Summary of Articles in Business Economics, April 2010

By Robert Crow
Editor, Business Economics 

“A Tale of Two Crises: One We Missed and One We Can’t Afford To”

Chris Varvares
The current economic crisis seems to be waning, largely due to effective federal government and Federal Reserve response.  Economists deserve credit for helping to avoid the abyss, but we did not do well in predicting the crisis and warning policymakers so that it could have been mitigated or avoided.  We cannot avoid predicting the next crisis, however: it is staring us in the face.  We can see clearly that federal debt will cripple the U.S. economy within several decades under current policy.  Moreover, simulations that take into account the effect of debt on interest rates indicate that the depressing effect on the U.S. economy will be even worse than current warnings suggest.

“The Impact of the Housing Market Boom and Bust on Consumption Spending”

Jeremy A. Leonard
While econometric evidence for the United States has consistently shown that increases in real estate wealth induce additional consumption, it does not directly speak to the effect of a substantial decrease in real estate wealth. This paper examines the real-estate wealth-consumption relationship over the past half century with a particular focus on the sharp decline in 2006-2008, and finds that the wealth effect in the recent down market is significantly larger than in an up market. Additionally, wealth changes seem only to affect consumption of services and non-durable goods; there is virtually no impact on durable-goods consumption.

 “Inflexible Wages and Prices?  Evidence in the Current Recession”

William C. Dunkelberg, Jonathan A.  Scott, and Michael J. Chow
The 2008-2009 recession period brought the most massive and quickest response of fiscal and monetary policy in modern economic history.  At the same time, small businesses (who produce half of private GDP) exhibited the most rapid adjustments in wages, prices, and inventories recorded in the past 35 years of data collected by the National Federation of Independent Business. The notion of “sticky” wages and prices plays a key role in arguments favoring government intervention to rebalance supply and demand for labor and output.  The faster wages and prices (and therefore employment and output) adjust to a “shock” to the economy, the less the need for government intervention.

“Victorian Financial Crises and Their Implications for the Future”

Kenneth N. Kuttner
Banking crises were a relatively common occurrence in nineteenth century England. Like the Federal Reserve today, the Bank of England struggled to quell panics by acting as the lender of last resort, while at the same time maintaining monetary stability. This article surveys the events leading up to and the bank’s response to the four post-1844 crises, highlights some of the similarities between the Victorian era panics and the 2007-2008 crisis, and draws on the nineteenth century experience to illustrate the dilemmas facing modern central banks.

“Stress Testing Economic Data”

Alan B. Krueger
The recent economic crisis has highlighted significant weaknesses in our economic and financial indicators. This paper documents what the crisis has revealed regarding some of the more critical shortcomings of our existing statistical infrastructure, and proposes a way in which these shortcomings could be mitigated.

“Three Simple Techniques to Analyze a Complex Economic Phenomenon: the Case of Profits”

John Silvia and Azhar Iqbal
This paper seeks to characterize the behavior of profits over the business cycle as a model for analyzing any economic series by a practicing business economist.  It addresses three fundamental questions about profits that are common and critical to identifying the behavior of any macroeconomic series: mean-reversion, volatility, and trend.  First, does profit growth over time exhibit mean-reverting behavior?  Second, how volatile are profits, and does this volatility obscure the message of average profit growth? Third, how can we estimate a long-run trend growth component for profits and thereby separate profit cycles from its long-run trend growth component?

Focus on Industries and Markets

“Indoor Climate Control: The Global Demand for Heating, Ventilating, and Air-Conditioning Equipment”
Michael A. Deneen, Andrew C. Gross, and Jennifer L. Mapes
The authors examine recent trends in world demand for HVAC equipment, looking at key drivers of demand, major product groups, energy sources, and key markets by region.

Economics at Work

“Aiming beyond the Box: Bringing out Economists’ Transferable Skills”
Susan Krug Friedman
The author examines how economists’ skills, especially in interpreting and analyzing data, can be transferable skills in a tough labor market and are in great demand in today’s information-laden society.

Book Reviews

Gillian Tett, Fool’s Gold: How the Bold Dream of A Small Tribe at J.P.Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe.  Reviewed by Malcolm C. Harris, Sr.

Charles Gasparino, The Sellout: How Three Decades of Wall Street Greed and Government Mismanagement Destroyed the Global Financial System and Gregory Zuckerman, The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History.  Both reviewed by Cliff Tan.
                 
Find the April issue of Business Economics

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