1st Ward Col’d Democratic Club.
NICK HOPE, Secretary.
Rooms Democratic Parish Committee.
New Orleans, Nov. 28, 1874.
The undersigned, Special Committee, appointed on behalf of the Parish

Committee, approve of the above Certificate.
ED. FLOOD, Chairman.

PAUL WATERMAN.
H. J. RIVET.
Attest:
J. H. HARDY, Ass’t Sec. Parish Committee.
These were the certificates given to negroes who voted the

democratic ticket, that they might present them to save their lives
when attacked by the men commonly known as Ku-Klux or white-
leaguers in that country; and we are told that there is no intimidation
in the State of Louisiana!
Our friend from Georgia [Mr. Gordon] has been very profuse in
his declamation as to the civility and good order and good bearing of
the people of Louisiana and the other Southern States. But, sir, this
intimidation continued up to the election. After the election, it was
necessary for the governor of that State to proceed in some manner
best calculated to preserve the peace and order of the country.
Now, Mr. President, I want to ask candid, honest, fair-minded

men, after reading the report of General Sheridan showing the
murder, not for gain, not for plunder, but for political opinions in the
last few years of thirty-five hundred persons in the State of
Louisiana, all of them republicans, not one of them a democrat—I
want to ask if they can stand here before this country and defend the
democratic party of Louisiana? I put this question to them for they
have been here for days crying against the wrongs upon the
democracy of Louisiana. I want any one of them to tell me if he is
prepared to defend the democracy of Louisiana. What is your
democracy of Louisiana? You are excited, your extreme wrath is
aroused at General Sheridan because he called your White Leagues
down there “banditti.” I ask you if the murder of thirty-five hundred
men in a short time for political purposes by a band of men banded
together for the purpose of murder does not make them banditti,
what it does make them? Does it make them democrats? It certainly
does not make them republicans. Does it make them honest men? It
certainly does not. Does it make them law-abiding men? It certainly
does not. Does it make them peaceable citizens? It certainly does not.
But what does it make them? A band of men banded together and
perpetrating murder in their own State? Webster says a bandit is “a
lawless or desperate fellow; a robber; a brigand,” and “banditti” are
men banded together for plunder and murder; and what are your
White Leagues banded together for if the result proves that they are
banded together for murder for political purposes?
O, what a crime it was in Sheridan to say that these men were
banditti! He is a wretch. From the papers he ought to be hanged to a
lamp-post; from the Senators he is not fit to breathe the free air of
heaven or of this free Republic; but your murderers of thirty-five
hundred people for political offenses are fit to breathe the air of this
country and are defended on this floor to-day, and they are defended
here by the democratic party, and you cannot avoid or escape the
proposition. You have denounced republicans for trying to keep the
peace in Louisiana; you have denounced the Administration for
trying to suppress bloodshed in Louisiana; you have denounced all
for the same purpose; but not one word has fallen from the lips of a
solitary democratic Senator denouncing these wholesale murders in
Louisiana. You have said, “I am sorry these things are done,” but you
have defended the White Leagues; you have defended Penn; you
have defended rebellion; and you stand here to-day the apologists of
murder, of rebellion, and of treason in that State.
I want to ask the judgment of an honest country, I want to ask the
judgment of the moral sentiments of the law-abiding people of this
grand and glorious Republic to tell me whether men shall murder by
the score, whether men shall trample the law under foot, whether
men shall force judges to resign, whether men shall force prosecuting
attorneys to resign, whether men shall take five officers of a State out
and hang or shoot them if they attempt to exercise the functions of
their office, whether men shall terrify the voters and office-holders of
a State, whether men shall undertake in violation of law to organize a
Legislature for revolutionary purposes, for the purpose of putting a
governor in possession and taking possession of the State and then
ask the democracy to stand by them—I appeal to the honest
judgment of the people of this land and ask them to respond whether
this was not an excusable case when this man used the Army to
protect the life of that State and to preserve the peace of that people?
Sir, the man who will not use all the means in his power to preserve
the nationality, the integrity of this Government, the integrity of a
State or the peace and happiness of a people, is not fit to govern, he
is not fit to hold position in this or any other civilized age.
Does liberty mean wholesale slaughter? Does republican
government mean tyranny and oppression of its citizens? Does an
intelligent and enlightened age of civilization mean murder and
pillage, bloodshed at the hands of Ku-Klux or White Leagues or
anybody else, and if any one attempts to put it down, attempts to
reorganize and produce order where chaos and confusion have
reigned, they are to be denounced as tyrants, as oppressors, and as
acting against republican institutions? I say then the happy days of
