Regional Economist - October 2009

8/9/2019 Regional Economist - October 2009

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Its Big, but Its Not Great

The

Man-Cessionof 2008-09

The Regional

Economist

A Quarterly Reviewof Business andEconomic Conditions

Vol. 17, No. 4

October 2009

The Federal reserve Bank oF sT. louis

C e n T r a l t o a m e r i C a s e C n m yTm


2/24

3 P r n t M g

10 More Freedom,

Less Terrorism

By Craig P. Aubuchon, Subhayu

Bandyopadhyay and Javed Younas

Te root causes o terrorism might

not be poverty and lack o educa-

tion, as many believe. Rather, the

lack o civil liberties, political rights

and the rule o law might be more

infuential.

12 Cap and Trade:

Economics and Politics

By Cletus C. Coughlin

and Lesli S. Ott

Te anti-pollution program in

Congress contains desirable

economic eatures. But a key

componentan auction process

covering all permits or carbon

emissionsdoes not seem to be

politically viable.

c o n t n t

The Man-Cession of 2008-2009By Howard J. Wall

Tat men are losing jobs at a much aster rate than women duringthis recession isnt a surprise. Te pattern is typical. And its not

just the men in the hard hats who are out o a jobmen in almost

all categories o work are being aected disproportionately.

4

The Regional Economistis published

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ubhayu Badypadhyay a 314-

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Economistuless he wie saes

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Director of Research

chisphe J. Walle

Senior Policy Adviser

rbe H. rashe

Deputy Director of Research

cleus c. cuhliDirector of Public Affairs

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Editor

ubhayu Badypadhyay

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The Regional

EconomistOCTOE 2009 | VoL. 17, no. 4

14 Hosings Great Fall:

Avoiding a epeat

By William Emmons

Te simplest way to avoid another

devastating housing crash and

oreclosure crisis probably is to

reduce household borrowing and,

then, to keep it low.

16 c o M M n t Y P r o F L

Alton, Ill.

By Susan C. omson

Tis city on the Mississippi River

north o St. Louis has accepted

that its industrial heyday is over.

Civic leaders hope that their

ambitious eorts to redevelop

the riverront will bring back

some o the glory.

19 t r c t o V r V W

Tax Collections Decline

By omas A. Garrett

In general, the recession is tak-

ing its toll on the collection o

sales tax, personal income tax

and corporate income tax in

the seven states o the Eighth

Federal Reserve District.

21 B o o K r V W

In Fed We Trst

By Kevin L. Kliesen

A Fed economist reviews In Fe

We Trust:Ben Bernankes War

on the Great Panic, the new bo

by David Wessel, a columnist

e Wall Street Journal.

22 cono MY t gL nc

23 r r c H ng

cv illustti by gg gvs/www.mucmpg.cm

2 The Regional Economist | October 2009


3/24

mortgage insurance premiums were not

deductible until 2007. Te homeownership

rate increased rom 63.8 percent in early 1994

to 68 percent in 2002.

Over the ollowing three years, the rate

increased to 69.2 percent, in the heart o the

housing boom. Over this period, subprime

lending took o and additional mortgage

products were introduced and became

popular. Tese included zero down-paymentloans, interest-only adjustable-rate mortgages

(ARMs) and payment-option ARMs. Te last

loan type allowed borrowers fexible monthly

repayment strategies, including ull amorti-

zation o principal with either zero or even

negative amortization.

Te bottom soon ell out. Since the end o

2006, nationwide home prices have allen by as

much as 30 percent. Te homeownership rate

has been steadily declining, too, since then.

Trough the second quarter o 2009, it was

down 1.5 percentage points, to 67.4 percent.Tis decline refects a rebalancing: Just as we

saw the homeownership rate increase by a lit-

tle over one percentage point as new mortgage

products were introduced, we now see those

buyers exiting the market as that equity disap-

pears. Assuming they could just renance

later, they ound themselves unable to make

payments as prices tanked. Additionally,

as Carlos recently discussed in the St. Louis

Feds National Economic Trends publication,

James llard, Peside ad co

Fedeal reseve Bak . Luis

he housing crisis has been central to ourcurrent recession. An economist at theFederal Reserve Bank o St. Louis, Carlos

Garriga, has devoted much o his research to

understanding the intricacies o mortgage

markets and loan choices.

