Third Quarter 1993
Federal Reserve Bank of Dallas

Economic Review was published until 1999.

Six Causes of the Credit Crunch
Robert T. Clair and Paula Tucker

Bank lending typically moves with the business cycle. In Texas from 1987 to 1992, however, bank loans declined while nonagricultural employment rose. Robert T. Clair and Paula Tucker consider this evidence of a constrained supply of bank loans, or credit crunch.

Clair and Tucker find that multiple factors have reduced banks' willingness and ability to supply loans. The resolution of failed banks and thrifts, tightening of bank examination standards, new capital requirements, new regulations and increased enforcement of old regulations, and increased exposure to lawsuits have each had an effect. Many of these regulatory changes where made to address important economic and social goals, but their side effects, often unintended and perhaps unavoidable, have been to reduce bank lending in the short run.

America's Health Care Problem: An Economic Perspective
Beverly J. Fox, Lori L. Taylor and Mine K. Yucel

Soaring health care expenditures and the large number of uninsured Americans-now estimated at 35 million-have received much public attention in recent years. The widespread concerns have led to demands for substantial reform of the U.S. health care system.

Beverly Fox, Lori Taylor, and Mine Yucel identify several distortions in the current health care system that may be contributing to overconsumption of health care by some and underconsumption of health care by others, and thus may be leading to excessively high expenditures and the problems of the uninsured. These distortions include tax subsidies for employer-provided health insurance, regulations and industry practices that restrict the supply of health care professionals, and the noncompetitive nature of the health insurance industry. Effective health care reform must address these distortions rather than nondistortionary elements of the system, such as producer and consumer uncertainty and the changing demographic composition of the U.S. population.

Rethinking the IS in IS-LM: Adapting Keynesian Tools to Non-Keynesian Economies Part 1
Evan F. Koenig

The IS-LM diagram was developed as a tool for analyzing Keynesian economies-economies with "sticky" prices and myopic households. In a series of two articles, Evan Koenig shows that a graphical apparatus similar to the traditional IS-LM diagram can be used to analyze economies that have optimizing, forward-looking households. In particular, an expectations-augmented variant of IS-LM analysis is fully consistent with a popular real-business-cycle model. Thus, the IS-LM diagram has wide applicability as a pedagogical device and as a framework within which to discuss policy.

This article deals with an economy in which the capital stock is fixed. A subsequent article will discuss how the expectations-augmented IS-LM framework developed here can be extended to an economy with capital investment.

The Long (and Short) on Taxation and Expenditure Policies
Zsolt Becsi

Much of the 1992 presidential campaign focused on which fiscal policies would best promote economic growth. In this article, Zsolt Becsi develops an analytical and graphical framework to evaluate the long- and short-run effects of a variety of taxation and expenditure policies.

Becsi shows that many tax schemes in their macro-economic effects are essentially taxes on labor or capital or both. While taxes on labor and capital both tend to depress private consumption and output in the long run, Becsi shows that a revenue-neutral reduction of capital taxes and increase in labor taxes are likely to be contractionary in the short run and expansionary in the long run.

Becsi discusses several ways of spending the peace dividend from a reduction in defense expenditures. He shows that use of the dividend to reduce capital taxes causes consumption to rise in the long run with ambiguous effects on output. In the short run, output and consumption will move in opposite directions, but whether output rises or falls is uncertain. Using the peace dividend to increase public investment will also promote a long-run rise of consumption with ambiguous long-run output effects, but without short-run contractionary effects.