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January 1991
Federal Reserve Bank of Dallas
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The Long-Run Effects of a Permanent
Change in Defense Purchases
Mark A. Wynne
In this article, Mark A. Wynne explores
how a permanent reduction in defense spending might affect
the average U.S. household. He finds that, in the long run,
Americans will reap a peace dividend. For example, if Congress
reduces annual defense spending from 6 percent of gross national
product to 3 percent, in the long run private consumption
as a share of GNP could rise 3 percentage points. In the short
run, some businesses and households will sustain losses. Over
time, however, the economy will reabsorb the resources freed
by lower defense-related production and will expand production
for private consumption.
Underlying Wynne's analysis is the assumption
that Congress will use the funds saved on defense spending
either to lower taxes or to reduce the federal deficit. Wynne
develops a simple empirical model to explain the relationship
between the share of GNP spent on private consumption and
the share spent on defense over the past one hundred years.
Europe 1992: An Overview
Linda C. Hunter
The European Community (EC) has embarked
on a program popularly referred to as Europe 1992. The aim
of the program is to achieve a unified European market that
will overcome the economic stagnation and unemployment of
the early 1980s and improve the position of EC members in
the global economy. In 1985, the European Commission proposed
almost 300 specific reforms that would reduce trade barriers
between EC countries by 1992. By July 1990, the Commission
had begun negotiations on 60 percent of these reforms, and
many of them have already been adopted.
Linda C. Hunter examines the key
measures that will contribute to European economic integration.
She points out that while the gains from unification may be
large, unification will benefit countries in the interior
of Europe-such as Germany-more than EC-member nations on the
periphery-such as Portugal, Spain, and Greece. Hunter observes
that the countries on Europe's periphery may become discouraged
and delay the process of unification. She concludes that while
the EC may not meet all its goals by 1992, it will have made
progress in liberalizing its internal trade, making Europe
more integrated than it was in 1985.
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