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1982 Economic Commentaries

  • Do Deficits Cause Inflation?


    Owen F. Humpage

    Abstract

    When the Reagan administration first took office, it forecast federal-budget deficits of $45 billion for fiscal year (FY) 1982 and $23 billion for FY 1983, and it projected a balanced budget by FY 1985. Fiscal year 1982, however, ended in September with a record $110-billion deficit, and most budget analysts now expect a deficit of approximately $170 billion to $180 billion in FY 1983. Moreover, the deficit could easily remain above $100 billion through FY 1985 unless Congress cuts expenditures or increases taxes. The federal government must finance these deficits by selling Treasury securities either to the Federal Reserve System or to the public. Read More

  • The Shift to Western Coal


    Gerald Anderson

    Abstract

    The U.S. coal industry has taken on an increasingly important role in recent years as a source of energy. The Organization of Petroleum Exporting Countries (OPEC) has increased the price of oil 15- fold since 1973, making coal a lower-priced alternative. For example, the delivered cost of oil purchased by electric utilities in 1982 has averaged $4.81 per million Btu's, while coal has cost $1.65 per million Btu's. The prospect that oil will become more scarce as energy demand grows also increases coal's attraction, because it is a much more abundant mineral. Moreover, the embargo that some OPEC nations imposed on oil shipments to the United States in 1973-74 made Americans realize the importance of this nation's domestic coal reserves. Read More

  • Safe-Harbor Leasing: Separating the Wheat from the Chaff


    Amy Kerka

    Abstract

    In August 1981 the U.S. Congress enacted the Economic Recovery Tax Act (ERT A) to stimulate investment in plants and equipment through expanded investment tax credits and a more rapid method of depreciation. Before this legislation, firms that did not generate sufficient taxable income could not take full advantage of tax incentives for investment. Consequently, these firms faced an effective cost of capital some 10 percent to 30 percent higher than their more profitable counterparts. The 1981 tax-law revisions allowed low-profit or profitless firms to sell their tax benefits to more profitable firms. The intent of these new rules, called the safe-harbor leasing provisions, was to equalize the cost of capital for all firms, that is, to allow a more even distribution of tax incentives for investment under the U.S. corporate-income-tax code. Read More

  • The Strength of Consumer Balance Sheets


    Kim Kowalewski

    Abstract

    Since the end of 1979, U.S. consumers have strengthened their balance sheets considerably. The growth of outstanding household liabilities fell from 14.3 percent in 1979 to an annual rate of 7.7 percent over the period 1979:IVQ to 1981:1VQ. Consequently, debt repayments relative to disposable personal income and outstanding liabilities relative to assets have fallen substantially from their high 1979 values. In several respects the improvement in consumer balance sheets has been more dramatic since 1979 than improvements in past recessionary periods. Indeed, this improvement is a key factor underlying forecasts of a consumer-led economic recovery later this year. However, there have been some marked changes in the composition of consumer assets in recent years and in the values of these assets in the past year. These changes could affect consumer behavior over the next several quarters in ways that may moderate the recovery in consumer outlays. This Economic Commentary discusses the significance of the recent changes in the composition of consumer balance sheets and speculates on the possible impact of these changes on consumer spending in the next several quarters. Read More

  • Anatomy of a Price-Fix


    Michael Bryan

    Abstract

    On February 19, 1982, the three largest retail food chains in the Cleveland area were fined $4.2 million by a federal court for criminal price-fixing, after entering pleas of no contest to the charges against them. Four supermarket executives were given three-year suspended sentences and fined $200,000 each for their participation in the price conspiracy. In related civil actions, the federal court accepted a $20-million coupon repayment plan from the local food stores, payable to the approximately one million households that the retailers serve. This is the largest consumer settlement in U.S. history. Read More

  • Union Wage Concessions


    Daniel A. Littman

    Abstract

    During the past several months, the climate of U.S. industrial relations has been characterized by a willingness on the part of trade unions to make significant wage, fringe benefit, and work-rule concessions. Unions have agreed to cost-saving measures at such major employers as General Motors, International Harvester, Armour, Uniroyal, and Pan American Airlines. Early in 1982, 335,000 members of the International Brotherhood of Teamsters accepted an indefinite pay freeze in negotiations with Trucking Management, Inc., and the Chicago Regional Trucking Association. While wage concessions have occurred with some regularity in the postwar period, they seem to be considerably more widespread in 1982; the recent automobile, trucking, and airline concessions eventually could affect over 1 million workers. In marked contrast to previous experience, the 1982 concessions are occurring in high-wage industries, strengthening the view that something unusual is taking place with respect to wage inflation. Read More

