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FOIA Number: 2018-0275-F
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This is not a textual record. This is used as an
administrative marker by the William J. Clinton
Presidential Library Staff.
Collection/Record Group:
Clinton Presidential Records
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Council of Economic Advisers
Series/Staff Member:
Michael LeBlanc
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20926
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[Weekly Economic Briefings of the President] [Folder 2] [Loose] [9]
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21
1
6
2
EYES ONLY
WEEKLY ECONOMIC BRIEFING
OF THE PRESIDENT OF THE UNITED STATES
Prepared by the Council of Economic Advisers
with the assistance of the Office of the Vice President
September 25, 1998
CHART OF THE WEEK
Manufacturing Compensation Costs
25
Japan
20
Europe
Hourly costs (current year dollars)
15
U.S.
Canada
28 trading partners
10
Asian newly
industrialized economies
5
Mexico
0
1975
1980
1985
1990
1995
The gap between the hourly labor compensation costs of U.S. manufacturers and those
of a weighted average of 28 U.S. trading partners widened in 1997. The major reason
was the strength of the dollar, according to the Bureau of Labor Statistics, which
compiled the data. European and Japanese costs, by contrast, fell closer to U.S. levels.
EYES ONLY
CONTENTS
CURRENT DEVELOPMENT
How Many Jobs Have Been Created?
1
SPECIAL ANALYSIS
Looking Beneath the Aggregate Income and Poverty Data
2
Big Gains for Lower-Income Groups but No Less Inequality
4
ARTICLE
A New Deal for Russia?
6
DEPARTMENTS
Business, Consumer, and Regional Roundup
8
International Roundup
9
Releases
10
U.S. Economic Statistics
11
Financial and International Statistics
12
e
,
GLOBA
EYES ONLY
CURRENT DEVELOPMENT
How Many Jobs Have Been Created?
Firms report that they have added 13.9 million jobs since January 1994-4.7 million
more than the employment growth reported by households over the same period (see
upper chart). What accounts for this discrepancy?
Employment Growth Since Jan. 1994
16
Methodology. The payroll survey
collects information from nonfarm
14
Payroll measure
employers, whereas the household survey
12
interviews one person from each
10
Millions
household about the activities of all the
8
Household measure
members of that household. Those who
adjusted to payroll concept
6
Household measure
hold more than one job are counted once
4
in the household survey but more than
2
once in the payroll survey.
0
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
In addition, agricultural, self-employed,
private household, and unpaid family
Cumulative Employment Discrepancy Since Jan. 1994
workers are counted in the household but
5
not in the payroll survey; and those under
4
16 are counted in the payroll but not in
the household survey. The household
3
Actual
Millions
survey includes auxiliary questions,
including one on multiple jobholders,
2
Normal cyclical
pattern
that can help reconcile the two surveys.
1
But after converting the household survey
to the payroll concept, the gap between
0
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
the two surveys, at 3.8 million, remains
wide.
Cyclical differences. The tendency of payroll job increases to outpace household
employment growth during good times is nothing new, although the explanation for
this cyclical pattern is not clear. It may be that the true number of multiple
jobholders is increasing faster than what is implied by responses to the question on
the household survey. Or it may have something to do with illegal immigration or
some other factor. Whatever the explanation, once the cyclical pattern is removed,
the discrepancy shrinks to 1.9 million (see lower chart).
The last 12 months. Neither the methodological differences nor the cyclical pattern
explain the growth in the discrepancy over the past 12 months. Over this period, the
payroll survey is still subject to revision because it has not yet been benchmarked to
the unemployment tax system. The unexplained slower growth in household
employment suggests a downward revision of payroll employment at the time of next
year's benchmark.
Weekly Economic Briefing
1
September 25, 1998
EYES ONLY
SPECIAL ANALYSIS
Looking Beneath the Aggregate Income and Poverty Data
New data on income and poverty released this week show a rise in real median
household income of 1.9 percent and a drop in the poverty rate to 13.3 percent.
Gains among the traditionally disadvantaged were particularly noteworthy.
Large gains for female-headed households with children. Historically, the
poverty rate has been extremely high for female-headed families with children, and
the rate remained high in 1997 (41.0
Poverty Rates of Female-Headed Families with Children
percent compared with 15.7 percent for
70
Hispanic Origin
all families). But female-headed families
Black
with children have shown substantial
60
improvements in recent years. The rate
Poverty Rate (Percent)
AS
50
for all such families is the lowest it has
been since 1979, and the rates for black
40
and Hispanic families are the lowest on
30
record (see chart). These are the families
White
most likely to be affected by welfare
20
1971
1976
1981
1986
1991
1996
reform, and it will be important to
monitor their well-being in coming years.
Issues in poverty measurement. Problems with the official poverty measure that
are currently under review by the Administration are particularly acute for female-
headed families with children. Such families are disproportionately likely to receive
the EITC, food stamps, Medicaid, or housing assistance, and they typically have work
expenses, particularly child care costs. The National Research Council's
recommended alternative poverty measure would reflect these additional sources of
income and expenditure in measuring the well-being of families. This spring the
Census Bureau is scheduled to release unofficial poverty estimates based on this
alternative measure.
Central cities share in the progress. Poverty in the central city remained high at
18.8 percent (compared with 9.0 percent in metropolitan areas outside of central
cities and 15.9 percent in non-metropolitan areas). The good news is that, although
still high, the central city poverty rate fell nearly a full point in 1997 and economic
gains were substantial in central cities within larger metropolitan areas. Median
family income for central city residents grew by 3.9 percent within metropolitan areas
of at least one million people and 2.0 percent for smaller metropolitan areas.
Poverty continues to fall among foreign-born residents. Data that are available
only since 1994 show declines in the poverty rate from 22.6 percent in 1994 to
19.9 percent in 1997 for foreign-born residents (compared with a decline from 13.8 to
12.5 percent for the native-born). The rate among naturalized citizens was an even
lower 11.4 percent in 1997.
Weekly Economic Briefing
2
September 25, 1998
EYES ONLY
Income deficit remains high for most poor families. Despite the fall in the poverty
rate, the income of many poor families is substantially below the poverty threshold.
Five percent of families needed only $500 of additional income to be lifted out of
poverty in 1997, and 9.4 percent needed less than $1,000. However, over half of
families in poverty needed at least $5,000 to reach the poverty line, and the average
poverty gap was $6,602.
The role of the economy. Many factors have probably contributed to the recent gain
in income and reduction in poverty, but one stands out-growth in the overall
economy. The poverty rate tends to rise during recessions and fall during
expansions. According to a simple model based on historical relationships, economic
gains over the past year should have reduced the poverty rate by between 0.3 and
0.5 percentage point. The actual decline of 0.5 point was at the top of this range.
Weekly Economic Briefing
3
September 25, 1998
EYES ONLY
SPECIAL ANALYSIS
Big Gains for Lower-Income Groups but No Less Inequality
Low-income groups experienced particularly large income gains in 1997, yet
measures of income inequality increased. What explains these divergent trends?
Changes in 1997. Real median household income rose by 4.3 percent for blacks and
by 4.5 percent for Hispanics between 1996 and 1997, compared with a 1.9 percent
increase in overall median household income. Other groups with median household
incomes below the overall median of $37,005 also experienced disproportionate
gains, including family households
Share of Household Income
headed by single females and elderly
60
1997
households (both up 4.4 percent),
50
1996
Southern households (up 3.6 percent),
40
and those in central cities of metropolitan
Percent
areas with at least a million people (up
30
3.1 percent). Meanwhile, the share of
20
household income received by each of the
10
bottom four quintiles fell by
0.1 percentage point, while the share
0
Bottom
Second
Middle
Fourth
Top
Quintile
received by the top 20 percent grew by
0.4 percentage point (see upper chart).
Analysis. Three factors might explain why disproportionate gains for lower-income
groups did not translate into reduced overall inequality.
Share shifts. If the proportion of the population belonging to the lower-income
groups were growing fast enough, the increasing weight attached to their below-
average level of income could increase overall inequality. This cannot be a large
part of the story, however, because 1-year shifts in population shares are quite
small. For instance, Hispanic households went from 8.1 to 8.4 percent of all
households between 1996 and 1997, and the South's share of households grew
from 35.3 to 35.7 percent.
Change in Income Share, 1996-1997
Inequality within lower-income
1.0
groups. If inequality increased within
0.5
the lower-income groups, that would
0.0
also tend to increase overall
Percentage points
-0.5
inequality. However, the little
-1.0
information we have suggests that
-1.5
this is probably not the explanation
White
-2.0
Black
either. For blacks, inequality
Hispanic
decreased between 1996 and 1997,
-2.5
Bottom
Second
Middle
Fourth
Top
Quintile
with the share of income rising in the
lower four quintiles and falling at the
Weekly Economic Briefing
4
September 25, 1998
EYES ONLY
top (see lower chart on previous page). For Hispanics, there was some
redistribution from the first and second quintiles to the middle quintile, but no
change in the share of the top two quintiles.
Inequality within higher-income groups. Increasing inequality in the rest of the
population is probably the reason why overall inequality did not diminish.
Published data do not exist for the relevant group (non-elderly, non-single
mother, non-Hispanic white households living in smaller metropolitan areas and
suburbs outside the South), which constitutes a considerable part of the
population. But the change in the distribution for white households is suggestive,
with the share of aggregate white household income falling for each of the
bottom four quintiles and rising for the top.
Conclusion. Although lower-income groups experienced disproportionate increases
in median household income between 1996 and 1997, large gains at the top for other
groups contributed to a modest increase in overall inequality.
Weekly Economic Briefing
5
September 25, 1998
EYES ONLY
ARTICLE
A New Deal for Russia?
Like the United States in the Great Depression, Russia currently faces a severe
economic crisis with widespread distress. This makes it understandable that Prime
Minister Primakov would draw parallels between his plans for increased state
intervention in the Russian economy and the New Deal. But such comparisons
should be approached cautiously.
Different macroeconomic conditions. The major macroeconomic problem facing
the United States in the Great Depression was a sharp drop in aggregate demand.
Output in 1933 was nearly 30 percent below its 1929 level, the unemployment rate
was almost 25 percent, and prices were falling. In Russia, by contrast, the major
macroeconomic problem is a breakdown of the supply side of the economy. The
sharp drop in output after 1989 reflected a costly adjustment from a planned toward
a market-oriented economy rather than a sharp drop in aggregate demand. There are
idle and unpaid workers in Russia today, but the supply-side problems that continue
to plague the economy suggest that aggressive demand stimulus would simply
aggravate inflation.
What happened during the New Deal? The New Deal transformed America's
view of the proper role of government in managing the economy. But modern
economic historians question how much it contributed to pulling the economy out of
the Great Depression.
Overall macroeconomic stimulus. Because Russia's macroeconomic conditions
are so different, there are few lessons from New Deal macroeconomic policy. It
is worth noting, however, that even though Keynesian analysis was forged in the
crucible of the Great Depression, U.S. fiscal policy did not really follow the
Keynesian prescription until the onset of World War II. The Federal budget
remained in surplus through 1930. The subsequent widening of the deficit mostly
reflected falling economic activity rather than active fiscal expansion. (The
structural balance may actually have been in surplus.)
Public spending. Although growth in Federal outlays during the New Deal paled
in comparison with the size of the output gap (and in comparison with subsequent
wartime spending), it was nevertheless substantial. Spending included direct
employment (such as the Civilian Conservation Corps and the Works Progress
Administration), public investment (particularly for public power and rural
electrification), and farm price supports. The Federal Government also took
increased responsibility for the social safety net, creating national unemployment
compensation, welfare, and social security programs. Whatever the merits of
these policies, however, the unemployment rate remained well above 10 percent
until 1941.
Weekly Economic Briefing
6
September 25, 1998
EYES ONLY
Microeconomic intervention. The New Deal entailed substantial government
intervention in specific industries and sectors, not always to good effect. For
example, the de facto suspension of antitrust prohibitions against price fixing at
the heart of the National Industrial Recovery Act of 1933 was almost surely
misguided. In retrospect, extending existing price and entry regulation to
trucking and airlines was probably unnecessary and inefficient. Thus, it would
probably be a mistake for Russia to emulate elements of the New Deal that tried
to "manage" competition.
Banking and Financial reform. FDR took office amidst a wave of bank runs and
bank failures. A bank holiday was declared in March 1933 and solvent national
banks were subsequently reopened with temporary Federal deposit insurance.
The Nation was effectively taken off the gold standard, and a number of financial
and securities reforms were enacted. Like so many other New Deal policies,
these actions represented a mixed bag of "try anything" emergency measures and
longer-term reforms. Among the latter, the most enduring are probably ones like
the creation of the Securities and Exchange Commission that created institutions
to increase confidence in markets and make them work better.
Conclusion. The New Deal was neither a consistent nor a comprehensive plan.
Neither did it pull the economy out of the Great Depression. But to judge it only on
economic grounds is to miss its political and social significance. FDR's bold
experimentation and balancing of conflicting interests kept the country together
through a period of severe economic distress and laid the groundwork for the mixed
economy that produced a doubling of living standards in the first generation
following the end of World War II.
Weekly Economic Briefing
7
September 25, 1998
EYES ONLY
BUSINESS, CONSUMER, AND REGIONAL ROUNDUP
Colleges Seen as Places to Learn about Diversity. The major findings of the new
book by Derek Bok and William Bowen, The Shape of the River, have been widely
reported: blacks who graduate from elite colleges earn advanced degrees at the same
rates as their white counterparts, and they tend to be more active than their white
classmates in civic activities. An important finding that received less attention is the
increased percentage of graduates who felt that their colleges contributed "a great
deal" to their ability to work effectively and get along with people of different races
and cultures-a 16 percentage-point increase between 1976 and 1989 for both black
and white cohorts (to 46 percent in 1989 among blacks and to 34 percent in 1989
among whites). A similar increase was found for a question regarding the ability to
have good rapport with people holding different beliefs. The authors posit that
students may be increasingly aware of the importance of learning to get along with
a wide range of people, and are taking better advantage of opportunities to learn this
in college. The authors also suggest that colleges may be becoming more adept at
creating an environment in which students can learn from classmates who are
different from themselves.
Traditional South Gets "All Shook Up." The historically black/white, mostly
Protestant, native-born South is rapidly becoming a multi-ethnic society, according
to a new study. Whereas whites made up 76 percent of the population 20 years ago,
that percentage is down to 68; meanwhile the percentage of Hispanics has jumped
from 5 to 11. Although most Hispanics in the South live in Florida or Texas, the six
counties with the most rapid growth in their Hispanic populations are in Georgia,
North Carolina, Virginia, and Arkansas. Just from 1990 to 1997, the Asian
population in the South increased 42 percent, from 1.2 to 1.7 million. The South also
contains the five counties with fastest growing Asian populations in the country. The
educational attainment of immigrants to the South has been bifurcated: the
proportion of foreign-born immigrants with at least a bachelor's degree is higher than
that of all Southerners, but the proportion lacking a high school diploma is also
higher. The South has also become less rural: seven in 10 Southerners live in a
metropolitan area, and three-quarters of the region's jobs are in those areas.
Survey Examines Work-Related Trends. Despite low unemployment and strong
economic growth, many Americans are still concerned about their economic security,
according to a new quarterly nationwide survey of workers or those actively looking
for work. In particular, 59 percent of Americans reported that they were very
concerned about job security for workers in general, although 55 percent reported
being very satisfied with the security of their own job. Nearly four in ten (39 percent)
rated the ability to balance work and family as an extremely important factor for a
job, followed by health and medical insurance (38 percent), job security (33 percent),
and income (33 percent). About 75 percent of respondents said that it is very or
extremely important for the government to provide financial assistance for skills
training, basic education, and college, and 88 percent think it is very or extremely
important for government to improve the quality of education in schools.
Weekly Economic Briefing
8
September 25, 1998
EYES ONLY
INTERNATIONAL ROUNDUP
IMF Offers New Assessment of Capital Market Liberalization. The International
Monetary Fund expresses some support for controls on inward movements of capital
in its latest annual report on international capital markets. This is noteworthy,
considering the IMF's past strong support for open financial markets. The report also
reveals that total net private inflows fell 28 percent in 1997, while inflows to Asia
plummeted by 87 percent-the first decline in those inflows since 1992. (According
to a press report, private capital may now even be flowing out of emerging markets.)
The report draws three broad conclusions about financial liberalization. First, strong
financial sectors are essential, particularly strong and sound banking systems.
Second, despite the large potential benefits derived from global capital makets,
critical preconditions need to be met before countries open their capital accounts, and
the sequencing of liberalization must be carefully considered. Third, transparency
and the timely availability of accurate information are crucial. One clear lesson
drawn from the Asian crisis is that unique problems arise when domestic banks are
the key intermediaries for volatile capital flows. The report identifies the
combination of a weak banking system and an open capital account as "an accident
waiting to happen." It also recognizes that restrictions on short-term capital flows,
such as those established by Chile, might be necessary given that there are limits to
the pace at which financial sectors can be strengthened. As the report notes,
however, it can be difficult differentiating between short- and long-term capital
flows, due to both data and conceptual problems. In addition, controls are not
substitutes for reform of the underlying financial sector. In fact, certain capital
controls might have contributed to the crisis (particularly those that discouraged
foreign purchases of long-term securities) by channeling foreign investment through
domestic banks.
Blair Calls for Overhaul of the International Financial System. In a speech
Monday, British Prime Minister Tony Blair called for "a new Bretton Woods for the
next millennium." He challenged heads of state, finance ministers, international
financial institutions, and outside experts to develop the necessary reforms within one
year, so that the new institutions would be in place by the year 2000. Blair proposed
several measures to deal immediately with the financial crisis. He called on the
world's major economies to coordinate macroeconomic policy to ensure that growth
is sustained. He also emphasized the urgent need for fiscal action in Japan to boost
domestic demand. Urging swift action to provide the IMF with resources to support
countries pursuing sound economic policy, he concluded with an exhortation against
short-term measures alone. In his view, the 54-year old Bretton Woods institutions,
built for a world of fixed exchange rates, capital controls, and smaller international
capital flows, are now outdated. Current conditions require greater transparency and
improved information transfers among government, the private sector, and the
international institutions themselves. Finally, Blair said, open world capital markets
require an international lender of last resort, a role that the IMF currently does not
and cannot play.
Weekly Economic Briefing
9
September 25, 1998
EYES ONLY
RELEASES THIS WEEK
Gross Domestic Product
According to revised estimates, real gross domestic product grew
at an annual rate of 1.8 percent in the second quarter.
Advance Durable Orders
Advance estimates show that new orders for durable goods
increased 1.6 percent in August, following an increase of
1.9 percent in July.
MAJOR RELEASES NEXT WEEK
Consumer Confidence-Conference Board (Tuesday)
Leading Indicators (Wednesday)
NAPM Report on Business (Thursday)
Employment (Friday)
Weekly Economic Briefing
10
September 25, 1998
EYES ONLY
U.S. ECONOMIC STATISTICS
1970-
1993
1997
1997:4
1998:1
1998:2
Percent growth (annual rate)
Real GDP (chain-type)
2.7
3.8
3.0
5.5
1.8
GDP chain-type price index
5.4
1.7
1.1
0.9
0.9
Nonfarm business (NFB) sector:
Productivity (chain-type)
1.5
1.7
0.9
3.5
0.1
Real compensation per hour:
Using CPI
0.6
1.9
2.8
4.1
2.0
Using NFB deflator
1.3
2.0
3.9
4.3
3.4
Shares of Nominal GDP (percent)
Business fixed investment
10.9
10.6
10.7
11.0
11.2
Residential investment
4.5
4.0
4.1
4.2
4.3
Exports
8.2
11.9
12.0
11.6
11.3
Imports
9.2
13.1
13.2
13.1
13.1
Personal saving
5.2
1.5
1.2
0.9
0.3
Federal surplus
-2.7
-0.3
0.0
0.7
0.9
1970-
June
July
August
1993
1997
1998
1998
1998
Unemployment Rate (percent)
6.7**
4.9**
4.5
4.5
4.5
Payroll employment (thousands)
increase per month
189
68
365
increase since Jan. 1993
16682
Inflation (percent per period)
CPI
5.8
1.7
0.1
0.2
0.2
PPI-Finished goods
5.0
-1.2
-0.1
0.2
-0.4
**Figures beginning 1994 are not comparable with earlier data.
New or revised data in boldface.
Weekly Economic Briefing
11
September 25, 1998
EYES ONLY
FINANCIAL STATISTICS
July
August
Sept. 24,
1996
1997
1998
1998
1998
Dow-Jones Industrial Average
5743
7441
9097
8479
8002
Interest Rates (percent per annum)
3-month T-bill
5.01
5.06
4.96
4.90
4.44
10-year T-bond
6.44
6.35
5.46
5.34
4.64
Mortgage rate, 30-year fixed
7.80
7.60
6.95
6.92
6.64
Prime rate
8.27
8.44
8.50
8.50
8.50
INTERNATIONAL STATISTICS
Exchange Rates
Current level
Percent Change from
September 24, 1998
Week ago
Year ago
Deutschemark-Dollar
1.678
-0.4
-5.5
Yen-Dollar
135.3
2.6
12.4
Multilateral $ (Mar. 1973=100)
96.40
-0.0
-1.4
Real GDP
Unemployment
CPI inflation
International Comparisons 1/
growth
rate
(percent change in index
(percent change last 4 quarters)
(percent)
last 12 months)
United States
3.6 (Q2)
4.5 (Aug)
1.6 (Aug)
Canada
3.1 (Q2)
8.4 (Jul)
1.1 (Jul)
Japan
-1.8 (Q2)
4.2 (Jul)
-0.1 (Jul)
France
3.0 (Q2)
11.7 (Jul)
0.8 (Jul)
Germany
2.5 (Q2)
2/ 7.4 (Jul)
0.9 (Jul)
Italy
1.1 (Q2)
12.4 (Apr)
1.8 (Jul)
United Kingdom
2.6 (Q2)
6.3 (May)
3.5 (Jul)
1/ For unemployment data, rates approximating U.S. concepts as calculated by the U.S. Department of Labor, Bureau of Labor
Statistics.
2/ Rate for former West Germany. Using OECD standardized unemployment data, the unemployment rate for unified Germany for
July 1998 is 9.6 percent.
Weekly Economic Briefing
12
September 25, 1998
EYES ONLY
WEEKLY ECONOMIC BRIEFING
OF THE PRESIDENT OF THE UNITED STATES
Prepared by the Council of Economic Advisers
with the assistance of the Office of the Vice President
September 18, 1998
CHART OF THE WEEK
The Flattening Treasury Yield Curve
7.5
March 1997
7.0
July 1997
6.5
Yield (percent)
Dec 1997
6.0
5.5
Federal funds rate
5.0
September 17, 1998
4.5
4.0
0
5
10
15
20
25
30
Maturity (years)
Over the past 18 months, intermediate- and long-term interest rates have declined
substantially, while short-term rates have declined much less. All Treasury issues now
have yields below the Federal Reserve's target Federal funds rate. In the past, such
conditions have often been indicative of Fed tightening to slow the economy, but a more
likely explanation now is strong demand for Treasury securities stemming from the
international financial crisis and very low inflation expectations.
EYES ONLY
CONTENTS
CURRENT DEVELOPMENT
Are Businesses Having Trouble Borrowing?
1
SPECIAL ANALYSES
Who Should Pay for Environmental Protection?
2
Can Japan Afford Fiscal Stimulus?
3
ARTICLE
The Distribution of Wealth
5
DEPARTMENTS
Business, Consumer, and Regional Roundup
7
International Roundup
8
Releases
9
U.S. Economic Statistics
10
Financial and International Statistics
11
Q.
"Up a hundred and sixteen points! If only we'd had the
foresight to invest ten minutes ago.
EYES ONLY
CURRENT DEVELOPMENT
Are Businesses Having Trouble Borrowing?
Some anecdotal accounts suggest that a "flight to
quality" spurred by the international financial crisis
has made it more difficult for U.S. businesses to
borrow. What do the data show?
Interest rate spreads. Since mid-July, the yield
spread between typical investment-grade corporate
bonds and Treasury bonds has increased sharply,
reaching its largest value since 1991 (see upper chart).
Yet the recent widening of the spread arises not from
Baa-Over-Treasury Yield Spread
an increase in the private yield but rather
2.4
from a decline in Treasury yields (see
2.2
lower chart). Thus, companies with a
2.0
rating of Baa or higher can still borrow
money at roughly the same cost as
Percent
1.8
2 months ago. Only high-risk companies
1.6
seem to be having more trouble obtaining
1.4
funds now, as yields on "junk" bonds
1.2
have increased substantially. Indeed,
new issuance of such bonds has come to
1.0
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
a virtual halt.
Bond Yields
11.0
Why have spreads widened?
