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1984 Economic Commentaries

  • A Problem of Seasonal Adjustment


    Richard Mugel

    Abstract

    Typically, the public's demand for money fluctuates with changes in the calendar. As a result, money stock data are highly variable and exhibit regular movements within a given year. For example, the money stock typically expands around the year-end holidays and tax-payment time in April. Economists consider these variations to be seasonal; i.e., the variations do not indicate changes in money demand associated with interest rates or with the underlying pace of economic activity. Since Federal Reserve policymakers wish to concentrate on fundamental movements in money demand that are consistent with longerrun objectives, seasonal variation is eliminated from the money-supply series by a process known as <em>seasonal adjustment</em>. Thus, policymakers state both long- and short-run targets in seasonally adjusted terms. Accurate seasonal adjustment enables policymakers to accommodate the needs of commerce and to make informed decisions about monetary policy. Accurate seasonal adjustment also helps market participants interpret monetary policy. Read More

  • Flat Taxes and the Limits to Reform


    Paul Wyckoff

    Abstract

    Although Congress and the administration are always talking about tax reform, there is currently heightened interest in new, all-inclusive approaches to the problem. According to Rudolph Penner, director of the Congressional Budget Office, "The prospects for radical tax reform are brighter than ever." In his State of the Union message on January 25, 1984, President Reagan called for the Treasury Department to make a comprehensive study of ways to make the income tax more simple, more efficient, and more equitable. Treasury Secretary Donald T. Regan has indicated that the department will probably recommend some sort of modified flat tax system in its report. The administration is not alone in its interest in flat taxes; each major party has formulated a detailed and comprehensive modified flat tax proposal and has introduced it in Congress. This <em>Economic Commentary</em> examines the nature of flat taxes, the inadequacies in the present system that they would remedy, and the reasons why the alluring goal of a pure flat tax is difficult to achieve. Read More

  • Dimensions of Change in Cleveland's Economy


    Randall Eberts

    Abstract

    In the past two decades, Cleveland has shared in the plight of many heavily industrialized cities in the northern United States. Unable to match the attractions of climate and business environment of the Sunbelt, these metropolitan areas have experienced a slow but steady movement of population and employment opportunities away from the North and into the South and Southwest. In most cases, the shift in activity is a response to fundamental social and economic changes in the United States and not to specific conditions in particular metropolitan areas. Nonetheless, this trend has placed cities such as Cleveland in an uneasy period of transition. Once a great success story in the industrialization of this country, Cleveland is now grappling with declining population, an employment growth rate that is below the national average, and a shift away from manufacturing to other types of employment. The Cleveland of tomorrow will be dramatically different from the Cleveland of two decades ago. Read More

  • Should We Return to Fixed Exchange Rates?


    Nicholas Karamouzis

    Abstract

    There has been growing dissatisfaction with the current system of managed floating exchange rates, leading a small but increasing number of economists, policymakers, and journalists to call for a return to a system of limited exchange-rate flexibility. One group advocates a return to the gold standard. At the 1984 Republican National Convention, for example, several members of the platform committee favored a return to the gold standard as a vehicle to sustain domestic price stability and to restore international monetary soundness. Others have harbored the view of returning to a system of more stable exchange rates similar to the Bretton Woods system, with an important role ascribed to the dollar. Read More

  • The Service-Sector Recovery in Cleveland


    Robert Schnorbus Lorie Jackson

    Abstract

    A popular belief in urban development is that the service sector provides a perpetual source of employment growth. Service-sector industries include transportation and public utilities, wholesale and retail trade, government, finance, insurance, real estate, and other consumer and business services. Except for an occasional quarter or two of employment loss during recessions, service-sector employment has increased steadily nationwide. Service-sector employment is especially important to the Fourth District to replace jobs lost in the shrinking local manufacturing sector, In many areas of the Fourth District, however, rates of servicesector growth often have been among the lowest in the nation. Moreover, in five of the first six quarters of the current national recovery, employment in Cleveland's service sector declined (see chart 1). Indeed, service-sector employment has been on a downward trend since 1980. Read More

  • The Recovery of Durable Goods: What Exhilarated the Consumer?


