Third Quarter 1994
Federal Reserve Bank of Dallas

Economic Review was published until 1999.

An Economy at Risk? The Social Costs of School Inefficiency
Lori L. Taylor

A preponderance of economic evidence demonstrates that the public school system in the United States is less efficient than it could be. However, few researchers have examined the economic consequences of such inefficiency. Lori Taylor finds that, although school inefficiency can crowd out consumption and investment in the remainder of the economy and can reduce the rate of return to investments in education, inefficiency has only a limited impact on economic activity. She estimates that, even compounded over twenty-five years, plausible degrees of school inefficiency reduce consumption and potential GDP by less than 1 percent. As such, the social costs of school inefficiency are similar in magnitude to the social costs of monopoly or the corporate income tax.

Monetary Policy and Recent Business-Cycle Experience
R. W. Hafer, Joseph H. Haslag and Scott E. Hein

Some critics of recent monetary policy have focused on slow M2 growth, claiming that the Federal Reserve is too interested in price stability and is forsaking its growth mandate. Others criticize the Fed for achieving price stability too cautiously and urge the adoption of a rule that seeks to eliminate inflation more quickly.

R. W. Hafer, Joseph Haslag and Scott Hein examine two alternative monetary policies and gauge their expected impacts on economic activity. Both policies are simulated over the period 1987–92. One policy, a GNP-targeting rule similar to one proposed by Bennett McCallum, slows nominal GNP growth substantially. Simulated nominal GNP, however, is quite volatile under the GNP-targeting rule. The other policy, referred to in the article as the M2-targeting approach would have resulted in somewhat faster average nominal GNP growth compared with what actually occurred, the start-and-stop pattern exhibited during the recent U.S. recovery would still be present. Thus, the evidence indirectly supports the notion that real shocks were the driving force behind recent weakness in economic activity.

GATT and the New Protectionism
David M. Gould and William C. Gruben

The Uruguay Round of the General Agreement on Tariffs and Trade (GATT) is the first agreement of its kind that reduces or eliminates tariffs on many goods and addresses issues related to intellectual property rights, trade in services and agricultural subsidies. With good reason, it has generated much optimism about the future of free world trade.

But does GATT's trade liberalization today mean that trade will remain liberalized tomorrow? Increasingly, governments are counteracting the perceived unfair trade practices of other nations with their own trade barriers. While concerns about fairness are legitimate, raising trade barriers to counteract actual or perceived unfair trade practices of others is another form of protectionism that restricts world trade. This new protectionism has most often taken the form of antidumping and countervailing duties.

Because the use of antidumping and countervailing duties has grown dramatically in recent years across many countries, David Gould and William Gruben analyze whether the recent changes to the GATT accord will discourage the most protectionist aspects of these widely used trade barriers. Gould and Gruben find that while the new GATT agreement does not eliminate the ability of such countries to misuse antidumping and countervailing duties, the accord delineates the rules of such duties much more clearly and provides mechanisms that will likely limit their abuse.

The Saving Grace
Richard Alm and David M. Gould

Many economists agree that a country's rate of saving can be a key factor in the growth rate and living standards the country achieves. Analysts are less certain about which factors have positive and negative influences on saving, what role government should have in creating a better environment for saving, and the extent to which a country can offset the effects of low domestic saving by tapping into other countries' savings.

Economists, bankers, and officials discussed these and other aspects of saving earlier this year at a symposium sponsored by the Federal Reserve Bank of Dallas. Richard Alm and David Gould recap much of that discussion in this article.