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Economic Review
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In an article adapted from a speech made to at the Annual Conference of the National Bank of Austria in May of this year, Federal Reserve Bank of Kansas City President Hoenig examines recent and prospective changes in the U.S. payments system. The theme of his remarks is that the rate at which a payments system develops depends largely on a struggle between rapid technological change and natural barriers to new product acceptance. This ongoing conflict explains why Americans have seen revolutionary developments in large-dollar payments but only evolutionary developments in small-dollar and retail means of payment. Mr. Hoenig first examines recent trends in the U.S. payments system. Second, he explores why progress has been so slow in small-dollar and retail payments by examining some of the barriers that have limited payments system progress. Third, he offers his thoughts on how the U.S. system is likely to evolve over time. Finally, he identifies the types of public policy issues the United States is likely to encounter as it moves toward a world of electronic money. Back to top Economic Review home
Considerable attention has been focused recently on the size and persistence of the U.S. budget deficit. Somewhat lost in the headlines is growing concern among many economists and policymakers over "the other deficit"--the U.S. current account deficit. Before 1982, U.S. current account deficits were small and temporary, as imports of goods and services rarely exceeded exports for an extended period. Since 1982, however, this deficit has increased significantly and many analysts expect the deficit to remain high well into the next century. Large current account deficits pose both a short-term risk and a long-term problem for the United States. At present, the United States depends on a commensurately large flow of foreign capital into U.S. markets to finance the current account deficit. If market sentiment were to shift against the United States, higher interest rates and a lower exchange value of the dollar might be necessary to continue to attract foreign capital. In the long term, because financing a chronic deficit requires the United States to borrow from abroad, future interest payments on this debt could lower the standard of living in the United States. Hakkio examines the current account deficit and its implications. First, he discusses why the current account deficit became large and persistent in the early 1980s. Second, he analyzes the short-term risk that current account deficits pose for the U.S. economy. Finally, he analyzes the long-term problem associated with a chronic current account deficit. Back to top Economic Review home
From early 1994 to early 1995, inflation surged in the producer price indexes for crude materials and intermediate goods. For example, inflation in intermediate goods prices rose from 2.6 percent annually in the first half of 1994 to 7.1 percent over the next nine months. At the same time, however, inflation in the consumer price index remained low, at slightly less than 3 percent. Many analysts are concerned that recent increases in the prices of crude and intermediate goods may be passed through to consumers. If such pass-through occurs, the Federal Reserve's progress in moving toward price stability over time would be jeopardized. Clark examines whether price increases at the early stages of production should be expected to move through the production chain, leading to increases in consumer prices. A review of basic economic theory suggests there should be a pass-through effect--that is, producer prices should lead and thereby help predict consumer prices. A more sophisticated analysis, though, suggests the pass-through effect may be weak. Clark examines the empirical evidence, which indicates that producer prices are not always good predictors of consumer prices. He concludes that the recent increases in some producer prices do not necessarily signal higher inflation. Back to top Economic Review home In recent years, members of Congress and academia have repeatedly urged the U.S. Treasury to issue some portion of its debt in the form of inflation indexed bonds. With an indexed bond, the interest and maturity value are adjusted by the rate of inflation over the life of the bond. Because the cash flow of an indexed bond is adjusted for inflation, the bond's real value does not vary with inflation, protecting investors and issuers alike from inflation risk. Inflation indexed bonds would be a fundamental innovation in U.S. financial markets, providing benefits to investors, the Treasury, and policymakers. Despite the potential benefits, the U.S. Treasury has never issued indexed bonds. In fact, only a handful of industrialized countries, including the United Kingdom and Canada, have issued inflation indexed government bonds. Shen discusses the benefits of inflation indexed Treasury bonds and points out some of their limitations. She concludes that, if carefully designed, inflation indexed Treasury bonds are likely to be beneficial. Back to top Economic Review home
U.S. agriculture depends on capital for its success. Nearly a trillion dollars of capital is at work in production agriculture, with trillions more at work in the rest of the U.S. food system. Public policy has always been concerned with ensuring that farmers have access to adequate amounts of capital at competitive terms. But as is true for many other parts of agricultural policy, substantial changes in the industry now call into question both the degree and type of policy intervention that have been undertaken in the past. The United States has a highly efficient market for agricultural credit. In many respects, it is a model market for the rest of the world. The agricultural credit market provides ready amounts of credit to farmers, at competitive rates, on terms that suit their unique needs. Without question, public policy has helped to develop this efficient market. But now that it operates smoothly the question is, what should be the public role in the future? In this article, based on testimony before the Senate Committee on Agriculture, Nutrition, and Forestry in March of this year, Drabenstott concludes that while there may be less need today for a federal government role in agricultural credit, there may be more need to pay attention to rural credit in the future. Back to top Economic Review home
After six decades of evolution, U.S. agricultural policy may be about to enter a revolution. Ever since farm programs were created in the 1930s, farm policy has generally evolved along predictable lines. To be sure, over the past decade policy has tended to move in a market direction, but the goals and policy instruments remain amazingly akin to those put in place during the Great Depression. Now, federal fiscal discipline may cause the nation to rethink an antiquated farm policy and replace it with a much leaner, more targeted policy to answer the nation's food needs for the next century. With the budget forcing change and economics supporting it, the question is, where should agricultural policy go? Debate on the 1995 farm bill has focused almost entirely on the budget, while neglecting the more important question. A new vision for agricultural policy is lacking, mainly because current arguments center on whether to maintain the status quo. But the status quo is unlikely to stand. Rather, the future of agricultural policy lies in the pursuit of four key goals: competing in world food markets, improving the nation's diet, conserving the nation's natural resources, and increasing economic opportunity in rural America. In combination, these goals will encourage continued growth in the agricultural sector, enhance the welfare of consumers, and have the added benefit of requiring considerably less government involvement than in the past. Drabenstott and Barkema develop a new vision for U.S. agricultural policy. First, they review the budget imperative that is forcing the debate. Second, they present three economic arguments that justify a redirection of policy. Finally, they explore four goals that mark the way to a new policy. |