regional economist - spring 2013

7/30/2019 Regional Economist - Spring 2013

1/13

A Quarterly Reviewo Business andEconomic Conditions

V. 21, N. 2

April 2013

The Federal reserve Bank oF sT. louis

CeNtral to ameriCas eCoNomy

Creating JobsLow Interest Rates

Arent Working So Far

Targeting FraudWho Is Illegally Gettin

Unemployment Beneft

Banks andCredit Unins

Cpn NGng awy


2/13

3 pres i d ent s mes s a g e

10 A View rm the Fiscal Cli

By Fernando M. Martin

Januarys deal on the so-called

scal cli only raised projected

revenue moderately and contin-

ued to push the spending issue

orward unresolved. Te econ-

omy may have been slowed down

by such a drawn-out process,

as well as by the uncertainty on

the uture size o government

and on the distribution o the

tax burden.

12 Unemplyment Insurance:

Wh Are the Frauds?

By David L. Fuller, B. Ravikumar

and Yuzhe Zhang

Concealed earnings represent

the largest source o raud in the

U.S. unemployment insurance

system. Individuals with relatively

low earnings constitute a larger

raction o those committing such

raud. High-earnings individuals,

however, account or larger dollar

amounts o this raud.

14 Lw Interest Rates Have

Yet T Spur Jb Grwth

By William . Gavin

Interest rates have been kept

low or more than our years to

stimulate aggregate demand and

job growth. However, these low

rates dont seem to be having

much o the intended eect. Whateconomic mechanisms are work-

ing against low interest rate policy?

What do the economic models say

would happen i rates were raised?

16 co mmu ni t y pro i le

Mt. Vernn, Ill.

By Susan C. Tomson

While Mt. Vernons location at a

major crossroads is still an impor-

tant driver o t he local economy,

the community is oen stressing

quality-o-lie issues these days in

an eort to attract residents and

jobs. At the same time, its pour-

ing money into inrastructure

and other basics, rom new roads

and medical acilities to a new

high school.

19 national overview

Signs Pint t Strnger

Grwth in GDP This Year

By Kevin L. Kliesen

Although there is no shortage o

mediocre news about the economy,

key underlying components regis-

tered solid growth in the ourth

quarter o last year and are

expected to keep growing this

year. As a result, growth in

GDP this year is likely to top

the 1.6 percent growth rate

registered or 2012.

2 0 d i s tr i ct o vervi e w

A Lk at Ppulatin

and Migratin Trends

By Subhayu Bandyopadhyay

and E. Katarina Vermann

On average, urban areas in

the District arent keeping up

with their counterparts across

the country when it comes to

population growth. However,

the Districts urban areas are

better in some categories o

migration and density.

2 2 eco no my a t a g la nce

2 3 rea d er ex ch a ng e

c o n T e n T s

James Bullard, p ceo

r Bk s. l

he Federal Open Market Committee(FOMC) has increased the degree otransparency surrounding monetary policy

in a number o ways since the 1990s. For

example, the FOMC now releases a state-

ment shortly aer each meeting and releases

the minutes o the meeting three weeks

later. In addition, Fed Chairman Ben Ber-

nanke now conducts our press briengs a

year. A urther step toward more transpar-

ency would be a quarterly monetary policy

report or the U.S., as I have called or in the

past. Many other central banks around the

world, including the Bank o England, the

European Central Bank, the Reserve Bank

o New Zealand and the Riksbank, already

publish such a report on a regular basis.

Currently, the FOMC releases a Sum-

mary o Economic Projections our times

a year, which includes projections or a ew

economic variables and or the uture path o

the target ederal unds rate. With 19 FOMC

participants, however, there are potentially

19 dierent sets o orecasts based on 19 di-

erent models and 19 dierent policy assump-

tions. Tus, while the Summary o Economic

Projections provides helpul inormation,

communications about how the FOMC views

the economy could be improved.

A quarterly monetary policy report could

potentially provide a more complete discus-

sion o the state o the U.S. economy and the

likely direction going orward. Tis reportcould also include a discussion o the risks

acing the economy and the possible impact

o special situations (e.g., natural dis asters).

Such a report should be orward-looking

and should contain orecasts as the Sum-

mary o Economic Projections does. Te

release o the new report could be coordi-

nated with the chairmans press briengs.

Te main benet o a quarterly monetary

policy report would be improved commu-

nication with nancial markets and the

American public about how the FOMC

views the key issues acing the U.S. econ-

omy. Tis view could serve as a benchmark

or the discussion o monetary policy and

the state o the economy, both or policy-

makers and or those in the private sector.

Te report should also be able to give a

sense o the amount o uncertainty sur-

rounding U.S. economic perorma nce. oo

much emphasis tends to be placed on specic

values or the orecasts and not enough on

the notion that we do not really know howthe economy will evolve. Te Bank o Eng-

land includes probabilities o a wide range o

outcomes, which reects how much uncer-

tainty exists. Te Fed should do the same.

An important question to address regard-

ing a quarterly monetary policy report is:

Whose orecast or the U.S. economy would

serve as the baseline Fed view? Te Board o

Governors sta could construct this orecast

under the chairmans guidance. Given that

the chairman typically stays in the

o the Committee, the natural outc

would be a orecast that is not too

rom the central tendency o the F

As with any orecast o the econ

the orecast in a quarterly moneta

report must be based on certain as

tions about uture monetary polic

preerence is to use the markets ex

o uture policy (on both the inter

side and the balance-sheet side) at

the orecast is made. By using the

expectation rather than the Comm

the FOMC participants would avo

tially giving the appearance o com

to a specic path or policy and wo

able to adjust uture policy as they

necessary. Using the markets exp

would also put the orecast on the

basis as private sector orecasts.

O course, not every single pers

FOMC would necessarily agree w

baseline orecast in the report. Vo

a orecast, however, would be very

cated and would not make sense.

pants could instead give their own

separately and explain how their v

rom the baseline Fed view. For in

a participants orecast or GDP m

higher, or his or her assessment o

risk may not be as large. Tus, the

debate would not go away; it woul

revolve around the baseline.Overall, a quarterly monetary p

report or the U.S. would be an im

ment in Fed communications, and

bring us up to the standards o int

transparency.

A Quarterly Mnetary Plicy ReprtWuld Imprve Fed Cmmunicatins

AQuarterlyReviewofBusinessandEconomicConditions

Vol.21,No.2

April2013

The Federal reserve Bank oF sT.louis

CeNtral to ameriCas eCoNomy

CreatingJobsLowInterestRates

ArentWorkingSoFar

TargetingFraudWhoIsIllegallyGetting

UnemploymentBenefts?

Banks andCredit Unions

Competition NotGoing awy

p r e s i d e n T s m e s s a g e

Banks and Credit Unins:Cmpetitin Nt Ging AwayBy Richard G. Anderson and Yang Liu

Has the competitive balance tilted away rom banks and towardcredit unions, given the latters tax exemption and more-recentability to draw members rom wider pools? Whether it has or not,both industries have seen similar trend growth over the past 15 yearsand, in act, have come to resemble each other in many ways.

4

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conomistIL 2013 | vol.21,no.2

Regional Economist b

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ONLINE EXTRA

Uncertaintyand the Economy

By Kevin L. Kliesen

Rising levels o economic

uncertainty, which are com-mon ollowing a recession,

are reportedly hindering

rms rom investing and

expanding. Monetary

policymakers, likewise, are

not immune to the challengeseconomic uncertainty poses.

Find out how uncertainty is

dened and measured in this

online-only article at www.

stlouised.org/publications/re

The main beneft o aquarterly monetary policy

report would be improved

communication with fnancial

markets and the American

public about how the FOMC

views the key issues acing

the U.S. economy. This view

could serve as a benchmark

or the discussion o mon-

etary policy and the state o

the economy.

th rgn ecn | www.stlth rgn ecn | April 2013


3/13

i n a n c i a l s Y s T e m

Credit unions and commercial banks are

important parts o this systemand aggres-

sive competitors. Bot h types o institutions

are chartered by the ederal and state gov-

ernments, oen with the intento ostering

competition between the institutions. At

the same time, a web o regulations seeks

to maintain competitive balance between

the institutions. In this essay, we examine

aspects o these regulations and the com-

petition between credit unions and banks

since the 1998 Credit Union Membership

Access Act (CUMAA) relaxed membership

regulations or credit unions.

At the end o September 2012, approxi-

mately 2,710 credit unions were chartered

by 47 states and Puerto Rico, and approxi-

mately 4,320 credit unions were chartered

by the ederal government. Each is a not-

or-prot cooperative, democratically gov-

erned (with each member having one vote)

and operated by a volunteer board o direc-

tors elected by the credit unions members.

Credit unions had 96 million members,

representing more than hal o American

amilies, and provided 16.7 percent o out-

standing consumer credit.1 Credit unions

have become important in home-mortgage

and small-business lending, too.2

In the provision o nancial services to

households, credit unions and community

banks continue to grow more similar, a

trend that began with advances in technol-

ogy during the mid-1970s and accelerated

during the 1980s.3 Because most credit

unions oer a ull range o nancial prod-

ucts and services (either directly or through

third parties), a number o news articles

have suggested that households consider

larger credit unions as ull-service alterna-

tives to banks.4 Academic studies have

conrmed that (1) rates on deposits at banks

and credit unions move together, (2) credit

union lending to small businesses partly

displaces bank lending, and (3) credit union

lending has been steadier through business

cycles, including the recent nanc

than bank lending.5 Further, a ser

studies have concluded that durin

2001 the presence o one or more c

unions in a county tended to redu

number o banks and competition

the existing banks.