What insight might his research bring to

the current environment? o begin, he has

examined the evolution o homeownership

rates and their connection with mortgage

market innovations. For about a quarter o

a century, the homeownership rate hovered

around 64 percent. In 1966, it was at 63.5

percent. wenty-seven years later, in 1993, it

had barely budged to 63.8 percent. However,

over the past 15 years, a signicant change

occurred, largely the result o government

policy and innovations in mortgage markets.

Politicians pushed to increase the home-

ownership rate on the premise that home-

owners are more likely to maintain their

property than a renter would. And, o course,almost every version o the American dream

includes a house with a white picket ence.

In the early 1990s, the Federal Housing

Administration (FHA) started to oer mort-

gage products with low down payments. Prior

to this, most mortgage lenders required a 20

percent down payment on all new loans. Te

rationale or the down payment was to ensure

that the home had enough equity to ward o

oreclosure i home prices were to all sub-

stantially. o qualiy or a low down payment,

homeowners had to buy lenders mortgageinsurance or private mortgage insurance.

In the late 1990s, conventional lending

became more sophisticated. o avoid mort-

gage insurance, lenders oered a second loan

(at a higher interest rate) or a portion o the

remaining loan amount. Te advantage o

the combo, or piggyback, loan was that bor-

rowers could increase their leverage at a lower

cost since mortgage interest payments could

be deducted on their income tax, whereas

Is the ate of Homeownership Nearing a ottom?

P r n t M g

renancing denials started to increase well

beore the peak o the housing boom, suggest-

ing that lenders were uncomortable with the

values being assessed to homes.1

Tese borrowers obtained nancing

through risky tools. I all borrowers who

could obtain nancing through standard

nancing options (i.e., not zero down-

payment loans, interest-only loans, etc.) had

already entered the homeownership arena,they would have already been captured

within the 2002 rate o 68 percent.

Te homeownership rate is now down

below the 2002 level; it has remained at

roughly 67.5 percent or three quarters

(Q4 2008 through Q2 2009). Although ur-

ther data are needed, this suggests the decline

might now have bottomed out, provided the

economic environment doesnt pull down

otherwise well-positioned homeowners.

A natural question is to wonder whether

the severity o the price decline will orceadditional homeowners out. During the 27

years that the homeownership rate hovered

around 64 percent, there were many price

fuctuations and yet no change in the owner-

ship rate. Te dierence is that virtually no

homebuyer was highly leveraged; almost all

buyers had already paid at least 20 percent

o the purchase price o their home. Hence,

even as prices ell, homeowners were able to

ride out the storm.

Examining homeownership rates is one

small but interesting piece o the puzzle.Government policy helped buoy the home-

ownership rate to historic highs, and risky

lending practices pushed it even higher.

ime will tell where the new equilibrium

rate will settle, but signs point to a near end

in the decline.

aual quesi is

wde whehe he seveiy

he pie delie will e

addiial hmewes u.

1 Garriga, Carlos. Lending Standards in Mortgage Mar-

kets. National Economic Trends, May 2009, p. 1. See

http://research.stlouised.org/publications/net/20090501

/cover.pd.

The Regional Economist | www.stloisfed.org 3


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r c o n



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By Howard J. Wall

The

of 2008-09Its Big, but Its Not Great

Between the ourth quarter o 2007, when thecurrent recession began, and the rst quarter o2009, men bore 78 percent o the job losses. Overthe same period, the unemployment rate or menrose rom 4.9 percent to 8.9 percent, while the rateor women rose by only hal as much, rom 4.7 per-cent to 7.2 percent. As reported by economist MarkPerry o the University o Michigan-Flint in his blog

Carpe Diem, this gap in unemployment rates hasno precedent during the post-war period. In lighto the disproportionate employment eects o therecession on men, some commentators in the pressand elsewhere have labeled the current recessiona man-cession or even the Great Man-Cession.



6/24

Te dominant explanation or this

phenomenon is that it ollows rom the

severity o the recession across industries.

According to Christina Ho Sommers o

the American Enterprise Institute, Men are

bearing the brunt o the current economic

crisis because they predominate in manu-

acturing and construction, the hardest-hit

sectors. Women, on the other hand, are

a majority in recession-resistant elds such

as education and health care. Harvard

economist Greg Mankiw echoes this in

his blog, conjecturing that a large part o

the explanation is the sectoral mix o this

particular downturn in economic activity,

including a signicant slump in residential

construction.