    Lawrence Slifman

    Abstract

    Much of the strength in domestic demand during the first half of 1984 was in the consumption sector. This is not unusual for a recovery. Consumption spending typically rises rapidly in the first four quarters of a recovery and often continues to expand at a healthy pace as the economy moves into the second year of expansion. As shown in chart 1, the cyclical rise in total consumption spending during the first year and a half of the recovery was well within the range of previous postwar experience, rising a total of 8.7 percent. What was unusual, however, was the strength of demand for postponable, relatively durable consumer goods-especially spending for household equipment, such as furniture, kitchen appliances, and electronic goods, as well as outlays for clothing and shoes. Read More

  • Small-Issue IDBs-Tax Policy in Search of a Focus


    Paul Wyckoff

    Abstract

    Although no cash actually changes hands, a significant portion of federal government resources are being used to subsidize the activities of households and private firms. This subsidy occurs rather indirectly, in the form of a loss to the U.S. Treasury when state and local governments are allowed to issue private-purpose tax-exempt bonds. According to the Congressional Budget Office, this tax loss to the federal government will total approximately $13 billion per year over the next five years. This amount is more than the federal government is expected to spend annually on highways through 1989, and more than it will spend in total for assistance to public transit systems, wastewater treatment, water resources, airports, air traffic control, and municipal water-supply systems. Read More

  • The Costs of a Protectionist Cure


    Michael Bryan Owen F. Humpage

    Abstract

    In recent years, many ailing US. industries have blamed their ill health on foreign competition and have sought a cure in limiting the flow of imports. While proponents of protectionist legislation argue that trade restrictions are necessary to protect U.S. jobs, economic theory indicates that protectionism may secure jobs at a substantial cost to consumers and economic efficiency. In capitalism, unlike in medicine, isolating the patient can cause the disease to spread. The Japanese Voluntary Export Restraint (VER) program, which restricts exports of Japanese cars to the United States, provides a useful example of such a costly cure. Read More

  • Rate Deregulation and Deposit Shifting


    Paul Watro

    Abstract

    The deregulation of interest rates has provided increasing opportunities and choices for depository institutions and for individuals. Recent regulatory changes have dramatically altered both the deposit holdings of consumers and the balance sheets of depository institutions. Of major importance were the introduction of money market deposit accounts (MMDAs) in December 1982 and Super-NOW accounts in January 1983. In addition, all new time deposits with maturities of over 31 days were deregulated in October 1983. Competitive pressures induced depository institutions to pay higher rates on these new unregulated deposit accounts. Rate differentials motivated customers to increase their deposit holdings, particularly those paying higher rates. These changes not only altered the deposit structure of commercial banks and thrift institutions but also their deposit share. Such developments, in turn, affected the volume of required reserves and the composition of monetary aggregates. Read More

  • The Japanese Cost Advantage in Automobile Production


    Susan Loos

    Abstract

    Over the past ten years, U.S. automobile producers have lost substantial ground to the Japanese in the small-car market. A major reason for the success of Japanese manufacturers is that they enjoy a fundamental cost advantage in automobile production. While estimates of this cost advantage vary widely, an accurate determination of the advantage is extremely important to U.S. auto makers if they are to compete successfully in the small-car market. If the Japanese cost advantage were as small as $500 per car, then U.S. producers could close the gap by slightly improving productivity, instituting minor wage restraints, and taking advantage of moderate dollar depreciation. However, if the Japanese cost advantage were as large as $2,000 per car (as some analysts estimate it to be), then U.S. producers must fundamentally alter their production technology and labor-cost structure. Even a large dollar depreciation against the yen would not close such a gap by itself. Read More

  • Regional Interstate Banking


    Gerald Anderson Thomas Buynak James Balazsy Jr.

