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1998 Economic Commentaries

  • Bank Notes and Stored-Value Cards: Stepping Lightly into the Past


    William Osterberg James Thomson

    Abstract

    Stored-value cards are among the most interesting payments innovations of recent years. Balances on these cards can typically be transferred without involving a depository institution directly. In this respect, the stored-value card (SVC) represents a new form of circulating bank liability reminiscent of the bank notes that made up a large share of the U.S. money supply in the nineteenth and early twentieth centuries. Like bank notes, SVCs replace coin and paper currency in retail payments, shifting the composition of the U.S. monetary base from government and central-bank liabilities toward private bank obligations. Read More

  • Subordinated Debt: Tough Love for Banks?


    Joseph G. Haubrich

    Abstract

    Good parents understand the perils of overprotection. They know that letting their children grow up often means letting them take their lumps. The past two decades have reinforced a similar principle with respect to the safety and soundness of banks. Government protection sometimes does as much to create the problem as to solve it. Here is the economics of moral hazard: Banks, secure in the safety net offered by the government, feel free to take increasingly risky positions. Depositors, knowing their deposits are safe, don’t care and will neither withdraw their funds nor demand a higher interest rate. The deposit insurance system then effectively insulates the bank from market discipline. Read More

  • Social Security’s Treatment of Postwar Generations


    Jagadeesh Gokhale

    Abstract

    The Social Security Administration’s (SSA’s) official projections indicate that paying benefits under current rules during the next 75 years will require a payroll tax hike of 2.2 percentage points. The tax hike must be immediate, and taxes must be maintained at that higher level throughout the 75-year horizon. Read More

  • Is the Current-Account Deficit Sustainable?


    Owen F. Humpage

    Abstract

    In 1987, after six straight years of large current-account deficits, the United States became a net debtor country. Our deficits have since persisted and our debts have grown—today we owe more than any other country—but the dire consequences predicted by some analysts have not materialized. Old concerns are now reemerging as Asian and Russian financial crises push the U.S. currentaccount deficit to new record levels. It reached $220 billion (annual rate) over the first three quarters of 1998, raising our debts to more than 17 percent of GDP. How long can we continue to service our growing international indebtedness without a sharp hike in U.S. interest rates, a rapid depreciation of the dollar, or some other economic disruption? Read More

  • Currency: Time for Change?


    Paul Bauer

    Abstract

    Despite the increasing usage of credit and debit cards and the emergence of various electronic payment instruments, currency remains king—at least if that title is based on volume of transactions. Maintaining the quality of Federal Reserve notes in circulation represents the single largest expenditure by Reserve Banks: Roughly $700 million a year is spent to buy new notes from the Bureau of Engraving and Printing and to process, store, and distribute notes. Read More

  • What Fiscal Surplus?


    Jagadeesh Gokhale

    Abstract

    The United States’ economic performance during the last two years has been spectacular. Inflation remained quiescent despite rapid output growth and plunging unemployment. Asset values were buoyed—Asian economic troubles notwithstanding— by upbeat earnings expectations, confidence in continued low inflation, and stability in the domestic economic environment. Strong income growth and increased capital gains realizations raised federal revenues beyond the levels projected earlier. Now, the Congressional Budget Office projects annual federal surpluses through the first decade of the new millennium. Read More

  • Global ATM Banking: Casting the Net


    John Heuter Ben R. Craig

    Abstract

    Twenty-five years of technological progress have transformed the way banking is done. Paychecks can be deposited, charitable contributions withdrawn, electronically. Customers can make cash withdrawals without ever seeing a human teller, at a machine their bank doesn’t own, perhaps even in a country where their bank has no office. These innovations have not only affected customer convenience, but have also changed the economic reference points for evaluating the efficiency of the electronic payments industry. Read More

  • Measuring Pricing Bias in Mortgages


    Stanley Longhofer

    Abstract

    Whether lenders discriminate against minority applicants is a long-standing question that has vexed regulators, bankers, and policymakers alike. The debate over this issue was fueled in the early 1990s by the findings of the socalled Boston Fed Study, which found that minority applicants in Boston were roughly 40 percent more likely to be rejected for mortgage loans than similarly situated whites. In the wake of this study, examiners at the Federal Reserve and other bank regulators began using advanced statistical techniques to help evaluate whether minority applicants face discrimination in home lending. Read More

  • Productivity Gains During Business Cycles: What’s Normal?


    Mark E. Schweitzer

    Abstract

    Productivity links the labor force to the economy’s real output, a key position that makes productivity growth one of the most eagerly forecast and analyzed economic statistics. A prime example is the current business cycle, in which the pattern of productivity gains has struck many observers as extraordinary. Read More

  • Productivity Measures and the “New Economy”


    John Carlson Mark E. Schweitzer

    Abstract

    Optimism abounds. Just look at indicators like consumer sentiment and the stock market. The good feelings partly reflect the persistent underlying strength of the U.S. economy, which surprised many observers by expanding almost 4 percent in the last 12 months. Over the past two years, the economy grew at an average annual rate of more than 3.5 percent, clear evidence for Stephen Shepard that a “New Economy” is here. No economy, however, can sustain a more rapid expansion than this unless its workforce continues to grow quickly or its workers become increasingly productive. Given that employment is expected to grow around 1 percent, Shepard’s view implies that trend productivity growth must more than double the 1.2 percent average rate it posted during the past 25 years. Read More

  • Government-Subsidized Training: A Plan for Prosperity?