10.0
Apparently, shifts in preferences toward
High-yield ("junk")
9.0
U.S. assets have focused on Treasury
Percent
8.0
securities, which are extremely safe and
Baa-rated
July 17
7.0
liquid. Moreover, increased uncertainty
Treasury 30-year
about future economic conditions seems
6.0
to have raised the risk premium that
5.0
investors demand for holding private
4.0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
instead of government bonds. Both
factors tend to push up Treasury
prices-and push down their yields-relative to
private securities. A larger risk premium may also
have contributed to the drop in stock prices since July,
if investors are now discounting expected future
earnings at a higher (risk-adjusted) rate.
Conclusion. Interest rates have risen in the high-risk
market of late. By contrast, rates have not increased
for less-risky debt-nor have they fallen in line with
Treasury yields.
Weekly Economic Briefing
1
September 18, 1998
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SPECIAL ANALYSIS
Who Should Pay for Environmental Protection?
Although equity considerations are central to the discussion of who should pay for
environmental protection, economists have tended to think that efficiency is largely
unaffected by how this question is resolved. That view is changing, however, as an
analysis of the Administration's "no surprises" policy with respect to endangered
species protection illustrates.
The Coase theorem. The belief that who pays is unrelated to efficiency can be
traced to analysis of Nobel laureate Ronald Coase showing that, under ideal
conditions, an efficient amount of an environmental good can be provided regardless
of who incurs the costs. If individuals are liable for any damage caused, they will
take mitigating action up to the point where the cost of additional mitigation would
exceed the benefits in terms of reduced damage payments. If individuals are not
liable for damages, government (acting in society's interest) should be willing to pay
individuals to take mitigating action up to the point where the additional benefits
would fall short of the additional costs. In either case, according to Coasean logic,
an efficient outcome is achieved.
Future costs. The ideal conditions necessary for the Coase theorem to hold are not
often met. In particular, who pays affects efficiency as well as distribution when the
issue is future environmental protection. Individuals who might face environmental
costs in the future have an incentive to try to avoid those costs. For example,
landowners fearful that they will face future land use restrictions aimed at protecting
endangered species may make investments that are harmful to species conservation,
rush to develop prior to regulation, or hide information about species on their land.
Each of these actions, while harmful to species conservation, can result in lower
expected future costs borne by the landowner.
No surprises. To reduce conflicts with private landowners, the Administration
introduced a "no surprises" rule to the Habitat Conservation Plan provisions of the
Endangered Species Act. Under the rule, a landowner with an approved HCP is
assured that no additional land use restrictions will be required for species covered
by the plan. This no surprise policy does not rule out surprises; rather, it shifts the
cost of any surprises from the landowner to the government. Because surprises entail
possible future environmental protection, it is important for efficiency reasons to
shelter landowners from paying the costs. Having the government compensate
landowners for future land use restrictions, but not necessarily for present land use
restrictions, is thus consistent with sound economic efficiency principles.
Conclusion. Deciding who should pay for environmental protection involves issues
that go beyond efficiency, such as whether individuals have a duty to protect the
environment or should be free to do as they please with their property. But as
economists are starting to demonstrate, it involves questions of efficiency as well.
Weekly Economic Briefing
2
September 18, 1998
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SPECIAL ANALYSIS
Can Japan Afford Fiscal Stimulus?
One reason Japan has given for resisting international pressure to pursue a more
expansionary fiscal policy is the country's large budget deficit and public debt. How
persuasive is this concern?
How large is Japan's fiscal imbalance? Japan's budget deficit is expected to be
6.1 percent of GDP this year, compared with a U.S. budget surplus and deficits below
3 percent in the European countries forming the EMU. By some measures, Japan's
public debt amounts to more than 80 percent of GDP. It is important to note,
however, that the current budget deficit includes a large cyclical component.
Net-Debt-to-GDP Ratio
Moreover, the debt underlying the
70
SS fund holdings of
80 percent calculation includes
non-gov't assets
60
substantial government debt held by other
Net debt excluding SS
fund assets
50
government agencies. The OECD
calculates that after netting out these
40
Ratio
assets, Japan's debt was equal to
30
59 percent of GDP in 1996, roughly in
20
line with several other major OECD
10
countries (see chart). Moreover, Japan's
0
social security system holds a substantial
Japan
US
Germany
France
UK
amount of non-government assets.
Netting these out reduces the debt-to-GDP ratio to 15.4, well below comparable
figures for the other major OECD countries.
The social security question. As in all G-5 countries, Japan's population is aging,
and social security issues color any assessment of the fiscal balance. The buildup of
assets in the social security system reflects Japan's awareness of the future
obligations it will face. However, Japan has a more serious aging problem than the
rest of the G-5, as it has the highest average age, will have one of the largest
dependency ratios in the next 50 years, and has the longest life expectancy. These
factors and the amount of legislated benefits imply that Japan faces greater unfunded
pension liabilities: 105 percent of GDP in Japan, compared with 25 percent in the
United States, over 100 percent in Germany and France, and 5 percent in the U.K.
These larger liabilities tend to counterbalance the greater assets of the Japanese
system and imply a serious long-term problem both for pension liabilities and health
care costs for the elderly.
Implications. Japan will eventually have to take further steps to prepare for the
aging burdens that are ahead. In the meantime, however, Japan does not face a
problem of exploding debt that would militate against a fiscal expansion. In fact, a
fiscal expansion could have substantial benefits. First, of course, it could help spur
the economy and avoid a worsening recession. Stronger growth would offset some
of the immediate impact of fiscal stimulus on the deficit. Second, paradoxically, a
Weekly Economic Briefing
3
September 18, 1998
EYES ONLY
larger deficit in the short term could produce a smaller deficit in the intermediate
term. If the stimulus leads to a strong enough rebound in spending and a sustained
recovery in growth, tax revenues might increase enough and countercyclical
government spending might fall enough to improve the medium-run deficit picture.
Just as a growing economy has helped shrink the U.S. budget deficit over the past
several years, a strong resumption of growth in Japan should help to reduce its deficit
over time.
Weekly Economic Briefing
4
September 18, 1998
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ARTICLE
The Distribution of Wealth
When the Census Bureau releases its latest report on money income and poverty next
week, annual data on family income and its distribution will be available through
1997. By contrast, 1995 is the latest year for which we have data on wealth and its
distribution. Nevertheless, it seems likely that the increase in stock prices since 1995
has produced a modest widening in what was already a highly unequal distribution.
No wealth of data. The best data for examining wealth and its distribution is the
Federal Reserve's Survey of Consumer Finances (SCF) for 1983, 1989, 1992, and
1995 (the 1998 survey is now underway). The SCF consists of a core representative
sample combined with a high-income supplement designed to provide a greater
number of potentially wealthy respondents. The SCF is not only less frequent than
the Current Population Survey used to produce the money income and poverty data,
it is also substantially smaller (less than 5,000 respondents, compared with about
50,000 in the CPS).
Levels and trends. The average net worth of all households was a little over
$200,000 in 1995. Taking out the net equity in owner-occupied housing, average
financial wealth was about $157,000. Because the distribution of wealth is highly
unequal, median wealth is substantially
Changes in Net Worth, 1983-95
lower than average wealth: median net
20
Mean
worth was roughly $50,000 in 1995, and
15
Median
median financial wealth was roughly
10
$10,000. Both mean and median net
5
worth rose between 1983 and 1989 and
Percent
0
fell between 1989 and 1995 (see chart).
-5
In one study, mean net worth in 1995 was
-10
slightly higher than it was in 1983, as
-15
shown in the chart. But in another study,
-20
1983-89
1989-95
1983-95
median net worth was also higher in 1995
than in 1983.
Inequality. Wealth is substantially more unequally distributed than income. For
example, the share of net worth held by the wealthiest 1 percent of households was
close to 40 percent in 1995, whereas the share of household income received by the
richest 5 percent of households was 21 percent. In the wealth rankings, the bottom
80 percent accounted for just 16 percent of net worth; in the income rankings, the
bottom 80 percent accounted for more than half of aggregate family income. The
proportion of households with zero or negative net worth was 18.5 percent in 1995.
Studies showing a sharp increase in wealth inequality between 1983 and 1989 have
been called into question by a recent study, which finds no statistically significant
change over that period. But wealth inequality does appear to have increased slightly
between 1992 and 1995.
Weekly Economic Briefing
5
September 18, 1998
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Race. Non-whites and Hispanics have substantially less wealth than non-Hispanic
whites (see chart). The median wealth of black households was only 12 percent that
of non-Hispanic whites in 1995. Although this represents an improvement over
Wealth Ratios by Race
1983's 7 percent, it represents a decline
0.40
from 17 percent in 1992. Wealth ratios
are substantially lower than the
0.30
non-white/white
non-white/white
corresponding black/white income ratio.
mean
median
black/white
One reason may be inheritances:
Ratio
mean
0.20
24 percent of white households had
received an inheritance (with an average
0.10
black/white
value of $115,000) in 1995, compared
median
with 11 percent of black households who
0.00
1989
1990
1991
1992
1993
1994
1995
had received an inheritance (with an
Note: Non-white:white ratios are from Federal Reserve data. Black:white
ratios are from other sources.
average value of $32,000).
Age. SCF data show the expected hump-shaped age-wealth profile, with wealth
accumulation over early and middle adulthood and decumulation in old age.
However, between 1983 and 1995, the shape of this profile shifted, with relatively
large gains for the oldest age group and losses for the youngest groups.
Who are the rich? The rich (the 1 percent of households with net worth of more
than $2.4 million in 1995) are different from everyone else not just because they have
more money. Other differences include age (the wealthy are older, on average),
education (69 percent college graduates compared with less than 30 percent for all
household heads), race (95 percent non-Hispanic whites), and self-reported health
status (55 percent excellent, compared with 30 percent for all household heads).
Conclusions. Ownership of wealth was highly concentrated in the United States in
1995 with the wealthiest 1 percent accounting for more than a third of net worth.
The rise in stock prices since 1995 has probably increased concentration at the top
even more, though the continuing economic expansion may have produced increases
in wealth for all groups.
Weekly Economic Briefing
6
September 18, 1998
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BUSINESS, CONSUMER, AND REGIONAL ROUNDUP
Beige Book Shows Moderate Growth but Deteriorating Expectations. The latest
summary of commentary on current economic conditions from the Federal Reserve
districts shows all district economies continuing to expand at a moderate pace,
although several districts indicated slowing in some sectors. The summary notes
reports from the New York district that significant segments of its economy were
slowing and from the Dallas district that economic activity decelerated in August as
the manufacturing sector declined. While the strength and pattern of the business
expansion appears to have changed only marginally since the August 5 report, several
districts indicated a sharp deterioration in both business and household expectations
regarding the economy in the fourth quarter and in 1999. A large number of districts
continued to exhibit labor market tightness, which appears to be pushing wages up
at a faster pace. Retail prices, by contrast, remain generally steady or are declining
slightly in most districts, and falling import prices have helped push industrial
commodity prices lower.
EPI Offers Gloomy Assessment of Working America. In its latest annual
assessment of the State of Working America, the Economic Policy Institute concludes
that most working families have not seen their standard of living recover from the
recession of the early 1990s, despite 7 years of strong economic growth and increases
in the minimum wage. This "glass is half empty" assessment finds that median
family income was $1,000 (2.3 percent) less in 1996 than it was in 1989, although
1997 data (available next week) are likely to show a parity with 1989 levels. Income
growth generated among middle-income families has been driven largely by increases
in working hours-an additional 6 weeks annually for the typical family since
1989-to make up for stagnant or falling wages. Between 1989 and- 1997, real
hourly wages remained constant or fell for the bottom 60 percent of workers, except
for low-wage workers, whose wages rose 1.4 percent during that period. However,
this assessment does not reflect healthy increases in real wages that have occurred
this year.
Teacher Quality Drives Student Achievement. A better understanding of ways to
improve the quality of teaching is necessary to evaluate proposed changes in
education policy, according to a new study. The study, which tracked one-half
million elementary school students in Texas public schools over 3 years, concluded
that differences in teacher quality explained variation in student achievement gains
better than class size, overall school organization, leadership, or financial condition.
However, measurable factors, such as experience or a master's degree, did little to
explain differences in teacher quality. The study did find that reduced class size had
a positive effect on the math and reading achievement of low-income children, but
cautioned that resources devoted to reducing class sizes for low-income children
might be better used to support preschool, after-school, or summer programs, for
which spending is currently quite low.
Weekly Economic Briefing
7
September 18, 1998
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INTERNATIONAL ROUNDUP
IMF Lowers Forecast for World Growth. IMF Managing Director Camdessus
acknowledged in a newspaper interview this week that the IMF is again lowering its
projection for world growth this year. The forecast of 2.1 percent growth, which will
be officially released in the forthcoming World Economic Outlook, represents a
precipitous drop from the IMF's October 1997 forecast of 4.3 percent growth. More
ominously, forecasted world growth for 1998 is now comparable to levels not seen
since the pronounced world slowdowns of 1974-75, 1980-82, and 1990-91.
Downward revisions are being driven by Asia. Japan's economy is expected to
decline by 2.3 percent; the newly industrialized Asian economies (Hong Kong,
Taiwan, Singapore, and Korea) are predicted to contract by 2.4 percent; and the
ASEAN-4 economies (Indonesia, Malaysia, the Philippines, and Thailand) are now
expected to shrink by a staggering 10.4 percent. Closer to home, expected growth
in the Western Hemisphere is now 2.7 percent, down from 5.1 percent actual growth
in 1997.
Falling Oil Prices Still Challenge a Diversifying Saudi Arabia. Since the early
1980s, Saudi Arabia has been relatively successful at diversifying its economy. Non-
oil activities (such as agriculture, manufacturing, and services) have increased from
about 44 percent of GDP in the 1970s to about 65 percent recently. Government
policies supporting this transition have included infrastructure investment,
privatization, and reductions in many subsidies. The country has also maintained a
favorable overall economic environment, with low inflation, competitive labor costs,
a reduced fiscal deficit, and an open trade and exchange rate system. Nevertheless,
oil revenues still account for nearly 90 percent of Saudi export earnings. This year's
fall in oil prices of around $7 per barrel has caused a sharp reduction in oil revenues
that will likely increase the budget deficit and cut GDP growth drastically-perhaps
even causing a decline-after 4.4 percent annual growth over the last 2 years.
World Bank Study Cites Role of Structural Flaws in Asia's Woes. A recently
released World Bank study applies standard financial-ratio analysis to determine
what caused the crisis in Asia. The study points to a rapid build-up of fixed assets
throughout Asia from 1992 to 1996, with particularly rapid growth in Indonesia and
Thailand. With most of the growth financed with debt (especially in Thailand and
Korea), high levels of corporate leverage were already prevalent in 1996. At the
same time, moderate to low profitability severely impaired the ability of many Asian
firms to meet their interest obligations. Banks were the main source of funds,
channeling very high household savings to businesses. Most of the countries in the
study that had poor returns on capital employed also have underdeveloped capital
markets. At the same time, many of the countries had recently liberalized their
financial sectors, but in an environment that lacked an adequate prudential
framework. The study concludes that the lack of financial and institutional
discipline, coupled with the recent financial sector liberalization is a plausible
explanation for the mix of currency, corporate, and banking crises confronting the
region.
Weekly Economic Briefing
8
September 18, 1998
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RELEASES THIS WEEK
Housing Starts
**Embargoed until 8:30 a.m., Friday, September 18, 1998**
Housing starts fell 5 percent in August to 1.613 million units at an
annual rate. During the first 8 months of this year, housing starts
were 10 percent above the same period a year ago.
Consumer Price Index
The consumer price index increased 0.2 percent in August.
Excluding food and energy, consumer prices also increased
0.2 percent.
U.S. International Trade in Goods and Services
The goods and services trade deficit was $13.9 billion in July;
it was $13.6 billion in June.
Industrial Production and Capacity Utilization
The Federal Reserve's index of industrial production rose 1.7
percent in August. Capacity utilization rose 1.1 percentage points,
to 81.7 percent.
Retail Sales
Advance estimates show that retail sales increased 0.2 percent in
August, following a decrease of 0.6 percent in July. Excluding
sales in the automotive group, retail sales rose 0.3 percent,
following an increase of 0.6 percent.
MAJOR RELEASES NEXT WEEK
Gross Domestic Product (Thursday)
Advance Durable Shipments and Orders (Thursday)
Weekly Economic Briefing
9
September 18, 1998
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U.S. ECONOMIC STATISTICS
1970-
1993
1997
1997:4
1998:1
1998:2
Percent growth (annual rate)
Real GDP (chain-type)
2.7
3.8
3.0
5.5
1.6
GDP chain-type price index
5.4
1.7
1.1
0.9
0.8
Nonfarm business (NFB) sector:
Productivity (chain-type)
1.5
1.7
0.9
3.5
0.1
Real compensation per hour:
Using CPI
0.6
1.9
2.8
4.1
2.0
Using NFB deflator
1.3
2.0
3.9
4.3
3.4
Shares of Nominal GDP (percent)
Business fixed investment
10.9
10.6
10.7
11.0
11.2
Residential investment
4.5
4.0
4.1
4.2
4.3
Exports
8.2
11.9
12.0
11.6
11.3
Imports
9.2
13.1
13.2
13.1
13.2
Personal saving
5.2
1.5
1.2
0.9
0.4
Federal surplus
-2.7
-0.3
0.0
0.7
0.9
1970-
June
July
August
1993
1997
1998
1998
1998
Unemployment Rate (percent)
6.7**
4.9**
4.5
4.5
4.5
Payroll employment (thousands)
increase per month
189
68
365
increase since Jan. 1993
16682
Inflation (percent per period)
CPI
5.8
1.7
0.1
0.2
0.2
PPI-Finished goods
5.0
-1.2
-0.1
0.2
-0.4
**Figures beginning 1994 are not comparable with earlier data.
New or revised data in boldface.
Weekly Economic Briefing
10
September 18, 1998
EYES ONLY
FINANCIAL STATISTICS
July
August
Sept. 17,
1996
1997
1998
1998
1998
Dow-Jones Industrial Average
5743
7441
9097
8479
7874
Interest Rates (percent per annum)
3-month T-bill
5.01
5.06
4.96
4.90
4.58
10-year T-bond
6.44
6.35
5.46
5.34
4.80
Mortgage rate, 30-year fixed
7.80
7.60
6.95
6.92
6.66
Prime rate
8.27
8.44
8.50
8.50
8.50
INTERNATIONAL STATISTICS
Exchange Rates
Current level
Percent Change from
September 17, 1998
Week ago
Year ago
Deutschemark-Dollan
1.685
-0.4
-4.9
Yen-Dollar
131.9
-1.8
9.0
Multilateral $ (Mar. 1973=100)
96.42
-0.5
-1.4
Real GDP
Unemployment
CPI inflation
International Comparisons 1/
growth
rate
(percent change in index
(percent change last 4 quarters)
(percent)
last 12 months)
United States
3.6 (Q2)
4.5 (Aug)
1.6 (Aug)
Canada
3.1 (Q2)
8.4 (Jul)
1.1 (Jul)
Japan
-1.8 (Q2)
4.2 (Jul)
-0.1 (Jul)
France
3.0 (Q2)
11.7 (Jul)
0.8 (Jul)
Germany
2.5 (Q2)
2/ 7.5 (Jun)
0.9 (Jul)
Italy
2.5 (Q1)
12.4 (Apr)
1.8 (Jul)
United Kingdom
2.6 (Q2)
6.3 (May)
3.5 (Jul)
1/ For unemployment data, rates approximating U.S. concepts as calculated by the U.S. Department of Labor, Bureau of Labor
Statistics.
2/ Rate for former West Germany. Using OECD standardized unemployment data, the unemployment rate for unified Germany for
June 1998 is 9.7 percent.
Weekly Economic Briefing
11
September 18, 1998
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WEEKLY ECONOMIC BRIEFING
OF THE PRESIDENT OF THE UNITED STATES
Prepared by the Council of Economic Advisers
with the assistance of the Office of the Vice President
August 7, 1998
CHART OF THE WEEK
Household Net Worth and the Personal Consumption Rate
6.0
100
98:Q2
5.8
99
5.6
Ratio of net worth to
Personal
98
disposable income
consumption rate
5.4
(left axis)
(right axis)
97
5.2
96
Ratio
5.0
95
Percent
4.8
94
4.6
93
4.4
92
4.2
91
4.0
90
1960 1964 1968 1972 1976 1980 1984 1988 1992 1996
The rise in the stock market over the past few years has increased household net worth
and boosted the ratio of net worth to disposable income. This increase in wealth has
reduced the need to save out of current income. As a result the proportion of income
going to consumption has risen (and the personal saving rate has fallen).
EYES ONLY
CONTENTS
CURRENT DEVELOPMENT
GDP Revisions Show More Growth, Less Personal Saving
1
SPECIAL ANALYSES
Conserving Species without Breaking the Bank
2
College Quality and Earnings
3
ARTICLE
More Work for Mom
4
DEPARTMENTS
Business, Consumer, and Regional Roundup
6
International Roundup
7
Releases
8
U.S. Economic Statistics
9
Financial and International Statistics
10
"So they hold this conference to figure out why we're becoming
extinct, and guess what they have for dinner."
EYES ONLY
CURRENT DEVELOPMENT
GDP Revisions Show More Growth, Less Personal Saving
The latest annual revisions to the National Income and Product Accounts show that
the economy grew faster than previously estimated over the past several years. The
growth rate of real GDP was raised for each of the past 3 years (see upper chart);
since 1993, real GDP has grown at a 3.4 percent annual rate-up 0.3 percentage point
GDP Growth
from the previous estimate.
7
Previous
6
Q1:
Revised
5.5
Lower prices. About three-fourths of
5.4
Percent change from previous year
5
the upward revision to real GDP resulted
4
3.8
3.9
from price revisions. The experimental
3.5
3.5
3.4
geometric indexes scheduled to be
3
2.8
2.3
incorporated into the consumer price
2.0
2
Q2:
1.4
index next January were used to deflate
1
most parts of nominal personal
0
consumption back to 1995.
1994
1995
1996
1997
1998
Personal Saving Rate
A smaller statistical discrepancy.
10
9
About one-fourth of the upward revision
8
to output resulted from the use of more
7
complete source data, which raised
6
Percent
Previous
nominal GDP by $31 billion in 1997.
5
Gross domestic income, by contrast, was
4
3
little changed, and the statistical
Revised
2
discrepancy between income and
1
98:Q2
spending was trimmed by $30 billion.
0
1947
1957
1967
1977
1987
1997
Saving reallocated. Capital gains
Productivity (Product Side)
108
108
distributions by mutual funds, which had
106
Estimated revision
106
been erroneously included in personal
dividend income, were shifted to
104
104
undistributed corporate profits. This
Ratio scale
102
102
reduced personal saving by $60 billion in
100
Previous
100
1997 but increased business saving by the
98
98
same amount-with no net effect on
96
96
national saving. Meanwhile the personal
saving rate fell to just 0.6 percent in the
94
94
1990
1991
1992
1993
1994
1995
1996
1997
Note: Revised productivity figures are estimated from revised output and hours data.
second quarter (see middle chart).
Higher productivity. Because the upward revision to real output exceeds the
upward revision to hours (announced 2 months ago by the Bureau of Labor
Statistics), productivity is likely to be revised up (see lower chart). Since the last
business-cycle peak, productivity appears to have grown at a 1.3 percent annual
rate-0.1 percentage point higher than previously estimated.
Weekly Economic Briefing
1
August 7, 1998
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SPECIAL ANALYSIS
Conserving Species without Breaking the Bank
The Endangered Species Act prohibits actions that may lead to the extinction of
species and requires the government to implement recovery plans that will restore
healthy populations. However, protecting all species is currently beyond the means
of both public and private conservation agencies. What is the best way to use limited
resources to achieve conservation benefits?
Selecting priority areas. A recent study by conservation biologists indicates that the
vast majority of domestic species on the endangered species list can be protected by
targeting a small number of high-priority areas. This study implicitly assumes that
the cost of setting aside land for conservation is the same in all areas. The priority
areas that were selected, however, include some of the most expensive land in the
United States (including Hawaii and much of coastal California). The same number
of species could be protected at lower cost by taking land costs into account.
A cost-effective conservation strategy. A recent economic study illustrates this
point. It treats a listed endangered species as protected if it occurs in at least one
county where a biological reserve site is established. For simplicity, reserve sites in
all counties are assumed to be the same size. Using data on the occurrence of listed
species and the per acre land value by county, the study assesses the number of
species protected and the total cost of choosing different sites for biological reserves
under two different protection strategies:
site-constrained, where the objective is to choose sites that cover the maximum
number of species, given that a fixed number of sites will be chosen.
budget-constrained, where the objective is to choose sites that cover the
maximum number of species given a fixed budget.