this Republic are gone. When we fail to see that republicanism
means nothing, that liberty means nothing but the unrestrained
license of the mobs to do as they please, then republican government
is a failure. Liberty of the citizen means the right to exercise such
rights as are prescribed within the limits of the law so that he does
not in the exercise of these rights infringe the rights of other citizens.
But the definition is not well made by our friends on the opposite
side of this Chamber. Their idea of liberty is license; it is not liberty,
but it is license. License to do what? License to violate law, to
trample constitutions under foot, to take life, to take property, to use
the bludgeon and the gun or anything else for the purpose of giving
themselves power. What statesman ever heard of that as a definition
of liberty? What man in a civilized age has ever heard of liberty being
the unrestrained license of the people to do as they please without
any restraint of law or of authority? No man, no not one until we
found the democratic party, would advocate this proposition and
indorse and encourage this kind of license in a free country.
Mr. President, I have perhaps said more on this question of
Louisiana than might have been well for me to say on account of my
strength, but what I have said about it I have said because I honestly
believed it. What I have said in reference to it comes from an honest
conviction in my mind and in my heart of what has been done to
suppress violence and wrong. But I have a few remarks in conclusion
to submit now to my friends on the other side, in answer to what they
have said not by way of argument but by way of accusation. You say
to us—I had it repeated to me this morning in private conversation
—“Withdraw your troops from Louisiana and you will have peace.”
Ah, I heard it said on this floor once “Withdraw your troops from
Louisiana and your State government will not last a minute.” I heard
that said from the opposite side of the Chamber, and now you say
“Withdraw your troops from Louisiana and you will have peace.”
Mr. President, I dislike to refer to things that are past and gone; I
dislike to have my mind called back to things of the past; but I well
remember the voice in this Chamber once that rang out and was
heard throughout this land, “Withdraw your troops from Fort
Sumter if you want peace.” I heard that said. Now it is “Withdraw
your troops from Louisiana if you want peace.” Yes, I say, withdraw
your troops from Louisiana if you want a revolution, and that is what
is meant. But, sir, we are told, and doubtless it is believed by the
Senators who tell us so, who denounce the republican party, that it is
tyrannical, oppressive, and outrageous. They have argued themselves
into the idea that they are patriots, pure and undefiled. They have
argued themselves into the idea that the democratic party never did
any wrong. They have been out of power so long that they have
convinced themselves that if they only had control of this country for
a short time, what a glorious country they would make it. They had
control for nearly forty long years, and while they were the agents of
this country—I appeal to history to bear me out—they made the
Government a bankrupt, with rebellion and treason in the land, and
were then sympathizing with it wherever it existed. That is the
condition in which they left the country when they had it in their
possession and within their control. But they say the republican
party is a tyrant; that it is oppressive. As I have said, I wish to make a
few suggestions to my friends in answer to this accusation—
oppressive to whom? They say to the South, that the republican party
has tyrannized over the South. Let me ask you how has it tyrannized
over the South? Without speaking of our troubles and trials through
which we passed, I will say this: at the end of a rebellion that
scourged this land, that drenched it with blood, that devastated a
portion of it, left us in debt and almost bankrupt, what did the
republican party do? Instead of leaving these our friends and citizens
to-day in a territorial condition where we might exercise jurisdiction
over them for the next coming twenty years, where we might have
deprived them of the rights of members on this floor, what did we
do? We reorganized them into States, admitted them back into the
Union, and through the clemency of the republican party we
admitted representatives on this floor who had thundered against
the gates of liberty for four bloody years. Is that the tyranny and
oppression of which you complain at the hands of the republican
party? Is that a part of our oppression against you southern people?
Let us go a little further. When the armed democracy, for that is
what they were, laid down their arms in the Southern States, after
disputing the right of freedom and liberty in this land for four years,
how did the republican party show itself in its acts of tyranny and
oppression toward you? You appealed to them for clemency. Did you
get it? Not a man was punished for his treason. Not a man ever
knocked at the doors of a republican Congress for a pardon who did
not get it. Not a man ever petitioned the generosity of the republican
party to be excused for his crimes who was not excused. Was that
oppression upon the part of the republicans in this land? Is that a
part of the oppression of which you accuse us?
Let us look a little further. We find to-day twenty-seven
democratic Representatives in the other branch of Congress who
