Analysis of Five Macroeconomic Articles

"The Lovebirds' Budget." The Economist, May 10, 1997.

In this article from a British publication, the author considers the recent balanced budget agreement developed by the American Congress. The article discusses how deficit estimates from the Congressional Budget Office (CBO) resulted in an extra $225 billion in projected revenues, which meant that the legislators were able to reach their agreement without having to resort to drastic budget cutting that might have affected Medicare or Social Security.

Under one proposal, which was abandoned when the CBO's revenue projections came in, Medicaid would have been subject to a federal spending cap so that states would only receive matching funds to a certain point; above that point, the federal government would cease matching payments. The other proposal which was dropped would have recalculated the Consumer Price Index (CPI), which many analysts believe overstates inflation. Since the CPI is used to determine the level of payments for federal programs, a reduction in its calculation would reduce federal spending. However, it would also slow down the rate of increases received by recipients of federal assistance, including Social Security, and the CBO's projections meant that the decision on reducing the CPI could be tabled for now.

The British press is interested in the American federal deficit because the American economy is central to the world's economy. If the federal deficit had continued to grow

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ings. "Greenspan, the Piano Tuner," Forbes, May 5, 1997. Summary Martin Sosnoff suggests that Alan Greenspan, head of the Federal Reserve Board, fine tunes interest rates rather than taking definitive action. The author compares Greenspan to his predecessor, Paul Volcker, and finds that Greenspan is a piano tuner compared to Volcker's butcher-like technique. However, Sosnoff foresees another round of interest rate hikes within 1997 which he expects to increase yields on Treasury bonds. He does not foresee a recession, and expects that corporate earnings will remain strong, increasing at a rate between five and seven percent. He notes also that oil prices have declined from $25 to $19 per barrel, and that the dollar is particularly strong, which brings in overseas capital to the equity (stock) markets. As a result of his analysis, Sosnoff recommends that investors keep one-quarter cash reserves, and that they seek out undervalued stocks (he even suggests that IBM may be undervalued). At the same time, he finds America Online an interesting stock to watch, and advises his readers to keep their bond exposure to two years or less, presumably so that they can take advantage of increases in yields as the year progresses. Ana

Category: Economics - A