Findings. The chart shows that the budget-constrained strategy protects listed
species at far lower cost than the site-constrained strategy. (Costs are illustrative and
Costs of Protecting Species
assume 1,000 acres are set aside for each
400
protected site.) For example, the costs of
covering approximately half of the listed
300
species under the budget-constrained
Millions of dollars
approach are about a third those under the
200
Site-constrained
site-constrained approach. By choosing
sites that are one-sixth as expensive, on
100
Budget-
average, the budget-constrained approach
constrained
has twice as many reserve sites, protects
0
0
200
400
600
800
1,000
as many species, and still costs far less
Number of species
than the site-constrained approach. The
chart also illustrates how the total costs of species protection rise slowly at first under
the cost-effective strategy, but eventually rise very sharply.
Weekly Economic Briefing
2
August 7, 1998
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SPECIAL ANALYSIS
College Quality and Earnings
Increased educational quality (in the form of smaller class size) appears to improve
educational outcomes among young children. Two recent studies suggest that quality
matters at the other end of the educational spectrum as well: attending a high-quality
4-year college enhances graduates' earnings over and above effects related to
students' individual characteristics.
Public and Private Tuition, Room, and Board
20
College tuition is high and variable.
18
Tuition (including room and board)
16
Tuition, room, and board (1996-97 dollars)
varies substantially among 4-year
14
Private colleges
colleges, averaging roughly $7,300 at
12
public institutions and $18,000 at private
10
colleges. Many of the elite schools cost
8
Public colleges
$25,000 or more. College costs have
6
4
been increasing since 1980, especially
2
among private institutions (see chart).
1965
1970
1975
1980
1985
1990
1995
Quality matters. A new study of 3,100 men finds that attending a higher-quality
college leads to greater earnings than attending a lesser-quality institution. The study
measured school quality using indicators such as SAT scores of incoming students,
share of faculty with Ph.D.s, applicant rejection rate, faculty-to-student ratio, and
spending per student. It found that after adjusting for individual characteristics (such
as performance on standardized tests, parental education, parental family structure,
and various characteristics of the student's high school), men who attended colleges
in the top fifth of the quality ranking earned 13 percent higher hourly wages than
those who attended colleges in the bottom fifth.
These results were confirmed by a second study, which found that attending elite
private colleges increases wages. Moreover, this study found that around age 24, the
wage advantage associated with attending an elite private college was lower for
students who graduated in the late 1970s (a 9 percent wage advantage relative to
attending a bottom-ranked public school) than in the mid- to late 1980s (a 20 percent
wage advantage). This finding is consistent with earlier studies showing that
disparities in wages have risen over this period among workers with the same years
of education, experience, and race.
Implications. The effectiveness of educational spending continues to be debated.
Although more spending per se may not improve student performance, new studies
have demonstrated that smaller class sizes and other quality improvements are
associated with better academic performance and future labor market outcomes. In
the case of colleges, however, a question remains whether improved school quality
raises graduates' wages because it raises their productivity or simply because
employers assume that graduates with prestigious degrees are worth more.
Weekly Economic Briefing
3
August 7, 1998
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ARTICLE
More Work for Mom
Many American families spend more time working for pay than their counterparts did
30 years ago. All of the increase is due to increased hours among women-wives
and single mothers.
Trends. Average annual hours of work increased for both married-couple and
single-parent families between 1969 and 1996. The increase was 496 hours
(18 percent) for two-parent families (see
Annual Hours of Work, Married-Couple Families
upper chart) and 297 hours (28 percent)
Wife
4,000
for single-parent households (see lower
Husband
chart). In 1996, wives in married-couple
3,000
families worked almost twice as many
Hours per year
hours as their 1969 counterparts, and
2,000
their increase more than accounted for
the rise in hours worked among such
1,000
couples. (To put these numbers in
context, a person working full-time year-
0
1969
1979
1989
1996
round would work about 2,000 hours per
year.)
Annual Hours of Work by Single Parents
More weeks or longer weeks? For
1,600
wives and single parents, the increase in
1,400
annual work hours reflects both more
1,200
weeks worked per year (including fewer
Hours per year
1,000
women not working at all) and more
800
hours of work per week. For husbands,
600
the number of weeks worked has
400
declined slightly, while the usual number
200
of hours worked per week has remained
0
1969
1979
1989
1996
relatively constant.
Where are the effects greatest? Although the basic trends are similar across a wide
range of family types, the following two groups experienced especially large effects:
The highly educated. For married couples with a college-educated husband,
average annual hours of work increased 644 hours (23 percent)-more than twice
the increase for couples in which the husband had a high school diploma or less.
In both cases, the increase came from the wives. For single parents with a college
degree, annual hours of work rose by 321 hours (20 percent), compared with
165 hours (16 percent) for single parents with a high school diploma or less.
Parents of young children. For single parents with a child under age 3, annual
hours of work increased by 405 hours (55 percent), compared with 260 hours
Weekly Economic Briefing
4
August 7, 1998
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(23 percent) for single parents without a young child. For married couples, hours
of work increased by 557 hours (21 percent) for families with a child under age
3, compared with 467 hours (16 percent) for families without a young child. This
result is not surprising, since mothers of young children worked less than mothers
of older children 30 years ago and therefore had more room to increase their
hours.
Implications. More work in the market means fewer total hours available for child
care, work in the home, and leisure. Changes in family size and structure complicate
any assessment of how this change in work hours has affected the amount of time
parents have available to spend with each child. On the one hand, a rising share of
single-parent families and increased time in the labor market among married-couple
families may mean less total time available for child care. On the other hand, a
reduction in the average number of children per family would tend to increase
parental time per child. In addition, working parents may spend less time on
housework and leisure in order to reclaim time with their children.
Weekly Economic Briefing
5
August 7, 1998
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BUSINESS, CONSUMER, AND REGIONAL ROUNDUP
Housing Affordability Index Remains High. Despite a small drop in the second
quarter, housing affordability conditions remain near their highest sustained levels
since the early 1970s, according to the National Association of Realtors (NAR). The
NAR composite Housing Affordability Index stood at 131.1 in the second quarter,
6.1 points higher than a year ago. The index measures housing affordability factors
(mainly home prices and mortgage rates and terms) relative to median family income.
The current level means that half the nation's households have at least 131.1 percent
of the income needed to afford a median-priced resale home (costing, coincidentally,
$131,100). The NAR calculates that families with $30,000 of income can afford a
house priced at $115,000 and those with $60,000 can afford a house priced at
$230,000. In the second quarter, an increase in the median existing-home price offset
a modest increase in family income and a slight decline in mortgage interest rates.
CBO Assesses Impact of Generic Drugs. Between 1984 and 1996, the proportion
of prescription drugs sold in the United States accounted for by generic drugs rose
from 19 to 43 percent, according to a recent study by the Congressional Budget
Office. Switching to generics saved consumers $8 to $10 billion at pharmacies in
1994. CBO found three main causes for the growth in generic sales. First, the 1984
Hatch-Waxman Act made it easier and less costly for manufacturers to market
generic drugs. Second, drug-substitution laws have allowed pharmacists to dispense
a generic drug when a brand-name drug is prescribed. Third, government and private
health plans have substituted generic for brand-name drugs. The Hatch-Waxman Act
also contained patent-extension provisions to address the issue of incentives to
develop new brand-name drugs, which could be eroded by increased generic entry.
The CBO study concludes that since 1984, the expected returns from marketing a
new drug have declined by about 12 percent, or $27 million in 1990 dollars.
Although probably not enough to make drug development unprofitable on average,
this decline may have made some specific projects unprofitable. Although some
pharmaceutical industry representatives have called for further patent-term
extensions, CBO concludes that policies to speed up the FDA drug approval process
without sacrificing the safety and efficacy of drugs would be much more beneficial
to both the pharmaceutical industry and consumers, because that would bring new
drugs to market sooner rather than delay the introduction of a generic.
Infants' Health Is Now Less Dependent on Family Income. The intergenerational
transmission of health inequality has been reduced over the twentieth century,
according to a new study. The relationship between a newborn's weight and its
parents' income has weakened, as has the relationship between a mother's height,
which is dependent on her own nutritional status during her growing years, and her
newborn's weight. Although birth weights at the turn of the century were quite
similar to today's birth weights, turn-of-the-century infants quickly lost ground
relative to today's infants, as their risk of death in the first 10 days of life was much
higher. The author attributes the change to improved obstetrical and medical
knowledge, particularly in infant nutrition.
Weekly Economic Briefing
6
August 7, 1998
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INTERNATIONAL ROUNDUP
New Study Compares Public Pension Systems among the G-5. A recent study
concludes that the cost of public programs for the elderly is expected to increase
significantly as a share of GDP in every G-5 country except the United Kingdom, as
the proportion of the population over 65 continues to grow relative to the population
aged 15 to 64. Several factors make the United Kingdom different. Over time, the
basic flat rate pension of their two-tier pension system has declined, and workers now
have the option of switching out of the earnings-based second tier into private
pension programs. In addition, public health care costs in the United Kingdom are
expected to increase less than in other G-5 countries, in contrast to the United States,
which has the largest projected increase in such costs. As a result of this reduction
in public spending on pension and health care programs, the United Kingdom will
not face the same financing problems as the other G-5 countries. Despite the impact
of privatization on the U.K.'s pension costs, the study notes a number of problems.
If large numbers of workers suffer low or negative returns on their investments, for
example, democratically elected governments may face pressure to compensate them
for their losses.
Do High Asian Saving Rates Reflect Cultural Differences? Economists remain
unsure exactly why some countries save so much more than others. Most
explanations based on differences in the economic environment (such as social
security systems, tax incentives, and land and housing prices) have been largely
unsuccessful at explaining the observed variation. As a result, many have suggested
that saving differences stem in part from cultural differences rather than strictly
economic differences. But a recent study of U.S. immigrants found that although the
saving patterns of immigrants differed substantially by country of origin, immigrant
saving patterns did not match up with the country-of-origin saving patterns. In
particular, immigrants from countries with high national saving rates, such as Japan,
Korea, and Taiwan, did not seem to have higher saving rates than the other
immigrants in the authors' sample. Of course, immigrants may differ in important
ways from those who remain at home.
Southeast Asian Governments Undertake New Measures to Support Recovery.
The governments of Malaysia and Thailand have each formulated plans to support
their weakening financial systems and promote economic recovery. Malaysia's plan
calls for a $5 billion bond issue for the purposes of bank recapitalization, stabilizing
the currency within a band set by a trade-weighted basket of currencies, increasing
foreign reserves, reducing dependence on the dollar for trade, and adopting a
balanced interest rate policy. The government has also recently announced several
fiscal and monetary measures to revive the Malaysian economy, which local analysts
expect to contract by 3 percent this year. Such measures include a $1.25 billion
infrastructure fund to revive infrastructure projects that were deferred last year and
the reduction of statutory reserve requirements by the Central Bank of Malaysia, from
10 percent to 8 percent. Details of the Thai plan are being withheld pending the
outcome of ongoing negotiations with the IMF.
Weekly Economic Briefing
7
August 7, 1998
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RELEASES THIS WEEK
Employment and Unemployment
**Embargoed until 8:30 a.m., Friday, August 7, 1998**
In July, the unemployment rate was unchanged from June at
4.5 percent. Nonfarm payroll employment rose by 66,000.
Leading Indicators
In June, the composite index of leading indicators decreased
0.2 percent following a decrease of 0.1 percent in May.
NAPM Report on Business
The Purchasing Managers' Index decreased to 49.1 percent in July
from 49.6 percent in June.
MAJOR RELEASES NEXT WEEK
Productivity (Tuesday)
Retail Sales (Thursday)
Industrial Production and Capacity Utilization (Friday)
Producer Prices (Friday)
Weekly Economic Briefing
8
August 7, 1998
EYES ONLY
U.S. ECONOMIC STATISTICS
1970-
1993
1997
1997:4
1998:1
1998:2
Percent growth (annual rate)
Real GDP (chain-type)
2.7
3.8
3.0
5.5
1.4
GDP chain-type price index
5.4
1.7
1.1
0.9
0.8
Nonfarm business (NFB) sector:
Productivity (chain-type)
1.5
2.1
1.4
1.1
N.A.
Real compensation per hour:
Using CPI
0.6
2.2
3.1
3.7
N.A.
Using NFB deflator
1.3
2.5
3.9
3.5
N.A.
Shares of Nominal GDP (percent)
Business fixed investment
10.9
10.6
10.7
11.0
11.1
Residential investment
4.5
4.0
4.1
4.2
4.3
Exports
8.2
11.9
12.0
11.6
11.3
Imports
9.2
13.1
13.2
13.1
13.2
Personal saving
5.2
1.5
1.2
0.9
0.4
Federal surplus
-2.7
-0.3
0.0
0.7
N.A.
1970-
May
June
July
1993
1997
1998
1998
1998
Unemployment Rate (percent)
6.7**
4.9**
4.3
4.5
4.5
Payroll employment (thousands)
increase per month
328
196
66
increase since Jan. 1993
16322
Inflation (percent per period)
CPI
5.8
1.7
0.3
0.1
N.A.
PPI-Finished goods
5.0
-1.2
0.2
-0.1
N.A.
**Figures beginning 1994 are not comparable with earlier data.
New or revised data in boldface.
Employment and unemployment data embargoed until 8:30 a.m., Friday, August 7, 1998.
Weekly Economic Briefing
9
August 7, 1998
EYES ONLY
FINANCIAL STATISTICS
June
July
Aug. 6,
1996
1997
1998
1998
1998
Dow-Jones Industrial Average
5743
7441
8873
9097
8578
Interest Rates (percent per annum)
3-month T-bill
5.01
5.06
4.98
4.96
4.90
10-year T-bond
6.44
6.35
5.50
5.46
5.44
Mortgage rate, 30-year fixed
7.80
7.60
7.00
6.95
6.94
Prime rate
8.27
8.44
8.50
8.50
8.50
INTERNATIONAL STATISTICS
Exchange Rates
Current level
Percent Change from
August 6, 1998
Week ago
Year ago
Deutschemark-Dollar
1.768
-0.5
-5.9
Yen-Dollar
144.6
1.5
21.9
Multilateral $ (Mar. 1973=100)
101.1
0.2
-0.3
Real GDP
Unemployment
CPI inflation
International Comparisons 1/
growth
rate
(percent change in index
(percent change last 4 quarters)
(percent)
last 12 months)
United States
3.5 (Q2)
4.5 (Jul)
1.7 (Jun)
Canada
3.8 (Q1)
8.4 (May)
1.1 (Jun)
Japan
-3.7 (Q1)
4.2 (Apr)
0.1 (Jun)
France
3.4 (Q1)
12.0 (Apr)
1.0 (Jun)
Germany
3.0 (Q1)
2/ 7.6 (Apr)
1.2 (Jun)
Italy
2.5 (Q1)
12.4 (Apr)
1.8 (Jun)
United Kingdom
2.6 (Q2)
6.4 (Mar)
3.7 (Jun)
U.S. unemployment data embargoed until 8:30 a.m., Friday, August 7, 1998.
1/ For unemployment data, rates approximating U.S. concepts as calculated by the U.S. Department of Labor, Bureau of Labor
Statistics.
2/ Rate for former West Germany. Using OECD standardized unemployment data, the unemployment rate for unified Germany for
April 1998 is 10.0 percent.
Weekly Economic Briefing
10
August 7, 1998
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WEEKLY ECONOMIC BRIEFING
OF THE PRESIDENT OF THE UNITED STATES
Prepared by the Council of Economic Advisers
with the assistance of the Office of the Vice President
July 31, 1998
CHART OF THE WEEK
Growth in Real ECI Compensation
3
2
12-month percent change
White-collar occupations
1
0
-1
Blue-collar occupations
Service occupations
-2
1988
1990
1992
1994
1996
1998
Employee compensation as measured by the employment cost index (ECI) has been
rising faster than inflation recently. White-collar (managerial, administrative, and
professional) and service occupations have seen larger increases than blue-collar
occupations.
EYES ONLY
CONTENTS
CURRENT DEVELOPMENT
GDP Scorecard: Second Quarter 1998
1
SPECIAL ANALYSES
What Do We Know about High-Performance Workplaces?
2
International Spillovers in Agricultural Technology
4
ARTICLE
Controls on "Hot-Money" Inflows in Chile and Colombia
6
DEPARTMENTS
Business, Consumer, and Regional Roundup
8
International Roundup
9
Releases
10
U.S. Economic Statistics
11
Financial and International Statistics
12
"The economy's never been better. Here's another potato!"
EYES ONLY
CURRENT DEVELOPMENT
GDP Scorecard: Second Quarter 1998
Real GDP is estimated to have increased at a 1.4 percent annual rate in the second
quarter-a dramatic slowdown from the 5.5 percent rate in the first quarter. Three
factors took a bite out of second-quarter output: a decline in net exports; slower
growth in stockbuilding after an extraordinary first-quarter pace; and the strike at
GM, which cut second-quarter growth by about 0.6 percentage point at an annual
rate. The price index for GDP increased only 0.8 percent at an annual rate in the
second quarter and 1.0 percent over the past year.
Component
Growth
Comments
Total consumer
5.8%
Motor vehicle purchases increased sharply,
expenditures
driven at least in part by generous incentive
programs. Increases in spending on
nondurables and services were also large.
Producers' durable
17.8%
Increases in transportation equipment and
equipment
information-processing equipment were large.
Nonresidential
-4.5%
These have been down in the last two
structures
quarters. In part, this may reflect a drop in oil
well drilling due to a drop in oil prices.
Residential structures
13.2%
The large increase in single-family home
construction reflects solid income gains over
the past year as well as declines in mortgage
rates in the second half of 1997.
Inventories (change,
$44.7
After heavy stockbuilding in the first quarter,
billions of 1992
inventory investment dropped sharply in the
dollars)
second, as expected.
Federal purchases
7.0%
Defense outlays bounced back after a drop last
quarter.
State & local
2.0%
Second-quarter growth is similar to the pace of
purchases
growth over the previous 4 quarters.
Exports
-8.0%
This is the second consecutive quarter of
decline and most likely reflects a drop in
exports to the Asian crisis countries.
Imports
11.9%
Strong growth in final sales, together with a
3 percent drop in prices of non-petroleum
imported goods over the past year, has
encouraged imports.
Percent real growth in the second quarter at annual rates (except inventories). The advance estimate is
subject to substantial revision-especially for exports, imports, and inventories, where the estimates are
based on only 2 months of data.
Weekly Economic Briefing
1
July 31, 1998
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SPECIAL ANALYSIS
What Do We Know about High Performance Workplaces?
In the past decade, the role of workplace organization, human resource practices, and
compensation schemes in determining firms' performance has received increasing
attention. The evidence is mixed as to whether these practices do indeed enhance
performance.
What are high-performance work practices? Human resource practices designed
to improve performance fall into five broad categories:
employee involvement in the work process, such as through self-managed teams
or regular meetings to discuss work-related issues;
skill building through formal and informal job training and job rotation;
reward systems, including individual and group incentive-based compensation;
explicit or implicit commitments by employers to provide long-term employment
relationships;
rigorous recruitment and selection systems.
How prevalent are these practices? The 1997 National Employer Survey (NES)
provides the most recent and most representative data on employer practices. Many
Workplace Practices Affecting Non-Managers
employers reported using high-
performance practices, such as self-
Self-managed teams
>50% participation
managed teams, work-related meetings
Work-related meetings
(also known as quality circles), and job
>50% participation
rotation with their non-managerial staff
Job rotation
(see chart). While many employers use
>50% participation
these practices with at least some of their
Formal training
employees, far fewer apply them to more
(Includes managers)
than half of their employees. Firms also
0
20
40
60
80
reported high rates of formal training.
Percent of employers offering program
The package matters. According to a recent review of research findings, firms that
implement multiple work practices designed to enhance flexibility and worker
participation can improve business productivity. However, isolated changes in
individual work practices were generally found not to improve performance. For
example, employee involvement may not encourage workers to share ideas if they do
not perceive that the rewards from higher productivity will be shared, or if
productivity gains are followed by worker layoffs. In light of these findings, it is
noteworthy that few firms in the NES reported implementing a strategy that
combined a number of practices.
Weekly Economic Briefing
2
July 31, 1998
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ESOP fables? Employee stock ownership plans (ESOPs) and profit sharing plans
have been the subject of growing interest, in large part because workers may respond
to these incentives with improved performance. Research combining the results from
many individual studies indicates that average productivity increases by 4 to
5 percent following the adoption of either ESOPs or profit sharing plans. However,
the individual studies themselves show that, although many firms experienced
increased productivity after instituting ESOPs, many other firms experienced little
or no change. For profit sharing, the individual studies yielded more consistently
positive results.
Implications. Evidence on the effectiveness of high-performance work practices
should be interpreted cautiously. While employee ownership and profit sharing plans
appear to help productivity and profitability, the mechanism through which they
operate effectively remains elusive. The positive relationship between multiple work
practices and outcomes may signal synergies within systems of practices. But it
could arise because firms that are more serious about improving performance in
general also implement more of these specific practices than firms that are less
committed. It is also possible that more-profitable firms are more willing to
undertake these strategies in the first place.
Weekly Economic Briefing
3
July 31, 1998
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SPECIAL ANALYSIS
International Spillovers in Agricultural Technology
Expanded global capacity in agricultural research has increased the rate at which new
food and agricultural technology flows across national borders. The United States
remains the world's largest investor in agricultural research, but foreign sources of
scientific and technological innovations have become increasingly important to us.
Global investments in agricultural research. Between 1971 and 1991, global
public expenditures for agricultural research more than doubled, from $7.3 billion to
Public Agricultural R&D Spending
$15.0 billion in constant 1985 dollars.
16
While the U.S. share fell from 17 percent
Developing countries
14
Other OECD countries
to 13.5 percent (see upper chart), that of
United States
Billions of 1985 international dollars
12
developing countries rose to more than
53.6 percent
10
half the total by 1991. Along with these
8
increases in public expenditures,
6
41.0 percent
multinational food and agricultural
4
32.9 percent
companies have stepped up their
42.1 percent
2
investments in agricultural research and
7.0 percent
13.5 percent
0
technology transfer.
1971
1991
U.S. imports of agricultural technology. One indicator of U.S. imports of
technology is the share of patents awarded to foreigners who want to market their
inventions here. For agricultural inventions, this share increased steadily from
13 percent in 1969 to 39 percent in 1993 (see lower chart), indicating a growing
reliance on imported technology in this
U.S. Patents Issued for Agricultural Inventions
sector. The United States also relies
3000
Foreign inventors' patents
heavily on foreign plant genetic material
2500
U.S. inventors' patents
to breed higher yielding crop varieties:
2000
most crops grown here originated
elsewhere, and most genes needed to
1500
increase biodiversity come from foreign
1000
locations. The use of plant genetic
material from international agricultural
500
research centers has led to significant
0
economic benefits for U.S. agriculture
1969
1978
1987
1993
(see box on next page).
U.S. exports of agricultural technology. Innovations in this country, such as
applying biotechnology to develop genetically modified crops, are also spreading
quickly to other countries via private multinational seed companies. Although
agricultural biotechnology is facing consumer resistance in Europe, genetically
modified crops are currently being grown commercially in Canada, Mexico, South
America, China, and Australia, as well as in the United States.
Weekly Economic Briefing
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July 31, 1998
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Implications. Growth in global public and private agricultural research implies that
new agricultural technology will spread more quickly across countries. Further, the
United States may increasingly look to foreign sources of new agricultural
technology for domestic agricultural productivity growth. Expanded cooperation in
international agricultural science and technology can improve U.S. access to foreign
agricultural innovations.
Benefits from International Agricultural Research
For nearly three decades, the United States has been an important player in
international agricultural research through its investments in the work of the
Consultative Group on International Agricultural Research (CGIAR), a network
of 16 agricultural research centers around the world. CGIAR research centers
helped produce the "green revolution" in the 1960s and 1970s. While the main
goal of U.S. support for the CGIAR is to enhance global food security and
alleviate poverty, we also enjoy direct spillover benefits from this effort. A recent
study found that by using improved plant genetic material developed at CGIAR
centers, U.S. crop breeders were able to increase U.S. yields of wheat and rice
significantly. By the early 1990s, about one-fifth of U.S. wheat acreage and
73 percent of U.S. rice acreage were sown with varieties having some CGIAR
ancestry. The total benefits to the U.S. economy between 1970 and 1993 were
estimated to have been between $3 and $15 billion. This compares with a total
U.S. investment of $134 million in international wheat and rice research at
CGIAR centers between 1960 and 1993.
Weekly Economic Briefing
5
July 31, 1998
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ARTICLE
Controls on "Hot-Money" Inflows in Chile and Colombia
The Asian currency and financial crisis has rekindled a broad debate over whether
controls on short-term capital inflows, such as those implemented by Chile and
Colombia in the 1990s, have helped them withstand international currency crises.
Effective Reserve Requirement Rate on Short-Term
How do controls work? Countries
Capital Inflows According to Maturity (1994)
have adopted numerous methods to
160
140
limit short-term capital inflows. Chile
120
and Colombia require borrowers to put
Reserve rate (percent)
100
Colombia
funds on deposit in non-interest-bearing
80
accounts against their foreign
60
borrowing-in effect "taxing" those
Chile
40
borrowings. The implicit tax rate
20
0
declines with the maturity of the
0
10
20
30
40
50
60
Maturity (months)
amount borrowed (see chart), with very
short-term inflows taxed at a steep rate.