In any industry where rms com

asks i others have an unair advant

ing industry supporters have long a

that credit unions possess an advan

because they are exempt rom eder

tax. State-chartered credit unions b

exempt in 1917, ederal credit union

1935. Alt hough the exemption redu

unions cost o capital by approxima

percent relative to a ully taxed envi

several thousand small and medium

banks are organized or tax purpose

Subchapter S corporations and are s

exempt rom ederal income taxes.6

Congress has been clear regardi

social purpose o the credit union

tion: Credit unions are exempt r

eral taxes because they are membe

democratically-operated, not-or-p

By Richard G. Anderson and Yang Liu

Banks andCredit Unins

Cpn N Gng awy

Credit unions and commercial

banks are important parts o

this systemand aggressive

competitors. Both types o

institutions are chartered

by the ederal and state

governments, oten with the

intento ostering competition

between the institutions.

Te U.S. nancial system includes depository institutions small and

large, some chartered by states and others by the ederal government,

some operated or prot and others not or prot, some operated by

volunteers and others by the worlds oremost nancial proessionals.

th rgn ecn | www.stlth rgn ecn | April 2013


4/13

A 2006 study o 14 million credit union

members concluded that the distr ibution o

their incomes closely resembled the income

distribution o the nation as a whole.8

When the dust settles, the core issue is

whether the tax exemption tilts the competi-

tive balance toward credit unions and away

rom community banks. Te intensity o

eeling is illustrated by the longevity o the

issue. In 1997, the rst vice president o the

American Bankers Association (ABA), R.

Scott Jones, testied at a House o Represen-

tatives hearing: Te act is that the exten-

sion o a single common bond to mult iple

common bonds carries with it an extension

o government benets and special regula-

tory treatment, paid or by all taxpayers. In

act, i credit unions were not subsidized

by the government, I doubt that we would

be here this morning. In January 2013,

the chairman o the ABA, Matt Williams,

placed rst on his 2013 wish list an end to

the credit union ederal tax exemption.

Tere is precedent or removal o a ederal

tax exemption: Mutual savings banks

and savings and loan associations (similar

to credit unions in being owned by their

depositors but dissimilar in not being orga-

nized as cooperatives) were exempt rom

ederal income taxes until 1952, when Con-

gress ruled that the nature o their business

had matured to the extent that they

should be taxed in the same manner as

commercial banks.

Credit Unions and the Banking Industry

Credit unions compete primarily with

community banks, those banks with assets o

$10 billion or less. At the end o September

2012, although the nationwide numbers o

credit unions and all commercial banks were

approximately equal (7,030 or credit unions

and 6,170 or all banks), credit unions in the

aggregate held $1 trillion in assets and banks

held $13 trill ion. Most credit unions andbanks are small: At the end o last Septem-

ber, 97 percent o credit unions and 91.5

percent o banks held less than $1 billion in

assets (Figure 1). Further, about 50 percent o

the credit union industrys assets but only 10

percent o the banking industrys assets were

held by small institutionsthose with less

than $1 billion in assets.

During the past 15 years, the banking and

credit union industries have experienced

remarkably similar trends (Figure 2). For

example, the number o banks has decreased

30 percent, while total assets have increased

140 percent. Te number o credit unions

has decreased 36 percent, while total assets

have increased 160 percent.

Field o Membership and the Common Bond

Membership in a credit union is governed

by its eld o membership (FOM). Each

FOM is composed o one or more groups

o persons who share a common bond.

Examples include an occupational bond

(the same employer), an associational bond

(membership in the same organization or

association) and a community bond (resi-

dence in the same neighborhood, commu-

nity or rural district).9 Although statutes

vary, most state credit unions operate with

multiple-group FOMs. Prior to 1982, ed-

eral regulations permitted only single-groupFOMs or ederally chartered credit unions.

In 1982, ederal regulators rst allowed

FOMs that included more than a single

occupational or associational group; in 1983,

they permitted FOMs or individual credit

unions that included both occupational and

associational groups.10 More recently, in cir-

cumstances where a solvent credit union has

acquired an insolvent one, ederal regulators

have permitted FOMs that include mixtures

o groups with occupational, associational

and community bonds.

In 1990, the American Bankers Associa-

tion and its supporters sued ederal regula-

tors, asserting that ederal law did not permit

multiple-group FOMs. Although the plaintis

prevailed in the Supreme Court on Feb. 25,

1998, Congress quickly vacated the courts

action: On Aug. 7, 1998, President Clinton

signed the Credit Union Membership Access

Act, which amended ederal law to explicitly

permit multigroup FOMs. But the law had

a number o caveats. Fir st, only groups with

ewer than 3,000 members would be allowedto join existing credit unions (except when

regulators certied that the group was unlikely

to orm a viable separate credit union). Se c-

ond, community charters were restricted to

a well-dened localcommunity, neighbor-

hood or rural district. Tird, a credit unions

commercial lending could not exceed 12.25

percent o its assets.

On Jan. 8, 1999, the ABA again sued ed-

eral regulators, alleging that their rules with

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20

10,000

9,000

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0

NUMBER

OFBANKS

Number of Banks Assets

figure 2

Commercial Banks: Number and Assets

SOURCE:FederaDeposi InsuranceCorp.

Credit Unions: Number and Assets

SOURCES:CrediUnion NaionaAssociaion,NaionaCredi UnionAdminisraion.

0-100 million 100M-250M 250M-500M 500M-1 billion 1B-10B >10B

90

80

70

60

50

40

30

20

10

0

B an ks C re di t U ni on s79.2

0

10.0

316.3

0

4.9

48.7

8

3.0

76.9

9

2.7

2

1.4

1

0.0

6

33.5

1

33.0

1

ASSET SIZE IN DOLLARS

ure 1

stribution oNumbero Banks and Credit Unions, by Assets Held

0 1 2 : Q 3

SOURCES:FederaDeposi InsuranceCorp.,Naiona CrediUnionAdminisraion,auorscacuaions.

0-100 million 100M-250M 250M-500M 500M-1 billion 1B-10B >10B

90

80

70

60

50

40

30

20

10

0

Banks Credit Unions

10.76

0.9412.06

2.7111.99

2.91

14.95

8.78

2.72%

1.41% 10.03

2.58

40.21

82.08

ASSET SIZE IN DOLLARS

stribution oAssets o Banks and Credit Unions, by AssetsHeld

0 1 2 : Q 3

SOURCES:FederaDeposi InsuranceCorp.,Naiona CrediUnionAdminisraion,auorscacuaions.

organizations generally managed by

volunteer boards o directors and because

they have the specied mission o meeting

the credit and savings needs o consumers,

especially persons o modest means. 7

Te words modest means, not dened

by Congress, oen have been interpreted as

synonymous with lower- and middle-income

wage earners. Banking industry support-

ers argue that banks ser ve larger numberso low- and middle-income households and

that the exemption is a taxpayer subsidy that

encourages credit union expansion. Credit

union advocates argue (1) that the banking

industry serves more low-income custom-

ers because it is larger, (2) that credit unions

should not turn away eligible higher-income

persons who wish to be members, and (3)

that banks can issue equity to raise capital,

while credit unions cannot.

respect to occupational and associational

groups did not reect Congress intent.

Te suit was dismissed by the U.S. Court

o Appeals.

Later litigation challenged the community

bond. In March 2003, ederal regulators

approved a community charter

in Utah that included six counties, two

metropolitan statistical areas (Salt Lake

City and Ogden) and, as noted by the court,

two mountain ranges. Te ABA sued the

next year. Te District Court vacatedapproval o the community charter or lack

o adequate procedure but not because o

the merits. Te community charters were

revised and approved.

As o 2012, there were three criteria or

a ederal community FOM. First, the area

must have clear geographic boundaries,

such as a city, township, county or c oun-

ties, or school district; entire states and

congressional districts are not permitted.

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20

12,000

10,000

8,000

6,000

4,000

2,000

0

State Charter Federal Charter Assets

NUMBEROFCREDITUNIONS

th rgn ecn | April 2013 th rgn ecn | www.stl


5/13

E N D N O T E S

1 Federal Reserve System, Flow o Fun

authors calculation.2 See Smith and Woodbury; Wilcox; S3 See Feinberg and Rahman.4 For example, Browning, Lieber and P5 See Burger and Dacin; Smith and Wo

Smith.6 See Credit Union National Associati7 See U.S. 105th Congress.8 See National Association o State Cre

Supervisors.9 See Emmons and Schmid (1999 and

10 See Burger and Dacin.11 See National Credit Union Administ12 See Lieber.13 See Browning.14 See Silver-Greenberg.

R E F E R E N C E S

Browning, Lynnley. Credit Unions Ex

Clientele. Te New York imes, Sep

Burger, Albert E.; and Dacin, ina. Fie

bership: An Evolving Concept. Filen

Institute, Madison, Wis., 1992.

Credit Union National Association. CU

Summary: Subchapter S Corporation

ary 2013.

Emmons, William R.; and Schmid, Fra

Unions and the Common Bond. Fe

Bank o St. Louis Review, September

1999, Vol. 81, No. 5, pp. 41-64.