took arms in their hands and tried to destroy this Government
holding commissions there by the clemency of the republican party.
We find in this Chamber by the clemency of the republican party
three Senators who held such commissions. Is that tyranny; is that
oppression; is that the outrage of this republican party on you
southern people? Sir, when Jeff Davis, the head of the great
rebellion, who roams the land free as air, North, South, East, and
West, makes democratic speeches wherever invited, and the vice-
president of the southern rebellion holds his seat in the other House
of Congress, are we to be told that we are tyrants, and oppressing the
southern people? These things may sound a little harsh, but it is time
to tell the truth in this country. The time has come to talk facts. The
time has come when cowards should hide, and honest men should
come to the front and tell you plain, honest truths. You of the South
talk to us about oppressing you. You drenched your land in blood,
caused weeping throughout this vast domain, covered the land in
weeds of mourning both North and South, widowed thousands and
orphaned many, made the pension-roll as long as an army-list, made
the debt that grinds the poor of this land—for all these things you
have been pardoned, and yet you talk to us about oppression. So
much for the oppression of the republican party of your patriotic
souls and selves. Next comes the President of the United States. He is
a tyrant, too. He is an oppressor still, in conjunction with the
republican party. Oppressor of what? Who has he oppressed of your
Southern people, and when, and where? When your Ku-Klux,
banded together for murder and plunder in the Southern States,
were convicted by their own confession, your own representatives
pleaded to the President and said, “Give them pardon, and it will
reconcile many of the southern people.” The President pardoned
them; pardoned them of their murder, of their plunder, of their
piracy on land; and for this I suppose he is a tyrant.
More than that, sir, this tyrant in the White House has done more
for you southern people than you ought to have asked him to do. He
has had confidence in you until you betrayed that confidence. He has
not only pardoned the offences of the South, pardoned the criminals
of the democratic party, but he has placed in high official position in
this Union some of the leading men who fought in the rebellion. He
has put in his Cabinet one of your men; he has made governors of
Territories of some of your leading men who fought in the rebellion;
he has sent on foreign missions abroad some of your men who
warred against this country; he has placed others in the
Departments; and has tried to reconcile you in every way on earth,
by appealing to your people, by recognizing them and forgiving them
for their offenses, and for these acts of generosity, for these acts of
kindness, he is arraigned to-day as a Cæsar, as a tyrant, as an
oppressor.
Such kindness in return as the President has received from these
people will mark itself in the history of generosity. O, but say they,
Grant wants to oppress the White Leagues in Louisiana; therefore he
is an oppressor. Yes, Mr. President, Grant does desire that these men
should quit their everyday chivalric sports of gunning upon negroes
and republicans. He asks kindly that you stop it. He says to you,
“That is all I want you to do;” and you say that you are desirous that
they shall quit it. You have but to say it and they will quit it. It is
because you have never said it that they have not quit it. It is in the
power of the democratic party to-day but to speak in tones of
majesty, of honor, and justice in favor of human life, and your Ku-
Klux and murderers will stop. But you do not do it; and that is the
reason they do not stop. In States where it has been done they have
stopped. But it will not do to oppress those people; it will not do to
make them submit and subject them to the law; it will not do to stop
these gentlemen in their daily sports and in their lively recreations.
They are White Leagues; they are banded together as gentlemen;
they are of southern blood; they are of old southern stock; they are
the chivalry of days gone by; they are knights of the bloody shield;
and the shield must not be taken from them. Sirs, their shield will be
taken from them; this country will be aroused to its danger; this
country will be aroused to do justice to its citizens; and when it does,
the perpetrators of crime may fear and tremble. Tyranny and
oppression! A people who without one word of opposition allows
men who have been the enemies of a government to come into these
legislative Halls and make laws for that government to be told that
they are oppressors is a monstrosity in declamation and assertion.
Who ever heard of such a thing before? Who ever believed that such
men could make such charges? Yet we are tyrants!
Mr. President, the reading of the title of that bill from the House
only reminds me of more acts of tyranny and oppression of the
republican party, and there is a continuation of the same great
offenses constantly going on in this Chamber. But some may say “It
is strange to see Logan defending the President of the United States.”
It is not strange to me. I can disagree with the President when I think
he is wrong; and I do not blame him for disagreeing with me; but
when these attacks are made, coming from where they do, I am ready
to stand from the rising sun in the morning to the setting sun in the