    Charles T. Carlstrom Christy Rollow

    Abstract

    Should the United States do more to increase its workers’ skills? Many say it should, arguing that subsidized training helps countries maintain flexible, productive workforces in the face of technological change and global competition. As Commerce Secretary William Daley has noted, “We must ensure our nation has a highly trained workforce to capture the vast potential of information technologies.” Industry trade organizations bolster this position by claiming that labor shortages in high-tech industries are critical. Read More

  • In Search of the NAIRU


    David Altig Paul Gomme

    Abstract

    Few ideas arise more frequently in monetary policy discussions than the NAIRU, an acronym for the awkward phrase “nonaccelerating inflation rate of unemployment.” The NAIRU—or more precisely, its relationship to the unemployment rate—is presumed to be an inflationary bellwether. When the actual unemployment rate exceeds the NAIRU, the inflation rate falls; when the actual rate is below the NAIRU, inflation rises. Read More

  • Generational Equity and Sustainability in U.S. Fiscal Policy


    Jagadeesh Gokhale

    Abstract

    Policymakers’ budget perspectives show a puzzling dichotomy. Their projections and plans for the general budget seem to extend only five years out, but President Clinton’s recent proposal for Social Security—that future budget surpluses be “reserved” until the program’s solvency is restored—suggests a much longer perspective. After all, the official figures of the Social Security Administration (SSA) indicate that the program will not go bankrupt under current law until the year 2032. Read More

  • Private Money: Everything Old is New Again


    Barbara Good

    Abstract

    It’s hard to pick up a newsmagazine or financial paper these days without reading about one of the new forms of electronic money. Although the business case for stored-value cards and cybermoney has not been proven in this country, media coverage has been lavish. Nearly all the stories, however, neglect one important fact: High-tech payments systems are best defined as a form of private money, something that has existed for centuries. Read More

  • What Happened to the Inventory Overhang?


    Terry Fitzgerald Jennifer Ransom

    Abstract

    During the first half of 1997, real output in the U.S. economy expanded at a robust 4.3 percent annual rate. Despite such good news, many observers voiced concern about one characteristic of this growth: It was accompanied by the largest six-month increase in business inventories in 13 years. Read More

  • Gold Prices


    Joseph G. Haubrich

    Abstract

    This January marked the 150th anniversary of a major event in American history: the discovery of gold at Sutter’s Mill, California. Fittingly, gold made news again this year by dropping past $300 an ounce to hit its lowest price in nearly two decades. While some of the subject’s interest undoubtedly springs from an almost voyeuristic fascination with the precious metal itself, gold prices are nonetheless legitimate news, since they are considered harbingers of stability or future inflation. Careful observers’ acquaintance with the gold market’s particular twists, turns, and idiosyncrasies gives them a more reasoned understanding of its uses as an economic indicator. This Economic Commentary takes the confluence of historical and current events as an excuse to refine our understanding of gold, gold prices, and inflation. Read More

  • Network Externalities: The Catch-22 of Retail Payments Innovations


    William Osterberg James Thomson

    Abstract

    For more than two decades, economists and business journalists have heralded the coming of a paperless society in which electronic payments will quickly replace the use of cash and paper checks in retail transactions. However, although tremendous advances in computing and telecommunications have facilitated development of inexpensive, safe, electronic retail payments, neither the number nor the dollar volume of paper-based transactions has dropped appreciably. Moreover, only modest declines in the growth rate of paper payments are predicted in the near term. Read More

  • Canada’s Money Targeting Experiment


    Paul Gomme

    Abstract

    Like many countries, Canada experienced historically high inflation rates in the 1970s. At the start of 1975, inflation topped 10 percent. In response, Bank of Canada Governor Gerald Bouey announced in November of that year the policy which became known as gradualism: The Bank would target the growth rate of the narrowly defined monetary aggregate M1, made up of currency plus demand deposits at chartered banks. Over time, the Bank would set gradually declining M1 growth rates (for these target ranges and actual M1, see figure 1). The idea was that as the Bank met its early M1 growth targets, it would win credibility for its later targets and would be able to break both high inflation and high inflation expectations without increasing unemployment. Read More

  • Assessing Fundamental Tax Reform


    David Altig Alan Auerbach Laurence Kotlikoff Kent Smetters Jan Walliser

    Abstract

    Fundamental tax reform remains a hot topic, for reasons that should come as no surprise. The current U.S. tax structure is complex, distortionary, and replete with tax preferences. Read More

  • A Hitchhiker’s Guide to Understanding Exchange Rates


    Owen F. Humpage

    Abstract

    Each day, more than $1.2 trillion worth of foreign exchange changes hands around the globe, an amount that far exceeds the daily value of world trade. Approximately 83 percent of these transactions involve U.S. dollars, but not all involve U.S. citizens. Read More