Summary of Articles in Business Economics, October 2008

By Robert Crow
Editor, Business Economics

“Current Economic and Financial Conditions”

Ben S. Bernanke
Chairman, Federal Reserve Board

Although the Federal Reserve strongly favors private-sector solutions to private-sector problems, the risk of financial instability in the United States and in much of the rest of the world has implied the need for governments and central banks to take extraordinary actions. The complexity of the problems has in some instances required situation-specific responses.  Enactment of the Emergency Economic Stabilization Act, especially the Troubled Assets Security Program, is an important step to deal with a systemic financial problem of historic dimensions.  Fortunately, economic policy makers have learned the lessons of history and have intervened while the majority of financial institutions still have adequate capital and liquidity to provide credit to the economy.  Timely government intervention, together with the natural recuperative power of financial markets, will lay the groundwork for financial and economic recovery.

“Reforming Mortgage Finance”

Sheila C. Bair
Chair, Federal Deposit Insurance Corporation

In the current period of financial stress, the Federal Deposit Insurance Corporation (FDIC) will have a critical role in helping to restore order to financial markets and the banking system.  This address describes FDIC actions as of early October 2008, and indicates what is necessary to improve mortgage finance in the future.  In particular, five basic principles must guide any reform effort.  How to apply these principles will be a challenge, and suggestions for doing so are presented.  NABE members could and should make an important contribution to rebuilding mortgage lending in the future.

“Encouraging Growth and Stability”

Edward C. Lazear
Chair, President’s Council of Economic Advisers

When significant government action is needed and sought, as in the current financial crisis and weak economy, it is easy to forget the underlying market principles that have made the U.S. economy the strongest in the world.  Adherence to these principles is the surest path to continued economic growth and stability over the long run.  Of particular importance are policies that allow flexibility in labor markets; free movement of capital, unimpeded by excessive regulation; tax rates that minimize disincentives for the development of human and physical capital; and liberalization of international flows of goods, services, and capital.  Regarding the current credit crisis, its effect on the real economy has been amplified by falling asset prices.  Policy will be continuously evolving, but the $700 billion stabilization package is an important step.

“The Baltics – Continuing Boom or Bursting Bubble?”

Matthias S. Fifka

Since the late 1990s, the economies of Estonia, Latvia and Lithuania have experienced unprecedented economic growth, which has attracted a large number of foreign investors. American companies were among the first to seek business opportunities and have invested over $1 billion in the three countries as of 2008. However, the boom – partly financed on a loose credit policy – has recently created a fragile economic situation due to soaring wages, double-digit inflation, and high current account deficits. Does this mean that the “Baltic Bubble” is about to burst, leading to a long-term recession? Or does it mean that the three countries are only experiencing a natural consolidation that does not seriously endanger business opportunities in the long run? This paper analyzes the current condition of the Baltic economies and the environment for businesses there in order to determine if the three countries will still be attractive destinations for FDI in the future.

“The Economics of Private Jet Travel: Decision Choices with the New Ownership Models”

Claire Starry and Gerald S. Bernstein

The use of private air travel for business trips has expanded rapidly over the past few decades. We estimate that the number of U.S. domestic passenger trips per year on business aircraft exceeded 17 million in 2007, or a number equal to about 40 percent of combined domestic first class, business class, and full-fare coach trips—travel options for which passengers also pay a premium for timeliness, comfort, or privacy.  Once a company determines that it can benefit from private business travel, it generally identifies the most cost-effective option, including the operating characteristics of the aircraft and the options for obtaining this service.  This paper examines some of the factors that influence decisions on these options, with particular emphasis on the financial and program alternatives that are making it less costly for business travelers to take advantage of private jet travel, thereby expanding its use.  Our findings indicate that the customary view of these options is oversimplified and ignores the new ownership (or non-ownership) models for obtaining use of a business aircraft. 

“Globalization and the U.S. Defense Industrial Base: the Competition for a New Aerial Refueling Tanker”

Nayantara Hensel

The growth of the global economy and the trend toward outsourcing have given rise to concerns over the composition and strength of the U.S. industrial base and the degree of U.S. dependence on other countries for certain goods.  The purpose of this article is to examine the concerns surrounding the alleged inroads of foreign manufacturers into the U.S. defense industrial base, as well as the background behind the concerns, with a specific focus on the recent competition to supply the United States Air Force with a new fleet of aerial refueling tankers. The article discusses the importance of imports and national defense spending in the U.S. economy, explores the dependence (or lack thereof) of the U.S. on foreign imports in the defense sector, explores strategies that have previously been deployed to reduce the role of foreign manufacturers in the U.S. defense industrial base, and examines in detail the recent tanker competition. The article argues that this competition required the deployment of innovative strategies on the part of the incumbent in the industry (Boeing) and the potential entrant (Northrop/EADS) in order to balance conflicting military, political, and economic procurement objectives.

Economics At Work
“Economists in a World of Financial Ruin”

Richard Koss

With the global financial system in a shambles, the author decides it’s a good time to consider the role of economists in firms, drawing on his 23 years of experience on Wall Street.

Focus On Industries And Markets
“The Global Management Consulting Sector”

Andrew C. Gross and Jozsef  Poor

The authors find that recent changes in management practice encourage managers, theoreticians, and consultants to be flexible, open-minded, and prove their mettle as they devise ways of working in global markets.

Find the October issue of Business Economics online.