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1994 Economic Commentaries

  • Year-End Report of the Fourth District Economists' Roundtable


    Michael Bryan John Martin

    Abstract

    Although economists share a common science, their roles in society vary a great deal. Academic economists expand our understanding of the purpose and operation of markets. Government economists use this knowledge to guide policies. And business economists apply these principles to enterprise. Read More

  • How Important Are U.S. Capital Flows into Mexico?


    William Osterberg

    Abstract

    In November 1993, the U.S. Congress voted to pass the North American Free Trade Agreement (NAFTA) after months of heated debate about its likely impact on our economy. As a result of the intense focus on this issue, the public has benefited from a greater appreciation of the increased interdependence of the Mexican and U.S. economies. However, both the public debate and detailed analysis of the post-NAFTA economic environment have understated the importance of capital flows from the United States into Mexico. Read More

  • Understanding Differences in Regional Poverty Rate


    Elizabeth Powers Max Dupuy

    Abstract

    The U.S. poverty rate is among the most widely used indicators of the nation's economic success—and of how that success is shared. However, the national rate masks tremendous variation in the regional numbers. In 1992, for example, the official poverty rate ranged from a low of 8.3 percent in New England to a high of almost 16 percent in the East South Central states. Read More

  • Fear and Loathing in Executive Pay


    Joseph G. Haubrich

    Abstract

    For some reason, people take offense when a corporate executive begins to make as much money as a basketball star or swimsuit model. Though at first glance some might see this as another example of the ill-informed anti-business bias of the American public and media, the disgruntlement in fact arises from a serious concern: the connection between executive pay and company performance. Read More

  • Specialization in Risk Management


    Jerry Jordan

    Abstract

    The financial press is full of stories lately about the risks associated with financial derivatives. The casual reader might think that some new risks have been invented, or that our financial system is riskier now than it was a few years ago. Read More

  • Bank Receivership and Conservatorship


    Walker Todd

    Abstract

    Defining physiological life and death used to be comparatively easy. Under broad definitions, living mammals were considered capable of growth and reproduction and exhibited a variety of vital signs such as positive blood pressure and respiration. Dead mammals lacked these capacities and gradually lost vital signs as death progressed. Read More

  • The Economics of Health Care Reform


    Charles T. Carlstrom

    Abstract

    Few things are as important to Americans as good medical care. In 1992, we spent about 14 percent of our national output on health-related services, and by the year 2000, mat share is expected to reach nearly 19 percent. To some, these numbers are frightening. To others, they merely reflect the preferences of a health-conscious and aging society. As Congress and President Clinton iron out the final details of a health care reform package, it has become clear that the scope and scale of the legislation are destined to affect the course of American lives for years to come. Read More

  • Banking and the Flow of Funds: Are Banks Losing Market Share?


    Katherine Samolyk

    Abstract

    By some accounts, the 1980s was the decade of both debt buildup and the decline and fall of the commercial banking industry. Nonfinancial sector debt grew substantially faster than national output during this period and was mirrored by a commensurate rise in financial intermediation. The commercial banking industry, however, once the dominant type of intermediary, does not appear to have shared in the proliferation of financial sector activity. Funds advanced by U.S. commercial banks as a fraction of nonfinancial sector credit outstanding has declined from 29 to 22 percent in the past 10 years. Moreover, the trend within the industry is widely characterized as one of consolidation: The number of commercial banks has fallen from more than 15,000 in 1984 to fewer than 11,000 today. Read More

  • Looking Back at Slow Employment Growth


    Kristin Roberts Mark E. Schweitzer

    Abstract

    Jobs growth in the current expansion has been unusually sluggish despite coming on the heels of a relatively mild recession in 1990-91. Employment finally returned to its pre-recession level in April of last year, but vigorous growth did not resume until the very end of 1993. Three years into the recovery, employment has increased only 4.8 percent, compared with an average of 11.2 percent during the past three economic upturns. If jobs growth since mid-1991 had kept pace with previous patterns, an additional seven million Americans would be employed today. Such lackluster performance is difficult to explain and has led to widespread concern. Though employment gains have been heading upward again in the past few months, understanding what has held down employment growth for so long may reveal ongoing economic pressures. Read More

  • Midyear Report of the Fourth District Economists' Roundtable


    Michael Bryan

    Abstract

    Looking into the future is a perilous duty, and it is wise to be humble about our abilities lest we give the impression we know more than we do. The difficulties in accurately assessing the economy's future, if not its current state, stem from our inability to grasp the broad scope of business activity and to anticipate the seemingly random patterns that aggregate measures of the economy frequently follow. Read More

  • Must the Fed Fight Growth?