The Great Man-Cession

or Just a Normal One?

Despite the sudden interest in the phe-nomenon, the relative eects o the reces-

sion on men and women are not the least bit

unusual. At least since the 1969 recession,

men have borne the brunt o job losses dur-

ing recessions, and, compared with previ-

ous recessions, men have actually borne a

smallerproportion o job losses in the cur-

rent recession. Between 1969 and 1991, male

employment ell by an average o 3.1 percent

during the ve recessions experienced dur-

ing the period. Female employment, on the

other hand, actually tended to rise by anaverage o 0.3 percent during recessions.1

Women have a much larger presence in the

work orce now than between 1969 and 1991;

so, a more-relevant comparison is to the

2001 recession. For that recession, employ-

ment peaked in the rst quarter o 2001 and

bottomed out in the third quarter o 2003,

with a total loss o a little more than 2.6 mil-

lion jobs. Men accounted or 78 percent o

those job losses, just as they have during the

current recession. So, in terms o job losses,

the current recession has hit men in roughlythe same proportion as did the previous

recession, but by a much smaller proportion

than during earlier recessions.

Still, according to unemployment rates,

the gap between men and women is higher

than it has ever been. It is a bit o a mystery

as to why the gap in unemployment rates

shows much more o a man-cession than is

indicated by jobs numbers, but unemploy-

ment rates indicate much more than simply

changes in employment status. Te rates

refect not only the net number o people

who lose their jobs, but also the net num-

ber o people who are in the labor orce

either already employed or looking or a

job. During this recession, the male labor

orce has been shrinking as the number

o unemployed men has been rising. Te

emale labor orce, in contrast, is actually

larger than it was when the recession began,

accounting or much o the increase in the

gap between the male and emale unemploy-

ment rates.

In sum, the proper perspective on the

current recession is that its eect on the

employment o men relative to women

is very similar to the eects o the 2001

recession and much milder compared with

earlier downturns. Although this perspec-

tive debunks the notion o this recession

being an especially bad one or men relativeto women, the act remains that recessions

hit male employment much harder than

emale employment. otal employment

has allen by 3.1 percent between the ourth

quarter o 2007 and the rst quarter o 2009

while male and emale employment ell by

4.8 percent and 1.4 percent, respectively.

Put another way, men lost jobs at 3.4 t imes

the rate at which women did. Despite what

has been presumed, however, or the current

recession, this is not necessarily due to the

dierent mixes o industries in which menand women tend to be employed.

The Role of Industry Mix

Its easy to see the reasons or supposing

that the disproportionate job losses or

men are due to the disparate impacts o the

recession on the goods-producing sector, in

which 77 percent o employees in the ourth

quarter o 2007 were men. Te two hardest-

hit industries have been construction and

manuacturing, which lost 12.7 percent

and 9 percent o their jobs, respectively,between the ourth quarter o 2007 and the

rst quarter o 2009. Tese two industries

also happened to have had two o the three

highest shares o male employment. At the

other end o the spectrum, two o the three

industries that saw positive job growth over

the periodthe government sector as well

as the education and health services sec-

torare among the three with the lowest

shares o male employees. As illustrated by

Th 2009 csson has hit the construction

industry especially hard. By August, employment in

the construction industry had fallen by 19 percent

during the recession. In the picture above, workers

pave a portion of Route 101 in Exeter, N.H.

/uts/cbis



7/24


8/24

disproportionately on women. Whereas

men comprised 58 percent o initial employ-

ment in the inormation service industry,

they accounted or only 49 percent o thejob losses. Tis industry is relatively small,

however, making up only about 2 percent o

total employment. In the nancial services

industry, the job losses ell almost propor-

tionally, with women seeing 61 percent o

the job losses while starting the recession

with 59 percent o the jobs.

The Demographics of the Man-Cession

Because men tended to have been aected

disproportionately across all industries,

whether goods-producing or service-pro-ducing, the story behind the man-cession

cannot be about industry mix alone.