  • Performance of Ohio's Independent Banks


    Gary Whalen

    Abstract

    Economic, regulatory, and technological developments have brought commercial banking organizations under increased pressure in recent years. Recession and persistently high and volatile interest rates have increased both interest-rate and credit risk for banks. Inter-industry and intra-industry competition also are increasing. Asymmetric bank/nonbank regulations, along with technological developments and financial innovations, have stimulated the growth of a variety of powerful nonbank financial competitors. The Depository Institutions Deregulation and Monetary Control Act of 1980 has increased the powers of thrift institutions and deregulated deposit rates, resulting in more intense rivalry in the markets for retail financial services. Finally, several states have eased regulatory restrictions on bank expansion by acquisition or merger and/or de novo branching. All of these forces are making it more difficult for the banks to perform as well as they have in the past. Read More

  • The Problem of Seasonally Adjusting Money


    John Carlson

    Abstract

    When an impending surge in the money supply filled the financial news in March of this year, the reports stated that the surge would result from above-average income tax refunds and early Social Security payments. Consistent with expectations, M-1 (which includes currency plus checkable deposits) grew 11.8 percent (saar) in April 1982. But personal tax refunds occur every year. And early Social Security payments occur whenever the third day of a month falls on a Saturday, Sunday, or holiday. The fact that these and other effects relate to seasonal or recurring events and can be predicted suggests a serious question. Why doesn't seasonal adjustment of the money supply filter all such movements? Read More

  • The Steel Trigger Price Mechanism


    Abstract

    The trigger price mechanism (TPM), implemented early in 1978, was devised to detect imports of steel at unfairly low prices and trigger the administrative relief provided by law. In 1977, the U.S. steel industry was facing tough import competition that compounded its problems of aging, inefficient plants, high wage rates, and low capacity utilization. U.S. steel imports had jumped to a record level of 19.3 million tons, 1 million tons higher than the previous record established in 1971. Read More

  • Bank Holding Companies' Participation in Credit Insurance Underwriting


    Paul Watro

    Abstract

    Banking organizations have responded to the growing demand for financial services by expanding the number of services that they offer. Commercial banks can offer non banking products and services through bank holding companies (BHCs). The resulting organizations can utilize existing facilities and resources more effectively and gain entry into potentially profitable areas; at the same time, the public benefits through price, product, and service competition. Read More

  • Unemployment Insurance: An Old Lesson for the New Federalism?


    Michael Bryan

    Abstract

    Although the unemployment insurance (UI) system in the United States evolved through the prompting of the federal government, the UI system functions as a collage of 53 individual state programs. The UI system is nearly 50 years old, yet its design might be viewed as a model for the Reagan administration's "New Federalism." As state-managed, state-financed insurance programs, the UI system embodies state autonomy in operating what essentially is federally established policy. However, a policy conceived at the federal level is not always cordially received at the state level, particularly if states are expected to shoulder part of the policy's financial burden. In the UI system the financing effort of the state programs has not been uniform, and the federal government has permitted, and even encouraged, some state UI programs to spend beyond their resources. Read More

  • Methods of Cash Management


    John Carlson

    Abstract

    Cash management-the control of payments, receipts, and any resulting transactions balances-has become increasingly sophisticated over the past decade. High interest rates, rapidly declining real costs of information-processing technology, proliferation of new financial instruments, and a changing regulatory environment all have contributed to a broadened market for cash-management practices that may soon include every small transactor in the nation, no matter how small. The cash-management process continues to have a significant impact on the public's portfolio holdings and consequently on the structure of financial markets. This impact is perhaps most evident in depository institutions, which have lost some of their share of the market for financial assets despite their offerings of new financial services and more attractive instruments. Read More

  • Financial Services and Small Businesses


    Paul Watro

    Abstract

    An important user of financial services is a group of customers known as small businesses. While it is commonly thought that small businesses depend almost exclusively on commercial banks for financial services, results of a recent survey of Ohio's small businesses cast some doubt on this assumption. The survey results show that small businesses demand and receive a variety of deposit and loan services, not only from commercial banks but also from other sources. Read More