    Jerry Jordan

    Abstract

    If all of your information about the economy came from the nightly news and the daily press, your thinking would probably go something like this: "A funny thing happened on the way to this economic boom. The economy gave a party and the Federal Reserve didn't come. Just as U.S. business activity was poised to burst from under the lingering shadows of the 1990-91 recession, monetary policy took a decidedly restrictive turn this year. Apparently, central bankers have been willing to sacrifice economic expansion in order to tilt at inflation windmills existing only in their own hyperactive imaginations." Read More

  • A Beginner's Guide to the U.S. Payments System


    Paul Bauer

    Abstract

    High living standards depend critically on many types of infrastructure—bom technological and institutional — that few fully comprehend. The payments system, the means by which funds are transferred between economic agents, is one such critical support. Read More

  • Are the Japanese to Blame for Our Trade Deficit?


    Owen F. Humpage

    Abstract

    Amid charges and countercharges of unfair competition and trade restrictions attending the recent U.S.-Japanese trade dispute, many commentators have lost sight of important variations in these nations' saving and investment behavior. These differences ultimately sustain the large, persistent, mirror-image trade imbalances of both countries. Read More

  • The Government's Role in the Health Care Industry: Past, Present, and Future


    Charles T. Carlstrom

    Abstract

    In 1965, Congress enacted Medicare and Medicaid to ensure that poor and elderly Americans would not be denied access to health care. In that year, 5.9 percent of the nation's total output was spent on medical services. By 1992, this share had soared to approximately 14 percent, and by the year 2000, it is projected to reach almost 19 percent. The growing fraction of the economy devoted to health care is one reason why many advocate a major overhaul of the current system. Read More

  • Assessing Progress toward Price Stability: Looking Forward and Looking Backward


    John Carlson

    Abstract

    Inflation, as measured by the rate of change of the Consumer Price Index (CP1), has slowed substantially in recent years. Since 1990, it has averaged less than 3 percent, compared with an average rate of about 5 percent in the previous three years (see figure 1). Similarly, other measures, designed to exclude transitory special factors and focus on the so-called core or underlying rate of inflation, have also slowed to around 3 percent. From the perspective of this rear-view mirror, it seems evident that the deceleration in prices has stopped, as both measures have tended to stabilize around the recent lower mean levels. Read More

  • Lessons from the Collapse of Three State-Chartered Private Deposit Insurance Funds


    Walker Todd

    Abstract

    The January 1991 collapse of the Rhode Island Share and Deposit Indemnity Corporation (RISDIC) was the last in a series of post-1970 failures of statechartered, privately operated deposit insurance funds for thrift institutions, industrial banks, and some credit unions. The failures began in Mississippi in 1976 and continued in Nebraska and California (1983), Ohio and Maryland (1985), Utah and Colorado (1987), and Rhode Island (1991). By February 1989, even the Federal Savings and Loan Insurance Corporation's (FSLIC) authority to accept new conservatorships or receiverships was effectively suspended. The Resolution Trust Corporation was created the following August to administer the resolution of insolvent thrifts whose deposits were FSLIC insured, and the FSLIC was abolished (Kane [ 1992]; U.S. House of Representatives [1985]). Read More

  • Health Care Reform from a Generational Perspective


    David Altig Jagadeesh Gokhale

    Abstract

    Every so often in the course of public affairs, we reach a defining moment, beyond which our final decisions have the potential to shape legislative and cultural reality for decades to come. In federal health care reform, that moment may be at hand. Read More