Emmons, William R.; and Schmid, Fra

Unions Make Friendsbut Not with

Federal Reserve Bank o St. Louis T

Economist, October 2003, Vol. 11, No

Feinberg, Robert M.; and Rahman, A.F.

Are Credit Unions Just Small Banks

nants o Loan Rates in Local Consum

Markets. Eastern Economic Journal

Vol. 32, No. 4, pp. 647-59.

Lieber, Ron. Credit Unions Are Becko

Open Arms. Te New York imes.

Morrison, David. Trivent Switches to

Charter. Credit Union imes, Dec. 5

National Association o State Credit Un

sors. NASCUS Survey o the State Cr

System. (Arlington, Va.). 2007.

Prevost, Lisa. Te Credit Union Alter

Te New York imes, Dec. 13, 2012.

Silver-Greenberg, Jessica. Small Bank

ters o Avoid U.S. as Regulator. Te

imes, April 2, 2012.

Smith, David M. Commercial Lending

Crisis: Credit Unions vs. Banks. Fil

Institute, Madison, Wis., 2012.

Smith, David M.; and Woodbury, Steph

standing a Financial Firestorm: Cred

vs. Banks. Filene Research Institute

Wis., 2010.U.S. 105th Congress. Bill H.R. 1151 (Cr

Membership Access Act), March 30,

Wheelock, David C.; and Wilson, Paul W

Credit Unions oo Small? Review o

and Statistics, 2011, Vol. 93, No. 4, pp

Wilcox, James A. Te Increasing Impor

Unions in Small Business Lending. S

Administration. Ofce o Advocacy

D.C., September 2011.

Williams, Matt. A Bankers Toughts

Resolutions. ABA Banking Journal,

Vol. 105, No. 1, p. 4.

cond, there must be interaction among

e residents, such as a single political/gov-

nmental jurisdiction or designation o the

ea by the ederal Ofce o Management

d Budget as a Core Based Statistical Area

r a Metropolitan Division within a Core

sed Statistical Area). Tird, the area must

ve a population o no more than 2.5 mil-

n people.11 State criteria or community

arters may dier.

See Figure 3 or more data on credit

nions with ederal charters.

edit Union Expansion

Since January 1999, multiple-group

deral credit unions have added 151,000

oups that contained 29 million persons

the time they were approved. O the

1,000 groups, 89 percent contained 200 or

wer people, while 806 groups contained at

ast 3,000 people.Te largest groups were large indeed. In

05, the Georgia United Federal Credit

nion added the 367,000 employees o the

atholic archdiocese o Atlanta. In 2006,

uth Florida Educational Federal Credit

nion added the 370,000 students attending

iami-Dade public schools. I n 2007, the Pen-

gon Federal Credit Union added the 300,000

rsons in the Military Ofcers Association

America. In 2012, Logix Federal Credit

nion (Los Angeles) added 325,000 members

the Caliornia eachers Association.

Because some multiple-group associa-

onal credit unions include in their FOM

rtain proessional, social and civic asso-

ations that accept anyone as a member,

e number o their potential members is

mited only by the U.S. population. Te

ntagon Federal Credit Union, or exam-

e, includes several associations that oer

embership to anyone or a nominal ee.12

New Jerseys Afnity Federal Credit

nion, or a one-time $25 ee, any resident

New York, New Jersey or Pennsylvanian join the New Jersey Coalition or Finan-

al Education and become a member o the

edit union.13 Utahs HeritageWest Credit

nion oers membership to all people who

ntribute $10 or more to the We Promise

undation o its parent, the Chartway

deral Credit Union, based in Virginia

ach, Va.

Perhaps the most-recent creative example

FOM expansion is the decision in 2012 by

Trivent Financial or Lutherans, a Min-

nesota nancial holding company, to split

its Trivent Financial Bank into two parts:

an associational ederal credit union and a

trust company, the latter to remain a sub-

sidiary o the holding company. A wr iter in

the Credit Union imes noted that oering

loan products and other retail banking ser-

vices through the tax-exempt credit union

would allow Trivent to reduce prices while

continuing to oer investment products

through its sister trust company. But whato the common bond? Membership in the

credit union is open to members o Trivent

Financial or Lutherans, a mutual organiza-

tion. As o this writing, Trivent Financial

or Lutherans web page oers or $19.95 an

associate membership to any person who

provides support or strengthening the

membership eorts o Trivent Financial

or Lutherans. Te membership requires

no purchase o products or servicesbut

the web page notes, Te $19.95 annual

membership ee may be waived when you

purchase a product rom a Trivent Finan-

cial afliate or subsidiary, such as a Trivent

mutual und product or Trivent Federal

Credit Union product. With the waiver,

this credit union is, perhaps, the lowest-cost

open-to-anyone associational credit union

in the United States.

In addition, some ederal credit unions

operate in multiple states. Noteworthy are

the $6.9 billion Security Service FederalCredit Union, San Antonio, exas, with

70 locations in three states, and the aore-

mentioned Chartway, with 64 ofces in 10

states. Tese credit unions, with complex

FOMs, were created when ederal regulators

used broad emergency authority to enable

the purchase and assumption o an insol-

vent credit union by a solvent one. Under

this authority, the acquirer and acquired

credit unions may be in dierent states, and

the acquirer may retain the FOMs o the

acquired in addition to its own.

Finally, we note that three ederal credit

unions bought assets rom banks during

2012. One o the more closely watched

was the purchase by GFA Federal Credit

Union (a community charter) in Gardner,

Mass., o Monadnock Community Bank in

Peterborough, N.H., a sha reholder-owned

savings bank.14 At the outset, some analysts

believed that it would be difcult or a credit

union with a ederal community charterto purchase a bank 25 miles away. Tat

difculty seems to have been resolvedbut

perhaps at the expense o credit unions

urther resembling banks.

Summary

Have the combined eects o the exemp-

tion rom ederal income taxes plus the mul-

tigroup expansion possibilities permitted by

the CUMAA tilted the competitive balance

away rom banks and toward credit unions?

Te evidence does not permit any sharp

conclusions. De spite the oen-heated rheto-

ric o competing advocates, both industries

have experienced similar trend growth since

1998. Further, the relative proportions o

assets held by ederally chartered single,

multiple and community bond credit unions

have changed little. Te only sae prediction

is that, in the uture, credit unions and com-

munity banks will continue to grow more

similar.

Richard G. Anderson is an economist at the Fed-eral Reserve Bank o St. Louis and a visiting pro-

essor at the University o Shefeld in England.Yang Liu is a senior research associate at theSt. Louis Fed. For more on Andersons work, seehttp://research.stlouised.org/econ/anderson/

figure 3

Share o Federally Chartered Credit Unions, by Charter Type

Number o Federally Chartered Credit Unions, by Charter Type

Share o Assets o Federally Chartered Credit Unions, by Charter Type

Amount o Assets o Federally Chartered Credit Unions, by Charter Type

1 99 8 1 99 9 2 00 0 2 00 1 2 00 2 2 00 3 2 0 04 2 0 05 2 0 06 2 0 07 2 00 8 2 00 9 2 01 0 2 01 1 2 01 2

300

250

200

150

100

50

0

Single GroupMultiple GroupCommunity

BILLIONS

OF

DOLLARS

SOURCE:NaionaCredi UnionAdminisraion.




1 9 98 1 99 9 2 00 0 2 00 1 2 0 02 2 0 03 2 0 04 2 00 5 2 00 6 2 00 7 2 0 08 2 0 09 2 0 10 2 01 1 2 01 2

100

90

80

70

60

50

40

30

20

10

0


PERCENT

1 99 8 1 9 99 2 0 00 2 0 01 2 00 2 2 00 3 2 00 4 2 0 05 2 0 06 2 0 07 2 0 08 2 00 9 2 01 0 2 0 11 2 0 12

3,500

3,000

2,500

2,000

1,500

1,000

500

0


NUMBER

1 9 98 1 99 9 2 00 0 2 00 1 2 0 02 2 0 03 2 0 04 2 00 5 2 00 6 2 00 7 2 0 08 2 0 09 2 0 10 2 01 1 2 01 2

100

90

80

70

60

50

40

30

20

10

0


PERCENT



6/13

For a number o years now, there has beena renewed and ongoing debate in the U.S.out the proper role and size o government.

n one side o the argument, distrust in

arkets has increased due to the severity o

e 2007-08 nancial crisis, particularly how

mpacted household wealth. On the othere, distrust in government has increased,

en the apparent ineectiveness o stimulus

ograms and worries about mounting debt,

th o which resulted rom the governments

ponse to the recession that ollowed. Te

agreement in views promoted a situation

which ederal revenue gradually ell well

ow historical averages while spending

e signicantly.

Tese circumstances marked the negotia-

ns to raise the debt ceiling in 2011. An

portant element o the agreement that

s brokered during these talks was the

ablishment o a congressional supercom-

ttee (ofcially, the Joint Select Commit-

on Decit Reduction), whose job was to

nicantly reduce the decit over the span

a decade. Tis bipartisan committee,

wever, ailed to provide any decit-cutting

ommendations; that ailure triggered a

ies o automatic decit-reducing measures,

specied in the original agreement during

debt-ceiling negotiations.

