Economic Letter

Last year, the Congressional Budget Office (CBO) released a remarkable report entitled A 125-Year Picture of the Federal Government’s Share of the Economy, 1950 to 2075. This report projects the future of government spending as a share of GDP assuming current policies remain in place, and the projections put forward are stunning: while the share has averaged about 19% since 1950, it is projected to rise drastically in coming decades, more than doubling to 39.7% by 2075.

The question in the title arises from looking at the ratio of patents issued to dollars spent on research and development (R&D). Patents often are thought of as the fruition of R&D spending and as measures of technological progress.

In the last two years, a large number of defined benefit pension plans swung from record overfunding to record underfunding, exposing many workers and retirees to pension risk. The Pension Benefit Guarantee Corporation (PBGC), established by Congress in 1974, mitigates the pension risk to some extent by providing pension insurance.

Paying attention to consumer prices is a key aspect of central banks’ efforts to maintain low and stable inflation. However, measuring consumer prices is not a straightforward or unambiguous procedure.

International efforts are underway to improve the regulation and supervision of banking institutions to reflect advances in financial risk management techniques. In April 2003, the Basel Committee on Banking Supervision (BCBS 2003a), headquartered at the Bank for International Settlements in Switzerland, released for public comment the new Basel Capital Accord, which will replace the 1988 Capital Accord.

Many governments have intervened in foreign exchange markets to try to dampen volatility and to slow or reverse currency movements. Their concern is that excessive short-term volatility and longer-term swings in exchange rates that “overshoot” values justified by fundamental conditions may hurt their economies, particularly sectors heavily involved in international trade.

The bursting of the stock market bubble has left many private defined benefit pension plans underfunded, raising some concerns about the effects on cash flows and, for a few firms, on financial soundness (see, for example, Kwan 2003). However, even as the asset value of corporate pension funds has eroded, firms sponsoring defined benefit plans have continued to report unusually low pension costs, because pension earnings have not fallen as much under the accounting rules for pension funds.

Policymakers and economists generally agree that financial development—that is, well-functioning financial institutions and markets, such as commercial and investment banks, and bond and stock exchanges—contribute to economic growth. More debatable, however, have been issues about how financial development promotes growth. These issues would have an impact on choosing the design for financial policies and regulations.