"Hot money" can burn you. A (controversial) view is that large inflows of short-
term capital, or "hot money," can be destabilizing. For example, large money
inflows may cause a country's currency to appreciate, ultimately eroding
competitiveness and widening its current account deficit. Growing reliance on
foreign debt to finance such a deficit can lead to crisis, especially if the liabilities are
short-term, foreign-currency denominated, and bank-related. When optimism about
a country's economic prospects turns to pessimism, the money can quickly flee.
You should not play with fire if you are not a grown-up. Is there evidence that
short-term debt can make a country more vulnerable to a crisis? Yes, but with an
important caveat: fundamentals matter too. A number of recent studies suggest that
countries with weak economic fundamentals are the ones where a high level of short-
term liabilities noticeably increases the probability or severity of a crisis. Danger
signs include real currency appreciation and large current account deficits, excessive
bank lending booms, and weak financial systems. In other words, strong economic
fundamentals are the best protection against crises.
If it feels too hot, should you take a cold shower? In contrast to short-term
portfolio flows, longer-term capital inflows (such as foreign direct investment, long-
term bonds, and equities) are generally thought to be stabilizing. Chile and Colombia
designed their controls in part to avoid boom-and-bust cycles of capital flows by
discouraging short-term inflows. Recent studies suggest that such controls have
affected the composition of capital inflows but have not reduced their overall level.
Weekly Economic Briefing
6
July 31, 1998
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Can you turn the hot water on and off? The Asian flu has recently caught up with
both Chile and Colombia. Their monetary authorities have been forced to defend
falling currencies by depleting foreign reserves and raising interest rates. Both
countries have recently trimmed their controls on short-term inflows because they
now need all the money they can get. Some argue that this policy reversal shows that
the rationale for controls was weak to begin with. Others suggest that a case remains
if the controls are intended to address a problem of excessive short-term inflows at
one stage of the cycle, followed by excessive reversal at another stage.
Arguments for free capital flows. Although capital controls have garnered
substantial attention since the Asian crisis, several strong arguments have been raised
against them. First, controls may raise domestic borrowing costs, diminishing
investment. Second, they may be unnecessary if a solid bank supervision system is
in place. In fact, some think Chile and Colombia have been sheltered from
speculative attack due to the strength of their financial sectors and not as a result of
their controls. Third, capital controls tend to become ineffective as investors find
ways around them. Finally, approval of targeted restrictions could lead countries to
use capital controls indiscriminately, thus insulating unsound policies from the
discipline of the marketplace.
Limiting controls to banks. Taking into account these arguments against controls,
some have proposed penalizing only banks' short-term borrowing from abroad. Such
regulations fall well within the kind of enhanced prudential banking supervision that
the United States and the IMF have for some time urged on developing countries.
Conclusion. Arguably, capital controls served a limited purpose in Chile and
Colombia. In general, however, free capital mobility is necessary for the market to
allocate saving to the best investment opportunities, and countries should pursue
capital account liberalization as their long-term goal.
Weekly Economic Briefing
7
July 31, 1998
EYES ONLY
BUSINESS, CONSUMER, AND REGIONAL ROUNDUP
Telecom Merger Mania Continues; Wall Street Cool. Bell Atlantic and GTE
Corp. have announced a "merger of equals" between the two telecommunications
companies that would create the nation's largest local exchange carrier, with
combined annual revenues of over $53 billion in 1997. The deal, valued at over
$50 billion, adds another large telecommunications merger to this year's record-
setting pace of proposed mergers and acquisitions. The Bell Atlantic-GTE merger
announcement highlighted four key businesses in which the merged company
expected to enjoy a leadership position: data and advanced Internet services, cellular
services, local telephone service, and international service. Unlike many mergers,
however, where the acquisition price represents a premium over the current market
valuation, the price in this merger was based on the recent stock market value of the
two companies. The day of the announcement, the prices of both companies' stock
fell, as did a more general index of telephone prices. One reason may be concern that
the wave of recent telecommunications mergers may lead to increased regulatory
scrutiny by the antitrust authorities and the Federal Communications Commission.
Mexican Immigrants Face Special Challenges. Mexicans represent a large share
(22 percent in 1990) of the foreign-born population in the United States-and an
even larger share of the children of foreign-born. Roughly one-third of the children
of immigrants have at least one Mexican-born parent. A recent study identifies an
education gap that separates Mexican immigrants from other immigrant groups and
puts them at particular economic risk in today's economy. Thirty percent of second-
generation non-Mexicans lived in a household where the head had a college degree
(7 percentage points higher than the rate for all natives); for second-generation
Mexican households the figure was only 4-percent.
Do Official Measures Underestimate U.S. Investment? According to standard
measures of investment, the United States has devoted a smaller share of its GDP to
investment than many other developed countries. A recent study suggests that the
U.S. investment record is, in fact, better than these figures suggest. The authors
argue that international comparisons using domestic prices for capital goods are not
meaningful, since they measure consumption sacrificed rather than real investment
gained. The authors use measures based on world prices to account for the fact that
capital goods are generally cheaper in the United States. Furthermore, the national
accounts measure only physical capital investment: business and non-military
government construction and purchases of plant and equipment, as well as purchases
of owner-occupied housing. The study argues for an accounting more compatible
with the economic notion of investment as an activity that yields income beyond the
present period. This broader definition would include education, research and
development, consumer durables, and military capital formation as investment goods.
Because the United States devotes a greater share of GDP to these areas than do most
other developed countries, a change in accounting methods would boost the U.S.
position in international comparison of investment-to-GDP ratios.
Weekly Economic Briefing
8
July 31, 1998
EYES ONLY
INTERNATIONAL ROUNDUP
New President Looks to Put Colombia Back on Track. Markets welcomed the
victory in June of President-elect Andres Pastrana, who has said that fiscal reform
will be a priority of his new administration when it takes office August 7. Colombia
had a long history of prudent economic management (a fact not widely known in the
United States). However, rising fiscal deficits under the current administration have
put upward pressure on interest rates and the already- appreciating real exchange rate.
This led to increasing capital inflows and a widening of the current account deficit.
These worsening fundamentals, together with general emerging-market turbulence,
led to reduced capital inflows this year and pushed the exchange rate toward the
bottom of its support band. Political uncertainty leading up to the election fueled
speculative pressure on the exchange rate, forcing the government to raise interbank
interest rates to nearly 80 percent and spend nearly $1 billion in reserves. After the
election the peso recovered somewhat against the dollar, but interest rate premiums
on Colombian debt still exceed those of Mexico, despite Colombia's better credit
rating. Failure by the new administration to address the growing current account and
fiscal imbalances could well result in a further depression of investor confidence and
a downgrade of the country's credit rating.
It's the Economy, Dummkopf. According to a recent poll, unemployment is the
single most important issue to German voters, who are generally dissatisfied with the
performance of the current government. Thus the centerpiece of the economic
platform of the opposition Social Democrats (SPD) is a proposal to boost demand-led
growth through a tax restructuring that will lower tax rates while expanding the tax
base. The SPD candidate for Chancellor, Gerhard Schroeder, is the current front-
runner for the September election, in part, some think, because his campaign rhetoric
promotes a policy approach that bridges traditional liberal-conservative differences.
The Schroeder approach integrates market-based economic reforms, an emphasis on
investment and new technologies, and the traditional progressive social policy of his
party. Schroeder, however, has not managed to reshape his party's economic policy
agenda, which has formally retained many of its traditional interventionist and
redistributional goals under the leadership of party chairman Lafontaine. So although
Schroeder himself has voiced support for market-based structural reforms, the need
for consensus building within the coalition government makes it unlikely that actual
SPD policies will represent a radical departure from current policies.
Weekly Economic Briefing
9
July 31, 1998
EYES ONLY
RELEASES THIS WEEK
Gross Domestic Product
**Embargoed until 8:30 a.m., Friday, July 31, 1998**
According to advance estimates, real gross domestic product grew
at an annual rate of 1.4 percent in the second quarter.
Employment Cost Index
The employment cost index for private industry workers rose
3.5 percent for the 12-month period ending in June.
Advance Durable Orders
Advance estimates show that new orders for durable goods
decreased 0.2 percent in June, following a decrease of 3.3 percent
in May.
Consumer Confidence
Consumer confidence, as measured by The Conference Board,
decreased 2.8 index points in July, to 135.4 (1985=100).
MAJOR RELEASES NEXT WEEK
NAPM Report on Business (Monday)
Leading Indicators (Tuesday)
Employment (Friday)
Weekly Economic Briefing
10
July 31, 1998
EYES ONLY
U.S. ECONOMIC STATISTICS
1970-
1993
1997
1997:4
1998:1
1998:2
Percent growth (annual rate)
Real GDP (chain-type)
2.7
3.8
3.0
5.5
1.4
GDP chain-type price index
5.4
1.7
1.1
0.9
0.8
Nonfarm business (NFB) sector:
Productivity (chain-type)
1.5
2.1
1.4
1.1
N.A.
Real compensation per hour:
Using CPI
0.6
2.2
3.1
3.7
N.A.
Using NFB deflator
1.3
2.5
3.9
3.5
N.A.
Shares of Nominal GDP (percent)
Business fixed investment
10.9
10.6
10.7
11.0
11.1
Residential investment
4.5
4.0
4.1
4.2
4.3
Exports
8.2
11.9
12.0
11.6
11.3
Imports
9.2
13.1
13.2
13.1
13.2
Personal saving
5.2
1.5
1.2
0.9
0.4
Federal surplus *
-2.7
-0.4
-0.1
0.6
N.A.
*Based on unrevised GDP data.
1970-
April
May
June
1993
1997
1998
1998
1998
Unemployment Rate (percent)
6.7**
4.9**
4.3
4.3
4.5
Payroll employment (thousands)
increase per month
320
309
205
increase since Jan. 1993
16246
Inflation (percent per period)
CPI
5.8
1.7
0.2
0.3
0.1
PPI-Finished goods
5.0
-1.2
0.2
0.2
-0.1
**Figures beginning 1994 are not comparable with earlier data.
New or revised data in boldface.
GDP data embargoed until 8:30 a.m., Friday, July 31, 1998.
Weekly Economic Briefing
11
July 31, 1998
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FINANCIAL STATISTICS
May
June
July 30,
1996
1997
1998
1998
1998
Dow-Jones Industrial Average
5743
7441
9080
8873
9027
Interest Rates (percent per annum)
3-month T-bill
5.01
5.06
5.00
4.98
4.94
10-year T-bond
6.44
6.35
5.65
5.50
5.50
Mortgage rate, 30-year fixed
7.80
7.60
7.14
7.00
6.97
Prime rate
8.27
8.44
8.50
8.50
8.50
INTERNATIONAL STATISTICS
Exchange Rates
Current level
Percent Change from
July 30, 1998
Week ago
Year ago
Deutschemark-Dollar
1.776
-0.9
-3.3
Yen-Dollar
142.5
0.7
20.4
Multilateral $ (Mar. 1973=100)
100.9
-0.4
1.2
Real GDP
Unemployment
CPI inflation
International Comparisons 1/
growth
rate
(percent change in index
(percent change last 4 quarters)
(percent)
last 12 months)
United States
3.5 (Q2)
4.5 (Jun)
1.7 (Jun)
Canada
3.8 (Q1)
8.4 (May)
1.3 (May)
Japan
-3.7 (Q1)
4.2 (Apr)
0.5 (May)
France
3.4 (Q1)
12.0 (Apr)
1.0 (May)
Germany
3.0 (Q1)
2/ 7.6 (Apr)
1.3 (May)
Italy
2.5 (Q1)
12.4 (Apr)
1.7 (May)
United Kingdom
2.6 (Q2)
6.4 (Mar)
4.2 (May)
U.S. GDP data embargoed until 8:30 a.m., Friday, July 31, 1998.
1/ For unemployment data, rates approximating U.S. concepts as calculated by the U.S. Department of Labor, Bureau of Labor
Statistics.
2/ Rate for former West Germany. Using OECD standardized unemployment data, the unemployment rate for unified Germany for
April 1998 is 10.0 percent.
Weekly Economic Briefing
12
July 31, 1998
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WEEKLY ECONOMIC BRIEFING
OF THE PRESIDENT OF THE UNITED STATES
Prepared by the Council of Economic Advisers
with the assistance of the Office of the Vice President
July 24, 1998
CHART OF THE WEEK
Tax Cuts and Budget Surpluses: A Look Back
200
100
Carter FY82 budget
Billions of dollars
0
Reagan FY82 budget
-100
-200
Actual
-300
1980
1981
1982
1983
1984
1985
1986
The budget history of the early 1980s illustrates how quickly projected surpluses can
become large deficits. The FY 1982 budget submitted by President Carter in January
1981 projected rapidly declining deficits, turning into a surplus of $121 billion by 1986.
The large tax cuts and other changes in the Reagan FY 1982 budget ate into this
surplus, but, based on optimistic economic assumptions, this budget still projected a
surplus for 1985 and 1986. In fact, of course, the combination of large tax cuts and a
severe recession produced massive deficits.
EYES ONLY
CONTENTS
SPECIAL ANALYSES
Estimating the Costs of Keeping Cool
1
More Guns, Less Crime?
3
New Evidence That Class Size Matters
4
ARTICLE
Back to the Future: Japan's Banking Crisis of 1927
5
DEPARTMENTS
Business, Consumer, and Regional Roundup
7
International Roundup
8
Releases
9
U.S. Economic Statistics
10
Financial and International Statistics
11
GUNS ARE TOO EASY TO GET. THERE
ARE Too MANY PEOPLE CARRYING
CONCEALED WEAPONS AROUND.
400
WELL,
NOT ME!
BUS
STOP
GOOD! THIS IS
A STICKUP.
00
BUS
STOP
EYES ONLY
SPECIAL ANALYSIS
Estimating the Costs of Keeping Cool
The Administration is about to release an economic analysis showing that the costs
to the United States of meeting its Kyoto Protocol emissions target can be modest.
Effective flexibility matters. The key to keeping costs modest is effective
flexibility. The Kyoto Protocol provides several market-based approaches for
achieving lower emissions-most importantly the trading of emissions permits
among countries that accept emissions targets (and among firms in those countries).
However, the rules for implementing trading still need to be negotiated. The
Administration's economic analysis follows the U.S. position and presumes that
trading will be implemented in an effective manner. Actions by other countries to
restrict the use of trading or otherwise increase transaction costs could significantly
increase the cost of compliance to the United States and other developed countries.
Model-based results. The CEA drew on a wide range of evidence to reach the
conclusion that compliance costs can be modest. For illustrative purposes, the report
contains simulation results from one long-term economic model of the United States
and 11 other regions of the world-the Second Generation Model. Several different
trading scenarios were examined (see box on next page). Key results include the
following:
Trading among the industrialized countries could reduce compliance costs by
nearly 60 percent relative to a strategy of achieving all emissions reductions
domestically.
Cost reductions would rise to about 80 to 90 percent if developing countries
adopted targets and participated in international trading.
If China, India, Mexico, and Korea were all to adopt emissions targets based on
2010 business-as-usual emissions levels and sell permits to developed countries,
the world price for a greenhouse gas permit would be $14 to $23 per ton.
Such prices would result in modest increases in the price of fuels (about 5 cents per
gallon for gasoline) that would cost the average household about $70 to $110 per
year. The Administration's electricity restructuring proposal would generate cost-
savings roughly offsetting this increase.
Batteries not included. The Administration's analysis focuses on compliance costs,
assuming effective flexibility. It does not attempt to quantify the effects of Kyoto on
climate change or assess the payoffs from our domestic initiatives.
Weekly Economic Briefing
1
July 24, 1998
EYES ONLY
Cost Reductions from Alternative Trading Scenarios
The ability to purchase international emissions permits reduces the total cost to the
United States of meeting its Kyoto emissions targets. The chart shows the
percentage reduction in resource costs (domestic abatement plus purchases of
permits abroad) under various trading scenarios, relative to a "domestic only"
scenario in which the target is met through domestic abatement alone. Scenarios
differ according to what groups of countries participate in trading: Annex I
(industrialized) countries, which include Russia and other Eastern European
countries; key developing countries (here taken to be China, India, Mexico, and
Korea); "umbrella" countries (the United States, Japan, Australia, Canada, Russia,
and Ukraine); and Eastern Europe.
Reductions in U.S. Resource Costs
(Relative to "Domestic Only* Abatement)
Annex I
Umbrella w/ Eastern
Annex Key Developing
Europe
Countries
Umbrella w/o Eastern
Umbrella w/ Eastern Europe
Europe
+ Key Developing Countries
0
-20
-40
Percent
-60
-57
-61
-80
-74
-80
-87
-100
Weekly Economic Briefing
2
July 24, 1998
EYES ONLY
SPECIAL ANALYSIS
More Guns, Less Crime?
A recent book by a scholar at the University of Chicago has garnered considerable
attention for its claim that "right-to-carry" concealed-handgun laws reduce crime.
However, several analysts have questioned the validity of this claim.
Background. Right-to-carry laws require local law enforcement authorities to issue
permits to carry concealed handguns to any applicant who meets a set of specified
criteria related to age, criminal history, and mental illness. Thirty-one states have
enacted such laws; an additional nine states have considered them.
In theory, the effect of right-to-carry laws on crime is ambiguous. Increasing the
number of guns may increase both the frequency and the severity of crime: guns may
be substituted for less lethal weapons in hostile confrontations, and higher rates of
gun carrying among potential victims may cause criminals to arm themselves with
greater frequency. However, right-to-carry laws may also deter crime to the extent
that criminals are unwilling to attack potential victims who may be armed.
A flawed study. The recent book is based on research that examined the crime rates
of all U.S. counties from 1977 to 1992. After controlling for other factors such as
arrest rates, personal income, and demographic characteristics, right-to-carry laws
were associated with declines of 5 to 10 percent in the rates of murder, rape, and
aggravated assault.
Several critics have noted that these results do not necessarily indicate any causal
relationship between right-to-carry laws and crime. Instead, they may reflect the
presence of other factors that are correlated with both crime rates and right-to-carry
laws. For example, if right-to-carry laws are enacted in conjunction with other anti-
crime measures, the Chicago study would attribute all of the subsequent crime
reduction to right-to-carry laws even if such laws had no effect on crime.
Another look. A new study addresses this deficiency by taking advantage of the fact
that many right-to-carry states also have a minimum-age requirement (ranging from
18 to 21) for obtaining a concealed-carrying permit. If right-to-carry laws actually
deter crime, they should-because of the minimum-age requirement-reduce crimes
against adults more than crimes against juveniles. Contrary to the deterrence
hypothesis, however, adult victimization rates have not fallen relative to juvenile
victimization rates in states that have passed right-to-carry laws. This suggests that
factors other than right-to-carry laws are behind the reductions in crime in these
states.
Implications. Pro-gun advocates have used the Chicago study to support right-to-
carry proposals in states without such laws. However, the defects of the Chicago
study render it an inappropriate guide to public policy towards guns.
Weekly Economic Briefing
3
July 24, 1998
EYES ONLY
SPECIAL ANALYSIS
New Evidence That Class Size Matters
A new evaluation of an important educational experiment has found promising
evidence that smaller classes improve children's academic achievement.
Problems with previous studies. Studies using non-experimental data on school
characteristics and student performance have tended to find little relationship
between expenditures and outcomes. But these studies are potentially flawed to the
extent that they have not controlled adequately for underlying factors, such as innate
ability or family resources, that also affect student outcomes. Moreover, reverse
causality may have been present if resources were directed toward the schools with
the greatest problems. An experimental approach, in which students are randomly
assigned to classes receiving different amounts of school resources, offers a way
around these methodological problems. Random assignment serves to remove
underlying differences in the average characteristics of students in each type of class.
STAR pupils. Although the experimental approach has been widely used in other
areas, such as welfare and training, it has rarely been used to evaluate education
outcomes. The Tennessee Student Teacher Achievement Ratio (STAR) experiment
is a notable exception. In this study, students in kindergarten through grade three
were randomly assigned to either a small class (with an average of about
15 students), a regular-size class of about 22 students, or a regular-size class with a
teacher's aide and about 23 students. For the most part, students remained in their
original class-size assignment until the third grade.
The results. Promising evidence from the STAR experiment includes the following:
Large initial effects. At the end of the first year, test scores of students assigned
to small classes exceeded those of other students by about 5 to 8 percentile
points. By contrast, the presence of a teacher's aide made little or no difference
in the scores of students in regular-size classes. Evidence on how additional
years in a small class affect subsequent relative test scores is inconclusive.
Larger effects for disadvantaged students. Both minority students and students
participating in the reduced-price lunch program tended to show larger relative
test score improvements from being assigned to a small class.
Lasting effects. A study that followed students for 4 years after they had left the
experiment found that those who had been assigned to small classes maintained
their achievement gains.
Implications. These results suggest that judiciously applying additional resources
in order to reduce class size can improve students' academic achievement. However,
it is important to note that this study was conducted only in one state and only among
very young students.
Weekly Economic Briefing
4
July 24, 1998
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ARTICLE
Back to the Future: Japan's Banking Crisis of 1927
In 1927 Japan faced a banking crisis similar in many ways to its current one (see box
on next page). In both episodes, banks' fragility was exacerbated by subsequent
deflationary shocks and a weak and delayed policy response that led to the
accumulation of bad loans. In what may be a lesson for the 1990s, however, an
expeditious cleanup of the banks after the formation of a new government in
1927 solved the banking crisis and ushered in a period of sustained economic growth.
Prelude to crisis. The banking crisis of 1927 resulted from excessive bank lending
and poor bank supervision in an economy hit by negative shocks, including the 1923
Tokyo-Yokohama earthquake. The banking system was already fragile when the
earthquake hit, due to excessive lending during the World War I boom period. In the
aftermath of the quake, many borrowers had trouble meeting their loan obligations,
and the Bank of Japan adopted a very easy credit policy in order to relieve the
pressure on financial institutions. In 1925, however, the Japanese government tried
to balance the budget by raising taxes and reducing expenditures. This had
deflationary effects and further hurt borrowers' ability to repay their bank loans.
Overlending, bad loans, and poor supervision. Among the main holders of bad
loans was the Bank of Taiwan, a Japanese institution in what was then a Japanese
colony. This bank had grown aggressively, venturing outside Taiwan to lend
excessively in Japan itself. It funded this loan expansion, not with stable deposits,
but with short-term call loans from other banks that could be, and eventually would
be, quickly withdrawn. While the bank borrowed short, it lent long. Banks were not
closely supervised in Japan and the law imposed no limit on how much a bank might
lend to a single borrower. Also, there were many small banks undiversified as to
both assets and liabilities, and there was no government deposit insurance.
Panic and bank runs. Confidence in the banking system was seriously shaken in
1927 by a Diet debate that revealed the unsoundness of many banks. The
government then resigned in April to protest a court rejection of its plan to rescue
the Bank of Taiwan. Public reaction to uncertainty about that bank's rescue led to
withdrawal of deposits, and when the Bank of Taiwan could not accommodate the
subsequent run, it collapsed. With no deposit insurance, contagion and panic spread;
other banks began to experience runs. Twelve banks failed in one 4-day period in
what was the worst crisis in Japanese financial history.
Resolution through rapid cleanup and recapitalization. A new government began
to reform the financial system by recognizing and dealing with losses and bad loans
that had been covered up for years. The 18 months after June 1927 were a period of
consolidation, during which the number of ordinary banks was reduced from 1,359
to 1,030. The corporate sector also went through restructuring. Weak firms were
closed or placed under new and more efficient control.
Weekly Economic Briefing
5
July 24, 1998
EYES ONLY
Japan fared well in the Great Depression. The rapid cleanup of the financial and
corporate system after the 1927 crisis is one of the reasons why Japan experienced
a period of sustained economic growth (at a 6 percent average annual rate) in the
1930s while the rest of the world went through the Great Depression. A very large
fiscal expansion beginning in 1931, when Japan also abandoned the gold standard
and depreciated the yen, further contributed to the successful growth experience of
the 1930s.
Implications. Japan's current banking situation is similar in many ways to the one
leading up to the 1927 crisis. In the 1990s, the cleanup of the banking system was
significantly delayed after the asset bubble of the 1980s burst, and bad loans built up
in the financial system. The plight of the financial sector and a tightening fiscal
policy have contributed to the protracted stagnation of the economy in the 1990s.
However, the experience of the 1920s suggests that sound policies can restore
financial stability and economic growth.