Because o these measures, the ederalcit was projected toward the end o 2012

drop sharply in the ollowing years, uel-

g worries o depressed uture economic

ivity in the context o a weak recovery

m the previous recession. Tis sharp

cal contraction, dubbed the scal cli

the news, consisted o the expiration o

rious tax cuts, tax credits, unemployment

urance extensions and Social Security

yroll tax relie; the decrease in Medicare

payment rates to health-care providers; and

automatic spending cuts, known as seques-

tration. But on Jan. 1, 2013, Congress

passed the American axpayer Relie Act

o 2012, which signicantly moderated the

increase in ederal revenue relative to the

scal cli scenario and postponed sequestra-tion until March.

Te burden o this increased taxation

was distributed unequally across income

groups. For those earning up to $400,000

a year ($450,000 or those ling joint tax

returns), the biggest impact came rom

the expiration o the cut in Social Security

payroll taxes. On the ip side, the so-called

Bush-era tax cuts were made permanent or

this income bracket, removing the uncer-

tainty about their eventual expiration. In

contrast, high-income earners saw signi-

cant increases in tax rates on their income,

capital gains and dividends.

Comparing Historical Levels with Todays

Te accompanying chart shows the

ederal decit, debt, revenue and outlays, all

in terms o GDP, since 1950 and projected

by the Congressional Budget Ofce (CBO)

until 2023.1 As a reerence, the chart

also includes projections o what could

have occurred i no scal deal had been

reachedthat is, i the scal cli scenariohad materialized.2

Until the recent nancial crisis, ederal

revenue had been relatively stable, averaging

about 18 percent o GDP between 1950 and

2008. A series o tax provisions (in 2001,

2003, 2009 and 2011-12) brought revenue

down gradually to 16 percent o GDP in 2012.

One o the main concerns during the scal

cli debate was the potentially recessionary

eect o letting these tax provisions expire.

Te deal ended up being a compromise rom

a decit-reduction perspect ive: Revenue is

projected to return to historical levels, but it

still will not be sufcient to nance current

levels o spending.

On the expenditure side, ederal outlays

averaged 20 percent o GDP between 1950and 2008. Since then, in response to the

nancial crisis and subsequent recession, out-

lays averaged 24 percent o GDP, peaking at

25 percent in 2009. Spending is currently at

its highest since the end o World War II. Te

scal cli deal postponed automatic spend-

ing cuts, which, although much dreaded in

the news, would have had a minor impact on

the ederal decit.

o better understand the outlook on

spending, it is instructive to inspect changes

in its composition. Since the end o the

Korean War in 1953, deense spending has

steadily decreased its share in total outlays.

Currently, deense accounts or about 20

percent o all spending and is projected to

decrease to about 13 percent in 2023. On the

other hand, mandatory spending or trans-

ersmainly, retirement payments, medical

care and unemployment assistanceis

accounting or a larger share o spend-

ing. Remaining below 30 percent o total

spending until 1970, the share o transers

has since exploded. In 2012, transersaccounted or about 57 percent o total out-

lays (13 percent o GDP) and are scheduled

to continue growing. As the chart shows,

much o the recent increase in transers

appears to be permanent; over the next

decade, they are expected to remain about

3 percentage points o GDP above precrisis

levels. Tis is an issue that will likely be at

the center o any meaningul political nego-

tiation aimed at curbing ederal spending.

A View rm the Fiscal Cli

Fernando M. Martin

e d e r a l F i n a n c e s

Tese recent developments in revenue and

expenditure have resulted in large and per-

sistent decits since 2009. During the past

our years, the decit has been at its largest

since World War II. One o the projecte d

outcomes o the scal cli scenario was a

quick, i painul, resolution o the current

decit problem. Instead, the deal struck in

January only raised projected revenue mod-

erately and continued to push the spending

issue orward unresolved.

Not a Pressing Problem Now, but

Persistent decits matter because they pile

up debt. Mounting debt turns into a serious

problem when markets start asking or heavy

compensation to buy public bonds or at-out

reuse to roll over the maturing debt. At the

moment, neither scenario appears pressing,

as evidenced by the historically low yields

earned by U.S. reasury bonds. I anything,

these low returns have postponed any sense

o urgency in resolving scal matters . Loo k-

ing ahead, however, as interest rates increase,

so will the nancial burden o accumulated

debt. Eventually, this may require signicant

E N D N O T E S

1 Te decit is the dierence between o

revenue. Outlays include all orms o

spending (that is, purchases o good

transers to individuals and other gr

interest payments on the debt). Debt

debt held by the public, which exclu

by ederal agencies. All years reerre

essay are scal years. Te scal year

States begins Oct. 1 and ends Sept. 30

quent year and is designated by the y

ends. Beore 1977, the scal year beg

ended June 30.2 Tis is the baseline scenario projec

CBO in August 2012.

Looking Back and Ahead

increases in taxes or reduction in other

spending priorities, both o which have eco-

nomic and political consequences.

Decits and debt aside, the uncertainty

about the ultimate size o government is

itsel an important concern. Will spending

eventually return to its postwar average level

o about a h o output, or will it remain

permanently elevated due to the pressures o

increased trans ers? I government is to be

larger, how is the burden o taxation going

to be distributed? Here, it is important to

know not only who will pay the tab, but also

in what orm new revenue is going to be col-

lected. Income taxes? Capital gains and divi-

dend taxes? Estate taxes? Uncertainty about

uture taxes, both level and type, makes

undertaking marginally protable endeavors

more risky and, thus, generally depresses

economic activity and outlook, urther delay-

ing the economic recovery.

Fernando Martin is an economist at theFederal Reserve Bank o St. Louis. For moreon his work, see http://research.stlouised.org/econ/martin/

CBO Projection

Fiscal Cliff Scenario

1950 1960 1970 1980 1990 2000 2010 2020

30

25

20

15

10

5

0

PERCENT

OF

GDP

12

10

6

8

4

2

0

-2

-4

CBO Projection


PERCENT

OF

GDP

1950 1960 1970 1980 1990 2000 2010 2020

30

25

20

15

10

5

0

PERCENT

OF

GDP

Transfers Alone

1950 1960 1970 1980 1990 2000 2

CBO Projection


100

80

60

40

20

0

PERCENT

OF

GDP

CBO Projection


1950 1960 1970 1980 1990 2000 2

R E v E N U E

D E F I C I t

O U t l A y S

D E b t I N t h E h A N D S O F t h E P U b l I C

SOURCE:CongressionabudgeOfce andauorscacuaions.

NOtE: tesaded areaigigse periodo efnanciacrisis andsusequenrecession (2007-2009). transersaremain reiremen

pamens,medicacare andunempomenassisance. Dein eands oe puicexcudes odings ederaagencies.



7/13

E N D N O T E S

1 Fraud data are taken rom the Bene

Measurement (BAM) program run b

Department o Labor. See Fuller et a2 See, or instance, www.azcentral.com

articles/2012/07/17/20120717des-tar

gotten-arizona-benets.html3 See Fuller et al. 2012a.4 See the U.S. Department o Labor, ww

gov/unemploy/chartbook.cm. More

ployed could have collected benets i

See Fuller et al. 2012b.5 o calculate the number o individua

ting concealed earnings raud, we ca

raction in the BAM sample and mul

total number o persons collecting be

We calculate weekly earnings in the B

by dividing total reported earnings b

weeks worked.6 Replacement rates are calculated rom

sample. For each individua l in the sa

divide the weekly benet amount by

o weekly earnings. Replacement rat

states. We present the average repla

each level o earnings.

R E F E R E N C E S

Fuller, David L.; Ravikumar, B.; and Zh

Unemployment Insurance Fraud, F

Reserve Bank o St. Louis Economic

2012a, No. 28. See http://research.stl

publications/es/article/9481

Fuller, David L.; Ravikumar, B.; and Zh

Unemployment Insurance: Paymen

ments and Unclaimed Benets. Fed

Bank o St. Louis Te Regional Econ

No. 4, October 2012b, pp. 12-13.

Wh Is Cncealing Earningsnd Still Cllecting

Unemplyment Benefts?David L. Fuller, B. Ravikumar and Yuzhe Zhang

r a u d

he unemployment insurance programin the U.S. oers benets to workers iey lose their jobs through no ault o their

wn. In 2011, this program cost $108 bil-

n, o which nearly $3.3 bill ion was spent

overpayments due to raud.1

Unemployment insurance raud occu rshen an ineligible individual collects

nets aer intentionally misreporting

s or her eligibility. Recent headlines

ve brought attention to extreme orms o

aud, such as t he collection o unemploy-

ent benets by prisoners.2 Te dominant

rm o unemployment insurance raud,

wever, is whats called concealed earnings

aud. Tis raud occurs when individuals

llect unemployment benets while they

e employed and are earning wages. Te

erpayments due to concealed earnings

counted or almost $2.2 billion in 2011,

o-thirds o the total overpayments due to

categories o raud.3

In this article, we document a ew acts

regarding concealed earnings raud among

various income groups. Tese acts may

help ocus eorts to deter raud and to

recover overpayments.

o begin, not everyone who is unem-

ployed collects benets: Some people are noteligible, and some choose not to collect. In

2011, the number o unemployed individuals

collecting benets was 3.7 million (only 27

percent o the unemployed individuals).4 Te

median o their earnings when they were last

employed was $596 a week. Among those

collecting unemployment benets, 88,00 0

committed concealed earnings raud; their

(past) median earnings were $479.5

Individuals committing this type o raud

are not evenly distributed among various

income groups. Fig ure 1 illustr ates the num-

ber o individuals committing this raud and

the overpayments to the individuals in each

income group.