Clearly, then, the man-cession phenomenon

is not a story about the goods-producing

industries but refects something much

broader about the economy and how rms

respond to downturns by deciding which

workers they will let go and which they will

hire. As we have seen, employment losses

are not elt the same by men and women

within the same industry, and, in act, reces-

sions have widely varying eects acrossdemographic groups. Perhaps the male/

emale dierences within these categories

can shed some light on the man-cession

phenomenon.

Up to this point, all o the data have come

rom payroll employment series produced

by the Bureau o Labor Statistics (BLS) and

which are derived rom a monthly survey o

150,000 or so employers around the country.

Tese data, however, are not broken down

4

2

0

2

4

6

8

10

12

14

16

%C

HANGEINEMPLOYMENT,

Q4.2

007TOQ1.2

009

SOURCE: Bureau of Labor Statistics

NOTE: The number above or below the bars is the ratio of the change in men's employment to the change in women's employment.

Men Women

Married Single White Black Other Ages

16-19

Ages

20-24

Ages

25-34

Ages

35-44

Ages

45-54

Ages

55+

8.9 2.4 3.5 4.5 2.7 1.1 5.5 4.1 1.6 24.1

0.9

The Man-Cession Across Demographic Grops

fiure 2 by demographic categories other than sex;

so, a dierent data source is needed. Fortu-

nately, the bureau also surveys households

on a monthly basis and categorizes the

responses by demographic categories. Te

employment measures rom the payroll and

household surveys are not the same in that

they cover dierent types o employment.

For example, payroll employment does not

include arm employment or sel-employ-

ment. Although the two employment

measures do not coincide perectly, they do

capture the same broad patterns in male/

emale employment. In act, by ortunate

coincidence, the household survey indicates

the same 78/22 split in the male/emale

employment losses that arise rom the

payroll employment data and each o its two

major components, the goods-producing

and service-producing sectors.

Figure 2 illustrates the dierences acrossdemographic groups and between men

and women within each group. For every

demographic group except or those aged 55

and above, ewer were employed in the rst

quarter o 2009 than in the ourth quarter

o 2007, and men ared worse than women

within every group. Tere were, however,

signicant dierences in the impact o the

recession across the groups and on men

relative to women. Note that the demo-

graphic groups overlap a great deal; so, the

explanations or the dierences across themalso oen overlap. Further, across groups,

employment changes over the period refect

not only the eects o the recession but also

ongoing trends in the tendency to partici-

pate in the labor market.2

Married men and women saw smaller job

losses than did their single counterparts.

Moreover, the eect o the recession on the

employment o married men was almost

nine times that on married women, whereas

the eect or single men was 2.4 times

that or single women. In part, the actthat married women are the least likely

subgroup to see employment losses can

be explained by what has been called the

added-worker eect. 3

According to this eect, some married

women enter the labor orce during reces-

sions ollowing their husbands job losses.

Te added-worker eect can account or

some o the increase in the emale labor

orce during the recession.

the evidee ha sme-

hi else is i is ha

me have bee hi disp-

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idusy; ha is, wihi aidusy, me have eded

lse jbs a a hihe ae

ha have wme.



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E N D N O T E S

1 See Goodman, Antczak and Freeman.

2 A recent paper by DiCecio et al. reviews the

trends in labor orce participation, separating

out the changes due to trends rom the changes

due to economic conditions.3 See, or example, Stephens. DeRiviere has

estimated the size o a related eect called the

pin-money hypothesis .

R E F E R E N C E S

DeRiviere, Linda. Have We Come a Long Way?

Using the Survey o Labour and Income

Dynamics to Revisit the Pin Money Teory.

Journal of Socio-Economics,Vol. 37, No. 6,

December 2008, pp. 2340-67.

DiCecio, Riccardo; Engemann, Kristie M.;

Owyang, Michael .; and Wheeler, Christo-

pher H. Changi ng rends in the Labor Force

A Survey. Federal Reserve Bank o St. Louis

Review, Vol. 90, No. 1, January/February 2008

pp. 47-62.

Goodman, William; Antczak, Stephen; and Free-

man, Laura. Women and Jobs in Recessions:

1969-92. Monthly Labor Review, Vol. 116,

No. 7, July 1993, pp. 26-35.

Ho Sommers, Christ ina. No Country or Burl

Men. e Weekly Standard, Vol. 14, Issue 39,

June 29-July 6, 2009, pp. 22-24.

