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with different methodologies and come to different results.

A more recent report on energy information activities was issued by the Professional Audit Review Team of GAO. This report, entitled Activities of the Office of Energy Information and Analysis, was published in December of 1977. The Professional Audit and Review Team is required by statute to make an annual evaluation of the Energy Information Administration. It is a unique form of GAO evaluation in that most members of the team are professionals in statistical and analytical work in other agencies such as the Census Bureau, Bureau of Labor Statistics, and Council of Economic Advisors.

This most recent evaluation by GAO reached four major conclusions concerning the work of the Office of Energy Information and Analysis (OEIA), FEA (now EIA in DOE). The first conclusion was that OEIA had made only limited progress toward meeting legislative requirements or goals for credible energy information and analysis. A second conclusion was that the accuracy of most energy data is undetermined. The other conclusions were that OEIA was not sufficiently independent of the energy policy function and that the credibility of energy models had not been established.

The GAO evaluations and general concerns of Congress led to establishment of several features in the Energy Information Administration aimed at correcting the problems. The agency and its administrator were given statutory responsibility to operate as an independent and objective statistical agency. The Department of Energy Organization Act and related conference report clearly provides for the Administrator to exercise his independent professional judgment on methodologies to use, on statistical and technical reports to issue, and on what

data collection and analysis work to include in his core program.

Another feature of EIA is its broad responsibility to collect administrative and regulatory data for DOE in addition to serving as the statistical center. The purpose of this responsibility is to eliminate duplication and overlap in energy information programs. To facilitate this function, EIA was also required to provide any data in their possession to any other agency that requested it in DOE. This feature complicates the issue of treating some data confidentially. DOE has conducted public hearings on alternative policies they could use on confidential treatment of data and still has the issue under consideration.

A third feature of EIA is that it is both the statistical center and the analytical center to DOE. The Office of Applied Analysis in EIA carries on an extensive program of model development, analytical studies and forecasting related to supply, use and prices of energy and microeconomic issues involving the structure, financing, competitiveness, and regulation of the energy industries.

A unique feature of EIA is the focal attention provided for continued evaluation and audit of the programs. The Professional Audit Review Team is responsible for external evaluation while the Office of Energy Information Validation was formed to provide a strong program for improving data quality within EIA. This office is to assure that organizational independence and high priority attention would be given to verifying and validating the accuracy of data collected by EIA, auditing energy information systems in general, performing special audits as necessary, evaluating new data system designs from a data validation perspective, and serving as a strong energy data standards advocate.

Chapter 7. FINANCIAL STATISTICS

Financial statistics may be broadly defined as those associated with private and public money and credit transactions. They cover the banking system, the nonbank investment community such as securities and mortgage markets, and income and balance sheet information on households, business, and governments.

This chapter focuses on financial information on domestic and international economic activity, although with major concentration on domestic activity. International economic transactions associated with the balance of payments and foreign direct investment are covered in the chapter on economic accounts. The programs in this chapter include:

1. Flow of funds accounts of the Federal Reserve Board,

2. Statistics of Income data of the Internal Revenue Service,

3. Industry financial data of the Federal Trade Commission, and

4. A broad grouping of banking, credit, securities, and government financial statistics provided by a number of Federal agencies.

The recently completed Gross National Product Data Improvement Project included several recommendations for strengthening financial statistics. For a more extended discussion of this study of the GNP data base, see the chapter on economic accounts.

Uses and Users

Financial data reflect the quintessence of the money economy. They provide the measuring rod for valuing income, production and wealth, summarize investment incentives of the private sector, and depict the basic vehicle for practically all economic transactions of households, businesses and governments. This is exemplified by the Federal Reserve Board's flow of funds accounts as the financial extension and counterpart of the nonfinancial income and expenditures of the national economic accounts. The flow of funds are used in the

development of projections of sources and uses of funds that are consistent with anticipated trends in the economic accounts, including alternative growth paths of the gross national product, as one analytic tool in the formulation of monetary policy.

Other major short-term uses of financial statistics include the Treasury Department's management of the Federal debt. This involves the continuous refinancing of maturing bills, notes and bonds and the financing of new borrowings at interest rates that clear the market in a pattern that is consistent with overall fiscal and monetary policies. Financial statistics also provide current information on government expenditures and revenues for analyzing and developing fiscal tax and spending policies. These address alternative mixes of the total amounts of fiscal stimulus or restraint, varying types of taxes and spending, and the timing of their implementation.