Comparisons between the 1920s and the 1990s
1920s
1990s
Tokyo-Yokohama earthquake in 1923
Kobe earthquake in 1995
Yen appreciation in 1925
Yen appreciation until 1995
Contractionary fiscal policy in 1925
Contractionary tax increase in 1997
Excessive lending and poor bank
Excessive lending and poor bank
supervision in boom years
supervision in 1980s and early 1990s
Slow reaction of the political system
Slow reaction of the political system
to the accumulation of bad loans
to the accumulation of bad loans
until 1927
until 1998
Bank run and crisis in 1927
Implicit and explicit bankruptcy
of financial institutions in 1997-98
New government in 1927 undertook
New government in 1998 ?
rapid closures and clean up of the banks
Weekly Economic Briefing
6
July 24, 1998
EYES ONLY
BUSINESS, CONSUMER, AND REGIONAL ROUNDUP
Greenspan Calls Economic Performance Impressive, Assesses Risks. In
presenting the Federal Reserve's mid-year report on monetary policy to the
congressional banking committees, Fed chairman Alan Greenspan observed that,
overall, the performance of the American economy continues to be impressive. He
noted that so far this year, the economy has continued to enjoy a "virtuous cycle" in
which economic performance has strengthened as inflation has subsided. Greenspan
reported that monetary policymakers foresee a reasonably smooth transition to a
slower and more sustainable rate of growth-but with significant risks attending that
outlook. Given the current tightness in labor markets, Fed policymakers see the
potential for accelerating inflation as probably greater than the risk of protracted,
excessive weakness in the economy.
Does Crime Pay for Gang Members? The distribution of wages in gangs is highly
skewed, with gang leaders reaping large rewards, while low-level drug dealers earn
surprisingly low wages for highly risky work. This is the implication of a recent
study based on 4-years' worth of detailed financial information from a now-defunct
gang-though it is unknown whether these results generalize beyond this single case
study. Average wages, which ranged between roughly $6 and $11 per hour in
different years of the study, conceal a sharp disparity between the gang leader's wage,
which ranged between $32 and $97 per hour, and the average wage of a "foot-
soldier," which ranged between $2.50 and $7.10 per hour. This disparity invites a
"tournament" interpretation-which has also been applied to corporate compensation
structures-in which participants choose to vie for large awards that only a small
fraction will ultimately attain. The gang members in the study, on average, earned
income only slightly above wages in legal jobs. This income difference implies a
compensation for increased "occupational" risk among gang members that is more
than 10 times lower than estimates typically found in the economics literature.
BEA Releases First Travel and Tourism Satellite Accounts. Travel and tourism
spending by U.S. residents and by nonresidents traveling in the United States
accounted for 5 percent of GDP in 1992, according to the newly developed travel and
tourism satellite accounts (TTSAs) recently released by the Commerce Department's
Bureau of Economic Analysis (BEA). These accounts show that travel and tourism
spending accounted for about 3 percent of total employment. Of the approximately
$300 billion in travel and tourism spending, the largest single expenditure was for
airline fares ($81 billion), followed by lodging ($56 billion) and meals and beverages
(approximately $50 billion). Satellite accounts are rearrangements of information
from the national economic accounts and other sources for the purpose of analyzing
specific economic activities more completely than is possible within the structure of
the basic accounts. For example, development of the TTSAs arose out of a 1995
White House Conference on Travel and Tourism that had highlighted difficulties
with existing measures of travel and tourism. BEA has also developed transportation
services, environmental, mineral resources, and R&D satellite accounts.
Weekly Economic Briefing
7
July 24, 1998
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INTERNATIONAL ROUNDUP
Moody's Threatens To Downgrade Japanese Credit Rating. Yesterday, Moody's
announced that it will consider downgrading Japan's credit rating, citing the
ineffectiveness of current policy to address structural problems in the Japanese
economy, lack of consensus over economic strategy, a worsening fiscal outlook, and
signs that Japan's external position is weakening. The yen dipped temporarily
following Moody's announcement. It had been depreciating throughout the week,
which press reports attribute in part to investor skepticism that front-runner Keizo
Obuchi will undertake serious reforms to address Japan's economic problems if he
becomes Prime Minister.
Wall Street Firm Urges Asian Debt Relief to Avert Further Crisis. Asian
governments must move quickly to shore up their banking systems, according to a
recent Goldman Sachs report. The report suggests that public sector balance sheets
of the crisis countries are sufficiently robust and the long-term growth outlook is
sufficiently strong that the banks can be recapitalized without generating an
unsustainable debt position. It goes on to argue for immediate government action to
alleviate credit crunch conditions. Goldman Sachs has lowered its macroeconomic
forecasts, predicting deeper real contraction this year for the crisis economies
(Indonesia, Korea, Malaysia, and Thailand), with negative or near-zero growth
extending into 1999.
ILO Reports That Violence on the Job is a Global Problem. France, Argentina,
Romania, Canada, and England have reported the highest rates of assaults and sexual
harassment on the job, according to a worldwide survey of violence in the workplace
issued this week by the International Labor Organization. While acknowledging the
difficulties of comparing rates of violence among countries, the ILO report draws on
a 1996 survey of workers in 32 countries and their perceptions of what had occurred
to them on the job. Of those surveyed, taxi drivers, health care workers, teachers,
and those working alone were among those facing the greatest risk of violence. The
ILO also reports that in the United States roughly 1,000 killings take place each year
in job settings, and that homicide has become the leading cause of death on the job
for U.S. women. One survey found that U.S. employers incurred costs from
workplace violence of more than $4 billion in 1992.
Nigerian Fuel Crisis Intensifies, with Renewed Violence. Nigeria's longstanding
fuel shortage has grown even more acute in the wake of violence sparked by the
death of Moshood Abiola. Over 30 oil tanker trucks have reportedly been destroyed
and several drivers killed; many other drivers have now refused to drive their tankers
from the fuel depots. Shortages of aviation fuel have required the cancellation of
some domestic flights. Although the oil sector generates a third of national output,
inefficiency and the poor economic performance of many of these enterprises have
helped generate fuel and power shortages that have depressed economic activity and
forced Nigeria to import fuel to meet domestic requirements. Many of Nigeria's
refineries have been shut down or are operating below full capacity.
Weekly Economic Briefing
8
July 24, 1998
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RELEASES THIS WEEK
Housing Starts
Housing starts increased 6 percent in June to 1.62 million units at
an annual rate. During the first six months of 1998, housing starts
were 8 percent above the same period a year ago.
MAJOR RELEASES NEXT WEEK
Consumer Confidence-The Conference Board (Tuesday)
Advance Durable Shipments and Orders (Wednesday)
Employment Cost Index (Thursday)
Gross Domestic Product (Friday)
Weekly Economic Briefing
9
July 24, 1998
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U.S. ECONOMIC STATISTICS
1970-
1993
1997
1997:3
1997:4
1998:1
Percent growth (annual rate)
Real GDP (chain-type)
2.7
3.7
3.1
3.7
5.4
GDP chain-type price index
5.4
1.8
1.4
1.4
1.2
Nonfarm business (NFB) sector:
Productivity (chain-type)
1.5
2.1
3.6
1.4
1.1
Real compensation per hour:
Using CPI
0.6
2.2
1.8
3.1
3.7
Using NFB deflator
1.3
2.5
2.7
3.9
3.5
Shares of Nominal GDP (percent)
Business fixed investment
10.9
10.5
10.7
10.6
10.7
Residential investment
4.5
4.1
4.1
4.1
4.2
Exports
8.2
11.8
11.9
11.9
11.5
Imports
9.2
13.1
13.3
13.2
13.1
Personal saving
5.3
2.8
2.6
2.9
2.6
Federal surplus
-2.7
-0.4
-0.1
-0.1
0.6
1970-
April
May
June
1993
1997
1998
1998
1998
Unemployment Rate (percent)
6.7**
4.9**
4.3
4.3
4.5
Payroll employment (thousands)
increase per month
320
309
205
increase since Jan. 1993
16246
Inflation (percent per period)
CPI
5.8
1.7
0.2
0.3
0.1
PPI-Finished goods
5.0
-1.2
0.2
0.2
-0.1
**Figures beginning 1994 are not comparable with earlier data.
Weekly Economic Briefing
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July 24, 1998
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FINANCIAL STATISTICS
May
June
July 23,
1996
1997
1998
1998
1998
Dow-Jones Industrial Average
5743
7441
9080
8873
8933
Interest Rates (percent per annum)
3-month T-bill
5.01
5.06
5.00
4.98
4.96
10-year T-bond
6.44
6.35
5.65
5.50
5.45
Mortgage rate, 30-year fixed
7.80
7.60
7.14
7.00
6.96
Prime rate
8.27
8.44
8.50
8.50
8.50
INTERNATIONAL STATISTICS
Exchange Rates
Current level
Percent Change from
July 23, 1998
Week ago
Year ago
Deutschemark-Dollar
1.792
0.1
-1.7
Yen-Dollar
141.5
0.9
22.2
Multilateral $ (Mar. 1973=100)
101.3
0.2
2.9
Real GDP
Unemployment
CPI inflation
International Comparisons 1/
growth
rate
(percent change in index
(percent change last 4 quarters)
(percent)
last 12 months)
United States
3.9 (Q1)
4.5 (Jun)
1.7 (Jun)
Canada
3.8 (Q1)
8.4 (May)
1.3 (May)
Japan
-3.7 (Q1)
4.2 (Apr)
0.5 (May)
France
3.4 (Q1)
12.0 (Apr)
1.0 (May)
Germany
3.0 (Q1)
2/ 7.6 (Apr)
1.3 (May)
Italy
2.5 (Q1)
12.4 (Apr)
1.7 (May)
United Kingdom
2.9 (Q1)
6.4 (Mar)
4.2 (May)
1/ For unemployment data, rates approximating U.S. concepts as calculated by the U.S. Department of Labor, Bureau of Labor
Statistics.
2/ Rate for former West Germany. Using OECD standardized unemployment data, the unemployment rate for unified Germany for
April 1998 is 10.0 percent.
Weekly Economic Briefing
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July 24, 1998
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WEEKLY ECONOMIC BRIEFING
OF THE PRESIDENT OF THE UNITED STATES
Prepared by the Council of Economic Advisers
with the assistance of the Office of the Vice President
July 17, 1998
CHART OF THE WEEK
Real GDP Growth Forecasts
4
Mid-Session Review
3.4
3.3
Congressional Budget Office
Blue Chip
3
2.9
Year-over-year percent change
2.4
2.0
2.1
2
1
0
1998
1999
This week the Congressional Budget Office (CBO) released its updated economic
forecast. CBO raised its forecast for real growth in 1998 to 3.3 percent (up from
2.7 percent in its January forecast). Like the private Blue Chip forecast, the new CBO
forecast is higher than the Administration's most recent forecast and reflects the
particularly strong first quarter. All three forecasts show slower growth in 1999.
EYES ONLY
CONTENTS
MACROECONOMIC UPDATE
A Slowdown, for Sure
1
SPECIAL ANALYSES
Who Owns Guns?
3
Evidence on Homelessness from Los Angeles
4
ARTICLE
Converting Surplus Military Real Estate
6
DEPARTMENTS
Business, Consumer, and Regional Roundup
8
International Roundup
9
Releases
10
U.S. Economic Statistics
11
Financial and International Statistics
12
"Steve tells me that when be was in Beijing be discovered
a rather good little Chinese restaurant."
EYES ONLY
MACROECONOMIC UPDATE
A Slowdown, for Sure
Evidence continues to mount that the long-anticipated
slowdown has arrived. Growth in real GDP may well
have been less than 1 percent at an annual rate in the
second quarter, and a decline in GDP is conceivable.
Production worker hours rose at only a 0.8 percent
annual rate in the second quarter-the smallest
increase since the second quarter of 1995. Spending
Inventory Change Excluding Motor Vehicles
weakness is concentrated in inventory
60
investment and net exports; domestic
50
final demand continues to perk along.
Billions of dollars (annual rate)
40
Inventories.
Nonfarm inventory
30
Apr-May
Avg.
investment (excluding motor vehicles)
I
20
was exceptionally-and unsustainably-
strong in the first quarter, adding almost
10
2 percentage points to GDP growth.
0
1996
Preliminary data for April and May
1997
1998
Note: calculated at book value
indicate a sharp drop in the second
Change in Production of Motor Vehicles
quarter (see upper chart)-enough to
1.5
1.2
subtract 2 percentage points from GDP
1.0
growth. In addition, the GM strike will
0.7
Planned
0.6
0.5
June 5
0.5
produce a huge drop in motor vehicle
Millions (annual rate)
0.4
0.3
inventories. Motor vehicle production in
0.0
the second quarter fell well short of
-0.5
-0.4
plans (see lower chart), largely because
-0.6
-0.7
-0.6
of the strike. CEA estimates that the
Actual
-1.0
July 2
strike reduced real GDP growth by about
-1.2
-1.5
0.6 percentage point in the second
1996
1997
1998
quarter.
International trade. Net exports, which subtracted
more than 2 percentage points from first-quarter
growth, appear to have fallen further in the second
quarter. April and May data show a continued erosion
of exports-especially to the Asian crisis countries—
while imports continue to rise.
Domestic spending. In sharp contrast to inventories
and net exports, domestic final spending remains
exceptionally strong. Buoyed by large increases in
real disposable income, real consumption appears to
Weekly Economic Briefing
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July 17, 1998
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have increased at a blistering 5½ percent annual rate
in the second quarter. Housing investment continues
to make solid gains, and business equipment
investment is likely to show another sizable increase
in the second quarter.
Inflation. Core CPI inflation seems to have stopped
falling, but it remains at a very low 2.2 percent, as
measured over the past 12 months. Inflation pressures
Consumer and Import Prices
are being contained, at least in part, by
8
the continued drop in non-oil import
6
Core CPI
prices, which have fallen 3.6 percent over
4
the past 12 months (see chart).
12-month percent change
2
What next? The economy may now be
0
moving toward the 2 percent average
-2
annual rate of growth anticipated in the
Non-oll Import prices
-4
Administration's forecast (though the
-6
fourth quarter could be boosted as GM
1991
1992
1993
1994
1995
1996
1997
1998
makes up for production lost during the
strike). Inventories remain lean relative to sales,
hence the adjustment to a slower pace of inventory
investment may have already been completed. In
other respects, however, the shape of aggregate
demand may be qualitatively similar to the second
quarter, with weak net exports offsetting solid growth
rates for consumption and business investment.
Weekly Economic Briefing
2
July 17, 1998
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SPECIAL ANALYSIS
Who Owns Guns?
Surveys indicate that approximately 40 percent of U.S. households have at least one
gun. A recent study based on a nationwide survey of almost 21,000 people between
1973 and 1994 provides evidence on the characteristics of gun owners.
Demographic and socioeconomic characteristics. The study provides evidence on
the effects of different characteristics on the probability of owning a gun, holding all
other characteristics constant. Findings include the following:
Sex and age. The likelihood of owning a gun is 8 percentage points higher for
men than for women, and people over the age of 40 are about 8 percentage points
more likely to own guns than are those under 30.
Family structure. People who are married are 9 percentage points more likely to
be armed. Families with teenagers are 2 percentage points more likely to own
guns, but also slightly less likely to own handguns.
Location of residence. Living in a rural area increases the probability of owning
a gun by over 60 percentage points. People in the South are almost 20 percentage
points more likely to own a gun than people in the East.
Education and income. Graduating from college reduces the probability of
owning a gun by about 10 percentage points. Income is positively correlated with
gun ownership, perhaps because guns are expensive or because high-income
individuals have more property to protect. Interestingly, gun ownership is also
higher among those who did not respond to the survey's income question, which
may indicate general mistrust.
Private or public justice? Other factors affecting gun ownership include attitudes
about crime and justice. People who fear crime in their neighborhood are more likely
to own handguns (although those who report being robbed in the past year are not any
more likely to own guns). Gun ownership appears to be associated with a belief in
private justice: Gun owners report less confidence in the courts and public officials
and are more likely to approve of violent retribution. Gun ownership is also higher
in states with fewer police per square mile.
The effect of gun-control laws. Waiting periods do not seem to reduce gun
ownership generally, but they do appear to be successful in reducing gun ownership
among people who have been arrested. No strong connection was found between
other gun-control laws and gun ownership.
Conclusion. Those who own guns are more likely to be middle-aged, married, male,
living in a rural area, and living in the South. Gun ownership also appears to be
linked to the idea that private enforcement of property rights is needed to supplement
public enforcement.
Weekly Economic Briefing
3
July 17, 1998
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SPECIAL ANALYSIS
Evidence on Homelessness from Los Angeles
The problem of homelessness became more apparent in the past two decades. New
information from Los Angeles provides some evidence on the characteristics of the
homeless and their sources of income and assistance.
How many people are homeless nationally? Estimating the number of persons
who are homeless is difficult. Estimates from 1987 suggest that in a given week
496,000 to 600,000 people in the nation were "literally" homeless in the sense that
they were living in temporary shelters or on the streets. But homelessness is
dynamic, with many people moving in and out of homelessness. Evidence from 1995
suggests that nationally at least 12 million people have been homeless at some point
in their lives.
Characteristics of the Homeless in LA, 1990
Who are they? A survey of 1,548
Black
homeless persons in Los Angeles in 1990
provides evidence on the needs and
High school
dropout
abilities of the homeless. The vast
Served In
majority (83 percent) of them were men,
military
and one-quarter had served in the military
Chronically
mentally III
(see upper chart). Blacks, who accounted
Chronic
for 11 percent of the total population of
substance abuser
Los Angeles in 1990, accounted for
0
20
40
60
80
Percent
53 percent of the city's homeless.
Although the homeless were less educated than the population as a whole, 60 percent
had at least a high school degree, and 29 percent had some schooling beyond high
school. Many may have had the formal education to be normal labor market
participants, but 22 percent were chronically mentally ill, 69 percent were chronic
Sources of Income of the Homeless in LA, 1990
substance abusers, and 17 percent
exhibited both characteristics.
Government
Family/friends
Formal employment
How do they get by? The Los Angeles
Panhandling
study found that total income from all
Selling goods
sources (including food stamps) averaged
Selling recyclables
$387 per month in 1990. The most
Selling blood
common source of income was
Other sources
government assistance-received by
0
10
20
30
40
50
60
70
nearly 60 percent of those surveyed (see
Percent receiving income from source
lower chart). Government assistance
represented 45 percent of all income in
the 30 days prior to the interview. A third of those surveyed received assistance from
family members and friends; 30 percent had formal employment. Panhandling,
Weekly Economic Briefing
4
July 17, 1998
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selling recyclables, and selling other goods were also fairly common. Thirteen
percent had sold their blood as a source of income.
How adequate is public assistance? Despite the overall importance of public
assistance, 42 percent of the homeless were not receiving government transfers even
though they presumably met the financial eligibility requirements for food stamps
and General Relief (GR). The fact that 84 percent said they received some form of
assistance in the past suggests that most homeless people knew that aid existed.
The most common form of government cash assistance received by the homeless in
Los Angeles was GR, which is the county-run and state-mandated welfare program
of last resort. GR provided aid to 76,281 persons in Los Angeles County in May
1998 (this number is greater than the number of persons receiving TANF in each of
28 states). California currently permits counties to place time limits on GR receipt,
and Los Angeles decided to limit participation to no more than 5 months out of every
12. On June 30, 6,500 GR participants were the first to hit the time limit, and debate
exists about what will happen to these people.
Implications. Although families and friends are an important source of assistance,
for some people this support is insufficient to prevent homelessness in the first place.
In addition, addressing the problem of homelessness is complicated by its dynamic
nature. For example, solutions that help people become housed must also try to keep
them from falling back into homelessness. They must also guard against
undermining other sources of support, such as families and friends.
Weekly Economic Briefing
5
July 17, 1998
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ARTICLE
Converting Surplus Military Real Estate
Between 1988 and 1995, the Department of Defense announced the closure or
realignment of 261 military bases and facilities, to be completed by 2001 under the
Base Realignment and Closure (BRAC) process. What do we know about how well
this process is working?
Selecting bases for closure: the BRAC process. In the past, efforts to close
individual military bases or facilities were often blocked by Congress to protect jobs
and Federal expenditures within a state or Congressional District-even though the
general public interest would be served by the closings. The BRAC process
addressed this common policy dilemma by creating an independent commission to
select domestic facilities to be closed or realigned. Congress could accept or reject
the entire list of actions, but could not make changes to the commission's
recommendations.
Assessing economic impacts. Besides the loss of civilian jobs, base closures and the
redeployment of substantial numbers of military personnel can adversely affect local
economies through reduced sales at businesses, depressed real estate values, lower
public school enrollments, and a diminished tax base. Potential impacts can be
exaggerated, however, since some bases may not be closely integrated into the local
economy and civilian workers can often find new jobs in other sectors-especially
when the national economy is strong. While reemployment of displaced workers is
one of the most important indicators of successful conversion, communities are also
concerned with finding new uses for the former base facilities themselves. The speed
at which base-use conversion takes place depends on several factors, including the
commercial value and condition of the facility, local economic conditions, and the
degree of assistance provided by Federal and state governments to local
redevelopment authorities.
Civilian conversion to date. The list of announced closures includes 98 major bases
(defined as ones where 300 or more civilian and/or military jobs are lost). Most of
the closed facilities are converting to nonmilitary uses, and civilian job loss at the
facilities is gradually being made up. By
New Civilian Jobs Created on Former Military Bases
400
March 1998, an estimated 47,682 jobs had
(new jobs/jobe lost)
Pease AFB, NH
been created on 58 former major military
(1,385/400)
300
Homestead AFB, FL
bases closed so far, replacing the 100,635
As a percent of jobs lost
(388/136)
civilian jobs lost at these facilities due to
England AFB, LA
200
Charleston Naval Base
(1,527/682)
(3,087/6,272)
closure and realignment.
Philadelphia Naval Base
100
(528/8,119)
Of the 58 major bases that have already
Eaker AFB, AR
(33/416)
Fort Sheridan, L
been closed, 14 have at least as many new
0
(20/1,681)
0
2
4
6
8
civilian jobs as were lost due to closing.
Years since base closed
Moreover, job creation improves with
Weekly Economic Briefing
6
July 17, 1998
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time (see chart) as facilities are refurbished and new tenants are found. An important
factor in the success of base conversion to nonmilitary uses is the commercial value
of base facilities. For example, many former Air Force bases located near
metropolitan areas have rapidly converted to civilian uses, probably because
communities have found it relatively easy to establish needed new civilian airports
at former military airfields. Surprisingly, the speed of new job creation at former
bases does not appear to be closely correlated with either local job growth or
unemployment rates in the affected communities.
Strengthening the base conversion process. The recent rounds of base closings
have provided important lessons in finding new uses for the surplus facilities as well
as evidence of learning over time. For example, preliminary results from an MIT
assessment of military base redevelopment found that conversion milestones were
reached more quickly in each successive round of base closings (1988, 1991, 1993,
and 1995). The study also examined techniques used by organizations other than the
military (state and local governments and corporations) to convert surplus or obsolete
sites to new uses. (Cases studied included former state mental hospital campuses,
contaminated industrial sites known as "brownfields," and former industrial facilities
owned by private corporations.) The following were identified as key elements of
successful conversion:
Infrastructure. Most surplus facilities required varying degrees of public
intervention, such as infrastructure improvements, to create developable and thus
commercially valuable sites.
Capital. Successful developers usually had a source of ready capital that either
did not require repayment or that could be repaid in the long term.
Expertise. Corporations tended to make greater use of outside experts and
consultants in developing conversion plans than did government authorities, and
corporate real estate people discovered that out-sourcing to obtain needed skills
and experience may be preferable to building up a large in-house staff.
Conclusion. The Department of Defense recently proposed another round of base
closings. While closing military bases can have adverse local economic impacts,
conversion to civilian uses can eventually lead to significant growth opportunities for
these communities. Lessons from the recent public and private experiences with
facility conversion suggest that further improvements can be made in the conversion
process.
Weekly Economic Briefing
7
July 17, 1998
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BUSINESS, CONSUMER, AND REGIONAL ROUNDUP
Corporate Charity Increases with Corporate Profits. Many of America's largest
companies plan to give more to charity this year than in 1997, according to a study
published in the Chronicle of Philanthropy. Among 66 big companies that reported
their giving plans for 1998, cash donations are expected to rise to $1.3 billion. This
11 percent increase in giving follows a 14 per cent increase by the same companies
from 1996 to 1997. The increase can be attributed to the companies' increased
profits, rather than to a higher rate of giving. Companies that provided income
figures averaged 11 percent growth in profits from 1996 to 1997, but their average
rate of giving remained constant at 0.8 percent of pre-tax profits. Some charities fear
that increased merger and restructuring activities will reduce corporate generosity as
corporations become less local, but the study cites several cases in which mergers led
to no change or an increase in the level of giving. Among 65 business that provided
figures, employees' contributions through matching gift programs are expected to
increase 12 percent to $190 million from 1997 to 1998.
Medicare HMOs Target Healthiest Seniors. Medicare HMOs attempt to attract
healthy, active senior citizens rather than people with costly medical problems,
according to a new study of the marketing strategies of Medicare HMOs by the
Kaiser Family Foundation and the marketing and public relations firm Porter Novelli.