Stephens Jr., Melvin. Worker Displacement

and the Added Worker Eect. Journal of

Labor Economics, Vol. 20, No. 3, July 2002,

pp. 504-37.

Another explanation or the dierence

between married and single people is that

married people are more likely to have

children and are, thereore, more likely to

take a new job at lower pay aer they lose

their old job. Also, much o the dierences

according to marital status are refections

o other demographic dierences that

make them more likely to be aected by a

recession: Compared with married people,

single people tend to be younger and,

thereore, have less work experience and

lower education levels.

Te dierences across racial categories are

intertwined with dierences in other cat-

egories. Black men, who have less education

on average than black women or whites, saw

the largest decrease in employment. Black

women, on the other hand, have seen the

smallest reduction in employment o any o

the six sex-race categories. Underlying thesedierences is the long-term trend o women,

especially black women, becoming more

likely to be employed.

Figure 2 also illustrates the changes in

employment across age groups, or which

there are signicant dierences across

groups and between sexes within each

group. eenagers, or example, have seen

the biggest decrease in employment during

the recession, but there was little dierence

between the percentage decreases or male

and emale teenagers. In contrast, or thenext lowest age group, those aged 20 to 24

years, men saw about a 9 percent decrease

in employment, which was 5.5 times the

decrease or women. Very large dierences

between men and women were also seen

or ages 25-34 and 45-54. Partly refecting

the ongoing trend o increasing employ-

ment, the number o employed people aged

55 and above rose by more than 3 percent

during the period. Tis increase might also

be due to the eects o delayed retirements

in the wake o dramatic decreases in sav-ings and investments or retirement.

Te nal demographic category is edu-

cational attainment, or which there were

dramatic dierences in male and emale

employment changes during the recession.

For every category, men ared worse than

women (Figure 3). Much o these dier-

ences refect the industry-mix eects: Men

without a high school diploma, or example,

would make up a signicant proportion o

2

0

2

4

6

8

10

12

14

Men Women

%C

HANGEINEMPLOY

MENTQ4.2

007TOQ1.2

009

No HighSchool

Diploma

High SchoolDiploma

SomeCollege

AssociateDegree

BachelorsDegree or

Higher

The Man-Cession y Edcation Level

fiure 3

men in the construction and manuactur-

ing industries, whereas women with associ-

ate and bachelors degrees would make up

a large portion o the education and healthindustries. Nevertheless, given the dier-

ences in education levels between the sexes

within other demographic categories, such as

race and age, education level is probably an

important part o the man-cession story.

So, Whats It All About?

Te rst thing to take away rom this

blizzard o data is that the so-called Great

Man-cession o 2008-09 is nothing unusual

when compared with the previous reces-

sion. Even so, a greater than three-to-oneemployment impact on men relative to

women is still large relative to the nearly

equal representation o the sexes in the work

orce. Tis certainly has something to do

with the dierences in the industries or

which men and women are in the majority,

as there is a strong tendency or industries

with large shares o men to have been hit

hardest by the downturn. Tese dierences,

however, are only part o the story, which

must be completed by examining the some-

times large dierences in the educationaland demographic characteristics o men

and women. Te dierences in employment

changes between men and women within

these groups are usually larger than those

across industries.

Howard J. Wall is an economist at the FederalReserve Bank of St. Louis. For more on his work,see http://research.stlouisfed.org/econ/wall.

Read more about economist

Howard Walls research into

recent U.S. recessions. Hisreport, e Eects of Reces-

sions across Demographic

Groups, looks at employ-

ment o U.S. workers or this

recession and others going

back to 1972. Wall presents a

range o demographic cat-

egoriessex, marital status,

race, age and education. o

read the report, go to www.

stlouised.org/publications/

RecessionDemographics/.

Report Goes In-Depth

On Recessions



10/24

Each year, the U.S. State Departmentpublishes Country Reports on Terror-ism, which highlights current strategies,

outcomes and casualties rom U.S. counter-

terrorism eorts. Te 2008 report high-

lights the growing trend in terrorist attacks

abroad, including the September attackagainst the U.S. Embassy in Yemen that

kil led 18 people. Te continued incidence

o terrorism prompts us to consider its root

causes. It is popular to single out poverty or

lack o education as major actors.1 Recent

economic literature, however, points more

toward civil liberties, political rights and the

rule o law as ar greater actors.