Among those committing concealed

earnings raud, 18,000 (roughly 20 percent)

earned less than $300 per week, and 12,000

(14 percent) earned more than $900 per week.

Part o the reason or the uneven distribution

across income groups could be that individu-

als collecting unemployment benets arenot evenly distributed across income groups.

However, the numbers do not line up con-

veniently. For instance, 14 percent o those

collecting benets earned less than $300

per week, whereas almost 25 percent earned

more than $900 per week.

able 1 illustrates the percent o individu-

als in each income group. Tose earning less

than $300 per week accounted or 14 percent

o the individuals collecting unemployment

benets but accounted or 20 percent o the

individuals committing concealed earnings

raud. In contrast, those earning at least

$900 per week accounted or 24 percent o

the individuals collecting unemployment

benets but only 14 percent o the individuals

committing concealed earnings raud.

Measured in terms o raud dollars, how-

ever, the picture looks dierent. As Figure 1

illustrates, nearly hal a billion dollars o the

overpayment went to those earning more

than $900 per week and only $210 million

o the overpayment was accounted or by

the individuals whose weekly earnings wereless than $300. Tat is, those earning more

than $900 per week accounted or almost

22 percent o the overpayment, while the

ones earning below $300 per week accounted

or less than 10 percent.

One reason why the number o individu-

als committing raud in each income group

does not line up perectly with the raud

overpayments in each income group is that

the unemployment benet dollars are not

distributed according to the proportion o

people in each income group. I n act, only

5.5 percent o the benets distributed by the

unemployment insurance program went to

individuals who earned less than $300 per

week, whereas 35.5 percent o the benets

went to individuals who earned more than

$900 per week. (Se e able 2.)

Roughly speaking, high earners receive

larger unemployment checks than low earn-

ers. In the U.S. unemployment insurance

system, each worker collects benets equal

to a percentage o his or her previous earn-

ings. Tis percentage is reerred to as the

replacement rate.

Te replacement rate or high earners is

less than that or the low earners. In 2011, a

person earning $300 per week had a replace-

ment rate o almost 50 percent, a person

earning $1,200 had a replacement rate o

33 percent and a person earning $2,400

had a rate o 15 percent. 6 Despite the lower

replacement rate, the high earners receive

a higher unemployment benet relative to

the low earners. Consequently, concealed

earnings raud committed by an individual

earning $2,400 per week accounts or more

than twice as many dollars as the raud by an

individual earning $300 per week.

able 2 illustrates the percent o the over-

payments (due to this type o raud) going to

each income group. Fraud commit ted by a

high earner involves more dollars relative to

a low earner, and more o the overpayment

amounts go to the high earners.

Fraud due to concealed earnings repre-

sents the largest source o raud in the U.S.

unemployment insurance system. Individu-

als with relatively low earnings c onstitute

a larger raction o those committing such

raud. High-earnings individuals, however,

account or larger dollar amounts o this

raud. Given limited resources to deter

raud and to recover overpayments, the

unemployment insurance system aces a

trade-o between the number o individuals

versus the dollar amounts.

David L. Fuller is an economics proessor atConcordia University. B. Ravikumar is aneconomist at the Federal Reserve Bank oSt. Louis. Yuzhe Zhang is an economics proes-sor at exas A&M University. For more onRavikumars work, see http://research.stlouis-

ed.org/econ/ravikumar/

Table 1

Percentages o Those Collecting UnemploymentBenets and Concealing Earnings in 2011

$300nd

ow $300 -$6 00 $60 0-$ 900 $ 900- $1 ,200

$1,200-

$1,600

$1,600-

$2,400

$2,400nd

ov

Indiiduascoecing

unempomenenefs

14% 37% 25% 11% 7% 4% 2%

Indiiduascommiing

conceaedearningsraud

20% 47% 19% 6% 4% 3% 1%

SOURCES:benefAccuracMeasuremen(bAM) program,U.S.Deparmeno laor;auorscacuaions.

NOtES: tooainepercenageoacoecorsearningessan$300/week,wecacuaeeoanumeroindiiduasin ebAMsampeearningeow

$300/weekanddiideiseoanumeroindiiduasinesampewocoecedsomeenefs. tecacuaionsorindiiduasinoerearningsgroups

andor indiiduascommiingconceaedearnings raudaresimiar.

Table 2

Percent o Unemployment Benets and Percent o Overpaymentsdue to Concealed Earnings Fraud by Dierent Income Groups in 2011

$300nd

ow $300 -$6 00 $60 0-$ 900 $ 900- $1 ,200

$1,200-

$1,600

$1,600-

$2,400

$2,400nd

ov

Unempomen enefs 5.5% 29% 30% 16% 10% 6.5% 3%

Oerpamensdueo

conceaedearningsraud

10% 43% 26% 10% 6% 5% 1%

SOURCES:benefAccuracMeasuremen(bAM) program,U.S.Deparmeno laor;auorscacuaions.

NOtES: tecacuaionsaresimiarooseintae1, onnowwearecacuaingeoadoaraueoenefsoroerpamensoeacincomegroup. For

exampe,oraunempomenenefs,weaddeoaenefscoecedoseearningessan$300/weekanddiideeoaenefscoecedine

bAMsampe.

ure 1

aud due to Concealed Earnings in 2011 by Income Group

$ 30 0 a nd b elow $ 30 0-$6 00 $ 60 0-$9 00 $ 90 0-$1 ,2 00 $ 1,20 0-$1,600

$1,600-$2,400

$2,400and above

45

40

35

30

25

2015

10

5

0

Individuals committing concealed earnings fraud (left axis)

Overpayments due to concealed earnings fraud (right axis)

$1,000

$800

$900

$700

$600

$500

$400

$300

$200

$100

$0

MILLIONS

O

FDOLLARS

WEEKLY EARNINGS

SOURCES:benefAccuracMeasuremen (bAM)program,U.S. Deparmenolaor; auorscacuaions.

NOtES: toarrie ae numero indiiduascommiingconceaedearnings raud(red),we frscacuaee racionoindiiduas ineac income

group(in ebAM sampe)commiingconceaed earningsraud. Ween muipisracion e oanumero indiiduascoecingenefs

ineacgroup. Weperorma simiarcacuaiono fndeoerpamensdueoispeoraud(uepaern). Wecacuaeeconceaedearnings

raudoerpamensas aracionoenefsoreacearningsgroup(inebAMsampe)andmuipieoaenefsreceiedeacgroup.



8/13

w Interest RatesHave Yet T Spurb GrwthWilliam . Gavin

o n e T a r Y p o l i c Y

he Federal Reserve set the target rangeor the ederal unds rate at 0 to 25 basisints in December 2008. It has remained

ere because the recovery in output and

bs has been so slow. Te rate was set so

w to stimulate aggregate demand and job

owth (by lowering borrowing costs ornsumers and rms). With low interest

tes, consumers are more likely to increase

ending now rather than wait to consume

er. Low interest rates also drop the cost

borrowing to invest in productive capital.

e increased demand or consumption and

vestment then leads to higher demand or

bor. But o late, the low interest rates do

t seem to be having much o the intended

ect, either on spending or on job growth.

One way to gauge job activity is to look at

e ratio o employed people to the civilian

pulation. Te employment-to-population

tio alls whenever people quit their jobs

d leave the labor orce. It also alls when

orkers are laid o and counted among

e unemployed. Te gure shows this

tio rom 1990 through 2012. Te shaded

eas represent recessions. As can be seen,

e employment-to-population ratio dips

a trough early in each recovery, but the

ost recent recovery is distinguished by the

lure o this ratio to rebound rom the post-

cession low.Te gure also shows the ederal unds

te over the same period. A cursory glance

veals positive comovement between the

mployment-to-population ratio and the

deral Reserves policy rate.

bstacles to Low Interest Rate Policy

Recognizing that the economy is a

mplex system subject to many shis in

te and shocks to productive activity, it

is also important to consider the economic

mechanisms that work against low interest

rate policy. Te eect o low interest rates on

the supply o labor is subtle but not so hard

to understand.

Interest rates represent the return we get

or waiting to consume. Low interest ratesencourage more spending today, which the

Fed intends, and more leisure today, which

the Fed does not intend. Labor participat ion

rates decline or many reasons, but low inter-

est rates work in the direction o discourag-

ing labor market participation.1 Tis eect

o interest rates is not large and is usually

ignored in academic studies o actors that

aect labor supply.

Te business demand or labor, however, is

widely thought to be t he main determinant

o job growth. Te eect o low interest rates

on labor demand works through the impact

o interest rates on the marginal product ocapital. o understand how this can discour-

age job growth, it might help to review the

basic economic principles surrounding the

ways that lower interest rates aect invest-

ment decisions.

Consider a simple world in which a rm

uses just two actors to produce output:

capital and labor. Te marginal product o

capital reers to the increase in the value o

output that occurs when a rm invests in

one more unit o capital while keeping the

employment level xed.

For example, consider an automobile plant

that produces cars with capital (assembly

lines) and labor which can vary depending

on the demand or cars and the cost o hiring

workers. I demand goes up, the rm mayhire more employees to produce more cars

with the same capital. Adding workers will

increase the marginal product o the physical

plant (the capital), but it will lower the mar-

ginal product o the last worker hired. Now

suppose that the cost o capital alls and the

rm decides to add another assembly line.

