Comments

Thomas W. Synnott, III
U.S. Trust Co. of New York

With thanks to Bill Brainard for his kind introduction, let me say how honored I am to be included in this panel. Before talking about my approach to economic analysis and forecasting -- and the influences Yale has had on me-I'd like to make a few comments about my first job experience.

I left Yale in September 1961 to fulfill my military service obligation by teaching economics to air force officers at the U.S. Air Force Institute of Technology near Dayton, Ohio. My students were involved in a Masters Degree Program; all had undergraduate degrees in engineering and all of them outranked me. This made for a different kind of relationship between student and professor. The point was underscored when one older student -- a major-explained to me -- a very junior 1^st lieutenant -- that all the students in the program had been carefully selected by the Air Force on the basis of their academic background and capabilities. Therefore, if they failed to learn economics, it was my fault not theirs. This perspective has been invaluable to me in my work as a bank economist over the years.

That work has involved analyzing, explaining and making projections through all kinds of economic conditions. During all this time -- over 30 years -- of being in what Willy Fellner called "the risky business of economic forecasting," I have never seen such ideal economic conditions. Low unemployment coexists with low inflation challenging decades of Phillips curve trade-off analysis. Though the U.S. role of growth engine for the world has led to record (and enormous) trade and current account deficits, they are being easily financed. While I am concerned about the rapid increase in our external liabilities, I have to confess that very few people share my concern.

Since others have already commented on the current state of the U.S. economy, I thought that I would say a few words about the methods and techniques involved in my forecasting work and then make a few brief observations on the U.S. economy from the perspective of a business economist.

Methods and Techniques

When we spoke a few weeks ago, Bill asked which Yale Economics courses had been most helpful. The simple answer is that all have, at one time or another, been enormously useful. Perhaps that is because they all seemed to share a certain open-minded way of thinking. That said, I have chosen a few to highlight.

Theory. I will always remember our first hour test in this course. The first question was "Describe how you would construct a supply curve." The second was "Describe how you would construct a demand curve." Very basic and direct questions they were -- nothing like the ones we anticipated from hours of poring over Joan Robinson's theories of capital. Still, it is surprising how many practical business -- people do not believe that profits are maximized when marginal cost equals marginal revenue.

International Trade and Monetary Systems. The courses in this area taught me the importance of looking at the U.S. economy with an international perspective. In the international financial sphere, it should be noted that many of Robert Triffin's observations and insights of the late '50s and early '60s have been borne out by events.

Economic History and Doctrine. Above all, history taught me the importance of seeing macro-economic conditions as a dynamic process. In my forecasting work, this view has led me to emphasize time-series analysis as a way of understanding economic relationships. Similarly, the classic writing provided some nuggets of thought that have been very helpful in understanding the investment world. Keyne's comment that "not one person in a hundred understands the power of compound interest" is still true. Bohm-Bauwerk's observation that humans have a subjective under -- valuation of the future-especially of low probability events with serious consequences -- has, in my experience, provided valid. One has only to think of recent problems in international lending to developing countries to recognize the validity of this point.

Portfolio Theory. Jim Tobin's seminal lectures on portfolio diversification started me on a path of quantitative analysis in finance, which has proved interesting and rewarding over and over.

Observations on the U.S. Economy

• Comments and questions: These follow from many years of forecasting successes and failures.
• It has generally been a mistake to underestimate the growth and robustness of the U.S. economy.
• Where are the imbalances which will bring this expansion to an end? With the exception of the trade deficit, there is no obvious one (of course they are always obvious in retrospect).
• Is this a new economy? Perhaps in the sense that intellectual capital is replacing physical capital (America On-Line has a greater stock-market capitalization than AT&T) we won't have the same kind of business cycle.
• Is NAIRU obsolete? Or is the tension between a weak world economy and a strong U.S. about to change suddenly and give us the inflation we've expected.
• What of the twin deficits? With the Federal Budget in surplus, why is the current account deficit expanding rapidly.

Conclusion

From these questions and observations it is clear that there are still many "unsettled questions of political economy." There would be great advantages from more dialogue between academic and business economists both in refining theories and improving the economic data with which we all work. When one considers how many flaws there are in our current economic statistical framework and how important are the policy judgments based on them, it is clear that there is much work to be done.