San Francisco Meeting Highlights Key Global Linkages

Running the gamut from financial markets and trade to monetary policy and technology, global linkages took center stage at NABE’s 49th Annual Meeting in San Francisco Sept. 9-11.  Keynote speakers and other prominent analysts shared their latest forecasts and analyses with the more than 300 attendees at the Grand Hyatt, near the city’s Union Square.

On occasion over the three-day meeting, the focus shifted to the host state of California as speakers offered their insights into the sagging housing market and recent policy initiatives that other states will watch in coming months.  Ever the trendsetter, California is either implementing or considering new directions in health care, global warming, trade, and other issues.

NABE members and guests also took advantage of being in the City by the Bay as they enjoyed two evening receptions in the vibrant financial center.  Winding up the meeting, several members and guests traveled to Napa Valley for a wine tasting and special dinner prepared as they watched and waited to be served.

Coverage of the annual meeting in this issue also includes these separate reports:  “Transportation Infrastructure: What Do We Need? How Can We Pay for It?” by William Strauss; Health IT Options Hold Promise But Face Major Hurdles by Devon Herrick;  “International Financial Markets: Asset Trade and the World Reserve Currency” by Rajeev Dhawan; and “The Economics of the Wine Industry” by Chris Swann.

Results of NABE’s latest economic outlook survey and predictions offered by public officials and top private analysts indicated growing concern about the housing-related downturn in the U.S. economy.  But for the most part, forecasters steered clear of recession scenarios and said they expect sluggish growth to characterize the economy through 2008 as the mortgage crisis plays out.  See the NABE forecast at: http://www.nabe.com/mem/mac/07/09/index.html

Holding to its tradition, NABE installed new officers and board members at the end of the annual meeting.  Ellen Hughes-Cromwick, chief economist, Ford Motor Company, became president, succeeding Carl Tannenbaum, chief economist, LaSalle Bank.  Hughes-Cromwick describes her priorities for the coming year in a letter to members in this issue. Chris Varvares, president, Macroeconomic Advisers, succeeded Hughes-Cromwick as vice president.  See the August issue for more information on the new Board of Directors members.

At a general session on Sept. 10, Tannenbaum vividly described the “Incredible Shrinking Banking Industry” in his presidential address, which will be published in the October issue of Business Economics.

Tannenbaum and other NABE officers thanked the annual meeting’s organizers: Chair Catherine Mann, Brandeis University and the Peterson Institute for International Economics; Lynn Reaser, Bank of America; Gene Huang, FedEx Corp., and Chris Varvares, Macroeconomic Advisers.

SF Bank President Yellen Offers Fed View

Speaking just eight days before the Sept. 18 Federal Open Market Committee meeting, San Francisco Fed President Janet Yellen offered her views on the economic outlook as markets assess how long the housing crunch is likely to last. Even as liquidity in the mortgage-related securities market improves, “the risk spreads incorporated in mortgage rates will likely remain higher on a long-term basis than they have been in years, and this could prolong the adjustment in the housing sector,” Yellen said.

If the credit issues and housing price declines erode consumer and business confidence, it could well mean a drop in consumer spending and a pullback in plans for business investment, Yellen suggested.  In sum, she saw “significant downward pressure based on recent data indicating further weakening in the housing sector and the tightening of financial markets.”

However, Yellen pointed out that conditions often change rapidly—in either direction.  “It’s also important to maintain a sense of perspective:  past experience does show that financial turbulence can be resolved more quickly than seems likely when we’re in the middle of it,” she said.  The 1998 Russian debt default caused many forecasters to predict   a major economic slowdown, she noted, but the crisis was short-lived and disruptions were relatively small.

CEA Chairman Lazear Looks at Regional Trends

Immediately following Yellen the morning of Sept. 10, Council of Economic Advisers Chairman Edward Lazear focused on regional trends in the U.S. economy.  He also talked about the Bush administration’s plans and proposals for dealing with the mortgage-lending crunch.

States in the Mountain West have been among the fastest growing in the last several years, in part because of rapidly expanding new manufacturing sectors, especially in computers and electronics, Lazear said. Labor typically moves into such states, where growth is robust.   States in the “old industrial belt” continue to lose manufacturing jobs and are among those with the weakest economies overall, he said. 

When states are hit hard by industry shifts and accompanying job losses, it can take two decades or more for a restructuring that eventually brings stability to a region, Lazear said.  He cited West Virginia as “instructive” in the way the state gradually recovered from recessions and mining industry downturns; now that state’s unemployment rate is close to the national average, reflecting labor mobility and major structural adjustments, he said.

Stronger links among financial markets that are a hallmark of today’s global economy have already meant that the U.S. housing crisis is felt in capital markets around the world, Lazear pointed out.   With severe conditions in California, Florida and parts of the Midwest and New England, the administration wants to work to help homeowners who can afford to own their homes stay in them and avoid foreclosures, he said, describing White House initiatives for “helping the homeowner, not bailing out the credit markets.” 

Taylor’s Lessons from Monetary Policy Rules

Stanford economics professor and former U.S. Treasury official John Taylor shared his observations on “The Explanatory Power of Monetary Policy Rules” in his Adam Smith address on Sept. 10.   He was chosen to receive this year’s Adam Smith Award, NABE’s highest honor, for his contributions as a groundbreaking researcher, public servant, and teacher.  See a profile of Taylor in the August issue.

Recounting how he has sometimes conjured the “spirit” of Adam Smith in his college economics lectures, Taylor described the results of his research on the often “surprising results” of monetary policy rules over his career of some 40 years.  “Today, I will argue that, while monetary policy rules cannot, of course, explain all of economics, they can explain a great deal.”

