Southwest Economy examines Texas economy, Social Security and Medicare, technology and the Economy, and Russia's transition to capitalism

For immediate release: February 7, 2005

DALLAS—The Texas economy, Social Security and Medicare, technology and the economy, and Russia's churn are explored in the latest issue of the Federal Reserve Bank of Dallas' Southwest Economy.

In "Don’t Mess with Texas," economist Fiona Sigalla sees the Texas economy growing in 2005 but at a slower rate than its traditionally fast pace.

Historically, Texas has experienced faster growth than the national economy; however, she writes, "domestic and global forces are now reshaping the Texas economy and restraining growth.”

Employment in the airline and manufacturing sectors is shrinking, while the service industry is expanding. Nearly all 2004 job growth was in the service sector.

Enhanced productivity and domestic competitive pressures have been especially instrumental in restructuring the economy.

“Globalization gets a lot of attention, but domestic forces have been the overwhelming driver of restructuring in manufacturing,” Sigalla states. Issues such as public school financing in Texas also are creating uncertainty and may alter the business climate.

While restructuring of the Texas economy plays out, Sigalla cautions that efforts to protect failing industries raises taxes, increases costs and restrains economic growth. The restructuring ultimately will lead to economic strength and more jobs, the author concludes.

Social Security and Medicare pose a long-term budgetary challenge, write senior economist Jason Saving and senior economist and research officer Alan Viard in "Social Security and Medicare: No Free Lunch."

These programs are big and getting bigger, outpacing future revenue growth.

"Large tax increases or benefit cuts will occur to address this shortfall, no matter how much we might wish they could be avoided,” the authors write.

Social Security and Medicare currently make transfer payments from workers to retirees; no funds are actually saved.

A reform that scales back these transfer payments would increase national saving and give future generations a better standard of living, Saving and Viard write; however, it would also impose a transition cost on current generations, who would continue to pay for the retirement of their parents while also saving for their own.

"Many people hope for a free lunch that avoids this transition cost. Unfortunately, there is none. Current generations must choose whether to sacrifice for the sake of future generations, and no policy proposal—not even privatization—offers an escape from that burden. If future generations are to be made better off, the transition cost must be paid,” the authors state.

In "Where IT's @: Technology and the Economy," senior economist and policy advisor Thomas Siems and senior economist and vice president Mine Yücel review presentations from a Dallas Fed conference. They find that because IT is now pervasive in the global economy, businesses must continuously improve their information management and effectively integrate IT into their organizations’ culture to experience benefits.

Speakers at the conference included Hal Varian of the University of California at Berkeley, Erik Brynjolfsson of the Massachusetts Institute of Technology and Nicholas Carr, former editor of the Harvard Business Review.

Varian stated that business survival depends on understanding how the information economy has changed, while Brynjolfsson stressed that market values rise for firms following “digital organization” practices and investing heavily in IT applications. In a departure from other speakers, Carr offered this advice: “Spend less; follow, don’t lead; innovate when risks are low; and focus more on vulnerabilities than opportunities.”

Economic analyst Julia Kedrova describes Russia's progress through its transition from communism to capitalism in “Russia’s Churn: So Far Along, So Far to Go.” She finds the country is still suffering from remnants of the past, which hinders its ability to compete for markets and capital with other countries that are pursuing free enterprise reforms more aggressively.

Russians initially embraced economic freedom by creating private companies to meet consumer needs, according to Kedrova. Jobs are steadily shifting from the government to the private sector, and the country has developed capitalistic tools, including a stock market.

However, she writes, “the infrastructure is ill-suited to a modern economy. The manufacturing base is dilapidated. Trade barriers are high. Complex regulations still impose burdensome costs.”

“To finish making enterprise truly free, Russia needs to embrace the churn,” she concludes. “It has no choice.”

Find the January/February issue of Southwest Economy online at www.dallasfed.org.

-30-

Media contact:
James Hoard
Phone: (214) 922-5307
e-mail: james.hoard@dal.frb.org