Major long-term uses of these data are associated with evaluating alternative proposals for tax and welfare reform. An important aspect of this work involves assessments of the effect of changes in tax laws on the income of demographic and business groups as well as their effect on governmental expenditures and revenues. Other long-term uses include projections of private and public sector capital requirements and the capacity to finance large-scale national programs such as those for protecting the environment and dealing with energy shortages.

These data are important to a number of Federal agencies. The Council of Economic Advisers, Federal Reserve Board, Treasury Department, and Office of Management and Budget use this information for macroeconomic policymaking. The Departments of Commerce, Housing and Urban Development, and Health, Education, and Welfare, as well as the agencies noted above, also use these data for special sectoral analyses such as housing markets and for studies and policy formulations affecting the financial implications of the longer run structural issues of tax and welfare reform, pollution abatement, etc. The data on household and business incomes are also used by the Department of Commerce in the preparation of the economic accounts.

Major congressional users include the Joint Economic Committee, Congressional Budget Office, House and Senate Budget Committees, House Ways and Means and Senate Finance Committees, House Committee on Banking, Finance, and Urban Affairs, and Senate Committee on Banking and Urban Affairs. Prominent users in the private sector include the banking and securities industries, university and other economic research groups, and industrial firms.

Flow of Funds Accounts

The flow of funds accounts (FFA), prepared by the Federal Reserve Board, give a comprehensive picture of the financial lending and borrowing transactions of the U.S. economy. These measures integrate the statistical series both on the sources and uses of funds in financial markets and the linkages between these financial activities and the nonfinancial income and expenditures in the national economic accounts (NEA).

The FFA provide the framework for developing projections of capital financing that are both realistic and consistent with projections of the gross national product. This type of analysis is one of several factors used by the Federal Reserve in establishing targets for monetary policy associated with overall goals for employment and inflation. It also is used by financial industries for projecting the probable trend of interest rates.'

Sources of funds are generated by demand deposits and currency, time and savings accounts, life insurance and pension fund reserves, corporate stock, credit market instruments (e.g., government securities, private bonds and bank loans, mortgages, consumer credit), securities and trade credit, and several other items. Uses of funds are absorbed by the (a) financial sectors composed of commercial banks, private nonbank financial institutions, federally sponsored credit agencies and the monetary authorities, and (b) nonfinancial sectors comprising households, business, governments, and rest of the world.

The FFA are integrated with the saving and investment components of the NEA. This interface provides measures of the different types of credit and equity financing used for expenditures by households, business, governments and the rest of the world. Thus, for each of these nonfinancial sectors, estimates are prepared of the external sources of

'Stephen Taylor, "Uses of Flow-of-Funds Accounts in the Federal Reserve System," and discussion by Thomas R. Atkinson, The Journal of Finance, May 1963. Although written in the early 1960's, the actual uses as described in these papers appear to be essentially unchanged.

funds that are used to supplement internally generated income derived from current production to support outlays for goods, services, and investments, and changes in cash balances. (The same information is provided for each of the financial sectors.)2

The FFA are prepared from data provided by a number of sources. Much of the financial data on sources and uses of funds are from the Treasury Department, Census Bureau, commercial bank regulatory agencies, Federal Home Loan Bank Board, and private sources such as the National Credit Union Administration and Life Insurance Association of America. The nonfinancial data related to incomes and expenditures come directly from the NEA.

The FFA data are published quarterly in both seasonally adjusted and unadjusted forms. A condensed version of the tables also appears in the Federal Reserve Bulletin. The data are revised annually to reflect NEA revisions and other benchmark data that become available during the year.

Data Gaps

As part of the Gross National Product Data Improvement Project, a limited examination was made of the content, quality, and timeliness of the underlying data used in preparing the flow of funds accounts. This led to the following recommendations for improving the FFA data base:

1. The Bureau of Economic Analysis should provide current quarterly seasonally unadjusted data for all components of the product side and as many components as feasible for the income side of the national economic accounts.

2. The Securities and Exchange Commission should explore the feasibility of tabulating the quarterly and annual reports filed by all registered large nonfinancial corporations to provide an integrated statement of income, balance sheets and sources of financing.