Measring Terrorism:

What Conts and How Mch?

Measuring the incidence and type o ter-rorism is controversial. First, it is important

to distinguish between domestic and trans-

national terrorism. Te latter is generally

considered any event that involves citizens

or territories o more than one country,

while the ormer is a local act carried out by

citizens o the target country. (Te attack

in New York City on 9/11 is a prominent

example o transnational terrorism, where

oreign citizens carried out the attack. Te

bombing by imothy McVeigh in Okla-

homa City in April 1995 is an example odomestic terrorism.) It is also important to

consider whether the number o incidents

or the magnitude o events is more impor-

tant. Tis is brought out very clearly in the

accompanying graphs reproduced rom the

work o economists Graham Bird, S. Brock

Blomberg and Gregory Hess.2 While Figure 1

shows a drop-o in the number o terrorist

incidents, Figure 2 shows a rise in the num-

ber o deaths per incident over time. Tis

demonstrates that terrorists are using more

lethal methods and weapons.

Poverty and Terrorism

A study by economists Alan Krueger

and Jitka Maleckova considers the infu-

ence o poverty and education on terrorism.Surprisingly, they nd no evidence that

reducing poverty or improving education

would meaningully reduce international

terrorism.3 Te authors reached their

conclusion based on evidence rom three

sources: Hezbollah militant activities in the

Gaza/West Bank region rom 1998 to 2000,

individual proles rom members o Israeli

Jewish extremists in the late 1970s and rom

a cross-country analysis using data rom the

U.S. State Department. Interestingly, the

authors ound that within the context o theWest Bank/Palestinian confict, individu-

als who engaged in terrorism were better

educated and economically more auent

than the average citizen. Tis apparently

paradoxical result may be better understood

when one realizes that individuals incomes

may correlate with their abilities. o suc-

ceed in terrorist attacks in a heavily guarded

environment (like Israel), one needs a

relatively high degree o skill and ability.

Tereore, it is natural or leaders o the ter-

rorist groups to choose more-able volunteersso that a planned attack is more likely to be

successul.

Another study, by Krueger and economist

David Laitin, analyzes the characteristics

o nations rom which terrorism originates

and o target nations.4 Tey considered

incidents o terrorism where the target and

source nations o terrorism were distinct.

Tey ound that source nations o terror-

ism were more likely to suer rom a lack

o civil liberties and that economic condi-

tions (as captured by GDP per capita) in

these nations had no statistically signicant

relationship with terrorism.5 On the other

hand, they nd that nations with high GDP

per capita were more likely to be targets o

terrorism. A 2006 paper by Harvard econo-mist Alberto Abadie also ound that the risk

o terrorism was not signicantly higher or

poorer nations once one accounted or other

country-specic characteristics such as the

level o political reedom.6

Te study by Bird and his co-authors

comes to a dierent conclusion. Tey ound

that net exporters o terrorism were poorer

nations, while terrorist targets (eectively,

the importers o terrorism) were rich.

Based on this observation, they suggest that

economic actors, among others, do have arole in explaining both the origin and the

location o terrorist acts.

The ole of Political and Civil ights

Te aorementioned study by Abadie

ocuses on the role that political reedom

plays in spurring terrorism.7 By studying

dierent nations, he nds that the incidence

o terrorism is highest in nations with

intermediate levels o political reedom.

Highly democratic and also highly auto-

cratic regimes both tend to experienceless terrorism.

A recent working paper by St. Louis

Federal Reserve economist Subhayu Ban-

dyopadhyay and co-author Javed Younas

explores the link between terrorism and

political and civil rights in developing

nations, using a sample o 125 countries.

