Second Quarter 2000
Federal Reserve Bank of Dallas

Economic and Financial Review was published from 1999 until 2001.

The Evidence on Government Competition
Lori L. Taylor

Society clearly benefits when businesses compete. The social benefits of government competition are still being debated, however. A large economics literature has sprung up to explore the premise that governments facing intense competitive pressure behave differently than do governments facing little or no competition. Lori Taylor examines the literature on government size, service quality, and productivity. She concludes that an ill-defined market for government, together with inconsistent and potentially inappropriate measuring sticks, raises the strong possibility that competition has been mismeasured in much of the literature on competition and government. Despite these flaws, the literature strongly supports one striking conclusion—competition improves public schools. Almost across the board, researchers have found that school spending is lower, academic outcomes are better, and school district efficiency is higher where parents have more choice of educational provider. Furthermore, competitive benefits appear regardless of whether the competitor is a private school or another public school.

The Economic Impact of Bank Structure: A Review of Recent Literature
Mark G. Guzman

The recent passage of the Financial Services Modernization Act, along with numerous bank mergers over the past few years, has focused attention on the banking system in general and on the sector's industrial organization in particular. Because of this, economists have recently begun developing theoretical models to more fully understand the economic impact of the industry's market structure. Mark Guzman reviews some of this research and draws two conclusions. First, a banking monopoly may benefit certain aspects of the economy. In particular, a monopoly bank can help overcome some of the informational problems inherent in the bank-borrower relationship. Second, how completely both the banking system and the economy are modeled is crucial to the results obtained. When ascertaining the overall economic impact, partial equilibrium models find either that monopoly is beneficial or that it is unclear whether it is beneficial or detrimental. In contrast, general equilibrium models find just the opposite: either monopoly is detrimental to the economy, or, at best, the impact is ambiguous.

The Effect of Welfare Reform and Technological Change on Unemployment
Jason L. Saving

Unemployment has fallen to its lowest level in a generation. Some welcome this development because they believe it increases the average person's ability to achieve the American dream. Others view low unemployment as a precursor to dire economic consequences. Jason Saving examines the issue of unemployment and reaches three main conclusions. First, welfare reform can significantly reduce unemployment, and the empirical evidence to date suggests the recent American welfare reform effort has caused hundreds of thousands of Americans to leave the welfare rolls and enter the labor force. Second, welfare reform can increase the official unemployment rate, but it cannot increase the number of people who are out of work. Finally, technological change can help low-skilled or disabled individuals become productive members of the labor force, and there is reason to believe it has done so during the 1990s.