Business Economics, July 2010
NABE members can access Business Economics online and freely download articles via this members-only page.
Business Economics (2010) 45
ISSN: 0007-666X | EISSN: 1554-432X
From the Editor
Robert Thomas Crow Editor
Bus Econ 45: 145-146; doi:10.1057/be.2010.24
Is the Global Economy Headed for a Lost Decade? A European Perspective
Jürgen Stark
Bus Econ 45: 147-151; doi:10.1057/be.2010.12
In the 15 years leading up to the recent crisis, the world economy's exceptional performance was driven by globalisation, rapid, export-driven growth in emerging markets, debt-fuelled consumption in major advanced economies, and a benign financial and macroeconomic environment. These, however, sowed the seeds for the financial crisis by creating unsustainable imbalances and distortions. Obstacles to future growth are likely to be retrenchment in consumption, dampened investment, and unsustainable fiscal balances. Going forward, there must be a renewed commitment to medium-term, rule-based, policies for maintaining fiscal sustainability, price stability, and financial stability. The international imbalances between savings and consumption must also be addressed through a global reform agenda discussed in the paper. Even with reform, the challenges to growth will be daunting. Without reform, however, it is likely that the global economy will suffer a lost decade.
Keywords:
global economy; financial crisis; economic reform; financial reform; economic policy
Labor Markets and Monetary Policy
Charles L Evans
Bus Econ 45: 152-157; doi:10.1057/be.2010.17
Headline employment numbers have been consistent with previous recoveries from recession. Behind the headlines, however, there are troubling data that suggest that the recovery of labor markets is weaker than what would be suggested by prior experience. In particular, labor force participation is weaker than expected, and the duration of unemployment has been longer. This paper describes the dimensions of the problems, their implications, and issues concerning whether the U.S. Federal Reserve could have done more to forestall them—particularly with respect to its Large Scale Asset Purchases program.
Keywords:
labor markets; unemployment; monetary policy; Large Scale Asset Purchases; Federal Reserve
Preparing for a Smooth (Eventual) Exit
Brian P Sack
Bus Econ 45: 158-163; doi:10.1057/be.2010.14
One aspect of the U.S. Federal Reserve's efforts to mitigate the financial crisis was the accumulation of unprecedented levels of assets. As financial and economic conditions become healthy and sustainable, the U.S. Federal Reserve will wind down these positions. Doing so without disruption poses serious challenges, but they are challenges that the U.S. Federal Reserve has considered carefully and that can be managed successfully. The approach features caution and transparency and must be coordinated with traditional monetary policy. This paper describes the potential effects of the U.S. Federal Reserve's exit activities and how it will control them.
Keywords:
financial crisis; federal reserve; balance sheet; assets; monetary policy; exit strategy
E-coli, Repo Madness, and the Financial Crisis
Gary Gorton
Bus Econ 45: 164-173; doi:10.1057/be.2010.13
All bond prices plummeted (spreads rose) during the financial crisis, not just the prices of subprime-related bonds. These price declines were because of a banking panic in which institutional investors and firms refused to renew sale and repurchase agreements (repos)—short-term, collateralized, agreements that the U.S. Federal Reserve rightly used to count as money. Collateral for repos was, to a large extent, securitized bonds. Firms were forced to sell assets as a result of the banking panic, reducing all bond prices and creating losses. There is nothing mysterious or irrational about the panic. There were genuine fears about the locations of subprime risk concentrations among counterparties. This banking system (the “shadow” or “parallel” banking system)—repos based on securitization—is a genuine banking system, as large as the traditional, regulated banking system. It is of critical importance to the economy because it is the funding basis for the traditional banking system. Without it, traditional banks will not lend and credit will not be created.
Keywords:
repo; financial crisis; panic; securitization; collateral
Inflation and Default Dynamics
Parul Jain and Leo Kamp
Bus Econ 45: 174-186; doi:10.1057/be.2010.16
Changes in inflation, particularly if they are sharp, can have important consequences for nominal contracts, especially debt instruments such as fixed-rate bonds. This paper examines the intricate dynamics of inflation and defaults. The experience of the United States during the past four decades is subjected to empirical analysis to examine how the nature of the relationship changed as we shifted from a high inflation to a low inflation regime. The paper is organized as a three-part study. We initially examine the U.S. default experience, as summarized in Moody's speculative grade default rate, along with industry differences. The paper then scrutinizes U.S. inflation dynamics as seen in different summary measures of the general price level and delves into pricing power issues. The study proceeds to examine co-movements in the inflation and default series from a theoretical and empirical standpoint and the results confirm the intuitive postulate: higher the inflation rate, the more pricing power companies have; greater pricing power leads to, better earnings and repayment abilities for firms and a lower incidence of defaults.
