From the Editor
In the first article of this issue, Diane K. Schooley and Debra Drecnik Worden use survey data to explore the wealth effect on household consumption within the context of the behavioral life-cycle model of savings. The use of this disaggregated data shows that it is not only total assets that matter, but also what types and how they are held.
During election years, in particular, some observers have contended that the Federal Reserve Board’s Open Market Committee displays political bias. For the period 1982-2006, Jerry H. Tempelman examines whether policy has been biased according to who occupied the White House and whether it changed depending on whether it is the beginning or the end of a presidential term.
Investment in the manufacturing sector has lagged behind the rise in profits, cash flow, overall manufacturing activity, and other drivers of investment since 2002. Donald A. Norman examines some of the explanations for this phenomenon and the consequences for the economy should this pattern persist. The consequences depend critically on whether expenditures reflect structural trends, such as higher costs, or a shift toward intangible investment.
Many of today’s economists had not yet been born, much less started their careers, when the United States was gripped by the “Great Inflation” of 1966-1983. Given the ongoing concern with controlling inflation and looming threats of its recurrence, it is timely to take another look at this era. Thomas W. Synnott, 3rd, who was on the scene, recounts its dynamics, how intractable it seemed at the time, and how it was ultimately reversed.
A critical element of macroeconomic policy is an assessment of the unemployment rate that can be achieved without triggering inflation. Albert E. DePrince, Jr., and Pamela D. Morris develop a “natural” unemployment rate that is based upon educational attainment, finding that both labor force participation rates and employment rates vary with education. Deviations of the observed unemployment rate from this estimated natural rate are found to be related to several expectation-based macroeconomic variables.
In the face of at best slower economic growth, state governments seem ill-prepared to deal with the fiscal consequences. These problems will affect local governments as well, largely because of their dependence on transfers from the states. Roger Brinner et al. quantify the highly regular, cyclical revenue patterns that emerge when actual state government revenues are purified of legislated changes. They also examine the exceptional expenditure growth that precluded the normal buildup of “rainy-day” funds during the economic boom of 2003-2007, finding that the principal culprit has been wage and salary inflation.
In this issue’s Focus on Statistics, Cynthia A. Glassman and David N. Beede describe a specific case of an ongoing problem: how to make coherent macroeconomic statistics from microeconomic data that were collected for entirely different purposes. In their particular case, the problem is how to treat the expensing of employee stock options in a national income accounting framework.
In the Focus on Industries and Markets, Lance A. Ealey and Andrew C. Gross analyze the global market for buses. Much of the demand for buses will come from developing countries and is being influenced by such cross-currents as rising incomes and rising fuel prices, which influence substitution between buses and automobiles. They also discuss industry structure and marketing issues.
In the first book review, Jerry H. Tempelman reviews Alan Greenspan’s memoir, The Age of Turbulence: Adventures in a New World. The book contains Greenspan’s reflections on the merits and drawbacks of capitalism, some of which in the United States are not so much flaws of capitalism as failures in primary and secondary education that generate excessive income inequality. Tempelman finds that Greenspan’s treatment of inequality is ambivalent—on the one hand, the necessary outcome of Greenspan’s “libertarian Republican” economic philosophy and on the other hand, a threat to capitalism itself. In all, however, Tempelman finds Greenspan to be an engaging storyteller with a story that is well worthwhile for economists.
In the second book review, Gerald L. Musgrave, the Business Economics Book Review editor, has called his own number to review Taxing Ourselves: A Citizen’s Guide to the Debate over Taxes, fourth edition, by Joel Slemrod and Jon Bakija. He finds it to be a “modern classic in tax economics” that is concise and accessible without compromising the underlying economics. The book covers the history of taxation in the United States and such themes as the macroeconomic impact of taxation, equity and fairness, administration, and the difficulty of striking a balance between them.
Robert Thomas Crow
rtcrow@comcast.net