Disaggregating the data between domestic

and transnational terrorism, they ound that

it was only domestic terrorism that was

Increasing Political FreedomMay Be Key To Reducing Threats

t r r o r M

By Craig P. Aubuchon, Subhayu Bandyopadhyay and Javed Younas

bi b



11/24

E N DN O T E S

1 For example, Chapter 5.7 o the 2008 Country

Reportson Terrorism states the implicit

assumption that poverty can lead to terrorism:

High unemployment and underemployment

oen a result o slow economic growth, are

among the most critical issues in predomi-

nantly Muslim countries.2 See Bird et al.3 See Krueger and Maleckova (2003).4

See Krueger and Laitin (2007).5 Admittedly, many nations are both sources

and targets o terrorism; the ocus o this

study, however, was on transnational inci-

dents where the sources and targets diered.6 See Abadie.7 A common measure o political and civil rights

comes rom Freedom House, a nonprot, non-

partisa n organization. Freedom House denes

civil liberties as the protection o undamental

individual rights against coercion and interer-

ence by the state; political rights include the

right to participate in the political process and

having reedom o speech. On a scale o 1 to 7,

Freedom House measures a countrys level

o political and civil rights separately, with 1

being ree and 7 being not ree, or a combined

score o 14. For example, in 2005 the UnitedStates scored a 1 in both political and civil

liberties; Sudan scored a 7 on both accounts.

Examples o countries in-between include

Argentina (2 and 2), Taila nd (3 and 3), and

Aghanista n (5 and 5).8 Chapter 5 o the RAND MIP publication,

More Freedom, Less error? Liberal ization

and Political Violence in the Arab World

presents a detailed look at the political climat

and terrorist activity in Saudi Arabia rom

1990 to the present.

R E F E R E NC E S

Abadie, Alberto. 2006. Poverty, Political Free-

dom, and the Roots o errorism. American

Economic Review: Papers and Proceedings,

2006, Vol. 96, No. 2, pp. 5056.Bandyopadhyay, Subhayu; Younas, Javed. Does

Democracy Reduce errorism in Developing

Nations? Federal Reserve Bank of St. Louis

Working Paper 2009-023A. Available at: http://

research.stlouised.org/wp/2009/2009-023.pd.

Bird, Graham; Blomberg, S. Brock; and Hess,

Gregory D. Internat ional errorism: Causes

Consequences and Cures. e World

Economy, 2008, Vol. 31, No. 2, pp. 255-74.

Kaye, Dalia Dassa; Wehrey, Frederic; Grant,

Audra K; and Stahl, Dale. More Freedom, Les

Terror? Liberalizat ion and Political Violence

in the Arab World. RAND Corp.: Santa

Monica, Cal. 2008. See www.rand.org/pubs/

monographs/MG772/.

Krueger, Alan B; Laitin, David D. Kto Kogo?:

A Cross-Country Study o the Origins andargets o errorism. NBER Working Paper,

2007. See www.krueger.princeton.edu/ter-

rorism4.pd

Krueger, Alan B; Maleckova, Jitka. Education,

Poverty and errorism: Is Tere a Causal

Connection? Journal of Economic Perspec-

tive, 2003, Vol. 17, No. 4, pp. 119-44.

RAND-MIP errorism Incidents Database, 2007

See www.rand.org/ise/projects/terrorism-

database/.

U.S. Department o State. Country Reports on

Terrorism 2008. See www.state.gov/s/ct/rls/

crt/2008/index.htm.

related to the level o political and civil

rights. Along the lines o Abadie, they

ound that a transition rom autocracy todemocracy might be associated with an

initial increase in terrorism.

Tese studies suggest that nations may

need to be patient on the path to democracy.

Giving more political rights to citizens may

not immediately reduce terrorism in that

country. An interesting example was the

2003 terrorist attacks against Saudi civilians

by an Al Qaida aliate, which occurred

against the backdrop o political reorm,

including the announcement o municipal

council elections in October 2003.8

Conterterrorism Policy:

A Comprehensive Approach

Because o the highly emotional and

traumatizing impact o terrorism, it is

important to take a measured and thought-

ul look at counterterrorism policy. While

still in its early stages, research suggests that

economic status or lack o education may

not be the most important actors spurring

terrorism. Te evidence suggests a closer

relationship with the lack o political or civil

liberties in origin nations, perhaps becauserustrations with existing regimes make

people more readily rely on violence. Tese

ndings suggest a multipronged approach

to counterterrorism policy; military power

as well as economic assistance may help the

source nations o terrorism to achieve eec-

tive reorm. All the studies suggest that, in

the long run, political reorms that coner

rule o law, civil liberties and political rights

to developing nations will be the best way to

reduce incidents o global terror.