3. The Census Bureau should collect quarterly data on cash and security holdings of State and local governments.

4. The Bureau of Economic Analysis should provide quarterly measures of fixed capital outlays, stocks, and capital consumption charges by sector and by type of capital as part of the national economic accounts.

'See Board of Governors of the Federal Reserve System, Introduction to Flow of Funds, 1975, for a more complete discussion of the conceptual and statistical aspects of the flow of funds ac

counts.

5. Basic research should be conducted on the measurement of land values with respect to use, ownership, encumbrances, and intangibles (e.g., mineral and timbering rights) related to natural resources and leases. The National Bureau of Economic Research is urged to devote one or more of its annual meetings of the U.S. Conference on Research in Income and Wealth in the near future to this subject.

6. The Federal Reserve Board, Federal Deposit Insurance Corporation, and Comptroller of the Currency should improve bank trust department reporting by collecting more timely data either quarterly or semiannually, speeding up the tabulation of the annual data to 6 months after the reference year, and refining the classification of financial components, e.g., separate tabulations of domestic corporate bonds, foreign corporate bonds, and other major market instruments.

7. The Office of Federal Statistical Policy and Standards should organize and guide an interagency task force to exploit the new census of nonprofit organizations for preparing measures of expenditures and financial transactions to be used in the national economic and flow of funds accounts.

8. The Office of Federal Statistical Policy and Standards should form an interagency task force to monitor and appraise the usefulness of the ongoing Internal Revenue Service project on developing personal wealth estimates by size class. The task force should consider how frequently the project should be repeated and how it could be extended to cover the expenditures of wealthy individuals.

9. The Office of Federal Statistical Policy and Standards should establish an interagency task force to reconcile operational definitions on international transactions used by the Bureau of Economic Analysis, Treasury Department and Federal Reserve System.

10. The Bureau of Economic Analysis should prepare a time series on the U.S. international investment position from 1948 forward.

These recommendations deal with a wide range of areas that should be followed up in the years ahead. They are, nevertheless, a highly selective list of improvements because of the summary nature of the review itself. In fact, there never has been a comprehensive study of the reliability of underlying data used in preparing the FFA. Past studies of the monetary system such as those of the Commission on

Money and Credit (1961) and President's Commission on Financial Structure and Regulation (1972) have emphasized the organization of the Federal Reserve System, use of different monetary policy instruments, regulation of financial institutions, and so forth, rather than the adequacy and development of the analytic and statistical tools for monetary analysis and policymaking.

The seminal conceptual and statistical work on the FFA by Morris Copeland of the National Bureau of Economic Research was completed in 1952.3 The Federal Reserve Board (FRB) then assumed the maintenance and further development of the FFA as a continuing program. Over the first quarter century of the FRB work, the annual estimates were extended to a quarterly series, seasonally adjusted figures were introduced, the FFA were made consistent with the NEA, and balance sheet data on assets and liabilities (stocks) were added to the sources and uses (flows) information.

This progress has been achieved on an ad hoc basis. The introduction of new statistical measures and conceptual advances reflects the demand for analytic uses of the construct balanced by the quality of the data available for preparing the estimates. A considerable body of literature has also developed over the years on problems and needs for the accounts. With the FFA established as one of the major tools for interpreting and forecasting money supply and interest rate movements in the context of overall economic activity, employment and prices, a thorough evaluation of the underlying data used in their preparation and the need for further conceptual development of the accounts is now appropriate.

A commission composed of experts in the flow of funds accounts should be established to conduct a comprehensive study of the need for improving the underlying data and further developing the conceptual aspects of the accounts. The commission should be an independent study group that consults with the Federal Reserve Board, governmental statistical agencies, and private and public users of the flow of funds. (A comprehensive study of the flow of funds data base was recommended in the Gross National Product Data Improvement Project Report.)

'Morris A. Copeland, A Study of Moneyflows in the United States, National Bureau of Economic Research, 1952.

'For an extensive catalogue of these references as of the early 1970's, see Jacob Cohen, "Copeland's Money Flows after TwentyFive Years: A survey," Journal of Economic Literature, March 1972, and A. D. Bain, "Surveys in Applied Economics: Flow of Funds Analysis," The Economic Journal, December 1973.

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