Summary of Articles in Business Economics, July 2009

By Robert Crow
Editor, Business Economics

Fiscal Policy and Economic Recovery

Christina D. Romer [1]
The American Recovery and Reinvestment Act of 2009 is the biggest, boldest countercyclical fiscal stimulus in American history.  What is its likely impact?  Current econometric research indicates that a tax cut is likely to have a multiplier of about 1.0 and that spending has a multiplier of about 1.6 after about 18 months.  Even the most sophisticated econometric analysis, however, suffers from an “omitted variable” problem.  In trying to take account of this, David Romer and I have found that the tax multiplier is more likely to be around two to three; and we suspect that the spending multiplier is correspondingly higher than the conventional estimates.  Of course, every recession is different, and the unique factors of this recession are analyzed to determine whether the multipliers will deviate from historic averages.

Government Lending and Monetary Policy

Jeffrey M. Lacker [2]
The financial dimension of the current contraction has brought an historic expansion in government lending to financial market participants, mostly through an expanding array of Federal Reserve initiatives.  This contrasts with the Fed's typical response to recent recessions, which has been limited to adjustments of the target federal funds rate.  Fed and other government lending programs have targeted particular sectors, altering the allocation of credit across markets.  Also, targeted credit programs contribute to the moral hazard problem inherent in the provision of government-funded credit or guarantees.  An alternative approach to monetary policy where the federal funds target is essentially zero is to purchase Treasuries, which is likely to have little effect on the relative credit spreads on different financial instruments. However, given that targeted lending has taken place, it is critical that government regulation matches the scope of government support.  Also, targeted lending by the Fed is in effect fiscal policy.  Is this a legitimate role for a central bank, or should such lending be subject to legislative approval, with the Fed’s role limited to monetary stability?

Four Long-Term Fiscal Realities

Alan D. Viard
The United States faces a long-run fiscal imbalance due to rapid projected growth in Social Security, Medicare, and Medicaid spending. The response to the imbalance will be shaped by four long-term fiscal realities.  First, revenue will rise as a share of gross domestic product (GDP). Second, entitlement spending will be reduced, relative to current policies.  Third, the middle class, broadly defined, will bear much of the burden of addressing the fiscal imbalance. Fourth, consumption taxation is likely to become a significant part of the federal tax system, probably through the partial replacement of the income tax by a value added tax.

Trade Policy and the Obama Administration

Jeffrey J. Schott
During his primary campaign, President Obama took an aggressive stance on trade, suggesting a protectionist drift in U.S. trade policy.  However, it seems more likely that policy will focus more on enforcement of existing rights than on protectionist initiatives.  The major influences on trade policy are likely to be multilateral approaches to trade problems, broad foreign policy concerns, the impact of trade policy on recovery from the current recession, and global climate change initiatives.  Holdover initiatives on the World Trade Organization’s Doha round and bilateral agreements will be joined by global climate change as the principal policy issues for the next few years.

Globalization of the U.S. Food Supply: Reconciling Product Safety Regulation with Free Trade

Thomas A. Hemphill
The pet food recall in the spring of 2007, its aftermath, and other reports of contaminated food imports have had an adverse affect on the American shopper’s confidence in the safety of the nation’s food supply.  This paper argues that the responsibility for ensuring that imported food entering the United States is safe must be shared by the public and private sectors.  The limited resources of public regulation need to be focused on high-risk, imported food products from countries that have weak export food safety regimes.  Furthermore, public regulation must emphasize private sector incentives encouraging implementation of state-of-the-art food safety management programs.

Focus on Industries: World Mining Machinery

Michael A. Deneen and Andrew C. Gross

Economics at Work: An Economist’s Role in Disaster Mitigation at FEMA

Keith Burbank

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