The study examined a sample of ads and marketing materials from Cleveland, Los
Angeles, Miami, and New York to reach five key conclusions: 1) advertising
emphasizes lower costs and more generous benefits than the traditional Medicare
program; 2) ads target physically and socially active seniors, rather than beneficiaries
in poor health; 3) non-elderly disabled Medicare beneficiaries are not targeted by ads;
4) marketing seminars are not consistently accessible to beneficiaries with physical
disabilities; 5) a great deal of the important information included in ads is in fine
print that is difficult for older people to read. The study noted that, without a
reimbursement system that pays HMOs more if they enroll members with high costs,
plans are financially disadvantaged if they enroll high-cost members, such as seniors
in poor health or non-elderly disabled.
OCC Weighs in on Bank Lending Practices. In a recent speech, the Acting
Comptroller of the Currency echoed concerns raised by the Federal Reserve about
possible future problems arising from current bank lending practices. At roughly
yearly intervals since 1995, the Office of the Comptroller of the Currency (OCC) has
conducted a survey of examiners-in-charge at a sample of its largest banks. Concern
arose from the continued deterioration in credit underwriting standards evident in the
most recent survey. On the consumer lending side, the survey found improved credit
card standards but easing standards for loans and credit backed by home equity. On
the commercial side, the survey found more serious problems, with banks increasing
their downside risk while also reducing their ability to cover potential losses. This
view of commercial lending is more pessimistic than the Fed's and prompted the
OCC to initiate a series of steps to give bankers the opportunity to make appropriate
risk management assessments and halt the perceived slide in credit standards.
Weekly Economic Briefing
8
July 17, 1998
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INTERNATIONAL ROUNDUP
Calculating the Bilateral Trade Balance with China. The trade balance between
the United States and China is one of the most contentious economic issues between
the two countries. Even the size of the deficit is in dispute. According to U.S.
statistics, the bilateral deficit was $40 billion in 1996, but Chinese data put it at less
than $11 billion. This discrepancy is largely due to differences in the treatment of
goods shipped through Hong Kong. Chinese goods that have been re-exported from
Hong Kong are generally treated as imports from China in U.S. trade statistics, but
many U.S. goods that are re-exported to China from Hong Kong are not recorded as
exports to China. Thus, resolving the discrepancy between the U.S. and Chinese
figures requires both an accurate accounting of bilateral trade shipped through Hong
Kong and proper measurement of the value added by Hong Kong traders to these
goods. These adjustments are not generally required under standard trade accounting
practices, but a recent academic study that made them found a "true" bilateral trade
deficit in the range of $15 to $20 billion in 1994 and $16 to $22 billion in 1995, a
little more than half the recorded U.S. bilateral deficit. Like both sets of official
balances, these estimates suggest that the bilateral deficit is widening over time.
Exploring the determinants of the deficit, the authors found that this widening
reflected the same evolving national saving and investment behavior in each country
that has increased the overall trade deficit of the United States and created an overall
trade surplus for China, as well as the general shift in the production of U.S.-
imported goods to mainland China from elsewhere in East Asia.
IMF Study Analyzes Capital Taxation in a Globalized Economy. With
globalization intensifying and vast amounts of capital instantly mobile across
borders, the ability of governments to tax financial capital appropriately and
effectively is a growing concern. Communication innovations like the Internet have
eased access to and the anonymity of international financial transactions, while the
rapid growth in the volume and complexity of financial instruments such as
derivatives has complicated traditional notions of securities income. Intensifying tax
competition among national governments seeking to attract capital has also eroded
the effectiveness of traditional tax collection. In a recent study, IMF economists
discuss possible solutions to these problems. Capital is now generally taxed
according to the country of residence of the income recipient, rather than the country
generating the capital income. One approach has been to adapt current tax policies
to close existing loopholes. Ultimately, however, residence-based arrangements
presuppose that the income recipients can be readily identified: The effectiveness of
these policies is dependent upon the availability of relevant information on resident
activities in tax haven countries. The IMF study concludes that since most interest
and dividend payments are made by easily identifiable entities such as governments,
corporations, and financial institutions, the simplest and most direct means of
combating tax evasion is a shift toward source taxation of cross-border flows of
interest and dividends. Such a move could be implemented through a multilateral tax
treaty that would set minimum source withholding tax rates on those entities
generating capital income in a given country.
Weekly Economic Briefing
9
July 17, 1998
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RELEASES THIS WEEK
U.S. International Trade in Goods and Services
**Embargoed until 8:30 a.m., Friday, July 17, 1998**
The goods and services trade deficit was $15.7 billion in May;
it was $14.3 billion in April.
Industrial Production and Capacity Utilization
The Federal Reserve's index of industrial production fell
0.6 percent in June. Capacity utilization fell 0.8 percentage point,
to 81.6 percent.
Retail Sales
Advance estimates show that retail sales increased 0.1 percent in
June, following an increase of 1.2 percent in May. Excluding sales
in the automotive group, retail sales also increased 0.1 percent in
June, following an increase of 0.9 percent in May.
Consumer Price Index
The consumer price index rose 0.1 percent in June. Excluding
food and energy, consumer prices also increased 0.1 percent.
MAJOR RELEASES NEXT WEEK
Housing Starts (Tuesday)
Weekly Economic Briefing
10
July 17, 1998
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U.S. ECONOMIC STATISTICS
1970-
1993
1997
1997:3
1997:4
1998:1
Percent growth (annual rate)
Real GDP (chain-type)
2.7
3.7
3.1
3.7
5.4
GDP chain-type price index
5.4
1.8
1.4
1.4
1.2
Nonfarm business (NFB) sector:
Productivity (chain-type)
1.5
2.1
3.6
1.4
1.1
Real compensation per hour:
Using CPI
0.6
2.2
1.8
3.1
3.7
Using NFB deflator
1.3
2.5
2.7
3.9
3.5
Shares of Nominal GDP (percent)
Business fixed investment
10.9
10.5
10.7
10.6
10.7
Residential investment
4.5
4.1
4.1
4.1
4.2
Exports
8.2
11.8
11.9
11.9
11.5
Imports
9.2
13.1
13.3
13.2
13.1
Personal saving
5.3
2.8
2.6
2.9
2.6
Federal surplus
-2.7
-0.4
-0.1
-0.1
0.6
1970-
April
May
June
1993
1997
1998
1998
1998
Unemployment Rate (percent)
6.7**
4.9**
4.3
4.3
4.5
Payroll employment (thousands)
increase per month
320
309
205
increase since Jan. 1993
16246
Inflation (percent per period)
CPI
5.8
1.7
0.2
0.3
0.1
PPI-Finished goods
5.0
-1.2
0.2
0.2
-0.1
**Figures beginning 1994 are not comparable with earlier data.
New or revised data in boldface.
Weekly. Economic Briefing
11
July 17, 1998
EYES ONLY
FINANCIAL STATISTICS
May
June
July 16,
1996
1997
1998
1998
1998
Dow-Jones Industrial Average
5743
7441
9080
8873
9328
Interest Rates (percent per annum)
3-month T-bill
5.01
5.06
5.00
4.98
5.03
10-year T-bond
6.44
6.35
5.65
5.50
5.50
Mortgage rate, 30-year fixed
7.80
7.60
7.14
7.00
6.94
Prime rate
8.27
8.44
8.50
8.50
8.50
INTERNATIONAL STATISTICS
Exchange Rates
Current level
Percent Change from
July 16, 1998
Week ago
Year ago
Deutschemark-Dollar
1.790
-2.2
-0.5
Yen-Dollar
140.3
-0.7
20.6
Multilateral $ (Mar. 1973=100)
101.1
-1.5
3.5
Real GDP
Unemployment
CPI inflation
International Comparisons 1/
growth
rate
(percent change in index
(percent change last 4 quarters)
(percent)
last 12 months)
United States
3.9 (Q1)
4.5 (Jun)
1.7 (Jun)
Canada
3.8 (Q1)
8.4 (May)
1.3 (May)
Japan
-3.7 (Q1)
4.2 (Apr)
0.5 (May)
France
3.4 (Q1)
12.0 (Apr)
1.0 (May)
Germany
3.0 (Q1)
2/ 7.6 (Apr)
1.3 (May)
Italy
2.5 (Q1)
12.4 (Apr)
1.7 (May)
United Kingdom
2.9 (Q1)
6.4 (Mar)
4.2 (May)
1/ For unemployment data, rates approximating U.S. concepts as calculated by the U.S. Department of Labor, Bureau of Labor
Statistics.
2/ Rate for former West Germany. Using OECD standardized unemployment data, the unemployment rate for unified Germany for
April 1998 is 10.0 percent.
Weekly Economic Briefing
12
July 17, 1998
EYES ONLY
WEEKLY ECONOMIC BRIEFING
OF THE PRESIDENT OF THE UNITED STATES
Prepared by the Council of Economic Advisers
with the assistance of the Office of the Vice President
July 10, 1998
CHART OF THE WEEK
Net Farm Income in the 1990s
70
Net farm income (NFI)
1990-97 average NFI
NFI less government payment
1990-97 average NFI
60
less gov't payment
50
Billions of 1997 dollars
40
30
20
10
0
1990 1991 1992 1993 1994 1995 1996 1997 1998
est.
The last 2 years were good ones for farmers, with both strong prices and large fixed
support payments from the 1996 Farm Act. The latest USDA projections suggest that
1998 will not be so strong a year-though it should be within the range experienced in
this decade. Some regions, particularly the upper Great Plains, are likely to experience
more severe distress.
EYES ONLY
CONTENTS
CURRENT DEVELOPMENT
Are Bank Lending Standards Too Lax?
1
SPECIAL ANALYSES
Living Arrangements of Elderly Widows
2
Foreign-Born Women in the U.S. Labor Market
3
ARTICLE
Time As Money: A Perspective on Productivity
5
DEPARTMENTS
Business, Consumer, and Regional Roundup
7
International Roundup
8
Releases
9
U.S. Economic Statistics
10
Financial and International Statistics
11
TURN OVER YOUR RECEIPTS
IRS
I MISS THE
OR I'LL BOP You WITH
OLD DAYS.
THIS FLUFFY PILLOW.
TORTURE
CHAMBER
1000000
EYES ONLY
CURRENT DEVELOPMENT
Are Bank Lending Standards Too Lax?
Financial imbalances sometimes presage the end of
expansions. As a precaution against the emergence of
such imbalances, the Federal Reserve recently told
bank examiners that this is a critical time for banks to
maintain lending discipline.
Indicators of Problem Business Loans
2.5
7
:
Background. Aggregate statistics for the
2.0
6
banking industry show problem business
Percent of average loan balances
Loan delinquency rate
5
1.5
(right axis)
4
Percent of average loan balances
loans to be at historically favorable
levels. Both delinquency rates and
charge-off rates are low (see chart).
1.0
3
Nevertheless, the Fed has been hearing
0.5
Loan charge-oft rate
complaints from both industry and
(leff axis)
2
supervisory officials that lending terms
0.0
1
1987
1989
1991
1993
and standards have become too lax.
1995
1997
Because its normal supervisory process was not
indicating any unusual amount of underwriting
weakness, the Fed conducted a special intensive study
of domestic commercial and industrial loans. This
study verified that competition appeared to be
encouraging banks to offer more favorable loan
pricing, longer maturities, and other favorable loan
conditions. However, these tendencies towards easing
lending standards were mostly offset by improved
(current) financial performance among many
borrowers. On balance, the examiners found no
evidence of significant deterioration in the credit
quality of loans made in 1997 compared with those
made in 1995.
Why the warning? The Fed's concern is that banks
are not sufficiently forward-looking in their loan
assessments. In particular, the current strength of the
economy has contributed to the strong cash flow and
solid balance sheets presented by borrowers. Without
adequate attention to what might happen under more
adverse circumstances, lending could become too
risky. In other words. the Fed does not see a major
problem now but worries that many of today's loans
could become problems if the economy were to
weaken
Weekly Economic Briefing
1
July 10. 1998
EYES ONLY
SPECIAL ANALYSIS
Living Arrangements of Elderly Widows
Today 79 percent of unmarried elderly women are widows. Surveys indicate that a
majority of elderly widows would prefer to live alone rather than move in with their
children, and a recent study shows that the proportion of elderly widows living by
themselves has increased dramatically over the past century. The main cause has
been improvements in economic status. Nevertheless. the poverty rate of elderly
widows remains substantially higher than that of elderly persons in general.
Trends. The share of (noninstitutionalized) elderly widows living alone stayed
roughly constant at a low level (10 to 15 percent) for several decades prior to the
Living Arrangements of Elderly Widows
enactment of Social Security in 1935 (see
80
Alone
(Green Book series)
upper chart). But between 1940 and
70
1980, the share living alone increased
60
With children
(Census series)
sharply, while the share living with adult
50
Percent
children fell. By 1980, 65 percent were
40
Alone
living by themselves, and only 24 percent
30
(Census series)
shared a home with their children. This
20
strong upward trend ended in 1980, and
10
living arrangements in 1995 were fairly
0
similar to those in 1980.
1880
1900
1920
1940
1960
1980
2000
What caused the change? The study found that rising economic status, primarily
due to greater coverage and higher benefits from Social Security, accounted for
62 percent of the increase in the share of elderly widows living alone between 1940
and 1990. About 9 percent of the change was explained by a decline in the number
of children available for widows to move in with.
Poverty Rates for the Elderly
40
Poverty status. Widows, like elderly
people generally, have seen their poverty
35
rate decline substantially over the past
30
three decades (the longest period for
Percent
25
Widows
which consistent data are available).
20
However, the poverty rate for widows
An Elderly
15
(who account for 27 percent of all elderly
persons) was a relatively high 19 percent
10
/
Non widows
in 1997-more than twice the rate for all
5
1970
1975
1980
1985
1990
1995
other elderly persons (see lower chart).
Implications. The primary source of income for most widows is Social Security.
In 1990, two-thirds of widows derived at least half their total income from Social
Security benefits. Thus, Social Security reform, including changes in survivor's
benefits. will be particularly important for this population.
Weekly Economic Briefing
2
July 10. 1998
EYES ONLY
SPECIAL ANALYSIS
Foreign-Born Women in the U.S. Labor Market
Several studies have examined the labor market performance of male immigrants, but
almost half of all immigrant workers are women. A recent study that does look at
women found substantial differences in labor force participation. unemployment, and
wages among immigrants born in different countries. These differences are highly
correlated with disparities in education among immigrant groups.
Immigration trends. The share of the population that is foreign-born rose from
4.8 percent in 1970 to 9.7 percent in 1997. At the same time, the importance of
different countries as sources of immigrants has been changing. Whereas 31 percent
of U.S. immigrants were from Europe in 1970, the share from Europe fell to
18 percent by 1995, with 37 percent coming from Asia and 12 percent from Mexico.
Women's labor force participation and unemployment. In 1990, 66 percent of
working-aged (25 to 60-year old) female immigrants participated in the labor force,
compared with 73 percent for U.S.-born women (see upper chart). Unemployment
Women's Unemployment and Labor Force Participation
was more common among foreign-born
Philippines
women. Their unemployment rate was
Central
Amenca
7.9 percent. compared with 4.8 percent
U.K/Canada
for U.S.-born women. (These estimates
Other Europe
are from the 1990 census; more recent
Japan/Korea/
China
surveys do not provide large enough
Mexico
day
samples for accurate estimation.)
All foreign-born
Rates for
U.S.-born
Although foreign-born women as a whole
women
20
15
10
5
0
20
40
60
80
100
Unemployment rate
Labor force participation rate
have relatively high unemployment rates,
(percent)
(percent)
immigrants from some countries do very
well. As shown in the chart, most groups' labor force participation rates are very
similar to that of U.S.-born women, and their unemployment rates are comparable.
However, immigrants from Mexico and Central America, who accounted for 19
percent and 6 percent, respectively, of all immigrant women in 1990, faced double-
digit unemployment rates in 1990.
Education and Wages of Women
130
Education and earnings. In 1990,
120
Philippines
U.K./Canada
working-aged foreign-born women had,
Weekly wages relative to U.S.-born
110
on average, 1.7 fewer years of schooling
Japan/Korea/China
100
Europe
than U.S.-born women (see lower chart).
U.S.-born
90
Thus, it is not surprising that immigrant
All foreign bom
women earned wages that were
80
14 percent lower. The wage gap was
70
Mexico
particularly high for Mexican women,
Contral America
60
7
8
9
10
11
12
13
14
15
who earned just 67 cents on the dollar
Years of schooling
relative to .S.-born women. This large
Weekly Economic Briefing
3
July 10. 1998
EYES ONLY
difference reflects very low levels of schooling among Mexicans: in 1990. average
education was just 7.6 years for Mexican women, while U.S.-born women averaged
12.9 years. The study found that the differences in completed years of schooling
explained 87 percent of the earnings gap for Mexicans.
At the same time, some women have performed very well. On average, immigrants
from the U.K. and Canada, the rest of Europe, Japan, Korea, and China, and the
Philippines earned wages that were higher than those earned by U.S.-born women.
Again, education is the key factor. As shown in the chart, foreign-born women with
higher wages have completed more schooling.
Implications. Women account for 42 percent of all foreign-born workers. Many
immigrant women are doing quite well in the labor market, earning wages
comparable to those of U.S.-born workers soon after arriving in the United States.
However, Mexican and Central American women earn much less due to their
relatively low levels of schooling, and they have high unemployment. These two
groups accounted for only 10 percent of all foreign-born women living in the United
States in 1970. But by 1990 this share had increased to 25 percent, and immigration
from these countries has continued to grow in the 1990s. This suggests that
aggregate gains among women in the labor market in the last decade were somewhat
attenuated by the increasing share of foreign-born workers with lower levels of
education.
Weekly Economic Briefing
4
July 10, 1998
EYES ONLY
ARTICLE
Time As Money: A Perspective on Productivity
The average manufacturing worker earned less than $9 per week in 1897, compared
with more than $13 per hour in 1997. Of course, a substantial amount of the increase
in manufacturing wages between 1897 and 1997 reflects a rise in the overall price
level. But productivity advances kept the prices of a large number of goods from
increasing as fast as wages, with the result that the purchasing power of the money
earned from an hour's work increased substantially.
Productivity, prices, and purchasing power. Analytically, changes in the real
wage are calculated by comparing changes in the money wage with changes in a
weighted average index of prices for a wide variety of goods and services. A new
study from the Dallas Federal Reserve takes a more colorful (but more
impressionistic) approach by calculating long-term changes in the amount of time it
would take a typical manufacturing worker to earn enough to buy a wide variety of
individual items. This approach is easily implemented for some items (a 3-pound
fryer chicken is a 3-pound fryer chicken), but in other cases the issue of quality
change is important. A 1997 Ford Taurus might be compared with a 1908 Model T,
for example, or today's 1/5-pound Big Mac might be compared with the 1/8-pound
burgers served by the McDonald brothers in 1940.
Food. Looking at basics, the report calculates the work time required to buy a
12-item food basket containing staples like a half-gallon of milk, a dozen eggs, a
pound of bread, 5 pounds of sugar, and a pound of ground beef. In 1919 it would
have required a long day's work (9.5 hours) to buy such a basket; this fell to
3.5 hours in 1950 and only 1.6 hours in 1997. A 3-pound fryer chicken, which was
relatively expensive at $1.23 in 1919, was relatively cheap at $3.15 in 1997. This
shows up in the dramatic drop in time cost-from 2 hours 37 minutes to just
14 minutes.
Shelter. The median price of a house in 1920 was $4,700. This rose to $14,500 in
1956 and $140,000 in 1996. This increase is larger than the increase in wages. But
houses have gotten bigger. (The average new home in 1996 had the equivalent of
two additional 12x15 foot rooms than the average new house in 1970; it had almost
twice the number of square feet as the average new home in 1920.) The labor time
required per square foot of housing fell from 7.8 hours per square foot in 1920 to
5.6 hours per square foot in 1996. Although the time cost today is slightly higher
than it was in 1970, today's home is more likely to come with central heat, air-
conditioning, and other amenities included in the basic price.
Clothing. In 1927 Charles Lindberg toured the country in a $42.95 suit provided by
Hart Schaffner & Marx. In 1997, the company's suits cost about $525. But a man
would have had to work 79 hours to afford the 1927 suit, compared with 40 hours in
1997. At the other end of the clothing spectrum, the work-time cost of a pair of Levis
Weekly Economic Briefing
5
July 10, 1998
EYES ONLY
jeans has fallen to about a third of what it was in 1900. Today's work-time cost is
somewhat higher than its all-time low in 1971, but the report argues that jeans have
moved from being designed for work to being designed with fashion, fit, and comfort
in mind (which it identifies with higher quality).
The automobile. The Ford Model T was one of the country's first affordable cars.
The 1908 model cost $850, or over 4,500 hours of work for the typical factory
worker (almost 2 years, given the average work week of about 50 hours). A 1997
Ford Taurus costing about $18,000 required about 8 months of work (at 40 hours per
week). Paying for a gallon of gasoline required about a half hour's work in 1920 but
only about 5 minutes' work in recent years.
New products. The report illustrates how dramatic productivity and price
improvements can be following the introduction of a new product. In 1972 a VCR
cost about $1,400 (365 hours of work); in 1997 a VCR cost about $200 (15 hours of
work). IBM's Mark I computer cost about $200,000 to build in 1944 and could do
about 3 calculations per second. In 1997, a $1,000 PC could do 166 million
instructions per second (MIPS). Between 1984 and 1997 alone, the work-time cost
per MIPS fell from 52 hours to 27 minutes.
What's up? Not everything has come down in price. Medical costs have, of course,
increased. And tuition and fees at public colleges and universities have roughly
doubled in terms of work time since the mid-1970s. (The increase has been even
greater at private institutions). However, the medical and educational dollars also
appear to be buying more than they used to. The report points out, for example, that
the wage premium associated with a college degree has also increased since the mid-
1970s.
Conclusions. Looking at long-term changes in the amount of work time it takes to
purchase a wide variety of goods and services illustrates in a more colorful way many
of the issues involved in formal analyses of productivity, price changes, and the cost
of living. For example, reductions in the time-cost of purchasing many specific items
have flattened out considerably since the early 1970s, reflecting the general
productivity slowdown at that time. (To be sure, productivity and price
improvements are still dramatic in areas like computing and home electronics.) In
addition, education and medical services illustrate the lack of measured productivity
growth and the difficulty in accounting for quality changes in key service sectors.
Weekly Economic Briefing
6
July 10, 1998
EYES ONLY
BUSINESS, CONSUMER, AND REGIONAL ROUNDUP
Mergers and Acquisitions Reach Record Level in the First Half of 1998.
Announced domestic merger and acquisition (M&A) activity reached an
unprecedented $973 billion, from over 5,300 deals, in the first half of 1998. This
value already exceeds 1997's record total of $920 billion (though merger activity in
the mid-1980s was larger as a share of the market value of U.S. companies than last
year's dollar-record level). Triggering this surge was an unprecedented volume of
activity during the second quarter of 1998. Nearly $700 billion in announced
domestic deals occurred in the past 3 months, more than double the previous
quarterly record for domestic M&As set during the fourth quarter of 1997.
Commercial banking was the leading sector for announced activity in the first half
of 1998 with nearly $216 billion from 212 deals, followed by the telecommunications
sector with about $122 billion from 137 transactions, and the radio and television
industry with over $86 billion from 138 deals.
Marginal Tax Rates Remain Low. Marginal Federal income tax rates, which fell
dramatically over the 1980s, have remained low for the vast majority of taxpayers,
according to a recent study by economists at the Urban Institute, the Brookings
Institution, and the Congressional Budget Office. In 1980, three-quarters of
taxpayers faced statutory tax rates above 15 percent, but by 1995 less than one-
quarter of taxpayers were in that situation. The proportion of taxpayers facing rates
of 28 percent or less rose from 57 percent in 1980 to 96 percent in 1995. The study
shows that the higher tax brackets introduced in the 1990 and 1993 reforms affected
very few taxpayers. Only 3 percent faced marginal rates of 31 or 36 percent, while
just one-half of 1 percent were in the highest bracket of 39.6 percent. The results
suggest that growing prosperity, not higher rates, is responsible for the recent
increase in total personal tax payments. The study considers only Federal personal
income taxes and not other Federal or state and local taxes.
States Refocus Welfare Systems toward Work. While the Nation's welfare
caseload fell by more than a quarter between 1996 and 1998, overall state spending
on welfare decreased by less than 10 percent, and state spending on child care and job
readiness training rose sharply. According to the National Governors' Association's
Fiscal Survey of States, state spending on child care increased by more than
50 percent during the period (from 15 percent of total welfare expenditures to
23 percent), and spending on services that promote self-sufficiency-training
education, job placement, and subsidized employment-increased by more than
30 percent (from 5 percent of total expenditures to 7 percent). The welfare-to-work
program of Portland, Oregon, may be a model of the refocused welfare system.