    Abstract

    More and more, bankers and legislators are initiating state laws to lower legal barriers to interstate banking. Using the authority of the Douglas Amendment of the Bank Holding Company Act of 1956, states are opting for one of three kinds of entry for out-of-state bank holding companies to acquire banks within a state's borders. Read More

  • Seeking a Stable Economic Environment


    Karen Horn

    Abstract

    Policymakers face many important decisions that will have a major effect on national economic performance in the years ahead. Such decisions will determine whether we as a nation will succeed in our efforts to restore prosperity in an inflation-free environment. The outcome will have a profound influence on the success of the efforts under way to improve productivity and to restore the competitive position of our industries and their workers in the Fourth Federal Reserve District. Read More

  • Nominal Income Targeting


    John Carlson

    Abstract

    In recent years prominent economists from diverse schools of thought have urged policymakers to establish long-term targets for nominal income. The common thread that emerges from these proposals is to extend the announced policy horizon beyond one year, thus clarifying the longer-run intent of policy. In this Economic Commentary, we describe the current framework for monetary policy and suggest that a multiyear nominal income target could be viewed as a practical extension of current policy procedures. To be useful, a nominal income target for monetary policy would need to be credible and hence achievable over a reasonably predictable period of time. In this article we also identify some potential problems for nominal income control, particularly during periods of disinflation. Read More

  • The Economy in 1984: Industry Perspectives


    Robert Schnorbus

    Abstract

    The U.S. economy steamed into its second year of recovery, with little perceptible reacceleration in inflation. In the first quarter of 1984, gains in employment and production accelerated at near-record rates; new-auto sales rose to their highest levels since 1979; and housing starts reached their highest rates since 1978. Indirect evidence of the recovery's strength was equally impressive. Supply shortages cropped up, which is unusual for so early in a recovery. Even some of the troubled smokestack industries reported, or expect to report, profits in 1984. Read More

  • Deregulation and Deposit Pricing


    Paul Watro

    Abstract

    The deregulation of interest rates on federally insured deposits has snowballed over the past several years. The deregulation process is almost completed, and banks and thrifts can now determine the rates that they pay on all deposits except some types of transaction accounts, passbook savings, and very short-term time deposits. Even these latter restrictions will be eliminated in the near future because of deregulatory legislation. Read More

  • Reorganizing the U.S. Banking Regulatory Structure


    Sandra Pianalto

    Abstract

    New financial instruments, new breeds of financial institutions, and different market conditions have developed in the United States since the mid-1970s. The traditional product, geographic, and institutional boundaries of our financial industry have been questioned by advances in technology, inflation, high and varying interest rates, and an increasing demand for more and better services from financially sophisticated consumers. Several pieces of legislation have been enacted to respond to these many changes in the financial marketplace. Two pieces of legislation-the Financial Institutions Regulatory and Interest Rate Control Act and the International Banking Act, both enacted in 1978-placed domestic banks on more equal footing with foreign banks. The Depository Institutions Deregulation and Monetary Control Act of 1980 and the Garn-St Germain Act of 1982 established procedures to eliminate deposit interest rate ceilings and gave financial institutions broader product powers. Yet, even with this widesweeping deregulatory legislation, many issues in banking structure remain unresolved. Read More

  • The Monetary Targets in 1984


    William Gavin

    Abstract

    Every February, the Chairman of the Federal Reserve Board of Governors reports to Congress on the economy and presents objectives for monetary policy for the coming year. The chairman's reports are required by the Full Employment and Balanced Growth Act of 1978 (Humphrey-Hawkins). In July, the chairman reviews the current years' objectives and presents tentative objectives for the next year. These objectives are stated as annual target ranges for growth in the supply of money and credit. As Chairman Paul A. Volcker stated in his February 1984 report, "The ranges for 1984 are intended to be consistent with the basic policy objective of achieving long-lasting economic expansion in a context of continuing control of inflationary pressures." Read More

  • Banking without Interstate Barriers


    Thomas Buynak Gerald Anderson James Balazsy Jr.