Keywords:
inflation; default; leverage
Can Industry Consolidation Lead to Greater Efficiencies? Evidence from the U.S. Defense Industry
Nayantara Hensel
Bus Econ 45: 187-203; doi:10.1057/be.2010.15
The question of whether mergers in various industries lead to greater market power or improved efficiencies has been the subject of numerous public policy debates. This analysis focuses on the impact of consolidation in the U.S. defense industry over the past 20 years and examines the reasons behind the wave of defense consolidation, the results in terms of the reduction in contractors, the antitrust response to mergers, and evidence on the impact of the mergers on weapons systems’ total and per-unit costs. The analysis finds that merger activity was driven less by declines in spending following the Cold War than by a stronger economy and a vibrant financial market. The cost data show that 39 to 44 percent of systems experienced statistically significant change in either total costs or per-unit costs following a merger. Somewhat more systems were likely to exhibit lower postmerger per-unit costs than higher per-unit costs, suggesting improved efficiency. The analysis also examines the impact on weapon systems cost by type of weapons system, manufacturer, and service (Army, Navy, Air Force). The evidence suggested greater efficiencies following consolidation for many sectors. Army and Navy systems overall showed lower per-unit costs, but the Air Force weapons systems showed mixed results.
Keywords:
mergers; efficiencies; defense industry; costs; consolidation
Compensation of Economists—Measuring the Market Value of NABE Member Characteristics
Elizabeth Bernstein and Christopher Swann
Bus Econ 45: 204-209; doi:10.1057/be.2010.18
This study is based on the 2008 NABE salary survey and provides detail on the estimated relationship between the total compensation and the professional characteristics of NABE members who responded to the survey. This study builds on previous work done by Peter Jaquette in analyzing the 2006 salary survey data. We find many similarities to the 2006 results, but also find interesting exceptions in the 2008 sample that suggest further inquiry in subsequent survey analysis.
Keywords:
NABE salary survey; single equation regression model; compensation differentials
Do Immigrant Nurses in Canada See a Wage Penalty? An Empirical Study
Karen J Buhr
Bus Econ 45: 210-223; doi:10.1057/be.2010.23
The purpose of this study is to analyse the labour market for female immigrant nurses in Canada and to address the following question: does a nurse with foreign educational credentials have the same earning potential compared with a nurse who was educated in Canada? This is part of a more general question on economic discrimination against immigrants. Using data from the confidential master files of the 2001 Canadian Census on Individuals, this study finds that nurses educated outside of Canada do face wage penalties. This indicates that their credentials might not be fully recognized and/or valued in the Canadian labour market for registered nurses. This result is important to the business world since it suggests the possibility of a general finding that immigrant credentials may not be readily transferable and compensated in a new country. This can result in qualified workers not being able to gain meaningful employment and this source of labour might not be adequately used to fill jobs in industries facing labour shortages.
Keywords:
immigrant wages; nurses; economic discrimination
Book Reviews
Nariman Behravesh, Spin-Free Economics—A No-Nonsense, Nonpartisan Guide to Today's Global Economic Debates
By Nariman Behravesh.
2008. New York: McGraw-Hill. Pp. 384, $27.95 hardcover.
Reviewed by Anthony Clark
Scott Patterson, The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It
By Scott Patterson.
2010. New York: Crown Business (Random House). Pp. 352, $27.00, hardcover.
Reviewed by Jesse S Hixson
James Barth, Tong Li, Wenling Lu, Triphon Phumiwasana, and Glenn Yago, The Rise and Fall of the U.S. Mortgage and Credit Markets: A Comprehensive Analysis of the Market Meltdown
By James Barth, Tong Li, Wenling Lu, Triphon Phumiwasana and Glenn Yago.
2009. New York: John Wiley & Sons. Pp. 525, $60.00 hardcover.
Reviewed by Michael Lea
Harold L. Vogel, Financial Market Bubbles and Crashes
By Harold L. Vogel.
2009.Cambridge: Cambridge University Press. Pp. 384, $35.00 hardcover.
Reviewed by Jerry H Tempelman
NABE members can access Business Economics online and freely download articles via this members-only page.
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