Letter to a Young Economist

Professor Prest prepares a recently graduated student of economics for the traps and tripwires of his profession. He is reticent about his allusions, and readers may guess - or grimace - at the organisations and individuals he has in mind.     

Monetary Targets and the World Economy: A Progress Report

The recent changes in the value of the dollar and the talk of an interest rate ‘war’ demonstrate again that the world finds it difficult to cope with rapid exchange rate movements. In some ways the experience - and the reactions to it - are similar to the events of 1978. As now, the world was in a recession (though on a milder scale) and there were fears that exchange rate problems would obstruct economic recovery. The main difference is that in 1978 it was the strength of the Deutschmark which caused concern whereas this time the problems are associated with the rise in the value of the dollar. In a Briefing Paper in Economic Outlook, February 1978, ‘Monetary Targets and the World Economy’ we suggested that the problem arose from inconsistencies between national monetary policies and exchange rate objectives. In general, countries dislike exchange rate changes - in either direction - and there were problems because countries would not accept the exchange rate consequences of their own or other countries' monetary policies. We estimated the required monetary policies for stable exchange rates and suggested specific national monetary targets for 1978 which would at least move the world economy towards consistent monetary policies. In this Economic Viewpoint we return to those ideas. We consider what happened in 1978 and we also revise the underlying monetary rules. More recent experience suggests that although there has been some progress towards the convergence of monetary policies there will continue to be trend changes in exchange rates. It is also clear that there will be short-term fluctuations around these trends. We believe that greater convergence of monetary policies would be desirable but failing that it is important that countries should avoid abrupt changes in monetary policy. It is also important that countries should become accustomed to exchange rate changes. They should direct monetary policy towards their objectives for inflation and should not be diverted from it by temporary or permanent changes in their exchange rates.     

Spinoff/Terminations and the Value of Pension Insurance

This paper derives the value of Pension Benefit Guarantee Corporation (PBGC) pension insurance under two scenarios of interest. The first allows for voluntary plan termination, which appears to be legal under current statutes. In the second scenario, termination is prohibited unless the firm is bankrupt. Empirical estimates of PBGC liabilities are calculated. These show that prospective PBGC liabilities greatly exceed current reserves for plan terminations, that even under a bankruptcy-only termination rule, PBGC liabilities still would be quite sensitive to discretionary funding policy, and that the increasingly common practice of pension spinoff/terminations, substantially increases the present value of the PBGC's contingent liabilities.     

RESALE PRICE MAINTENANCE AND DISTRIBUTIONAL EFFICIENCY: SOME LESSONS FROM THE PAST

Resale price maintenance (RPM) has had a history similar to that of a religious war, with the legal status shifting as the various sects have had more or less influence over the courts and the political arenas. Both the RPM and anti-RPM missionaries have overstated their cases. In theory, RPM can have both procompetitive and anticompetitive effects. Unfortunately, most of the dispute has been theoretical (theological); both sides have provided minimal empirical support for their theological conclusions. The empirical evidence, though sketchy, shows both procompetitive and anticompetitive instances of RPM. In particular, history warns that strongly organized interest groups tend to use the political process to enforce abuses of a distributional restraint that theoretically might otherwise have primarily procompetitive effects. The theoretical and empirical record does not support either per se legality or illegality for RPM in all instances. In some situations, such as for small firms in unconcentrated wholesale and retail markets and for new entrants, the probability of anticompetitive effects is negligible. In other situations, the evidentiary burden of demonstrating either the likelihood of anticompetitive effects, or of their absence, would be practically insurmountable in a litigation context. Rule-of-reason litigation, then, also seems to be an unwise policy choice. On balance, considering the economic, political, and legal constraints, we recommend continuing the current per se illegal standard, but with exceptions for clearly defined instances in which the probability of anticompetitive effects is minimal.