    Abstract

    In today's deregulated banking environment, more and more states are considering loosening their interstate banking restrictions. Ohio, Michigan, and Florida are three of about fifteen states currently considering interstate banking legislation. If such legislation were enacted, these states would join 15 other states that already allow some form of interstate banking. Most of the interstate banking laws are very restrictive as to who can enter and the powers of the entrants. States with the least restrictive laws include Alaska and Maine, which allow interstate banking with any state; New York, which allows interstate banking with any state that permits reciprocal entry; and Massachusetts, Connecticut, and Rhode Island, which allow banks from reciprocating states in New England to expand interstate and bar banks from entering from outside the region. Read More

  • Monetary Policy in the 1980s


    Karen Horn

    Abstract

    Twenty years ago policymakers were optimistic that monetary and fiscal policies were capable of maintaining both full employment and price stability. With longer lags involved in deciding on and implementing tax and budget policies, fiscal policy became a more complicated process, less able to respond quickly to adverse shifts in employment and output. Consequently, the responsibility for stabilizing the economy fell more and more to the nation's central bank, and monetary policy objectives alternated between fighting inflation and fighting unemployment. At the peak of the business cycle, monetary policy was aimed primarily at subduing inflation; at the trough of the business cycle, monetary policy was directed at spurring business activity. By switching objectives between inflation and unemployment, both battles were lost. Experience shows that the Federal Reserve cannot, for very long, trade off a little more inflation for a little less unemployment. Indeed, our experience in the past 20 years has been the opposite, as inflation rose to higher levels in each expansion period and unemployment rose to new heights in each recession. Read More

  • Collective Bargaining and Disinflation


    Mark Sniderman

    Abstract

    Labor relations and collective bargaining have changed markedly in recent years. Although economic recessions usually bring deescalation of wages and increased labor concessions, an inordinate number of labor concessions occurred in the recession years of 1981 and 1982. Economy-wide wage growth dropped to its slowest pace since the early 1970s. At the same time, roughly one-half of the 3.3 million workers settling union contracts in 1982 accepted wage freezes or cuts. An even larger number acceded to costsaving changes in work rules and fringe benefits. Concessionary labor contracts were settled in highly visible key industries, such as automobiles and steel, and traditional bargaining patterns among' unions deteriorated. Strike activity dropped to a postwar low, and unions lost more than one-half of their representation elections. Meanwhile, many employers seemed more willing to accept the notion that their firms' survival depended on improving productivity and cutting costs. Read More

  • Closely Watched Banks


    Paul Watro

    Abstract

    The soundness of commercial banks is a primary concern of banking regulators, investors, depositors, and the public at large. The number of financially troubled banks in the United States has increased significantly over the past two years. As of year-end 1983,631 banks were on the Federal Deposit Insurance Corporation's list of problem banks, up from 369 at year-end 1982 and 223 at year-end 198I.l The number of banks that actually failed also rose to post-Depression highs in the last two years. High interest rates, poor economic conditions, and deregulation have, in fact contributed to below-average performance and financial difficulties for many banks. Read More

  • Commercial Bank Holdings of Treasury Debt


    Gary Whalen

    Abstract

    Even conservative estimates of future federal government deficits suggest that the U.S. Treasury's borrowing needs will continue to be large in the months ahead. The impact of the increase in Treasury debt resulting from large, persistent deficits on financial market rates and flows will depend on the strength of the demands made by certain classes of investors for such securities. The absorption of Treasury debt by commercial banks is of particular concern, because traditionally banks have held more Treasuries than any private domestic sector except households. Read More

  • The International Debt Situation


    Owen F. Humpage

    Abstract

    The precarious international debt situation clouds the economic outlook, worrying bank regulators and complicating international commerce. The world's developing countries, excluding members of the Organization of Petroleum Exporting Countries (OPEC), have debts outstanding totaling approximately $575 billion. Of this amount, U.S. banks hold approximately $100 billion. The economic climate of the past few years has left many developing countries unable to meet the interest and principal payments on their debts according to their original loan agreements. Although no country has repudiated its debt, many have entered into negotiations with their creditors to extend repayment schedules. A default or major disruption in meeting payments on debts might shake confidence in the U.S. banking system, producing a contraction in both domestic and international bank lending. Such developments could reduce international trade and slow the pace of the economic recovery worldwide. Read More