In this case, the rm will move some o the

workers rom the other line and hire more

workers. For a variety o reasons, the second

assembly line will produce ewer cars than

the rst line operating alone would. One rea-

son is simply that demand uctuates and the

two lines together will operate below capacitymore oen than one line alone would. Te

increase in capital will lead to a decline in

its marginal product, but investment can be

justied i the cost o capital is low enough.

Te marginal product o capital depends

on how much capital one uses, but it also

depends on how much labor is employed.

I interest rates all, the marginal product

o capital will also all i the rm adds more

capital or i it dismisses some workers. I

interest rates all because demand is projected

to be weak, then the rm may decide to lay

o a shi o workers, leaving the existing

assembly lines idle more oen and resulting,

overall, in a lower marginal product o capital

that is compatible with the lower interest rate

on bonds.

The Role o Bond and Capital Markets

Low interest rates aect investment

through the interaction between bond and

capital markets. I bond rates are held lower

by policy, then the return to capital will

all until investors are indierent between

investing in bonds or capital. In the happy

scenario, unds shi rom bond markets

toward investment in more capital until the

risk-adjusted net marginal product o capital

alls enough to equal the policy-induced low

return on bonds. In the perverse scenario,

rms lay o workers until the marginal prod-

uct o capital alls enough to be consistent

with the lower interest rate. For the employ-

ment-to-population ratio, it matters whether

the marginal product o capital is lowered by

adding capital (more investment) or by laying

o workers.

We are in new territory with interest rates

being held at zero. In policy statements rom

recent meetings, the Federal Open Market

Committee (FOMC), the monetary policy

arm o the Federal Reserve System, promised

to continue adding $85 billion a month to

its balance sheet, and it pledged to keep the

target rate unchanged until the unemploy-

ment rate alls to 6.5 percent or ination

projections rise to 2.5 percent. According to

the most recent FOMC orecasts, neither is

expected to occur beore 2015.

Forecasting is always a problem, but

especially so today because we have very

little data rom economic history with which

to predict how the economy will behave

when the interest rate is pegged at zero. A

ew theoretical studies use New Keynesian

macroeconomic models to analyze monetary

policy when interest rates are near zero. In

these models, i there is a positive shock to

productivity that would normally occur dur-

ing a recovery, it is expected to have perverse

eects i the interest rate is pegged at zero.

Te perverse eects include subpar expan-

sion and downward shis in both the supply

and demand or labor.2 In these models, rais-

ing nominal interest rates (liing o the zero

lower bound) can lead to higher wages and

to higher rates o return in both bond and

capital markets. Firms would have an incen-

tive to add workers because doing so would

lead to an increase in the marginal product

o capital. People would have an incentive to

re-enter the work orce because the return to

saving would increase.

Although these are only models, they are

widely used in analyzing monetary policy.

Aer more than our years o low interest

rates and stagnating growth around the

world, a better understanding o low interest

rate policies is needed.

William . Gavin is an economist at the FederalReserve Bank o St. Louis. Feng Dong, a techni-cal research associate, provided researchassistance. For more on Gavins work, seehttp://research.stlouised.org/econ/gavin/

E N D N O T E S

1 Mulligan argues that changes in gove

especially the 2009 American Recover

vestment Act, substantially increased

benet o not working relative to the s

2007. He arg ues that the distortions r

supply are a major reason or slow inv

job growth during the past our years

2 As Krugman notes, these perverse e

associated with liquidity traps in ana

Great Depression. Fernndez-Villav

Gavin et al. examine the eect o pos

ogy shocks when interest rates are co

at the zero lower bound. For more o

dynamics at the zero lower bound, se

and Woodord; Christiano, Eichenba

Rebelo; Braun, Krber and Waki; an

Groh and Uribe.

R E F E R E N C E S

Braun, R. Anton; Krber, Lena Mareen;

Yuichiro. Some Unpleasant Proper

Linearized Solutions When the Nom

Zero. Federa l Reserve Bank o Atla

Paper 5, 2012.

Christiano, Lawrence; Eichenbaum, Ma

Rebelo, Sergio. When Is the Govern

Spending Multiplier Large? Journa

Economy, 2011, Vol. 19, No. 1, pp. 78-

Eggertsson, Gauti B.; and Woodord, M

Bound on Interest Rates and Optima

Policy. Brookings Papers on Econom

2003, No. 1, pp. 139-233.

Fernndez-Villaverde, Jess; Gordon, G

Quintana, Pablo A.; and Rubio-Ram

Nonlinear Adventures at the Zero L

National Bureau o Economic Resear

Working Paper, No. 18058, 2012.

Gavin, William .; Keen, Benjamin D.;

Alexander; and Trockmorton, Nath

Global Dynamics at the Zero Lower

Federal Reserve Bank o St. Louis, W

2013-007A.

Krugman, Paul R.; Dominquez, Kathry

Rogo, Kenneth. Its Baaack: Japan

and the Return o the Liquidity rap.

Brookings Papers on Economic Activit

No. 2, pp. 137-205.

Mulligan, Casey B. Te Redistribution

How Labor Market Distortions Cont

Economy. Oxord University Press,

Schmitt-Groh, Stephanie; and Uribe, M

Making o a Great Contraction with

rap and a Jobless Recovery. NBER

Paper No. 18544, 2012.The Federal Funds Rate and the Employment-to-Population Ratio

1990 1995 2000 2005 2010

10

8

6

4

2

0

Fed Funds Rate (left axis)

Employment-to-Population Ratio, 16 Years and Older, Seasonally Adjusted (right axis)

PERCENT

PERCENT

58

63

62

61

60

59

64

65

66

Labor participation rates decline or many reasons, but low

interest rates work in the direction o discouraging labor

market participation. This eect o interest rates is not large

and is usually ignored in academic studies o actors that

aect labor supply.

SOURCES: FederaResere board,bureauo laorSaisics/haerAnaics.

NOtE: tesaded areasindicaerecessions.



9/13

Mt. Vernn/Jeersn Cunty, Ill.

b b

CITY | CoUNTY

Ppun 15,236* | 38,713*

lb Fc Na | 19,895**

Unpyn r Na | 8.7%**

P Cp Pn inc $33,747*** | $33,546***

* U.s.Cnu Buu, 2011 .

** Buu f lb sc/Hv anyc,Jnuy 2013,

ny djud.*** Bea/Hv,2011.

LARGEST EMPLoYERS

Cnnn t h ac 3,200

Wgn Dbun Cn 1,475

Gd sn rgn Hh Cn 1,165

Cd Cuny Hp 315

m. Vnn Cy sch 257

soUrCe:Jffn Cuny Dvpn Cp.

sf -pd

he 2010 U.S. census was a reality checkor Mt. Vernon and surrounding Je-son County, in the middle o Southern

nois. Results, released in early 2011,

vealed population declines o 6 percent

r the city and 3 percent or the county as a

hole over the previous decade.Ironically, the decade ending in 2010 had

en one o substantial job growth. It was

d by the towns major employers, primarily

ire-maker whose successive expansions

eated jobs by the hundreds. Employment

o grew steadily at a drug store chains

stribution center and in the c itys vibrant

alth-care sector, made up o two hospitals

d a number o o-site medical ofces

d clinics.

Obviously, people have been working in

town but not living there, but why?

Were in a rural economy, and a rural

economy means labor can come rom 45 or

more miles away, says Jo David Cummins,

president o Mt. Vernons Community First

Bank. People dont move into town; theycommute back and orth.

With a limited housing stock, mostly

rom the mid-20th century, the town oers

ew compelling options. According to a

study done or the city last year, just to keep

up with the new jobs, the city needs in the

coming ve years at least 360 new homes,

mostly priced under $175,000. Cummins

speculates that a ch icken-and-egg situa-

tion developed, with risk-averse builders

o m m u n i T Y p r o F i l e

Susan C. Tomson

Area Plays Up Quality-o-Lie Issues

As Another Economic Development Tool

were connected in 1974, creating beelines

rom Mt. Vernon north to Chicago, south

to Memphis, west to St. Louis and east to

Louisville. Tat same year, the plant o

Continental ire the Americas opened with

150 employees. aking advantage o what

had become a natural location or distribu-

tion centers, the drug store chain Walgreens

began operations in Mt. Vernon in 1990 with

175 employees and gradual ly expanded. Te

distribution center now services 700 stores in

10 Southern and Midwestern states.

Te crossroads have also given rise to

12 hotels, with more than 1,000 rooms

altogether. Bonnie Jerdon, director o the

Mt. Vernon Convention & Visitors Bureau,

says room nights have increased steadily in

recent years. L ast year alone, they went up

5 percent. However, only about hal o the

visitors stay more than one night. Jerdon

hopes that the new branding campaign will

persuade more people to stay longer.

Mary Ellen Bechtel, executive director o

the Jeerson County Development Corp.,

welcomes the new brand as a supplement to

rather than a substitute or traditional eco-

nomic development. Te latter includes tax

credits and training grants rom the state and

property tax abate-

ment and sales

tax waivers

rom local

interpreting the population drop as lack

o demand.

o help raise its prole, reverse the decline

and create a more vibrant and economically

sustainable community, the city last year

hired a branding expert. Te result was the

slogan Mt. Vernon, Illinois: Creativity Rede-

ned! It has been combined with art into a

logo that is now appearing on publications o

the city, the countys Chamber o Commerce,

and the local tourism and economic develop-

ment agencies.