evening to defend every act of his in connection with this matter
before us.
I may have disagreed with President Grant in many things; but I
was calling attention to the men who have been accusing him here,
on this floor, on the stump, and in the other House; the kind of men
who do it, the manner of its doing, the sharpness of the shafts that
are sent at him, the poisonous barbs that they bear with them, and
from these men who, at his hands, have received more clemency than
any men ever received at the hands of any President or any man who
governed a country. Why, sir, I will appeal to the soldiers of the rebel
army to testify in behalf of what I say in defense of President Grant—
the honorable men who fought against the country, if there was
honor in doing it. What will be their testimony? It will be that he
captured your armed democracy of the South, he treated them
kindly, turned them loose, with their horses, with their wagons, with
their provisions; treated them as men, and not as pirates. Grant built
no prison-pens for the southern soldiers; Grant provided no
starvation for southern men; Grant provided no “dead-lines” upon
which to shoot southern soldiers if they crossed them; Grant
provided no outrageous punishment against these people that now
call him a tyrant. Generous to a fault in all his actions toward the
men who were fighting his country and destroying the constitution,
that man to-day is denounced as a very Cæsar!
Sherman has not been denounced, but the only reason is that he
was not one of the actors in this transaction; but I want now to say to
my friends on the other side, especially to my friend from Delaware,
who repeated his bitter denunciation against Sheridan yesterday—
and I say this in all kindness, because I am speaking what future
history will bear me out in—when Sheridan and Grant and Sherman,
and others like them, are forgotten in this country, you will have no
country. When the democratic party is rotten for centuries in its
grave, the life, the course, the conduct of these men will live as bright
as the noonday sun in the heart of every patriot of a republic like the
American Union. Sirs, you may talk about tyranny, you may talk
about oppression, you may denounce these men; their glory may
fade into the darkness of night; but that darkness will be a brilliant
light compared with the darkness of the democratic party. Their
pathway is illuminated by glory; yours by dark deeds against the
Government. That is a difference which the country will bear witness
to in future history when speaking of this country and the actors on
its stage.
Now, Mr. President, I have a word to say about our duty. A great
many people are asking, what shall we do? Plain and simple in my
judgment is the proposition. I say to republicans, do not be scared.
No man is ever hurt by doing an honest act and performing a
patriotic duty. If we are to have a war of words outside or inside, let
us have them in truth and soberness, but in earnest. What then is our
duty? I did not believe that in 1872 there were official data upon
which we could decide who was elected governor of Louisiana. But
this is not the point of my argument. It is that the President has
recognized Kellogg as governor of that State, and he has acted for
two years. The Legislature of the State has recognized him; the
supreme court of the State has recognized him; one branch of
Congress has recognized him. The duty is plain, and that is for this,
the other branch of Congress, to do it, and that settles the question.
Then, when it does it, your duty is plain and simple, and as the
President has told you, he will perform his without fear, favor, or
affection. Recognize the government that revolution has been against
and intended to overthrow, and leave the President to his duty, and
he will do it. That is what to do.
Sir, we have been told that this old craft is rapidly going to pieces;
that the angry waves of dissension in the land are lashing against her
sides. We are told that she is sinking, sinking, sinking to the bottom
of the political ocean. Is that true? Is it true that this gallant old
party, that this gallant old ship that has sailed through troubled seas
before is going to be stranded now upon the rock of fury that has
been set up by a clamor in this Chamber and a few newspapers in the
country? Is it true that the party that saved this country in all its
great crises, in all its great trials, is sinking to-day on account of its
fear and trembling before an inferior enemy? I hope not. I
remember, sir, once I was told that the old republican ship was gone;
but when I steadied myself on the shores bounding the political
ocean of strife and commotion, I looked afar off and there I could see
a vessel bounding the boisterous billows with white sails unfurled,
marked on her sides “Freighted with the hopes of mankind,” while
the great Mariner above, as her helmsman, steered her, navigated
her to a haven of rest, of peace, and of safety. You have but to look
again upon that broad ocean of political commotion to-day, and the
time will soon come when the same old craft, provided with the same
cargo, will be seen, flying the same flag, passing through these
tempestuous waves, anchoring herself at the shores of honesty and
justice, and there she will lie undisturbed by strife and tumult, again
in peace and safety. [Manifestations of applause in the galleries.]
Speech of Hon. James G. Blaine, of Maine,
On the False Issue raised by the Democratic Party, Delivered in the

