Is the Large U.S. Current Account Deficit Sustainable?
By Jill A. Holman 

The U.S. current account deficit has grown steadily since 1991, hitting record levels of 3.6 percent of GDP in 1999 and 4.4 percent in 2000. In recent years, the growing deficits have increasingly raised concerns.  For instance, most economists who took part in a recent Wall Street Journal forecasting survey agreed that the current account deficit is the major threat facing the U.S. economy.  Some policymakers have also suggested that the large and growing U.S. current account deficit may be unsustainable and thus may create problems for the economy.

Holman examines the causes and consequences of the large current account deficits in the United States.  She identifies the potential sources of the large deficits.  Much of the rise in the current account deficit over the past decade can be attributed to two factors: accelerating U.S. productivity and a surge in household wealth driven by the stock market.  She then examines whether the U.S. current account deficit is sustainable in the near term.  In this analysis, an unsustainable deficit is defined as one that triggers a sharp hike in interest rates, a rapid depreciation of the dollar, or some other domestic or global economic disruption.  She concludes that, over the near term, deficits of roughly the current magnitude are sustainable and therefore unlikely to disrupt the U.S. economy.

The Transformation of Banking and Its Impact on Consumers and Small Businesses
By William R. Keeton 

The banking industry has undergone profound changes during the last decade.   The most obvious change has been the large number of bank mergers, which have increased both the average size of banks and the area over which they operate.  Other changes may also prove dramatic but are at this point just getting under way—the growth of Internet banking and the combination of banking with other financial services, such as insurance and securities underwriting. 

The implications of these changes for the profitability and safety of banks have been widely discussed, but what do they mean for local economies?  Some analysts argue that the changes will benefit most communities by increasing the public’s access to financial services and making it easier for banks to continue lending during regional economic downturns.  Others argue that the changes will end up hurting many communities, especially smaller ones, because the large organizations created by mergers will be uninterested in serving small customers and will siphon off funds from smaller markets to lend in big cities.

 To shed light on the debate, Keeton focuses on the two groups that are most likely to be affected by the transformation of banking—consumers and small businesses. He concludes that the recent changes in banking are likely to benefit consumers and small businesses in most communities, as long as they remain free to choose between small and large banks for their banking services. 

What Are the Benefits of Hosting a Major League Sports Franchise?
By Jordan Rappaport and Chad Wilkerson

Over the last few decades the number of U.S. metropolitan areas large enough to host a franchise from one of the four major professional sports leagues has soared.  Even as major league baseball, football, basketball and hockey have expanded to include more franchises, demand by metro areas continues to exceed supply.  Metro areas have thus been forced to compete with each other to retain and attract franchises.

The resulting large public spending on new sports facilities has been quite controversial. Usually these costly projects are justified by claims that hosting a sports franchise spurs local economic development by creating numerous new jobs and boosting local tax revenue.  Independent economic studies suggest, however, that such benefits are much smaller than the outlay of public funds.

Does this mean that public funding of sports franchises is not justified?  Perhaps not.  Rappaport and Wilkerson review the current rush by metro areas to build sports facilities.  They lay out the arguments both in favor of and against using public funds to do so. They show why the job creation and tax revenue benefits from hosting a major league franchise fall far short of typical public outlays on constructing a new sports facility. Finally, they argue that the large quality-of-life benefits associated with hosting a major league team may justify the public outlays.