- The Washington Times - Sunday, January 13, 2008

In the field of economics many flowers grow, some of which blossomed at the Jan. 4-6 annual meeting of the American Economic Association (AEA) in New Orleans. Hundreds of papers were presented on a wide variety of subjects. Here’s a brief rundown on a few of the more eye-catching.

The Federal Reserve received considerable attention. Starting off with a blast, Christina Romer and David Romer of the University of California-Berkeley compared the economic forecasts of the policymaking Federal Open Market Committee (FOMC) with those of the Federal Reserve staff. Even though policymakers have the staff forecasts in hand when making their own projections, the study found that in predicting inflation and unemployment, the FOMC added nothing of value to the staff forecasts.

In the authors’ words: “Someone wishing to predict actual inflation and unemployment who had access to the forecasts of both the FOMC and the staff would be well served by throwing away the FOMC forecast and just using the staff predictions. Policymakers appear to base at least some decisions on their apparently useless information.”

Dean Croushore, University of Richmond economist and visiting scholar at the Federal Reserve Bank of Philadelphia, analyzed revisions in the core and overall personal consumption expenditures price indexes, inflation measures that directly influence monetary policy. He found a pattern that made it “possible to forecast revisions from the initial release to August of the following year. Generally, the initial release of inflation is too low and is likely to be revised up. Policymakers should account for this predictability.” Some of the revisions “could have a substantial impact on monetary policy.”

A paper by Jerry Tempelman, senior analyst with the Federal Reserve Bank of New York, was titled, “A case against explicit inflation targeting.” It’s well known that Fed Chairman Ben Bernanke favors such a policy, i.e., of the Fed announcing a numerical inflation target, and he has been pushing in that direction.



If anything, the presentation of the Tempelman paper testifies to the Fed’s openness and willingness to allow its staff to speak out even though it could be interpreted as a shot at the boss.

Mr. Tempelman says: “Aiming for a specific number rather than a zone attributes too much ability to a central bank to fine-tune the economy. It also attributes too much precision to the measurement of the rate of inflation. … [B]ecause the 1 to 2 percent long-run comfort zone of implicit inflation targeting is so universally understood to be the Federal Reserve’s existing practice, it is not clear that anything is to be gained from an explicit announcement. … The most effective way for a central bank to generate credibility in fighting inflation is to build an actual track record of success in doing so.”

On another subject, Randall Heron of Indiana University and Erik Lie of the University of Iowa investigated the extent of backdating of stock option grants to top executives. The authors estimated 13.6 percent of grants between 1996 and 2005 were backdated or manipulated, with the fraction “highest for unscheduled at-the-money grants, and among firms that are small, operate in the tech sector, and have high stock price volatility.” They found that the “incidence of backdating was more than halved as a result of the two-day filing requirement that took effect on Aug. 29, 2002, but it remains high for grants that are filed late.”

A paper by Abdulkadir Civan of Faith University in Turkey and Michael Maloney of Clemson University studied the retail price of drugs in the United States. Question: Is society getting its money’s worth? The authors say yes: “The retail price of existing drugs causes new drugs to be developed. The higher are the prices of existing drugs in a therapeutic category, the larger is the number of drugs in the development pipeline. … [I]f drug prices decline by 50 percent, a number well within the range of possibility if drug reimportation becomes common, the number of drugs in the development pipeline could decline by 14 to 24 percent. … It is possible that lowering price will kill the goose that lays the golden eggs.”

Joseph J. Doyle Jr. of the Massachusetts Institute of Technology and Steven Levitt of the University of Chicago evaluated the effectiveness of seat belts and child safety seats in protecting children from injury. Analyzing data on crashes reported to the police along with linked hospital data, they found evidence that “lap-and-shoulder seat belts perform roughly as well as child safety seats in preventing serious injury for older children, although safety seats tend to be better at reducing less serious injuries. Lap belts had somewhat higher injury rates, while no restraint is associated with much larger injury rates.”

The authors note that the “estimates of the benefits of child safety seats… are far below those obtained in prior studies based on parent interviews. … One possibility is that either parents (in the previous studies) or police (in the current study) systematically misreport restraint use or injuries.”

I hope these few tasty hors d’oeuvres will tempt you to visit the AEA Web site for a multi-course banquet.

Alfred Tella is former Georgetown University research professor of economics.

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