  • Central Bank Independence


    Owen F. Humpage

    Abstract

    To many Americans, the idea that a central bank should make crucial economic policy decisions with no direct political accountability either to the citizenry or to their elected representatives seems the antithesis of democracy. Central bank independence, however, is but one solution to a problem endemic to fiat money. Because fiat money has no intrinsic value, the willingness of individuals to hold it depends solely on their faith that the government will not depreciate its purchasing power. Uncertainty about the long-term value of money arises because inflation generates government revenues and, according to some economic theories, can lead to a temporary surge in employment and output. Read More

  • Back to the Future: Prospective Deficits through the Prism of the Past


    David Altig Jagadeesh Gokhale

    Abstract

    Approaching the halfway mark of fiscal year (FY) 1994, the Clinton administration's first major piece of budget legislation — the Omnibus Budget Reconciliation Act of 1993 (OBRA93) — appears to be a smashing success. According to the Congressional Budget Office's (CBO) January estimate, this fiscal year's federal deficit will be some $64 billion less than forecasted before the legislation was passed. Read More

  • Issues in CRA Reform


    Mark Sniderman

    Abstract

    Last July, the Clinton administration urged federal bank and thrift institution regulators to propose new rules for implementing the Community Reinvestment Act (CRA), a law that was enacted in large part to discourage mortgage lenders from redlining disadvantaged communities. In asking for a less burdensome and more objective lenderevaluation process, the President noted that both lenders and community advocates have been dissatisfied with the results of more than 15 years of CRA regulation. The President's request follows a period of intense nationwide examination and debate about housing credit discrimination. This <em>Economic Commentary</em> discusses the prevailing CRA environment and reviews some of the related issues that remain to be resolved. Read More

  • The National Depositor Preference Law


    James Thomson

    Abstract

    Last August 10, Congress passed the Omnibus Budget Reconciliation Act of 1993 (OBRA93). Contained in this legislation was a provision that dramatically revised the priority of claims on failed depository institutions. The Act's effect was to give depositors (and, by implication, the Federal Deposit Insurance Corporation [FDIC]) a superior, or preferred, claim on a failed bank's assets relative to that of other general creditors. By doing so, Congress hoped to reduce the FDIC's losses from bank failures. In fact, the Office of Management and Budget estimated that a national depositor preference law could cut the FDIC's expected losses by $1 billion over the next five years. Read More

  • Are Service-Sector Jobs Inferior?


    Max Dupuy Mark E. Schweitzer

    Abstract

    In recent years, U.S. service-producing industries have, on net, added jobs more rapidly than the goods-producing industries. Since the end of 1990, jobs in the service-producing sector have increased 4.1 percent overall, while goodsproducing employment has shrunk 5.6 percent." During the same period, total nonfarm employment has risen 1.9 percent. A number of commentators have used these basic statistics to paint a bleak picture: The economy is creating some new jobs and employing a few more people, but only in low-wage service positions; meanwhile, the old high-wage manufacturing jobs are disappearing. Read More

  • Report of the Fourth District Economists' Roundtable


    Michael Bryan John Martin

    Abstract

    Uncertainties always cloud the economic horizon, and current conditions are no exception to that rule. The surge in business activity during the final quarter of 1993 raises the immediate question of whether the economy can maintain some of this momentum during the coming year, or whether the rapid year-end growth rate borrowed some strength from early 1994. One of the longer-term uncertainties is how forecasters judge the economy's inflationary potential. To help sort through these and other issues, the Federal Reserve Bank of Cleveland hosted its most recent gathering of the Fourth District Econemists' Roundtable on January 21. Read More

  • Monetary Policy and Inflation: 1993 in Perspective


    Gregory Bauer John Carlson

    Abstract

    In 1993, monetary policy was most unusual because of what did not happen: The federal funds rate objective remained unchanged. The fed funds rate is the interest rate banks pay when they borrow deposits at the Federal Reserve from other banks, usually overnight. It is closely watched in financial markets because its level can be immediately and purposefully affected by open market operations of the Federal Reserve's New York Trading Desk. Market analysts understand that "permanent" changes in this rate generally occur only after deliberative action by the Federal Open Market Committee (FOMC), the policymaking arm of the Federal Reserve System. Read More