Te slogan is a nod to Mt. Vernons top

creative attraction, the Cedarhurst Center

or the Arts. Tis 90-acre expanse eatures

a 60-piece sculpture garden and a museum

permanently displaying late 19th and early

20th century American paintings rom the

collection o the local couple that bequeathed

most o the property. Te center, which

also oers special exhibits, art classes andconcerts, drew 55,000 visitors last year, two-

thirds o them rom out o town, says the

executive director, Sharon Bradham.

In keeping with the branding eorts goal

to lure more visitors, the city staged its rst

Fall Fest last October. At least 15,000 people

came or the three-day weekend o music,

ood, arts and cras, says Brandon Bullard,

the Chamber o Commerces executive direc-

tor. Another Fall Fest and several other spe-

cial events are on tap or this yearrst steps

toward the estival city image the branding

study suggested that the city seek.

O the many ideas to come rom the

branding exercise, the biggest was redevel-

oping downtowns vacant National Guard

armory into a estival marketplace with a

mix o events and vendors unique to the Mt.

Vernon area. Its easibil ity is being studied,

says a city councilman, odd Piper, who

describes the new creativity brand as some-

thing to be earned over the years.

Quality o Lie, Quality o Lie, Quality ...Te consultants report presented brand-

ing as an economic development strategy.

Te report says quality o lie is the lead-

ing reason businesses start in or move to an

area in the 21st century. L ocation is now a

secondary consideration, the report says.

In contrast, Mt. Vernons location at the

intersection o Interstates 64 and 57 was its

primary economic engine in the late

20th century. Te thoroughares

i th ws an dou a M. vernon is a croci, is coecion o signs a an inercange eome e poin.

PhOtO by SUSAN C. thOMSON

governments. All o these incentiv

been used in various combinations

new businesses to the area and help

ones grow, she says.

Investing in Inrastructure

A heavy emphasis has been put

structure improvements, too. On

side o town, near the I-57 interch

opened in 2009, plans call or a ne

school, a 600-acre planned-unit d

ment, the areas third industrial pa

more medical-related acilities. T

state are investing $9.5 mil lion int

works in that area to make all the d

ment possible.

We use every tool we have in th

nomic toolbox to encourage devel

and redevelopment, adds Mt. Vern

Mary Jane Chesley.

Te citys tools also include tax

ment nancing (IF) districts, wh

increases above an initial, xed am

are dedicated to district upgrades.

our the city has created over the p

years, results have been most strik

the downtown district, where comckws om th top: te $237 miion Good Samarian Regiona hea Cener opened in Januar. te arges empoer in own is e Coninenan, were ruck and car ires are made under e Coninena and Genera rand names. A Magnum See Works new $16 miion pan,coninuous miner a was assemed ere is inspeced. Muc renoaion is aking pace downown, as we as in oer oder pars o e ci.

(PhOtOS

by

SUSAN

C.

thOMSONA

ND

CONtINENtAltIRE

thE

AMERICAS.)



10/13

buildings are up to a century old and many

remain empty. Proceeds rom the IF have

unded 40 building renovation projects,

worth about $2.3 million, and have spurred

another $5 mi llion in private investment, the

mayor says.

Little by little, a downtown master plan

completed in 2006 is being realized. Its

been slow, but we keep moving orward, says

Cyndy Mitchell, executive director o the

Downtown Mt. Vernon Development Corp.

I think downtown is the heartbeat o

a city, says Chesley. As urther signs o

progress, she points to what she describes as

the citys ongoing quality o lie enhance-

ments, including street repairs, park

improvements, new bike trails and an out-

door aquatic center that is due to open July 4.

Abandoned housing and other unused

buildings are being demolished, and rental

housing is now being inspected.

Meanwhile, the year began with, by

Bechtels calculation, up to 450 new jobs

pending over the next three years. O these,

350 are on tap at Continental ire. Te non-

union plant, which makes Continental and

General tires, has thrived as the company has

closed unionized U.S. plants. In January, it

announced its latest expansion. It will cost

$129 million and lead to 100 new jobs.

New Plant or Magnum

Te remaining 50 to 100 new jobs are

in the ofng at Magnum Steel Works, a

abricating and machining shop specializing

in repair o industrial equipment. Magnum

started in 2005 with a handul o employees.

In January, the company began moving its

56-person workorce rom an outgrown

33,000-square-oot building into a new

$16 million, 128,000-square-oot acility.

President Jim Czerwinski says Mt. Vernon

is an ideal location or h is company, which

counts the tire company and Southern

Illinois coal mining companies among its

major clients.

New Hospital Facilities

Also in January, Mt. Vernon continued

evolving into what Cummins perceives as a

health mecca. Good Samaritan Regional

Health Center moved to a new, ve-story,

142-bed, $237 million acility near the new

interchange, almost double the size o its

previous home. Te extra space allowed or

a large number o improvements. With the

move, the hospital also created 100 jobs, says

President Michael Warren. Te opening

came just months aer Crossroads Commu-

nity Hospital, also on the west side o town,

completed its $23 million renovation and

expansion.

A developer has bought Good Samari-

tans ormer site and is tentatively planning

to build housing there. City Manager Ron

Neibert says the city is in preliminary con-

versations with two other potential develop-

ers who have other home-building projects

in mind.

We think were on the right track,Bechtel says. We think we can correct the

decline in population, but its going to take

some time. We probably wont know until

the next census.

Susan C. Tomson is a reelance writerand photographer.

m th top: A gaer a e Cedarurs Cener or e, e main cuura aracion in e area. te museum,

rounded a scupure garden, drew 55,000 isiors ear. te cener is one o man reasons eind e

mmunis new sogan: M. vernon, Iinois: Creaiiefned. te sogan and ogo ae egun o e usede in e area.

OS by SUSAN C. thOMSON

n a T i o n a l o v e r v i e W

he U.S. economy ended 2012 on a downnote. A lthough real gross domesticproduct (GDP) rose at an annual rate o only

0.4 percent in the ourth quarter, several

o the key underlying components reg-

istered solid growth. In particular, con-

sumer outlays or durable goods remained

exceptionally strong, as did construction

o new residential structures. Likewise,

business spending on equipment and s o-

ware rebounded impressively aer alling

unexpectedly in the third quarter. Outlays

or imports are another measure o the will-

ingness o consumers and rms to spend.

ogether, these components registered about

a 3.7 percent annual rate o growth in the

ourth quarter o 2012.1

So, what accounted or real GDPs at

perormance in the ourth quarter? Te

Bureau o Economic Analysis provided an

explanation. First, rms cut back on their

inventory stocking in the ourth quarter;

this reduced overall real GDP growth by

1.5 percentage points. Second, ederal

government expenditures on national

deense ell at their astest rate in a little

more than 40 years; this plunge reduced real

GDP growth by an additional 1.3 percent-

age points. Finally, exports o goods and

services declined or the rst time in nearlyour years; this drop reduced real GDP

growth by 0.4 percentage points. In all

likelihood, these developments are one-o

actors and not likely to persist.

As or the components o real GDP that

posted healthy growth in the ourth quarter,

there are plausible reasons to believe that

those actors supporting growth in this area

will remain in place in 2013. Tus, it is likely

that real GDP growth this year wil l exceed

Signs Pointto Stronger Growthin GDP This Year

By Kevin L. Kliesen

its 1.6 percent growth rate registered in 2012,

which was the weakest growth in three years.

Hope on the Horizon

Several developments have weighed on

nancial markets, consumers and businessesover the past two years. Tese developments

have included Europes sovereign debt and

banking crises, the debates in the United

States over the debt-ceiling extension and

over the expiration o the 2001-2003 tax cuts,

the sharp rise in oil prices rom May 2010

to April 2011, the Japanese earthquake and

tsunami in 2011, and Hurricane Sandy in

October 2012. Fort unately, the headwinds

emanating rom these shocks are abating or

have abated entirely. As evidence, the

St. Louis Feds Financial Stress Index in Feb-

ruary indicated lower than normal nancial

stresses. All else equal, lower than normal

nancial stresses tend to be associated with

improving economic conditions.

A bottom-up approach to analyzing

the economy provides urther support or

steadily improving prospects in 2013. Last

year, auto sales registered their highest

level since 2007, housing starts posted

their highest level since 2008 and business

capital spending nished on a strong note.

Tus, continued low interest rates, risingvalues o nancial assets like stocks and

bonds, an improving labor market, and

increased lending activity should continue

to benet sales o autos, houses and other

durable goods this year. R ising stock prices,

elevated prot margins and healthy cash

ows also augur or continued improvement

in business capital spending and increased

hiring in 2013. Finally, most orecasters

expect continued modest ination pressures

in 2013. I mportantly, the U.S. En

Inormation Administration is o

modest decline in crude oil prices

Risks to the Outlook

Any orecast contains the risk t

and ination could turn out to be

stronger than orecasters had exp

this vein, our recent developmen

out. First, scal policy will be res

in 2013chiey through higher t

Higher taxes could have a signic

on consumption spending. Secon

decision to raise the ederal debt c

postponed until May. As in the su

o 2011, another rancorous politic

could raise uncertainty, elevate n

stresses, and dent the condence

ers and businesses. Tird, gasolin

have risen by more than expected

in 2013. Finally, labor productivi

has weakened considerably over t

two years. In response, the growt

labor costs has accelerated. I bus

are increasingly able to pass along

increased costs to consumers, the

could be another avenue or highe

in 2013. At this point, though, or

and nancial market participants

tion o about 2 percent this year.

