Business Economics ®- January 2002

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Richard B. Berner

Corporate Profits: Critical for Business Analysis -and not just for Wall Street
The role of profits and return on investment need increasing attention from business and financial economists in order to analyze income through stock prices; identify potentials for mis-pricing stocks; and to understand prospects for investment, hiring, and pricing. The analysis of corporate profits must take account of finan-cial and operating leverage and global influences. Operating leverage, in particular, has played a particularly damaging role in the 2001 recession, as firms became more capital-intensive. Finally, given the importance of profits in macroanalysis, it is critical that the quality and relevance of government statistics be continually upgraded.
(PDF, 47K)

Anthony M. Santomero

What Monetary Policy Can and Cannot Do: It can do a lot, but its important to know its limits.
There is general agreement that price stability is necessary for macroeconomic success and that only monetary policy can achieve price stability. The Fed has been successful in this respect over the past twenty-two years. However, there is disagreement on whether monetary policy can do more. Future potential is limited by both the quality of data and the state of economic science. However, past success has created the irony that—while there is recognition that monetary policy is a blunt instrument—there are calls for the Fed to use it with surgical precision. A realistic appraisal of the potential for monetary policy suggests that persistent, incremental action—rather than aggressive attempts at fine-tuning—is the right direction for achieving an environment for maximum sustainable economic growth.
(PDF, 61K)

Michael D. Bordo

Globalization in Historical Perspective: Our era is not as unique as we may think, and current trends are not irreversible
Globalization, in the sense of increased integration of international markets, has waxed and waned throughout history. Most recently, it thrived between the middle of the nineteenth century and World War I, languished and retreated until about 1970, and has thrived again since then. What have we learned from this experience? In eras of increasing globalization, technological change and reduction of barriers increased trade and caused international price convergence. In general, as barriers to trade diminished, so did barriers to international migration, leading to an increasingly integrated global market for skilled labor. Integration of capital markets corresponded in time with trade and migration, with flows increasing, decreasing and increasing again. However, the charac-teristics of modern capital flows are significantly different from previous eras of globalization. In general, it appears that countries that take advantage of free movement of goods and services, labor and capital can thrive in the aggregate. However, sound macroeconomic policies are necessary. Although the number of individual gainers appears to outnumber losers in increased globalization, it is possibile that the losers can create a backlash that will once again cause a retreat.
(PDF, 65 K)

Kevin J Stiroh

Information Technology and the U.S. Productivity Revival: A Review of the Evidence. The closer one looks, the more persuasive it is.
Aggregate, industry, and firm level studies all point to a strong connection between information technology (IT) and the U.S. productivity revival in the late 1990s. At the aggregate level, growth accounting studies show a large and growing contribution to productivity growth from both the production and the use of IT. At the industry level, industries that produce or use IT most intensively have shown the largest increases in productivity growth after 1995. At the firm level, IT-intensive firms show bet-ter performance than their peers, and several specific case studies show how IT improves real business practices. This accumulation of evidence from a variety of studies suggests a real productivity impact from IT.
(PDF, 66K)

Eric W. Ford

Economic Implications of Defined Contribution Health Plans: Their impact on employers, insurers, employees, and healthcare providers.
Employee health benefits are a major payroll expense for companies that provide them. During the 1980s and 90s, many employers moved workers into managed care programs to control costs. However, the ability of those mechanisms to contain healthcare inflation has run its course. Significant rate hikes in 2002 will cause some large employers to increase employee contributions anywhere from thirteen to twenty percent. Further, new legislation threatens to increase the pace of healthcare infla-tion and possibly make employers liable for the plans they offer. Therefore, some firms have already turned to Defined Contribution Health Plans (DCHPS) to control health benefit costs and limit their legal exposure. This paper describes two types of DCHPs that have emerged and analyzes their impact on employers, insurers, employees, and healthcare providers. The first type, based on individual Medical Savings Accounts (MSAs) plus group-based catastrophic health insurance, may be work-able if forthcoming legislation provides appropriate tax shelter treatment for both employers and employees. The second type, which involves straightforward voucher payments, is unlikely to work because it removes all vestiges of community rating and would therefore leave many classes of workers unable to obtain affordable health coverage.
(PDF, 42 K)

Lewis L Smith

Economies and Markets as Complex Systems: Looking at them this way may provide fresh insights.
Conventional economic theory follows a mathematical paradigm pioneered by classical physics, embodying smooth, differentiable functions, and dominant equilibria. The real business environment, however, is not so neat; and conventional ways of representing it have severe shortcomings. Complexity theory has important potential for shedding additional light on the behavior of the economy, particularly when impacted by sudden events. This paper outlines basic principles of complexity theory and indicates how they are relevant to the practice of economics in business.
(PDF, 66 K)

Focus on Industries and Markets

Michael A Deneen and Andrew C Gross

The Global Commercial Refrigeration Equipment Market.
World demand for commercial refrigeration equipment is projected to increase at 6.2 percent per year between 1999 and 2004, compared to a 5.6 percent annual growth during the 1994-1999 period. Total shipments in 2004 will be valued at $25.1 billion. North America should continue to account for thirty percent and Europe for about twenty-five percent of shipments. But growth will be much faster in developing countries, especially in China with its vast popula-tion and its rising consumption of frozen food. Parts and components will continue to account for over one-third of all shipments, followed by reach-in and walk-in units with over one-fourth of all shipments. Other major product categories are display cases, vending machines and ice-making units. Major end-users include food processors, retail grocers, and supermarkets and various eating/ drinking establishments, such as restaurants and taverns. The five key producers globally accounted for only twenty-four percent of shipments in 1999. Accordingly, there are opportu-nities for other firms. However, many cooperative ventures and mergers are also under way in the industry.
(PDF, 44 K)

Forum on Emerging Issues

Perry D. Quick and Mary T Goldschmid

FASB Statements 141/142 and the Business Economist— Where, oh where, have my intangibles gone?
Although business economists seldom involve themselves in accounting details, recent changes in accounting rules provide fertile ground for economists to make productive use of their analytical skills in the valuation of intangible assets. Choices of what to report and how to value intangibles have important strategic as well as financial reporting implications. Helping management “get it right” can be an important role for the application of economics in business.
(PDF, 23 K)

Focus on Statistics

Robert P Parker

Statistical Reports from the Social Security Administration
(PDF, 17 K)

Book Reviews

Edmund Mennis

E. Philip Davis and Benn Steil. Institutional Investors. MIT Press, 2001.

Phillip Caruso and Virginia Paganelli Caruso

Ross B. Emmett, editor. Great Bubbles. Pickering & Chatto Limited.

(PDF 25K )