Senate of the United States, Monday, April 14, 1879.
The Senate having under consideration the bill (H. R. No. 1,)
making appropriations for the support of the Army for the fiscal year
ending June 30, 1880, and for other purposes—
Mr. Blaine said:
Mr. President: The existing section of the Revised Statutes
numbered 2002 reads thus:
No military or naval officer, or other person engaged in the civil,
military, or naval service of the United States, shall order, bring,
keep or have under his authority or control, any troops or armed
men at the place where any general or special election is held in any
State, unless it be necessary to repel the armed enemies of the United
States, or to keep the peace at the polls.
The object of the proposed section, which has just been read at the
Clerk’s desk, is to get rid of the eight closing words, namely, “or to
keep the peace at the polls,” and therefore the mode of legislation
proposed in the Army bill now before the Senate is an unusual mode;
it is an extraordinary mode. If you want to take off a single sentence
at the end of a section in the Revised Statutes the ordinary way is to
strike off those words, but the mode chosen in this bill is to repeat
and re-enact the whole section leaving those few words out. While I
do not wish to be needlessly suspicious on a small point I am quite
persuaded that this did not happen by accident but that it came by
design. If I may so speak it came of cunning, the intent being to
create the impression that whereas the republicans in the
administration of the General Government had been using troops
right and left, hither and thither, in every direction, as soon as the
democrats got power they enacted this section. I can imagine
democratic candidates for Congress all over the country reading this
section to gaping and listening audiences as one of the first
offsprings of democratic reform, whereas every word of it, every
syllable of it, from its first to its last, is the enactment of a republican
Congress.
I repeat that this unusual form presents a dishonest issue, whether
so intended or not. It presents the issue that as soon as the
democrats got possession of the Federal Government they proceeded
to enact the clause which is thus expressed. The law was passed by a
republican Congress in 1865. There were forty-six Senators sitting in
this Chamber at that time, of whom only ten or at most eleven were
democrats. The House of Representatives was overwhelmingly
republican. We were in the midst of a war. The republican
administration had a million or possibly twelve hundred thousand
bayonets at its command. Thus circumstanced and thus surrounded,
with the amplest possible power to interfere with elections had they
so designed, with soldiers in every hamlet and county of the United
States, the republican party themselves placed that provision on the
statute book, and Abraham Lincoln, their President, signed it.
I beg you to observe, Mr. President, that this is the first instance in
the legislation of the United States in which any restrictive clause
whatever was put upon the statute book in regard to the use of troops
at the polls. The republican party did it with the Senate and the
House in their control. Abraham Lincoln signed it when he was
Commander-in-Chief of an army larger than ever Napoleon
Bonaparte had at his command. So much by way of correcting an
ingenious and studied attempt at misrepresentation.
The alleged object is to strike out the few words that authorize the
use of troops to keep peace at the polls. This country has been
alarmed, I rather think indeed amused, at the great effort made to
create a widespread impression that the republican party relies for
its popular strength upon the use of the bayonet. This democratic
Congress has attempted to give a bad name to this country
throughout the civilized world, and to give it on a false issue. They
have raised an issue that has no foundation in fact—that is false in
whole and detail, false in the charge, false in all the specifications.
That impression sought to be created, as I say, not only throughout
the North American continent but in Europe to-day, is that elections
are attempted in this country to be controlled by the bayonet.
I denounce it here as a false issue. I am not at liberty to say that
any gentleman making this issue knows it to be false; I hope he does
not; but I am going to prove to him that it is false, and that there is
not a solitary inch of solid earth on which to rest the foot of any man