According to an HHS-sponsored study, the program was strongly employment-
focused-emphasizing job search for "good" jobs-though it utilized a mixed service
strategy, including short-term education, vocational training, work experience. and
life-skills training. The program raised employment levels by 11 percentage points
over 2 years (relative to a control group), increased earnings by 35 percent, and
reduced welfare expenditures by 17 percent.
Weekly Economic Briefing
7
July 10, 1998
EYES ONLY
INTERNATIONAL ROUNDUP
Can A New Central Bank Chief Halt the Slide of the Rand? In the wake of
renewed turbulence in emerging markets, South Africa's rand has come under
pressure. Since May 1, the rand has lost about 20 percent of its value. Perhaps
hoping to restore market confidence, the government announced the successor to the
central bank governor this weekend, 1 year before the appointment is due to take
effect. The nominee is the current labor minister, an ANC politician with no banking
experience. The initial market reaction to the appointment was adverse. On Monday
the rand fell to a new low against the dollar, but it has since recovered somewhat.
Although there are signs of some deterioration in fundamentals, many feel the rand
may have overshot its "fair value" (although they also expect it may continue to fall
in the short term under continuing speculative pressure). Investors seem to be
keeping close watch on South Africa's thin reserves, which fell to about $5.5 billion
at the end of June. Net reserves may be even lower, as the reported gross figures
include about $3 billion in foreign borrowing and ignore central bank commitments
made in forward market operations to support the rand. The bank's foreign exchange
liabilities in forward markets now exceed current reserves by $22.5 billion, up
sharply from $12.8 billion 2 months ago.
Romanian Reform Goes Back to the Future. Romania's private sector produces
less than 60 percent of national output. This is one of the lowest shares in Central
and Eastern Europe and a testament to the trouble the country has had achieving
privatization and economic reform. Popular dissatisfaction with the pace of reform
led to a new government with a new reform program in 1996, but coalition wrangling
over tough political decisions stalled those efforts. The new government that took
office earlier this year inherited an economy that had shrunk 6.6 percent last year
while experiencing inflation of over a 150 percent. Pledges by Prime Minister Visile
to push through privatization have renewed the promise of reform, but recent reports
suggest that little has changed in the basic political landscape. A $410 million
financing agreement with the IMF was put on hold after Romania's program started
to go off track last fall, but the IMF is ready to negotiate a new program if it sees
credible commitments to bring the budget deficit under control and restart the
structural reform process. IMF officials remain skeptical, however.
As Goes MERCOSUR, So Goes Uruguay. After a recession in 1995, Uruguay has
recorded two consecutive years of rapid growth (5 percent in 1996 and 6 percent in
1997). This growth was largely attributable to buoyant demand from its major
trading partners and fellow MERCOSUR members, Argentina and Brazil. Between
1990 and 1996, the share of Uruguayan exports to MERCOSUR countries increased
from one-third to almost one-half. Although events in Asia have had no significant
direct impact on Uruguay to date. both Brazil and Argentina are in vulnerable
positions, and it is likely that either devaluations or the protracted defense of the
currency in one or both of these countries could cripple Uruguay's expansion.
Weekly Economic Briefing
8
July 10. 1998
EYES ONLY
RELEASES THIS WEEK
Producer Price Index
**Embargoed until 8:30 a.m., Friday, July 10, 1998**
The producer price index for finished goods fell 0.1 percent in June.
Excluding food and energy, producer prices rose 0.2 percent.
MAJOR RELEASES NEXT WEEK
Consumer Prices (Tuesday)
Retail Sales (Tuesday)
Industrial Production and Capacity Utilization (Thursday)
U.S. International Trade in Goods and Services (Friday)
Weekly Economic Briefing
9
July 10. 1998
EYES ONLY
U.S. ECONOMIC STATISTICS
1970-
1993
1997
1997:3
1997:4
1998:1
Percent growth (annual rate)
Real GDP (chain-type)
2.7
3.7
3.1
3.7
5.4
GDP chain-type price index
5.4
1.8
1.4
1.4
1.2
Nonfarm business (NFB) sector:
Productivity (chain-type)
1.5
2.1
3.6
1.4
1.1
Real compensation per hour:
Using CPI
0.6
2.2
1.8
3.1
3.7
Using NFB deflator
1.3
2.5
2.7
3.9
3.5
Shares of Nominal GDP (percent)
Business fixed investment
10.9
10.5
10.7
10.6
10.7
Residential investment
4.5
4.1
4.1
4.1
4.2
Exports
8.2
11.8
11.9
11.9
11.5
Imports
9.2
13.1
13.3
13.2
13.1
Personal saving
5.3
2.8
2.6
2.9
2.6
Federal surplus
-2.7
-0.4
-0.1
-0.1
0.6
1970-
April
May
June
1993
1997
1998
1998
1998
Unemployment Rate (percent)
6.7**
4.9**
4.3
4.3
4.5
Payroll employment (thousands)
increase per month
320
309
205
increase since Jan. 1993
16246
Inflation (percent per period)
CPI
5.8
1.7
0.2
0.3
N.A.
PPI-Finished goods
5.0
-1.2
0.2
0.2
-0.1
**Figures beginning 1994 are not comparable with earlier data.
New or revised data in boldface.
PPI data embargoed until 8:30 a.m., Friday, July 10, 1998.
Weekly Economic Briefing
10
July 10. 1998
EYES ONLY
FINANCIAL STATISTICS
May
June
July 9,
1996
1997
1998
1998
1998
Dow-Jones Industrial Average
5743
7441
9080
8873
9090
Interest Rates (percent per annum)
3-month T-bill
5.01
5.06
5.00
4.98
4.94
10-year T-bond
6.44
6.35
5.65
5.50
5.41
Mortgage rate, 30-year fixed
7.80
7.60
7.14
7.00
6.91
Prime rate
8.27
8.44
8.50
8.50
8.50
INTERNATIONAL STATISTICS
Exchange Rates
Current level
Percent Change from
July 9, 1998
Week ago
Year ago
Deutschemark-Dollar
1.831
0.4
3.9
Yen-Dollar
141.3
-0.1
25.1
Multilateral $ (Mar. 1973=100)
102.7
0.5
6.9
Real GDP
Unemployment
CPI inflation
International Comparisons 1/
growth
rate
(percent change in index
(percent change last 4 quarters)
(percent)
last 12 months)
United States
3.9 (Q1)
4.5 (Jun)
1.7 (May)
Canada
3.8 (Q1)
8.4 (May)
1.3 (May)
Japan
-3.7 (Q1)
4.2 (Apr)
0.5 (May)
France
3.4 (Q1)
12.0 (Apr)
1.0 (May)
Germany
3.0 (Q1)
2/ 7.6 (Apr)
1.3 (May)
Italy
2.5 (Q1)
12.4 (Apr)
1.7 (May)
United Kingdom
2.9 (Q1)
6.4 (Mar)
4.2 (May)
1/ For unemployment data, rates approximating U.S. concepts as calculated by the U.S. Department of Labor, Bureau of Labor
Statistics.
2/ Rate for former West Germany. Using OECD standardized unemployment data. the unemployment rate for unified Germany for
April 1998 is 10.0 percent.
Weekly Economic Briefing
11
July 10. 1998
EYES ONLY
WEEKLY ECONOMIC BRIEFING
OF THE PRESIDENT OF THE UNITED STATES
Prepared by the Council of Economic Advisers
with the assistance of the Office of the Vice President
June 19, 1998
CHART OF THE WEEK
The Current Account Balance
2
Balance on
Balance on services
investment income
1
0
Percent of GDP
Overall balance on
current account
-1
-2
-3
Balance on goods
-4
1979 1981 1983 1985 1987 1989 1991 1993 1995 1997
The current account deficit widened again, to $47.2 billion in the first quarter. in dollar
terms, this is the second record quarterly deficit in a row-though deficits were much
larger as a share of the economy in the mid-1980s. The current account deficit reflects
the rate at which U.S. residents must borrow from abroad to finance spending in excess
of income. In addition to trade in goods and services, which is reported monthly, the
current account deficit includes investment income and unilateral transfers (public and
private remittances).
EYES ONLY
CONTENTS
MACROECONOMIC UPDATE
Growth May Be Moderating
1
SPECIAL ANALYSES
Placing a Value on Improvements in Health
3
Life Insurance: Profiles in Coverage
5
ARTICLE
The Malthusian Economics of Easter Island
6
DEPARTMENTS
Business, Consumer, and Regional Roundup
8
International Roundup
9
Releases
10
U.S. Economic Statistics
11
Financial and International Statistics
12
100
,
"Sure, we doctors make a lot of money. But,
don't forget, we spend a heck of a lot, too."
EYES ONLY
MACROECONOMIC UPDATE
Growth May be Moderating
The supercharged pace of growth over the past year
may be moderating.
Employment and output. Increases in production-
worker hours appear to have slowed to a 1½ percent
annual rate in the second quarter (see upper chart). In
addition, unemployment insurance claims have edged
up recently-though they remain very low.
Consistent with the high and rising dollar, the
Production-Worker Hours
slowdown in production is most notable
5
in manufacturing, where output has
4.1
4
3.9
grown more slowly than in the economy
Percent change at an annual rate
3.3
3.4
as a whole so far this year.
3.2
3
2.3
Demand. Available data hint that
2
inventories and net exports are the
1.2
(est.)
1
components of demand that are slowing.
Inventory investment was very high in the
0
first quarter, and second-quarter stock
96:Q4
97:Q1
97:Q2
97:Q3
97:Q4
98:Q1
98:Q2
building is likely to fall back towards a
Exports and Imports of Goods and Services
95
more normal pace. Retail sales in May
show that consumption continues to grow
90
at full throttle-with particularly rapid
85
Imports
spending on motor vehicles. But to the
Billions of dollars
80
extent that consumers are buying goods
produced abroad, import growth may
Exports
75
partly offset the boost from
70
consumption-as it did in the first
quarter. Weakness in the Asian
65
1996
1997
1998
economies appears to be reducing exports
as well (see lower chart).
The GM strike. The ripple effects of the strike by
two United Auto Workers locals are expected to shut
down almost all of General Motors' production by the
end of this week. Without a strike, real GDP might
have grown at around a 3 percent annual rate in the
second quarter. But with a strike continuing through
the end of the quarter, the CEA estimates that real
growth would be about 0.6 percentage point less.
Unless the strike is prolonged well beyond the end of
June, these output losses could be recouped later in
Weekly Economic Briefing
1
June 19, 1998
EYES ONLY
the year so that the net effect would simply have been
to shift output from one quarter to another.
Prices and wages. Inflation has picked up slightly in
recent months. Although core CPI inflation has fallen
Core CPI Inflation
0.3 percentage point over the past year,
7
the core CPI increased at a 2.7 percent
6
annual rate in the 6 months ending in
12-month change
May-up from a 1.9 percent annual rate
5
during the preceding 6-month period (see
Percent
4
chart). Nevertheless, inflation remains
6-month
change
relatively low and under control. As a
3
result, increases in nominal wages have
2
translated into healthy increases in real
1
wages, which are up 2.8 percent over the
1990
1991
1992
1993
1994
1995
1996
1997
1998
past 12 months.
Weekly Economic Briefing
2
June 19, 1998
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SPECIAL ANALYSIS
Placing a Value on Improvements in Health
Increases in expenditures for health care have been substantial over the past three
decades, but have they been "excessive"? The answer depends on the value of health
benefits that have flowed from these expenditures. A definitive assessment is
impossible, but a recent study finds very large increases in the value of total
improvements in health between 1970 and 1990, suggesting that increases in health
expenditures may well have been cost effective, on average.
Health improvements. From 1970 to
Life Expectancy
84
1990, the health of the population
At age 65
82
improved markedly. Life expectancy at
birth rose from 70.8 to 75.4 years, and
80
Life expectancy in years
life expectancy at age 65 rose from
78
80.2 to 82.2 (see chart). The quality of
76
At birth
health at a given age has also improved.
74
Although, the prevalence of chronic
conditions has increased because people
72
are living longer, improved medical
70
1970
1975
1980
1985
1990
1995
technology lets those with many of these
conditions enjoy a better quality of life.
Valuing longevity and health. Attaching a dollar value to changes in health and
longevity is inherently difficult and likely to result in a wide range of estimates. One
strategy pursued in several studies is to look at how much individuals are willing to
pay for technologies-such as smoke detectors-that reduce their mortality risk, or
how much additional pay individuals demand to work in riskier jobs. Another
approach is to use evidence from surveys that ask individuals directly how much they
would pay for hypothetical health improvements. The new study uses a central
estimate from this literature of $100,000 per additional year of life in perfect health.
The authors then adjust this value to reflect the prevalence and impact of several
chronic diseases. An individual's "health capital" is the present discounted value of
expected future "quality-adjusted" years of life. The authors construct estimates of
health capital for newborns and 65 year-olds in 1970 and 1990. Changes over time
in the value of health capital provide a measure of the value of health improvements.
Results. The study estimates that health capital for an individual born in 1990 was
about $95,000 greater than that for an individual born in 1970. The value of health
improvements were even greater for older people; for a 65 year-old, the value of
health capital was about $170,000 greater in 1990 than in 1970. To compare the
costs and benefits of medical spending, the change in health expenditures must be
measured in comparable present discounted value terms at birth and at age 65. The
study estimates that the present discounted value of expected lifetime medical
Weekly Economic Briefing
3
June 19, 1998
EYES ONLY
spending at birth rose $25,000 between 1970 and 1990, and the present discounted
value of remaining health spending at age 65 rose by $45,000 over the same period.
Is medical care worth the cost? In addition to advancements in medical
technology, many factors including smoking, diet, exercise, and environmental
quality influence the health of the population. The authors compare changes in
health capital to changes in expected lifetime health spending. The cost and health
estimates imply that the additional medical spending was, on average, worth it if
advancements in medical care were responsible for at least 30 percent of the observed
improvements in health. Since these are estimates of the average cost-effectiveness
of medical care, they do not imply that every treatment or procedure has been cost-
effective.
Conclusion. There are signs that health expenditures may have begun rising more
quickly after several years of slow growth-though growth rates recently still do not
approach the double-digit growth rates of the 1980s. But it is important to bear in
mind the health improvements that additional spending may provide, even though
estimating the value of those potentially large health benefits is difficult.
Weekly Economic Briefing
4
June 19, 1998
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SPECIAL ANALYSIS
Life Insurance: Profiles in Coverage
A recent New York Times article suggested that people are forgoing the life insurance
coverage that once protected families in the event of the death of a policyholder. In
fact, life insurance coverage has declined only modestly: 78 percent of households
owned life insurance in 1992, compared with 83 percent in 1960. What has declined
is usage of those types of life insurance that can also serve as tax-deferred savings
shelters or tax-exempt bequests.
Types of life insurance. Term life insurance provides life insurance for a specified
period of time, with annual premiums increasing with the life of the policyholder.
Cash value life insurance policies (such as whole life), in contrast, charge a constant
annual premium throughout the life of the policy. The premium charged in the early
years is higher than the actual cost of the insurance coverage; the excess amount of
the premium is held in reserve as the policy's cash value, and this cash value grows
over time from investment earnings. A policyholder who surrenders a cash value life
policy receives the cash value contained in the policy at the time of surrender. Over
the last 15 years, there has been a trend in life insurance purchases away from cash
value polices and toward term policies.
Why buy life insurance? Both term and cash value policies provide insurance for
dependents of the policyholder against financial hardship in the event of the
policyholder's death. But cash value life insurance also serves as a savings vehicle.
Because the assets in a cash value policy earn interest that is not taxed as it is
accumulated, a cash value policy serves as a tax-deferred way of saving. In addition,
Federal income and estate taxes can be avoided on money received under a life
insurance contract paid by reason of the death of the insured-including the
investment income earned on the accumulated cash value. Thus, families with
substantial wealth can use cash value life insurance to reduce Federal estate taxes.
Explaining changing patterns of life insurance. There do not appear to be any
careful studies of why the demand for the savings features of whole life may have
decreased. Lower tax rates may have diminished the attractiveness of tax-deferred
savings vehicles. In addition, the development of other attractive tax-deferred
savings vehicles, such as IRAs (which were not widely available until 1981) and
variable annuities, may have reduced demand for cash value life insurance.
Consumer awareness about alternative savings vehicles that offer better returns than
cash value life insurance may also have increased.
Conclusion. Life insurance has traditionally served multiple functions, offering not
only insurance in the event of death but also a tax-deferred savings vehicle and a tax-
exempt bequest vehicle. Americans are covered by insurance against death in
roughly similar proportions as always, but they appear less willing than in the past
to buy policies that bundle other features together with basic insurance.
Weekly Economic Briefing
5
June 19, 1998
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ARTICLE
The Malthusian Economics of Easter Island
Thomas Malthus warned in 1798 that the tendency for growth in population to
outstrip growth in the means of subsistence could end in disease, famine, and
poverty. Two centuries of impressive gains in living standards, accompanied by
rapid population growth and stability (or even decline) in the relative prices of
resources and primary commodities have left most economists skeptical of the
Malthusian logic. But an intriguing new analysis of the rise and decline of Easter
Island suggests that a Malthusian outcome can occur when natural resource
degradation occurs gradually, when the payoff from taking action is long-deferred,
and when cooperation on a large scale is required.
The mystery of Easter Island. At the time of its discovery by Europeans in 1722,
Easter Island was a Polynesian island with a "late stone age" culture. Enormous
carved stone statues, resting on large platforms around the island, bore witness
though, to a past in which the island was both richer and more populous. The statues
had been moved substantial distances from the island's lone quarry to their
destinations; but observers estimated the population of the island at 3,000 in
1722-far too small to have transported the larger statues without appropriate tools.
Moreover, the island had no trees suitable for making such statue-transport
equipment. Local residents believed that the statues had walked to the platforms
under the influence of a spiritual power.
What happened? A variety of theories have been advanced to explain the Easter
Island mystery, but recent archaeological evidence suggests that after perhaps a
thousand years of peace and prosperity, Easter island suffered a Malthusian fate. Its
population rose above a sustainable level, the environment was degraded to the point
it could no longer support its population, the social order disintegrated, and the
civilization crashed.
The depletion of the palm forest. Easter Island was apparently settled around 400
A.D., at a time when great palm forests flourished. These forests were a nesting
place for birds, a source of food. The palms also likely provided the wood needed
for tools and for canoes used to fish. With abundant food, the population had ample
time for artisan activities including carving and moving statues. As Malthus would
predict, population grew rapidly. The statues appear to have been carved between
1100 and 1500 A.D.
The pollen record points to noticeable forest reduction by about 900 A.D., although
the pace of forest loss was probably gradual enough to have been imperceptible to the
typical Easter Island resident over his 30-year expected lifespan. By 1400 the palm
forest was gone. Diet changed for the worse (less fish and hence less protein) with
the depletion of the forests, and soil erosion lowered agricultural yields. With falling
food consumption, carving activity declined and ultimately ceased. The islanders
Weekly Economic Briefing
6
June 19, 1998
EYES ONLY
developed dagger-like weapons and began inhabiting caves and fortified dwellings,
suggesting violent internecine conflict. By 1774, some statues that were still
standing in 1722 had been knocked over, statue worship had disappeared, and the
population had further declined in size.
Why Easter Island? If the Malthusian theory applies to Easter Island, how did other
Polynesian islands, with similar demographics, culture and technologies, escape the
same fate? A likely explanation relates to the particular species of palm tree (Chilean
Palm) indigenous to Easter Island but found nowhere else in Polynesia. The Easter
Island palms are particularly slow-growing, requiring 40 to 60 years to bear fruit. In
contrast, the palms found elsewhere in Polynesia reach fruit-growing age in 7 to
10 years. More rapid forest growth implies a greater likelihood that regeneration of
a shrinking resource base can occur, which would contribute to other islands' being
able to avoid the dramatic collapse suffered on Easter Island. Depletion on Easter
Island, once it occurred, would not quickly be reversed. Moreover, the investments
needed to rebuild Easter Island's resource base would have produced payoffs for the
island's descendants but not for the inhabitants themselves.
Other Malthusian episodes? Recent archaeological evidence suggests that the
Easter Island experience was probably not unique. Environmental decline may have
precipitated the collapse of the Mayan, Mesopotamian and Chaco Anasazi
(southwestern United States) cultures. In each case, decline of the resource base,
particularly soil degradation, precipitated a population crash and the decline of a
complex civilization. More recently, the violent Rwandan conflict between Hutus
and Tutsis could also have been related to resource competition. Between 1950 and
1994, advances in health care and agricultural practice raised real incomes but also
increased fertility, resulting in a quadrupling of the population in Rwanda. By the
1980s conflicts over land had increased in severity, and may have precipitated civil
war.
Implications. In modern times, technological progress, reduced fertility in the face
of rising income, and the evolution of more effective resource management
institutions-including well-defined property rights and international agreements to
prevent "overgrazing of the commons"-have normally short-circuited the
Malthusian dynamic. However, adaptive responses become more difficult when
environmental degradation occurs gradually, when the payoff from environmental
protection is long-deferred, and when cooperation on a large scale is
needed-conditions that are all present, for example, in the case of global warming.
Thus, Easter Island provides a cautionary tale about the possibility of Malthusian
outcomes in the absence of appropriate institutions and effective policy responses.
Weekly Economic Briefing
7
June 19, 1998
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BUSINESS, CONSUMER, AND REGIONAL ROUNDUP
Beige Book: U.S. Economy Continues Its Excellent Performance. The economy
continued to grow in all Federal Reserve districts and across most sectors, according
to the Fed's latest summary of commentary on current economic conditions. The
pace of growth varied across Federal Reserve districts, ranging from quite strong in
the Northeast, much of the Midwest and the West Coast, to somewhat more modest
in the Southeast and in the Dallas district. Growth was fueled by liberal consumer
spending and by business investment in plant and equipment. The construction
sector was very strong. Manufacturing was robust in several districts, notably
Chicago, St. Louis, and Kansas City, but somewhat weaker in an arc from Dallas
through Atlanta and Richmond. In agriculture, crop conditions were generally
favorable, but prices were low. Oil and gas drilling continued to be slack, while
output in other natural resource industries was generally stable. Seven districts
reported some adverse effects from economic problems in Asia.
New Evidence on Family Structure and Educational Attainment. Numerous
studies have found that living outside a traditional two-parent family has a negative
effect on high school completion. However, a new study has found that the lower
probability of high school graduation among children living with a divorced,
separated, or widowed mother stems primarily from the reduced level of economic
resources available to these families. (There were not enough never-married mothers
in the sample to evaluate such families.) After taking economic status into account,
living in with a divorced, separated, or widowed mother had little or no effect on the
high school graduation rates of white males, white females, or black males. Such a
family structure did have a slight negative effect on the educational attainment of
black females, however, even after economic status was taken into account. Finally,
the study found evidence that living in a mother-stepfather family slightly reduced
the probability of high school graduation among all groups studied except black
males. The author suggests that this effect may be attributable to the increased stress
frequently associated with remarriage.
Homeownership Encourages Good Citizenship. Homeownership is strongly
correlated with variables associated with good citizenship, according to a recent
study. Controlling for factors such as age, race, gender, income, marital status, and
having children, homeowners in the United States are 10 percent more likely than
renters to work to solve local problems or know their local congressman by name.
They are also more likely to know the identity of their school board head, vote in
local elections, attend church, and join nonprofessional organizations. The study
warns, however, that any judgment about the appropriateness of policies to encourage
homeownership (including current tax policy) would require quantitative estimates
of these homeownership benefits (which the study does not provide) as well as their
costs, both in absolute terms (homeownership reduces mobility in the face of
economic shocks) and relative to alternative policies to promote good citizenship.
Weekly Economic Briefing
8
June 19, 1998
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INTERNATIONAL ROUNDUP
CBO Assesses Antidumping Actions Here and Abroad. U.S. antidumping law
imposes duties on imports that are sold here below their estimated cost of production,
or below their price in the seller's domestic market, when such "dumped" imports
cause "material injury" to the competing U.S. industry. A recent study by the
Congressional Budget Office finds that the United States has taken antidumping
action against other countries far more than they have against us and that, unlike
other industrialized countries, the United States substantially increased its
antidumping activity over the 1979-95 period covered by the study. However, U.S.
antidumping policy may be coming back to haunt U.S. exporters. Many developing
countries that now find their protectionist policies increasingly restricted by WTO
discipline are starting to follow the U.S. lead in imposing antidumping duties.
However, evidence suggests that in general U.S. firms are not singled out in foreign
antidumping cases: In 16 of the 18 countries for which data were available, the share
of U.S. imports was higher than the share of antidumping actions taken against the
United States. The report also concludes that the application of antidumping duties
to upstream goods (those used as inputs in the further production of other goods) is
high enough in some cases to disrupt markets and create a significant disadvantage
to downstream users. In the United States, two-thirds of the products covered by
active antidumping measures are upstream goods, with average duties ranging from
32 percent on intermediate goods to 52 percent on raw and processed materials.
