Business Economics ®- July 2001

To download the entire July issue in one large file right click the link below, and choose Save to Disk. (Due to the large file size, you will have best results downloading the file and saving it, rather than trying to view it online.) Articles can also be viewed individually online or downloaded. All articles are in Adobe Acrobat format (pdf). To get a free Adobe Acrobat reader, please see the Adobe site. Selected articles, as noted, are available to the public. July 2001 Issue (PDF, 476 K) (Note: To save the entire issue, or any of the individual articles, directly to disk so that you can view them later, right-click on its link. Then select "Save Target As" in Internet Explorer, and "Save Link As" in Netscape Navigator, in the pop-up menu.) Most articles are available for members only. Non-members can purchase articles at the NABE Document Store online.
	Front Matter -- Masthead, Board of Editors, From the Editor
Hossein Askari, John Forrer, Hildy Teegen, and Jiawen Yang	*U.S. Economic Sanctions: Lessons from the Iranian Experience* The United States has been the world’s only major country to make frequent use of economic sanctions to change what it perceives as the objectionable policies of other countries. Although the global economic, financial, and military influence of the U.S. enables it to use sanctions as an instrument of foreign policy, the efficacy of sanctions is still in great doubt. Using Iran as an example, over a period of twenty years U.S. sanctions have had a significant economic cost for the U.S. as well as for Iran. Direct merchandise trade between the U.S. and Iran has declined signifi-cantly, but the more important costs of sanctions to each country are due to factors such as missed foreign direct investment (FDI) opportunities, which will ultimately have long-term negative consequences for both countries. For the future, largely because of the expected growing importance of the World Trade Organization (WTO), the use of sanctions by the U.S. is likely to diminish. (PDF, 60 K)
Rudolph G. Penner	*The Uncertainty of Budget Estimates* The influence of the federal budget is so pervasive that it has a profound effect on private as well as governmental activities. Thus, it is important to have a sense of the accuracy of federal budget forecasts. In fact, these forecasts are usually quite wrong; and often they are wrong by huge amounts. Moreover, the size of the average error relative to GDP that is due to economic forecasting and technical mistakes grows rapidly as the projection period grows. If the Congressional Budget Office (CBO) made an average error in its January 2001 projection, it will be wrong by $120 billion in estimating the fiscal 2002 surplus and wrong by almost $400 billion for 2006. CBO made its first ten-year projection in 1997, and so far its estimate of the 2007 surplus has changed by $844 billion, or by over six percent of expected GDP. Although flawed ten-year forecasts are not quite use-ess, they should not be given the prominence that they now receive. It is particularly misleading to cumulate the value of surpluses or tax cuts over a ten-year period in that the adding up process treats the 2011 estimate as though it should be given the same weight as the 2002 estimate. Because forecasting errors typically affect the budget balance much more than policy changes, Congress should not put numerical targets into legislation affecting the budget process. Gramm-Rudman collapsed because of forecasting errors, and the same fate awaits efforts to make the surplus exactly equal to the Social Security plus Medicare surplus. Congress should, however, spend much more time debating how a wrong forecast in either direction might alter the impact of major policy changes. (PDF, 65 K)
Thomas D. Corrigan and Pan G. Yatrakis	*The Phillips Curve and the Federal Reserve: Were the 1999-2000 Interest Rate Hikes Really Necessary?* A critical issue for monetary policy and corporate planning is whether the disappearance of the negative relationship between inflation rates and unemployment rates since 1992 has continued and is permanent. In 1999, the Fed apparently believed that the “Phillips Curve” was reasserting itself when it increased interest rates. Did the Fed act too early, or too late, or should it have acted at all? In analysis of data through April 2001, the Phillips Curve has not re-emerged, indicating that the Fed still has some room to use monetary policy to stimulate the economy, without triggering inflation—for the time being. (PDF, 40K)
A. Gary Shilling	*The Phillips Curve and Postwar Inflation are History* Over 250 years of history have shown inflation to be a demand-side phenomenon, primarily caused by war and central governments’ ability to spend far in excess of revenues for sustained periods. However, the stage is now set for a sustained price stability or even deflation throughout the developed world. Of fourteen forces that tend to lead to deflation, thirteen are now operable, and the fourteenth can be expected to hit soon. In short, the Phillips Curve is an artifact of a particular epoch, not a structural element of a peacetime economy. The coming price stability or deflation will largely be productivity-driven and, on balance, benevolent. (PDF, 33 K)
Stephen D. Oliner, Jack E. Triplett, and David Wessel	*A Panel Discussion: Faster Productivity Growth–A New Economy?* It is no secret that U.S. labor productivity accelerated in the second half of the 1990s. The bulk of the spurt can be traced to the boom in investment information technology capital and to the growth in the information technology- producing part of the economy. Measurement issues abound and having better data would help resolve them. Whether or not the change in productivity is cyclical or structural is too soon to tell. (PDF, 41 K)
Christopher Gust and Jaime Marquez	*International Comparisons of Productivity Growth:Recent Developments* This paper reviews recent productivity trends in thirteen industrial countries. The focus of the analysis is on whether productivity in other industrial countries has accelerated to an extent comparable to that observed in the United States. We find that labor productivity outside of the United States has not accelerated in the latter half of the 1990s. We discuss the role played by information technology in influencing these trends as well as the role of cyclical and methodological factors. (PDF, 43 K)
Hubert Fromlet	*Behavioral Finance-Theory and Practical Application* Behavioral finance has the potential to be a valuable supplement to classical and neoclassical financial theory, which currently dominates financial analysis. It considers psychological factors as important input to financial analysis and decisions and is gaining increasing momentum in academic research and practical application in the U.S. and Europe. Behavioral finance explains many reactions on financial markets that appear to be contrary to conventional theory and can thus make an important contribution to avoidance of serious mistakes and to finding investment strategies. It also can make a contribution to improved asset performance—but it can hardly pick single winners on the market, despite some interesting approaches. (PDF, 35 K)
Edward D Hester and Andrew C Gross	*Micropower* Micropower involves the generation of electricity from small-scale units (ten-megawatt rating or less). Key product categories involve conventional generator sets fired by fossil fuels, fuel cells, microturbines, and several renewable sources such as solar, photovoltaic, wind, and biomass units. Key applications will be standby and distributed power, small-scale cogeneration, and resource recovery. Sales in the U.S. are expected to grow from $3.4 billion in 2000 to $6.1 billion by 2005, at the annual rate of 12.7 percent per year, which is considerably faster than growth rates for other types of electric power equipment. Installed cost for micropower is estimated to be in the range of $500 to $1100 per kilowatt in 2005. The top players in the indus-try currently are Caterpillar, Cummins, and GE; other big names include BP Amoco, Detroit Diesel, Honeywell, Siemens, and United Technologies. Several factors favor wider use of micropower, but many barriers also remain. (PDF, 41 K)

Book Reviews	*Grace-Marie Arnett, editor, Empowering Health Care Consumers through Tax Reform,* Jesse S Hixson Marino Regini, Jim Kitay, and Martin Baethge, From Tellers to Sellers: Changing Employment Relations in Banks, Edmund A. Mennis Elroy Dimson, Paul Marsh and Mike Staunton, Millennium Book II: 101 Years of Investment Returns, Edmund A. Mennis ( PDF, 28 K) Available to Public
	Order these books at the NABE Bookstore