who makes that issue. I have in my hand an official transcript of the
location and the number of all the troops of the United States east of
Omaha. By “east of Omaha,” I mean all the United States east of the
Mississippi river and that belt of States that border the Mississippi
river on the west, including forty-one million at least out of the forty-
five million of people that this country is supposed to contain to-day.
In that magnificent area, I will not pretend to state its extent, but
with forty-one million people, how many troops of the United States
are there to-day? Would any Senator on the opposite side like to
guess, or would he like to state how many men with muskets in their
hands there are in the vast area I have named? There are two
thousand seven hundred and ninety-seven! And not one more.
From the headwaters of the Mississippi River to the lakes, and
down the great chain of lakes, and down the Saint Lawrence and
down the valley of the Saint John and down the St. Croix striking the
Atlantic Ocean and following it down to Key West, around the Gulf,
up to the mouth of the Mississippi again, a frontier of eight thousand
miles either bordering on the ocean or upon foreign territory is
guarded by these troops. Within this domain forty-five fortifications
are manned and eleven arsenals protected. There are sixty troops to
every million of people. In the South I have the entire number in
each State, and will give it.
And the entire South has eleven hundred and fifty-five soldiers to
intimidate, overrun, oppress and destroy the liberties of fifteen
million people! In the Southern States there are twelve hundred and
three counties. If you distribute the soldiers there is not quite one for
each county; and when I give the counties I give them from the
census of 1870. If you distribute them territorially there is one for
every seven hundred square miles of territory, so that if you make a
territorial distribution, I would remind the honorable Senator from
Delaware, if I saw him in his seat, that the quota for his State would
be three—“one ragged sergeant and two abreast,” as the old song has
it. [Laughter.] That is the force ready to destroy the liberties of
Delaware!
Mr. President, it was said, as the old maxim has it, that the
soothsayers of Rome could not look each other in the face without
smiling. There are not two democratic Senators on this floor who can
go into the cloak-room and look each other in the face without
smiling at this talk, or, more appropriately, I should say without
blushing—the whole thing is such a prodigious and absolute farce,
such a miserably manufactured false issue, such a pretense without
the slightest foundation in the world, and talked about most and
denounced the loudest in States that have not and have not had a
single Federal soldier. In New England we have three hundred and
eighty soldiers. Throughout the South it does not run quite seventy
to the million people. In New England we have absolutely one
hundred and twenty soldiers to the million. New England is far more
overrun to-day by the Federal soldier, immensely more, than the
whole South is. I never heard anybody complain about it in New
England, or express any great fear of his liberties being endangered
by the presence of a handful of troops.
As I have said, the tendency of this talk is to give us a bad name in
Europe. Republican institutions are looked upon there with jealousy.
Every misrepresentation, every slander is taken up and exaggerated
and talked about to our discredit, and the democratic party of the
country to-day stand indicted, and I here indict them, for public
slander of their country, creating the impression in the civilized
world that we are governed by a ruthless military despotism. I
wonder how amazing it would be to any man in Europe, familiar as
Europeans are with great armies, if he were told that over a territory
larger than France and Spain and Portugal and Great Britain and
Holland and Belgium and the German Empire all combined, there
were but eleven hundred and fifty-five soldiers! That is all this
democratic howl, this mad cry, this false issue, this absurd talk is
based on—the presence of eleven hundred and fifty-five soldiers on
eight hundred and fifty thousand square miles of territory, not
double the number of the democratic police in the city of Baltimore,
not a third of the police in the city of New York, not double the
democratic police in the city of New Orleans. I repeat, the number