He looked at the track record of what has become known as the Taylor rule, a widely applied equation on setting central bank interest rates to control inflation.  According to the rule, which Taylor first presented in 1992, the short-term interest rate equals one-and-a-half times the inflation rate plus one-half times the real GDP utilization rate plus one. “Originally, the rule was meant to be normative: a recommendation of what the Fed should do….It certainly was not meant to be used mechanically, though it now appears that monetary policy might operate better if it stayed closer to the rule,” he said in his lecture.

Tracing the use of such rules, Taylor said central banks, notably the U.S. Federal Reserve, began to put the rule to practical use between the late 1980s and early 1990s.   “An important reason for the break-through, in my view, was that, following the Fed’s aggressive disinflation effort under Paul Volker’s leadership, there was a need for a practical framework—a practical rule—for setting interest rates in order to keep inflation low,” he said.  As it turns out, monetary policy rules are “pretty accurate at predicting future interest rates,” Taylor said.  Citing other researchers’ work on how the Taylor rule worked in the mid-1990s, he noted that the rule was predictive of inflation in 1993 and 1994.

In conclusion, Taylor speculated that given the “very fast changing economic world, we do not know how long these explanations or predictions will last.  I have no doubt that in the future a bright economist will show that some of the explanations discussed here are misleading or simply wrong.”  Taylor’s Adam Smith address will be reprinted in the October issue of Business Economics.

Hal Varian on  “Googlenomics,” Business Cycles

Hal Varian, the first chief economist of Google, Inc., described the inner workings of the fast-growing company based in Mountain View, Calif.   He also holds academic appointments at the University of California, Berkeley, in three departments: business, economics, and information management.  Beginning at Google as a consultant in 2002, Varian has been involved in many aspects of the company, including auction design, finance, corporate strategy, and econometrics.

Varian said that Google constantly experiments with ways to improve its highly successful auctions that generate advertising revenue by offering the best ad placement to highest “bidders” with key search words that generate matches when users search on Google. As he noted in a recent academic paper, “Search engine advertising has become a big business, with the combined revenue of industry leaders Yahoo and Google exceeding $11 billion in 2005.”

A few months ago, Varian said he asked his staff at Google to try to answer the question of whether advertising on Google is sensitive to business cycles.  In general, advertising revenue is extremely sensitive to the ups and downs of the cycle, especially when it comes to advertising for discretionary purchases, he noted.   “It turns out that we have a highly diversified group of advertisers,” Varian said.  The kind of direct marketing that is Google’s mainstay “is not sensitive to cycles much at all.  We think that Google actually looks much more like direct mail than radio or TV.”  Therefore, the company’s chief economist said he would  “bet that online search-based advertising is not very vulnerable to cycles.”

Deputy USTR Brings Meeting to Close With Trade Issues

Wrapping up the meeting with his Sept. 11 luncheon speech, Deputy U.S. Trade Representative John K. Veroneau discussed “Trade in the Age of Anxiety.”  His remarks focused on the backlash coming from the two sides of today’s global trade debate: “those who think there’s been too much globalization in their lives; and those who think there’s been too little globalization in their lives.”

To the first group, especially those who see job losses as the top issue, Veroneau urged attention to the benefit to consumers in the form of lower prices and access to a broad array of goods and services, and producers who can sell to a global market. “The most important tools in mitigating risk are policies that promote economic growth…A dynamic, job-creating economy will always provide a better safety net than any individual assistance program,” he said.

The second group of critics, who tend to be from developing countries, “view globalization as a constructive force but feel they are not sufficiently reaping its benefits,” Veroneau said. Maintaining political support for policies that support the global economy is essential, he said, citing three main policies that he said best serve this goal: “openness; rule of law; and foreign assistance, including capacity building.”  He also urged support for the Bush administration’s trade goals, especially trade agreements with Latin America that require Congressional approval.

Meeting Well Attended by the Media

Eighteen reporters, producers, anchors, and camera technicians from 11 different media outlets attended and covered speeches delivered at the annual meeting, reported Melissa Golding, NABE press officer. CNBC economic correspondent Steve Liesman broadcast reports live via satellite from the meeting on Monday, Sept. 10, and Bloomberg TV (Mike McKee) and Radio (both McKee and Tom Keene) broadcast live and recorded interviews on Sept. 9, 10, and 11. Other outlets in attendance included Reuters, Dow Jones, MarketWatch, and Bloomberg News. Other media represented included: the Toronto Globe and Mail, the San Francisco Business Times, the Courier Mail (Australia), ABC-TV 7 San Francisco, Forbes, Thomson Financial, Barron’s, the San Jose Business Journal, TheStreet.com, the Daily Labor Report of BNA, Inc., the Contra Costa Times, and the Stanford Daily News.

The September 2007 NABE Outlook has received a great deal of media coverage since its release on Sept. 10, at the annual meeting. NABE President Ellen Hughes-Cromwick, Ford Motor Company, was interviewed about the survey by CNN Radio, the Wall Street Journal Radio Network, CNBC, Bloomberg Radio, Bloomberg TV, CBS Radio, National Public Radio, the San Francisco Chronicle, and the San Jose Mercury News. The survey was also covered by many other outlets, including the Associated Press, Reuters, Market News International, CNN Headline News, the Associated Press, Bloomberg News, Dow Jones, the Chicago Tribune, the South Florida Sun-Sentinel, the Milwaukee Journal-Sentinel, CNNMoney.com, Investor’s Business Daily, the Arizona Republic, the New York Post, Voice of America, and MarketWatch.