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The Atlas of Economic Indicators.

There are a variety of ways to examine and analyze the American economy. Herbert Stein and Murray Foss, senior fellows at the American Enterprise Institute, focus upon historic and recent performance (through 1990) using a descriptive approach. Stansbury Carnes and Stephen Slifer, vice presidents of Shearson Lehman Brothers, direct their attention to market indicators and role of the Federal Reserve for the purpose of effective business decision making and successful financial investment.

An Illustrated Guide to the American Economy vividly illustrates over one hundred key economic issues through the use of colorful graphs and charts and the generous use of photographs. Herbert Stein, former chairman of the Council of Economic Advisors and Murray Foss, a former director of the Bureau of Economic Analysis of the U.S. Department of Commerce, have limited their written remarks to one page per issue. This makes for a concise treatment of an assortment of issues organized into major sections ranging from aggregate domestic output and its distribution to the performance of the U.S. in the world economy.

An Illustrated Guide puts the American economy in perspective. Among other things, Stein and Foss make it clear that: (1) the U.S. is a "rich" country both in absolute and relative terms. In 1990, for example, the Japanese economy's gross domestic product per person was only 80 percent of the same measure for the U.S. economy. Most countries, of course, do not come close to this. In 1987 two thirds of the world's population lived in countries with per capita gross domestic product less than 20 percent of that of the U.S. (2) Private debt in the U.S. has risen, but private net worth (the excess of assets over liabilities) has increased at almost the same rate as gross national product since World War II. (3) Post World War II recessions have been mild in comparison to pre-war contractions due in part to the growth in government purchases which tend to be independent of business downturns. Indeed, federal expenditures on social security and medicare have continuously increased during the last four decades. (4) Since the 1960s, the U.S. exports and imports have both increased with exports surpassing imports in the 1980s due primarily to the strong dollar. The authors note that this was in not associated with a loss in total domestic employment. (5) The rate of productivity growth has slowed after 1973 for reasons not well understood. In the 1980s, total national savings also declined relative to total output. The authors attribute much of the decline in national savings to the rise in the federal deficit. Stein and Foss also briefly discuss macroeconomic policy, but in a way that is factual and not normative in nature. At one point they observe that wage and price controls during 1971-1974 did not permanently restrain inflation. This is ironic because Dr. Stein was among President Nixon's top policymakers during that period. Interestingly, at this point the authors present what is sure to be a classic photograph of the Nixon administration economic advisors including Paul McCracken, George Schultz, John Connally, Arthur Burns, Paul Volcker and author Herbert Stein.

Several times Stein and Foss warn the reader about the problems associated with measurement and quantification in economics. For example, during their discussion of poverty, the authors note that the proportion of the U.S. population considered to be in poverty is three times as high under one definition as under another. In another context, during their discussion of economic fluctuations, the authors observe that economists have not been very effective at identifying turning points in the business cycle.

Carnes and Slifer have more confidence that an analyst can forecast changes in economic variables through the wise use of economic indicators. Carnes and Slifer, however, are not interested in using these indicators to identify turning points in the business cycle, but rather to forecast changes in interest rates, the stock market and changes in the international value of the dollar. After a brief discussion of market forces and the Federal Reserve, the authors devote a chapter each to seventeen different indicators. On the first page of every chapter an indicator is ranked with respect to its importance. The expected reaction of the bond market, stock market and international exchange rates to changes in each indicator are summarized. Moreover, the authors list the source of information about the indicator, its availability, and frequency of release.

Not surprisingly, Carnes and Slifer rank the nominal output and total employment as the best indicators. Of the remainder, the producer and consumer price indexes, retail sales, industrial production and capacity utilization, housing starts, personal income and consumption expenditures and the index of leading economic indicators as compiled by the Bureau of Economic Analysis of the U.S. Department of Commerce are regarded as most valuable. The final section of The Atlas of Economic Indicators is devoted to an analysis of Federal Reserve monetary policy because as the central bank attempts to control the money supply it has important effects on short term interest rates and the value of the dollar. In all likelihood, this part of the book is largely the work of Mr. Slifer, who served at one time as a senior economist with the Board of Governors of the Federal Reserve. In this section, it is noted that the federal funds rate is the best gauge of monetary policy and open market operations are the most important policy making tool. While the relation between money definition M1 (currency + traveler's checks + demand deposits + other checkable accounts) and the rate of growth of nominal output has deteriorated in recent years, the authors think that M2 (M1 + overnight repurchase agreements + overnight Eurodollar accounts + money market funds + money market deposit accounts + savings deposits + small time deposits), still tracks the economy fairly well.

Alan Greenspan, chairman of the Federal Reserve, however, recently took issue with the usefulness of using M2 as an intermediate target for monetary policy. In July 1993, Mr. Greenspan argued that the relationship between M2 and nominal income had broken down and indicated that the Federal Reserve would use the real interest rate (the nominal rate minus the inflation rate) as a guide for monetary policy.

Finally, Carnes and Slifer outline a three-step monetary policy process and a simple method designed to detect Federal Reserve policy changes. They note that "surprise" actions by the Fed do "ring bells on Wall Street." The authors explain when it may be appropriate for "Fed watchers" to ring the bells although the task will undoubtedly be more difficult now that the Fed has changed its intermediate policy target.

Both books contain superb graphs. An Illustrated Guide to the American Economy contains color graphs; The Atlas of Economic Indicators is printed in black and white. However, neither book contains an index. The detailed table of contents in An Illustrated Guide can be used as a substitute, but the presence of an index in both would have enhanced their value for the student or the general reader.

An Illustrated Guide to the American Economy could serve as a supplement for instructors of economic principles who currently use a brief text containing few graphs or charts. Apprising students of the recent policy change by the central bank. instructors can use The Atlas of Economic Indicators as an effective supplement for a course in investment analysis or for a money and banking course designed with the business student primarily in mind.

WILLIAM C. PERKINS Manhattanville College
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Author:Perkins, William C.
Publication:American Economist
Article Type:Book Review
Date:Sep 22, 1993
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