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An Econometric Model of the US

Economy: Structural Analysis in 56

An Econometric Model of the US Economy: Structural

Crowding Out Fiscal Stimulus: Testing the Effectiveness

Why Fiscal Stimulus Programs Fail, Volume 1: The Limits

Econometric Analysis Global Edition William H. Greene

Cause and correlation in biology a user s guide to path

HRM in Africa Understanding New Scenarios and

Partial Differential Equations of Classical Structural

Why Fiscal Stimulus Programs Fail, Volume 2:

ISBN 978-3-319-50680-7 ISBN 978-3-319-50681-4 (eBook)

Library of Congress Control Number: 2017940494

© The Editor(s) (if applicable) and The Author(s) 2017

Cover illustration: Lyroky / Alamy Stock Photo

Printed on acid-free paper

This Palgrave Macmillan imprint is published by Springer Nature

engineering courses, where every equation describes what actually works,

SUNY, Albany John J. Heim

Most of all, I am indebted to Nobel Laureate Robert Solow for providing

Part I Production of the GDP

3 Literature Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115

4 The Consumption Models . . . . . . . . . . . . . . . . . . . . . . . . . . . 147

5 Models Identifying the Determinants of Investment

5.8 OLS Estimates of the Determinants of Investment

6 The Exports Demand Equation . . . . . . . . . . . . . . . . . . . . . . 221

7 Statistically Estimated Real GDP Determination

8 Real GDP Determination Function (“IS” Curve)

9 Determinants of the Prime Interest Rate: Taylor

10 Determinants of the Prime Interest Rate – LM

11 Determinants of Inflation – The Phillips Curve Model . . . . 265

12 Determinants of Unemployment . . . . . . . . . . . . . . . . . . . . . . 273

13 The Savings Functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285

14 Determinants of Government Receipts . . . . . . . . . . . . . . . . . 303

16 Capacity of the Model to Explain Behavior

16.2 Model 2: Treating C, I, and X Model Determinants

17 Converting the Older Keynesian IS-LM Model to

19 Summary and Conclusions (Production Side of the

Part II Income Side of the NIPA Accounts

20 Determinants of Factor Shares . . . . . . . . . . . . . . . . . . . . . . . 381

Fig. 4.1.1 Actual consumption compared to levels

Graph. 20.4.1.1 Model of only variables robust in at least

Table. 1.4.1 Determinants of consumption . . . . . . . . . . . . 18

Table. 1.4.14 Determinants of interest total income

Table. 4.0.2 Determinants of consumption

exogenous or lagged in their effect

Table. 7.1.1 Comparison of PR –2 effects in GDP,

Table. 14.2 Robustness over time – government

Table. 18.2 Dynamic Effects of Stimulus Programs

Table. 20.4.6.1 Summary of factors affecting profit’s %

THE PRODUCTION SIDE MODEL

a Keynesian model. However, when a variable to measure “crowd out” is

and why it is used here. Chapter 2 is literally a paper within a paper. It

. . . Your arguments in favor of Cowles-type models as against VAR and

After Keynes himself, Solow is arguably the greatest economist of the

THE INCOME SHARES MODEL

interest income. An additional four equations describe the variables found

The econometric model of the U.S. economy developed in this

© The Author(s) 2017 1

On Self-Government in Louisiana, January 13 and 14, 1875.

This is to certify that Charles Durassa, a barber by occupation, is a

NICK HOPE, Secretary.

Rooms Democratic Parish Committee.

New Orleans, Nov. 28, 1874.