Will Europe Be a Locomotive of Growth? Economic growth in the EU was
3.1 percent over the last four quarters, an increase from the 2.9 percent registered at
the end of 1997, and not too far below the U.S. growth rate of 3.7 percent, according
to preliminary estimates of first quarter GDP released this week by the EU Statistical
Office. Inflation edged up slightly in April but remained low (1.6 percent at an
annual rate). Some European commentators have suggested that these trends are an
encouraging sign that a broad recovery is underway, but such proclamations may be
premature. Almost half of this growth occurred between the first and second quarters
of 1997 (growth in the second quarter was 5.7 percent at an annual rate). For the last
three quarters, output in the EU has consistently grown at a pace closer to 2 percent
at an annual rate, suggesting that a plateau has been reached. April unemployment
numbers support this interpretation-unemployment stands unchanged from March
at 10.2 percent, down only slightly from the April 1997 rate of 10.7 percent.
Oil Producers Make New Attempt to Raise Prices. Reacting to weak market
conditions, the oil ministers of the three producers that initiated cuts this March in
Riyadh-Saudi Arabia, Mexico, and Venezuela-agreed to further reductions of
450 thousand barrels per day in Amsterdam earlier this month. Estimates of global
demand for the second quarter have been revised downwards by 510 thousand barrels
per day to 73 million, due to weak demand among the OECD countries and in Asia.
Since last October, there has been a cumulative downward revision of Asia's
projected demand for 1998 of 750 thousand barrels per day due to the regional crisis.
Weekly Economic Briefing
9
June 19, 1998
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RELEASES THIS WEEK
U.S. International Trade in Goods and Services
The goods and services trade deficit was $14.5 billion in April;
it was $13.2 billion in March.
Housing Starts
Housing starts decreased 1 percent in May to 1.53 million units at
an annual rate. During the first five months of 1998, housing starts
were 6 percent above the same period a year ago.
Industrial Production and Capacity Utilization
The Federal Reserve's index of industrial production rose
0.5 percent in May following an increase of 0.3 percent in April.
Capacity utilization rose 0.1 percentage point, to 82.2 percent.
Consumer Price Index
The consumer price index increased 0.3 percent in May. Excluding
food and energy, consumer prices increased 0.2 percent.
MAJOR RELEASES NEXT WEEK
Advance Durable Shipments and Orders (Wednesday)
Gross Domestic Product (Thursday)
Weekly Economic Briefing
10
June 19, 1998
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U.S. ECONOMIC STATISTICS
1970-
1993
1997
1997:3
1997:4
1998:1
Percent growth (annual rate)
Real GDP (chain-type)
2.7
3.7
3.1
3.7
4.8
GDP chain-type price index
5.4
1.8
1.4
1.4
1.0
Nonfarm business (NFB) sector:
Productivity (chain-type)
1.5
2.1
3.6
1.4
1.1
Real compensation per hour:
Using CPI
0.6
2.2
1.8
3.1
3.7
Using NFB deflator
1.3
2.5
2.7
3.9
3.5
Shares of Nominal GDP (percent)
Business fixed investment
10.9
10.5
10.7
10.6
10.7
Residential investment
4.5
4.1
4.1
4.1
4.2
Exports
8.2
11.8
11.9
11.9
11.5
Imports
9.2
13.1
13.3
13.2
13.1
Personal saving
5.3
2.8
2.6
2.9
2.7
Federal surplus
-2.7
-0.4
-0.1
-0.1
0.6
1970-
March
April
May
1993
1997
1998
1998
1998
Unemployment Rate (percent)
6.7**
4.9**
4.7
4.3
4.3
Payroll employment (thousands)
increase per month
82
302
296
increase since Jan. 1993
16010
Inflation (percent per period)
CPI
5.8
1.7
0.0
0.2
0.3
PPI-Finished goods
5.0
-1.2
-0.3
0.2
0.2
**Figures beginning 1994 are not comparable with earlier data.
New or revised data in boldface.
Weekly Economic Briefing
11
June 19, 1998
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FINANCIAL STATISTICS
April
May
June 18,
1996
1997
1998
1998
1998
Dow-Jones Industrial Average
5743
7441
9037
9080
8813
Interest Rates (percent per annum)
3-month T-bill
5.01
5.06
4.95
5.00
5.05
10-year T-bond
6.44
6.35
5.64
5.65
5.50
Mortgage rate, 30-year fixed
7.80
7.60
7.14
7.14
6.94
Prime rate
8.27
8.44
8.50
8.50
8.50
INTERNATIONAL STATISTICS
Exchange Rates
Current level
Percent Change from
June 18, 1998
Week ago
Year ago
Deutschemark-Dollar
1.793
-0.6
3.5
Yen-Dollar
137.6
-3.9
21.2
Multilateral $ (Mar. 1973=100)
100.5
-1.2
5.2
Real GDP
Unemployment
CPI inflation
International Comparisons 1/
growth
rate
(percent change in index
(percent change last 4 quarters)
(percent)
last 12 months)
United States
3.7 (Q1)
4.3 (May)
1.7 (May)
Canada
3.8 (Q1)
8.4 (Apr)
1.0 (Apr)
Japan
-3.7 (Q1)
4.2 (Apr)
0.3 (Apr)
France
3.4 (Q1)
12.0 (Apr)
1.0 (Apr)
Germany
3.0 (Q1)
2/ 7.6 (Mar)
1.3 (Apr)
Italy
2.8 (Q4)
12.1 (Jan)
1.8 (Apr)
United Kingdom
2.9 (Q1)
6.5 (Feb)
4.0 (Apr)
1/ For unemployment data, rates approximating U.S. concepts as calculated by the U.S. Department of Labor, Bureau of Labor
Statistics.
2/ Rate for former West Germany. Using OECD standardized unemployment data, the unemployment rate for unified Germany for
March 1998 is 10.0 percent.
Weekly Economic Briefing
12
June 19, 1998
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WEEKLY ECONOMIC BRIEFING
OF THE PRESIDENT OF THE UNITED STATES
Prepared by the Council of Economic Advisers
with the assistance of the Office of the Vice President
June 12, 1998
CHART OF THE WEEK
People Without Jobs Who Want to Work
14
12
Not in labor force
Percent of population aged 16 to 64
10
but want to work
8
6
4
Unemployed
2
0
1970 1973 1976 1979 1982 1985 1988 1991 1994 1997
In congressional testimony this week, Federal Reserve Chairman Greenspan noted that
the percentage of persons aged 16 to 64 who wanted to work but did not have jobs had
fallen to slightly more than 5½ percent-a record low for this series, which first became
available in 1970. This statistic, which includes both the unemployed and those who
wanted a job but had not looked for work (and were therefore treated as not in the labor
force) is a measure of how tight labor markets have become.
EYES ONLY
CONTENTS
TREND
Growing-up Risks Are Going Down
1
SPECIAL ANALYSIS
Economic Change in the Great Plains
3
ARTICLE
Vehicle Leasing Takes Off
5
DEPARTMENTS
Business, Consumer, and Regional Roundup
7
International Roundup
8
Releases
9
U.S. Economic Statistics
10
Financial and International Statistics
11
"All I'm saying is now is the time to develop the technology to deflect an asteroid
EYES ONLY
TREND
Growing-up Risks Are Going Down
Until about 1970, the main reason for reductions in child mortality was progress
against infectious disease and other medical conditions. Since then, a large part has
come from reductions in deaths due to injuries.
Current levels. Unintentional injuries represent the number-one cause of death for
children aged 1 to 14. The major causes of these injuries are accidents affecting
Causes of Childhood Deaths Due to Unintentional Injury,
motor vehicle passengers, pedestrian
1995
accidents (which often involve collisions
Drowning
Motor vehicle
between cars and pedestrians), drowning,
fires, suffocation, bicycle accidents, and
firearm accidents (see upper chart).
Fire
Causes of death vary by age; for example,
while firearm accidents represent only
Other
3 percent of injury-related deaths for all
Firearm
Pedestrian
children under age 14, they represent
Bicycle
Suffocation
24 percent of all injury-related deaths for
Note: Data are for children aged 14 and under.
children aged 10 to 14.
Injury-Related Fatalities for Children
Reasons for decline. The number of
4
1970
deaths due to unintentional injuries for
1990
children aged 1 to 14 declined by
3
53 percent from 1970 to 1995, accounting
Fatalities (thousands)
for half of the total reduction in child
2
mortality over this period. The decline in
child-injury fatalities in the 1970s and
1
1980s occurred across a broad range of
injury categories (see lower chart).
0
Auto
Pedestrian
Fire
Drowning
Other
Hence, it is unlikely that it was driven-by
Note: Data are for children aged 1 to 12.
a small number of specific interventions.
Rather a combination of factors was probably responsible, including the following:
Increased regulation, such as drug-packaging requirements, seat belt and
automobile safety seat requirements, and safety standards for toys and other
products likely to be encountered by children.
More information due to increased research and development in child safety and
greater coverage of child-safety issues in the press and in popular child-rearing
books. For example, the number of pages devoted to child-safety issues in the
best-selling child-rearing book by Dr. Spock more than quadrupled between the
1957 and the 1992 editions.
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June 12, 1998
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Demographic/lifestyle factors probably had mixed effects on child safety. For
example, the increase in the number of working mothers and single-parent
families may have reduced the amount of parental time available for child
supervision. But these effects may have been offset by decreases in the average
number of children per family.
Enhanced trauma care probably led to improvements in outcomes for accident
victims, particularly for victims of burns and motor vehicle accidents.
Policy initiatives. Because unintentional injuries remain a major cause of death and
disability for children, the Children's Environmental Health and Safety Task Force
has made further reductions in unintentional injuries one of its main priority areas.
It will consider a range of approaches to reducing unintentional injuries, including
education and outreach, subsidies for safety devices such as fire alarms and bicycle
helmets, and enhanced technical support to promote state and local interventions.
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SPECIAL ANALYSIS
Economic Change in the Great Plains
The tough economic times currently facing farmers in the northern Great Plains may
revive arguments that the region is losing population and is no longer economically
viable. In fact, however, a recent study shows that population growth in the Great
Plains has been roughly comparable to overall U.S. population growth. Farm jobs
are disappearing, but the population is growing in metropolitan areas. and new job
opportunities are opening up in manufacturing and services.
Population growth. Between 1990 and
Population Growth
1997, population in the Great Plains grew
All
by 7.3 percent (see upper chart),
Metro
compared with 7.5 percent for the United
States as a whole. Almost all of this
Nonmetro
growth occurred in metro areas (cities of
urban
50,000 or more). While the total
less urban
population in nonmetro counties also
rural
grew slightly, over half of Great Plains
counties lost population. Most of these
-4
-2
0
2
4
6
8
10
12
14
Percent change (1990 to 1997)
are sparsely populated, isolated from
urban centers. and highly dependent on
agriculture.
Economic change. Total employment in the Great Plains grew by an average of
2.0 percent per year between 1990 and 1995 (see lower chart), compared with
1.0 percent for the nation as a whole.
Employment Growth
Like the rest of the U.S. economy, most
employment growth occurred - in
Total
wholesale and retail trade and services.
Farming
Jobs in manufacturing grew more rapidly
than the U.S. average, although from a
Manufacturing
relatively small base. Employment in
primary industries (farming and mining)
Services
declined, but total agricultural output
-2
-1
0
1
from the 10 Great Plains states increased
2
3
Annual percent change (1990 to 1995)
during this period due to productivity
gains. Nevertheless, counties highly
dependent on agriculture lost population. Rural communities that have been
successful in maintaining population and jobs are those that have been able to
diversify their economies, are connected to urban centers, or offer natural amenities
that attract new residents or tourists.
Farming the Great Plains. Few crops are well-adapted to the Great Plains climate.
Dryland agriculture emphasizes wheat and rangeland for cattle. while irrigation is
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generally required to support corn and cotton. Farm numbers have been declining in
the region, and many farmers rely on government farm program payments and off-
farm jobs to supplement farm earnings. Further consolidation of farms is expected,
and without growth in nonfarm job opportunities, continued population decline is
likely in many rural, isolated counties.
What is the Great Plains?
The Great Plains is the continental slope of the west central United States, east of
the Rocky Mountains. In general, the Plains have sparser population, lower and
more erratic rainfall, and less forest land than areas to the east. The eastern
boundary often lacks a sharp visible physical border. As defined here it includes
478 counties, about one-fifth of the land area of the continental United States.
Nonmetro
Metro
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June 12, 1998
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ARTICLE
Vehicle Leasing Takes Off
The popularity of leasing new cars and trucks has increased sharply since the early
1980s (see chart). Under a typical lease contract, the consumer puts up a modest
down payment, then makes monthly
Leasers as a Share of Those Recently Acquiring a New Vehicle
payments for a fixed period (often
30
3 years), at the end of which the
25
consumer can choose to purchase the
20
vehicle for a price specified in the
Percent
15
original lease contract or return the
vehicle. Some might be concerned that
10
leasing is diminishing one of the
5
traditional channels of wealth
0
accumulation in the United States: the
1980-82
83-85
86-88
89-91
92-94
95-97
Note: Data represent percent of those recently acquiring a new vehicle who
"forced saving" imposed by a monthly
have at least one leased vehicle.
car payment.
Leasing pros. Industry analysts cite several reasons consumers might prefer to lease
rather than buy. For a given vehicle, leases entail a lower down payment and much
lower monthly payments, making it possible for consumers to drive a nicer car than
they could afford to buy. For high-income consumers who want a new car every few
years, leasing can be a way to avoid the inconvenience and cost of repeatedly
disposing of used vehicles. Leasing can also provide "lemon insurance," because a
consumer with a problem car probably will not choose to buy it when the lease ends.
Similarly, leasing is a convenient way to experiment with an unfamiliar vehicle type,
such as a sport utility vehicle, with the option to return the vehicle at the end of the
lease if it turns out not to fit the consumer's needs.
Leasing cons. Because lease contracts are necessarily very complex, some
consumers may not fully understand the terms of the deal to which they commit
themselves when they agree to lease. Indeed, the upsurge in leasing in the early
1990s was accompanied by complaints from consumers charging that they had been
misled in various ways about the terms of their leases. The worst abuses involved
down payments, trade-in values, and rebates that were not credited to the consumer
in the terms of the lease-effectively disappearing into the dealer's or lessor's
pocket, in ways that unsophisticated consumers might find difficult or impossible to
detect amid the complexity of the lease contract. Another problem was that some
contracts did not contain enough information for consumers to be able to verify or
understand how their monthly payment was calculated. Finally, many consumers
reportedly did not understand that there are often hefty penalty charges for
terminating a lease early.
The Fed to the rescue. In response to these problems, the Federal Reserve Board,
which writes the regulations for the leasing industry, implemented an updated set of
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June 12, 1998
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guidelines in January 1998 that require lessors to specify clearly all terms of the lease
in a standard format designed to make comprehension and comparison of lease
contracts simpler.
Meet the leasers. So who is the typical leaser? Perhaps surprisingly, data from both
1992 and 1995 show that leasers of new vehicles tend to have considerably higher
household incomes and greater liquid assets than consumers who choose to finance
their new vehicle with a loan (and both owners and leasers of new vehicles are
considerably more affluent than the average household). Furthermore, leasing is
more prevalent at the luxury end of the auto market than in the middle or economy
parts of the market.
Conclusions. Leasing rather than buying new vehicles can be attractive to
consumers for a variety of reasons. Surveys have found higher levels of satisfaction
among consumers who have leased vehicles than among those who have financed
their purchase. Surveys also find that a large proportion of current leasers intend to
lease their next vehicle as well. While leasers do not build equity in their vehicles
over the course of the lease, they may simply prefer to pursue wealth accumulation
more directly in such forms as tax-favored retirement accounts. So long as the recent
changes in regulations and in leasing procedures succeed in making consumers
informed purchasers, there appears to be little reason for concern about the
remarkable rise in the proportion of vehicles that are leased.
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BUSINESS, CONSUMER, AND REGIONAL ROUNDUP
Greenspan Calls Current Economic Performance "Impressive." In testimony to
Congress on Wednesday, Federal Reserve Chairman Alan Greenspan stated, "The
current economic performance, with its combination of strong growth and low
inflation, is as impressive as any I have witnessed in my near half-century of daily
observation of the American economy." However, Greenspan expressed his
continuing concern that economic growth will run into constraints as the reservoir of
unemployed people available to work is drawn down (see Chart of the Week).
Greenspan said the Fed remains watchful for signs of potential inflationary
imbalances, but his testimony appeared to ease many investors' concern that the Fed
was likely to raise interest rates at its next meeting, and the bond market rallied.
Study Finds Differences by Race in Application of Death Penalty. A new study
released by the Death Penalty Information Center (DPIC) finds evidence of
significant racial disparities in the application of the death penalty. The study,
conducted in Philadelphia, examined a large sample of the murders there between
1983 and 1993 in which the death penalty could be applied. Even after controlling
for a variety of case differences such as multiple victims, the deliberate infliction of
pain, and the background of the accused, blacks were almost four times as likely to
receive a death sentence as whites. The racial combination most likely to result in
a death sentence was a black defendant with a non-black victim, followed by a black
defendant with a black victim and a non-black defendant with a non-black victim.
Non-blacks who killed blacks were least likely to receive a death sentence. These
findings accord with most previous research on the subject. Another recent study,
also released by the DPIC, finds that nearly 98 percent of the chief District Attorneys
in death penalty states are white, though the study offers no direct evidence on
differences between white and non-white DAs in seeking the death penalty.
Behavior Alone Does Not Explain Socioeconomic Differences in Mortality.
Differences in health along socioeconomic lines have been recognized as a persistent
public health problem. A prominent hypothesis about these differences suggests-that
they arise from the higher prevalence of risky behaviors, such as smoking, drinking
alcoholic beverages, and being overweight, among those with lower levels of
education and income. However, a new study has found that socioeconomic
differences in mortality would persist even with improved health behaviors among
the disadvantaged. The study investigated the degree to which education, income,
and four behavioral risk factors (cigarette smoking, alcohol drinking, sedentary
lifestyle, and relative body weight) affected mortality risk over a period of seven and
a half years. The study found that, although behavioral differences explained a
modest portion of the mortality differences across socioeconomic groups, the risk of
dying was still significantly greater for the lowest income groups even after these
risky behaviors were taken into account.
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INTERNATIONAL ROUNDUP
Sinking Yen Pulls Down Pacific Rim Currencies. On Monday the yen fell below
140 to the dollar for the first time in 7 years; it then fell further later in the week.
Monday's drop helped trigger a fall in the Australian dollar the same day. Despite
intervention by the central bank, Australia's currency fell to a 12-year low against the
U.S. dollar. Trade links to Asia have contributed to weakening in both the Australian
and the New Zealand dollars over the past 18 months, and each country faces a
difficult choice between letting the currency fall (which would increase inflationary
pressure) and raising interest rates (which would risk recession). New
Zealand-which is experiencing rising unemployment, falling stock prices, and a
current account deficit approaching 8 percent of GDP-has already eased monetary
policy several times in recent months. In Japan, new data are likely to show that the
economy contracted again in the first quarter, producing the two consecutive quarters
of decline that conventionally signify a recession. On Wednesday, the Diet extended
its session to June 18 to allow time to pass the supplementary budget, which is
necessary for implementing the economic stimulus package announced April 24.
Is Russian Tax Reform Finally on the Way? Despite long-standing recognition
that effective tax reform is central to Russia's recovery from its current economic
troubles, little progress has been realized. One response was the formation last week
of Russia's newest political movement, the "Union of Russian Tax Payers," on the
platform of rational and effective budget and tax policies for Russian citizens.
Sensing, perhaps, the growing grass-roots pressure for movement on tax reform, the
Russian government made the unprecedented move Monday night of arresting the
head and several managers of Goskomstat, the state statistical agency, for
systematically understating the actual production of large firms to facilitate tax
evasion among Russian companies. The arrests raise questions about the accuracy
of Russian economic accounting, which could contribute to the shaky confidence of
international investors even though the implication is that true economic production
is higher than officially declared. (In general, including black market activity would
add an estimated 25 to 35 percent to Russian GDP.) Russian financial markets
remained relatively stable early this week, despite defaults on several regional
government agribonds. According to Russian news reports, legislation is now being
drafted by the Finance Ministry that would prohibit borrowing at the regional level.
Repression of Union Activities Increasing. Repression of trade union activities is
increasing around the world, according to the annual report on trade union rights
published this week by the International Confederation of Free Trade Unions
(ICFTU), which represents 125 million workers in 141 countries. In 1997, 299 trade
unionists were killed, more than half of these in Colombia. In addition, 1,681 were
tortured or ill-treated, 2,329 were detained, and there were 3,369 cases of
intimidation. "Fifty years after the adoption of the ILO Convention on Freedom of
Association trade unionists are still having to fight for the right to organize,"
commented the ICFTU General Secretary, introducing the report.
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June 12, 1998
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RELEASES THIS WEEK
Producer Price Index
**Embargoed until 8:30 a.m., Friday, June 12, 1998**
The producer price index for finished goods increased 0.2 percent
in May. Excluding food and energy, producer prices also increased
0.2 percent.
Retail Sales
Advance estimates show that retail sales rose 0.9 percent in May
following an increase of 0.7 percent in April. Excluding sales in the
automotive group, retail sales rose 0.4 percent in May following an
increase of 0.5 percent in April.
MAJOR RELEASES NEXT WEEK
Consumer Prices (Tuesday)
Housing Starts (Tuesday)
Industrial Production and Capacity Utilization (Tuesday)
U.S. International Trade in Goods and Services (Thursday)
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June 12, 1998
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U.S. ECONOMIC STATISTICS
1970-
1993
1997
1997:3
1997:4
1998:1
Percent growth (annual rate)
Real GDP (chain-type)
2.7
3.7
3.1
3.7
4.8
GDP chain-type price index
5.4
1.8
1.4
1.4
1.0
Nonfarm business (NFB) sector:
Productivity (chain-type)
1.5
2.1
3.6
1.4
1.1
Real compensation per hour:
Using CPI
0.6
2.2
1.8
3.1
3.7
Using NFB deflator
1.3
2.5
2.7
3.9
3.5
Shares of Nominal GDP (percent)
Business fixed investment
10.9
10.5
10.7
10.6
10.7
Residential investment
4.5
4.1
4.1
4.1
4.2
Exports
8.2
11.8
11.9
11.9
11.5
Imports
9.2
13.1
13.3
13.2
13.1
Personal saving
5.3
2.8
2.6
2.9
2.7
Federal surplus
-2.7
-0.4
-0.1
-0.1
0.6
1970-
March
April
May
1993
1997
1998
1998
1998
Unemployment Rate (percent)
6.7**
4.9**
4.7
4.3
4.3
-
Payroll employment (thousands)
increase per month
82
302
296
increase since Jan. 1993
16010
Inflation (percent per period)
CPI
5.8
1.7
0.0
0.2
N.A.
PPI-Finished goods
5.0
-1.2
-0.3
0.2
0.2
*Figures beginning 1994 are not comparable with earlier data.
New or revised data in boldface.
PPI data embargoed until 8:30 a.m., Friday, June 12, 1998.
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June 12. 1998
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FINANCIAL STATISTICS
April
May
June 11,
1996
1997
1998
1998
1998
Dow-Jones Industrial Average
5743
7441
9037
9080
8812
Interest Rates (percent per annum)
3-month T-bill
5.01
5.06
4.95
5.00
4.97
10-year T-bond
6.44
6.35
5.64
5.65
5.44
Mortgage rate, 30-year fixed
7.80
7.60
7.14
7.14
7.04
Prime rate
8.27
8.44
8.50
8.50
8.50
INTERNATIONAL STATISTICS
Exchange Rates
Current level
Percent Change from
June 11, 1998
Week ago
Year ago
Deutschemark-Dollar
1.804
2.2
5.1
Yen-Dollar
143.3
3.5
28.6
Multilateral $ (Mar. 1973=100)
101.8
2.1
7.3
Real GDP
Unemployment
CPI inflation
International Comparisons 1/
growth
rate
(percent change in index
(percent change last 4 quarters)
(percent)
last 12 months)
United States
3.7 (Q1)
4.3 (May)
1.4 (Apr)
Canada
3.8 (Q1)
8.4 (Apr)
1.0 (Apr)
Japan
-0.2 (Q4)
4.2 (Apr)
0.3 (Apr)
France
3.4 (Q1)
12.0 (Apr)
1.0 (Apr)
Germany
3.0 (Q1)
2/ 7.6 (Mar)
1.3 (Apr)
Italy
2.8 (Q4)
12.1 (Jan)
1.8 (Apr)
United Kingdom
2.9 (Q1)
6.5 (Feb)
4.0 (Apr)
1/ For unemployment data, rates approximating U.S. concepts as calculated by the U.S. Department of Labor, Bureau of Labor
Statistics.
2/ Rate for former West Germany. Using OECD standardized unemployment data, the unemployment rate for unified Germany for
March 1998 is 10.0 percent.
Weekly Economic Briefing
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June 12, 1998