Kevin L. Kliesen is an economist at thReserve Bank o St. Louis. See http://stlouised.org/econ/kliesen/ or more

What Are Proessional Forecasters Predicting or Real GDP Growth and CPI In

2011:Q1 2011:Q4 2012:Q3 2013:Q2

5.0

4.0

3.0

2.0

1.0

0.0

Real Gross Domestic Pr

Consumer Price Index

PERCENT

A ctua ls For ecas ts

SOURCE:Sureo ProessionaForecasers,Federa Reserebank oPiadepia,Feruar2013.

E N D N O T E

1 Tis percentage is derived rom able 2 o

March 28, 2013, GDP report rom the Bu

Economic Analysis.



11/13

i s T r i c T o v e r v i e W

pt mt T t dtt d nt ThehthfdrsvDstct

iscomposed o our zones,eac o

wicisceneredaroundoneo

eour mainciies:lieRock,

louisie,Mempisand S.louis. Subhayu Bandyopadhyay and E. Katarina Vermann

Economists who study urban areasargue that cities lead to higher levels ooductivity due to agglomeration econo-

es. In other words, the higher the density

individuals, the higher the overall level o

oductivit y within that area. o examine

e potential or productivity growth in t heghth District, we looked at population and

pulation density growth trends between

00 and 2011.

Te District, whose population grew

5 percent since 2000 and 2.0 percent since

07,1 experienced signicant growth in its

etro areas.2 o illustrate, able 1 indicates

at the population in the Districts metro

eas grew 9.9 percent since 2000 and

9 percent since 2007. During these time

riods, three o the our major metro areas

the District grew at rates lower than the

tions. Specically, the populations in

uisville, Memphis and St. Louis grew

.0 percent, 9.7 percent and 4.3 percent,

spectively, since 2000 and 3.6 percent, 2.5

rcent and 1.3 percent since 2007. Litt le

ck grew 15.9 percent since 2000 and 5.7

rcent since 2007, rates higher than the

stricts and the nations cities.

Te Districts largest levels o growth,

wever, came rom some o the smaller

etro areas. O these areas, the astest

owers were Fayetteville-Springdale-gers, Ark.-Mo. (35.6 percent since 2000

d 8.5 percent since 2007); Bowling Green,

y. (22.0 percent since 2000 and 6.9 percent

nce 2007); Columbia, Mo. (20.3 percent

nce 2000 and 6.1 percent since 2007); and

ringeld, Mo. (19.0 percent since 2000

d 4.0 percent since 2007). Only one

eaPine Blu, Ark.showed a popula-

n decline (7.7 percent since 2000 and

.9 since 2007).

E N D N O T E S

1 Tese District numbers are or all me

where at least hal o the population r

the District. With only metro areas t

contained in the District, metro area

growth increased 8.5 percent since 2

percent since 2007. We chose 2007 a

point or two reasons: 1) due to the av

disaggregated data using the Americ

nity Survey ve-year sample (which h

the 2007-2011 period); and (2) exami

rom 2007 onward allows us to conti

o a 2007 District Overview article by

Wall; this article also examined popu

in the District.2 We dene cities as Core Based Statisti

(CBSAs): urban areas with at least 10,0

and the neighboring areas t hat are so

cally linked to the urban center by com3 Columbia, Mo., is a university city. A

more likely to have higher resident tu

changes in student populations.

R E F E R E N C E S

Glaeser, Edward L.; and Gottleib, Joshua

Wealth o Cities: Ag glomeration Econ

Spatial Equilibrium in the United Sta

Economic Literature, December 2009,

pp. 983-1,028.

Pakko, Michael R.; and Wall, Howard J.

Overview: Population, Sprawl and Im

tion rends in Eighth District Metro A

Widely. Federal Reserve Bank o St. L

Te Regional Economist, Vol. 15, No. 3

pp. 16-17.

Table 1

General District Population Trends

Popt on gowth Mton (2007-2011)

Snc

2000

Snc

2007

Movs Nw

rsdnts

bowing Green, K. 22.0% 6.9% 22.6% 41.8%Cape Girardeau-Jackson, Mo.-I. 7.2 2.5 18.8 38.2

Coumia, Mo.* 20.3 6.1 27.2 40.7

Eizaeown, K. 14.5 8.0 18.5 58.0

Eansie, Ind.-K. 4.9 1.5 14.6 27.1

Faeeie-Springdae-Rogers, Ark.-Mo.* 35.6 8.5 21.0 32.3

For Smi, Ark.-Oka.* 9.6 2.6 16.4 27.2

ho Springs, Ark. 10.0 2.5 16.5 37.9

Jackson, tenn. 7.2 1.5 15.0 41.6

Jeerson Ci, Mo. 7.3 2.7 16.5 43.6

Jonesoro, Ark. 13.6 5.7 22.3 30.4

Little Rock-North Little Rock, Ark. 15.9 5.7 18.1 29.0

Louisville, Ky.-Ind. 11.0 3.6 14.0 26.5

Memphis, Tenn.-Miss.-Ark. 9.7 2.5 17.0 19.7

Owensoro, K. 4.8 2.2 13.4 29.4

Pine bu, Ark. 7.7 2.9 17.2 41.7

St. Louis, Mo.-Ill. 4.3 1.3 13.7 22.1

Springfed, Mo. 19.0 4.0 20.6 32.8

TOTal urbaN uSa 11.7 3.9 15.1 42.8

all DiSTriCT CiTieS 9.9 2.9 16.2 27.6

full DiSTriCT CiTieS 8.5 2.7 15.7 26.8

NOtES: 1)ADisricCiiesreporscangesinmeroareasweremoreanaoepopuaionieswiineEigDisric;FuDisricCiiesindicaes

cangesinmeroareaswereao epopuaionieswiineEigDisric;2)Moersareindiiduaswocangedresidencesineearprecedinge

periodinwiceweresureed;3)NewResidensareindiiduaswocangedresidencesineearprecedingeperiodinwiceweresureedand

moedromaresidenceousideoeircurrenmeroarea;4)Iaicsindicaea majormeroareaineDisric;and5)*indicaesaemeroareaispar

conainedin eEigDisric.

Te Districts metro areas with the highest

levels o mobility rom 20 07 to 2011 were

Columbia (27.2 percent), Bowling Green

(22.6 percent) and Jonesboro, Ark. (22.3 per-

cent).3

Te cities with the lowest levels wereOwensboro, Ky. (13.4 percent), St. Louis,

Mo.-Ill. (13.7 percent) and Louisville, Ky.-

Ind. (14.0 percent).

O those moving within metro areas in

the District or into those metro areas rom

outside, only 27.6 percent were new residents

to the area, compared with 42.8 percent o

migrants who were new residents to their

respective cities throughout all U.S. urban

areas. In act, only two o the Districts metro

areasElizabethtown, Ky., and Jeerson City,

Mo.had higher percentages o new residents

than the average among all U.S. cities.

Migration within District CitiesTe low rate o new residents as a percent-

age o total movers in the District implies

that there are high levels o intracity migra-

tion. Tis trend could indicate that the cities

within the District were growing spatially.

able 2 examines the level o suburban

sprawl: individuals moving rom central cit-

ies and inner suburbs to outlying suburbs.

Table 2

Intracity Migration Patterns

Mton to Otyn

Conts

Cnt as Dnsty Otyn as

Dnsty

Nw

rsdnts

Oth

Mnts

Snc

2000

Snc

2007

Snc

2000

Snc

2007

bowing Green, K. 5.3% 66.0% 24.3% 7.6% 3.9% 0.3%

Cape Girardeau-Jackson,

Mo.-I.

11.5 66.7 11.4 4.2 6.2 3.3

Coumia, Mo.* 3.5 77.1 21.8 6.4 0.2 1.2

Eizaeown, K. 3.5 34.7 15.6 8.8 6.8 2.2

Eansie, Ind.-K. 18.4 52.9 6.5 2.0 1.0 0.7

Faeeie-Springdae-

Rogers, Ark.-Mo.*

7.8 63.3 38.7 9.3 7.8 1.1

For Smi, Ark.-Oka.* 38.5 32.5 11.9 3.2 5.8 1.5

ho Springs, Ark. NA 65.1 10.0 2.5 NA NA

Jackson, tenn. 18.6 68.2 6.7 1.3 10.2 3.1

Jeerson Ci, Mo. 53.9 43.1 6.9 3.3 7.6 2.1Jonesoro, Ark. 13.4 67.2 19.1 7.6 4.3 1.2

Little Rock-North Little Rock,

Ark.

25.4 60.7 13.2 5.1 27.9 8.3

Louisville, Ky.-Ind. 20.3 53.7 10.2 3.7 14.9 3.2

Memphis, Tenn.-Miss.-Ark. 13.4 64.9 8.7 2.4 17.0 2.6

Owensoro, K. 15.7 69.5 6.1 2.7 1.7 0.8

Pine bu, Ark. 21.4 64.7 9.4 3.2 1.5 2.0

St. Louis, Mo.-Ill. 12.2 23.2 3.4 1.3 10.8 1.6

Springfed, Mo. 15.1 51.9 20.2 4.6 14.0 1.6

TOTal urbaN uSa 7.9 50.7 11.2 3.9 17.3 3.9

all DiSTriCT CiTieS 15.9 48.6 9.7 3.2 1

regional economist - spring 2013

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