Third Quarter 1997
Federal Reserve Bank of Dallas

Economic Review was published until 1999.

Does Being Different Matter?
Finn E. Kydland and D'Ann M. Petersen

Changes in the demographic structure of the U.S. population will affect many aspects of the U.S. economy as we move into the next century. Concerns about the impact of an aging population on savings and interest rates, the financing of government spending programs for the elderly, and the possibility of higher taxes for future generations to pay for them have become hot topics, both in the press and among economists. Another concern is whether rising immigration will place an even greater burden on the government.

In this article, Finn Kydland and D'Ann Petersen present a framework economists can use to shed light quantitatively on such issues, where individual differences matter. They also discuss why, for a certain class of questions, being different does not matter. In the final section, the authors present findings from current research that deals with the issues mentioned above.

The Economics of Private Placements: Middle-Market Corporate Finance, Life Insurance Companies, and a Credit Crunch
Stephen D. Prowse

In this article, Stephen Prowse examines the private placement market. Like the bank loan market, this market is information-intensive: parties negotiate lending terms, lenders evaluate and monitor borrowers' credit risk, covenants are used to control risk, and borrowers lack access to public debt markets. There are also differences from the bank loan market: debt instruments are securities, not loans; maturities are longer; interest rates are fixed, not floating; and the principal investors are life insurance companies, not banks.

The article provides evidence on the credit crunch that occurred in the below-investment-grade sector of this market in the early 1990s and that apparently continues to this day. Asset-quality problems in 1990 and 1991 focused regulatory, stock market, media, and policyholder attention on the financial solvency of life insurers and on their holdings of below-investment-grade bonds. This generated a flight to quality by insurers, who withdrew from this sector of the market. The article also examines reasons for the persistence of the crunch.

"Tough Love": Implications for Redistributive Policy
Jason L. Saving

Jason Saving explores the economic and political implications of "tough love" for redistributive policy. The American welfare system unquestionably helps support the least fortunate among us, but, in making poverty less onerous, it may discourage employment among some individuals. Traditional notions of altruism assume that compassion for the poor is measured by one's willingness to redistribute income, but, to the extent that more generous support for the poor actually encourages recipiency, welfare programs simultaneously mitigate and exacerbate the problem of poverty. A "new altruistic" approach that incorporates tough love would reduce the number of poor people but could only do so by worsening the living standards of those who remain in poverty.