From The Editor

Those of us who were paying attention to economic affairs 25 years ago will recall that there was much concern and ink shed over the “twin deficits”—the current account deficit and the federal budget deficit. The fact that the twin deficits did not precipitate a crisis then perhaps encouraged some complacency as they reemerged over the past few years. It appears, however, that complacency has run its course, as was evident at the NABE Policy Conference. The first four articles of this issue are papers developed from presentations at that conference. In the first, David M. Walker, the Comptroller General of the United States, presents the structural underpinnings of the federal deficit—particularly demographics, entitlements, rising health care costs, and unfunded commitments—and paints a clear picture of the unsustainability of the current U.S. fiscal course.

The next two concern the current account deficit. Michael R. Rosenberg shows that the trend of the current account, exacerbated by managed exchange rates by important trading partners, is unsustainable and likely to lead to severe economic consequences for the United States. However, U.S. attempts to redress the situation by embracing an exchange rate management policy of its own are likely to make a bad situation worse.

Catherine L. Mann’s analysis corroborates Rosenberg’s and illuminates the “co-dependency” between the United States and its trading partners that make it so comfortable to maintain the status quo: the United States is happy consuming more than it produces, and the rest of the world is happy to produce more than it consumes. A real risk implied by continuation of this co-dependency is that it may prevent necessary policy action by the United States and its trading partners until forced by the emergence of a global financial crisis.

The fourth paper from the Policy Conference, by Kristin Forbes of the President’s Council of Economic Advisers, focuses on the trade deficit and other structural issues facing the manufacturing sector and how they have impacted manufacturing employment in the recent recession and recovery. She examines short-term and structural factors and proposed remedies to make U.S. manufacturing more competitive and ease the pain of those who are displaced from manufacturing jobs.

Harry Shuford explores the effects of shocks and cycles on the property and casualty insurance industry. He particularly focuses on three events that had a major impact on the industry over the 1990-2002 period: Hurricane Andrew in 1992, the Northridge Earthquake in 1994, and the terrorist attack on the World Trade Center in 2001. He finds that as important as these were, they had little impact on an endogenous cycle driven primarily by profitability.

Hugh Schwartz questions the degree to which business economists, and the executives they work for, rely on formal economic theory and methods in their jobs. To explore this question, he conducted in-depth interviews with a dozen senior economists. He explores whether there is much room to expand the scope and influence of economics in firms. He also explores the use of rules of thumb in lieu of formal economic analysis and finds that they are often rational and efficient but can be improved significantly. His analysis is accompanied by recommendations to make economics in firms more effective.

This issue also includes a “Focus on Industries and Markets” article on the turbine industry (e.g., electricity generation equipment and jet engines) by Edward D. Hester and Andrew C. Gross, an “Economics at Work” article on consulting to health care professionals by Bernard F. Pettingill, and a comment by Thomas Lam on a recent article by Douglas J. Lamdin concerning causality between corporate bond yield spreads and stock market returns, together with a reply by Lamdin.

In the book reviews, Merrill Matthews reviews What Price the Moral High Ground? Ethical Dilemmas in Competitive Environments by Robert H. Frank, in which the author re-examines narrow economic criteria for rational behavior and expands it to include elements of altruism. Edmund A. Mennis reviews The Future of Capitalism by Frederic L. Pryor, a political and social as well as economic exploration of how capitalism is likely to evolve. Mennis also reviews The Quiet Revolution: Central Banking Goes Modern by Alan S. Blinder, a former Vice Chairman of the Board of Governors of the U.S. Federal Reserve Bank. Much of this book concerns the worldwide changes in the way central banks conduct their activities.

Robert Thomas Crow
rtcrow@comcast.net