Subhayu Bandyopadhyay is an economist atthe Federal Reserve Bank of St. Louis. Craig P.Aubuchon is a research associate at the Bank.Javed Younas is assistant professor of economicsat the American University of Sharjah, UnitedArab Emirates. For more on Bandyopadhyayswork, see http://research.stlouisfed.org/econ/bandyopadhyay.

Transnational Terrorist Incidents, 1968-2003

fiure 1

1968 1973 19881978 1983 1993 1998 2003

700

600

500

400

300

200

100

0

INCIDENTS

PER

YEAR

YEAR

1968 1973 19881978 1983 1993 1998 2003

10

9

8

7

65

4

3

2

1

0DEATHS

PER

INCIDEN

T

EACH

YEAR

YEAR

Deaths Per Transnational Terrorist Incident, 1968-2003

fiure 2

suc: graha brd, s. bro boer and greor D. e



12/24

c L M t c H n g

Increased concentrations o greenhousegases have heightened concern through-out the world about climate change and

global warming. One maniestation o this

concern in the United States is refected in

a market-based approach termed cap and

trade to regulate carbon dioxide emissions;this is contained in the proposed American

Clean Energy and Security Act o 2009.1 Tis

legislation requires a 17 percent reduction in

emissions o carbon dioxide by 2020 rom

2005 levels.2 While there are numerous con-

troversial provisions in this legislation, this

article ocuses on the economic principles

underlying the cap-and-trade proposal.3

Reducing Carbon Emissions Efciently

Various regulatory approaches exist or

controlling pollution. A common one iscommand and control. One example in the

context o carbon emissions is the Corporate

Average Fuel Eciency (CAFE) standards,

which mandate minimum feet mileage stan-

dards or motor vehicles sold in the United

States. Generally speaking, economists tend

to preer market-based approaches, such as a

cap-and-trade program, to other regulatory

approaches or reducing carbon emissions.

Various economic reasons exist or preer-

ring market-based approaches. First, all pol-

luters ace the same marginal cost o reducingpollution, which is a necessary condition or

reducing pollution in the most cost-eective

way. For example, say that a polluter is either

taxed $15 or each ton o carbon emissions or

must have a permit that costs $15 per ton o

carbon emissions. In either case, $15 is the

price that the polluter must pay to emit one

ton o additional carbon emissions. Ten,

each rm must compare this $15 per ton with

its own cost o reducing carbon emissions.

As long as the rms incremental costs stay

less than or equal to $15, then it will reduce

its emissions; i not, assuming it is protable

to do so, then the rm will pay the tax or buy

the permit. (Note that part o a rms adjust-

ment to the higher price to pollute might

entail a cut in its production o goods.)Second, incentives are provided so that

pollution is reduced relatively more by rms

with relatively lower costs o doing so. In

other words, i rms must pay $15 per ton

o carbon emissions, then rms that can

reduce pollution at relatively lower cost will

undertake relatively more abatement than

will higher-cost rms.

Tird, market-based approaches provide

incentives or innovative activity that can

lower the cost o reducing pollution. Sim-

ply put, rms can increase their prots bynding ways to lower the cost o reducing

pollution.

Under a cap-and-trade program, the

quantity o carbon emissions is capped. Given

an upper limit on the quantity o carbon

emissions, market participants will determine

the price o these emissions. Te supply and

demand diagram in Figure 1 can be used

to illustrate the basics o a cap-and-trade

program. Te horizontal axis measures the

quantity (Q) o carbon dioxide emissions

abated, while the vertical axis measuresthe value (benets or costs) per unit (P) o

carbon abated. Note that by capping emis-

sions at some level, an abatement quantity

is set as well. Te marginal benet (MB)

curve is sloped negatively to refect that

the additional benet to society o abating

more carbon declines. Tis marginal benet

curve refects the social benets o reducing

pollution. From the perspective o a polluter,

the (private) benet o abatement is zero.

Meanwhile, the marginal cost (MC) curve

is sloped positively to refect the assumption

o increasing marginal abatement costs. In

other words, as a rm attempts to abate more

and more carbon emissions, incremental costs

to the rm o additional abatement increase.

Given the curves in Figure 1, the ideal

quantity o abatement is indicated by Q*.

Tis quantity o abatement will result in a

price o carbon emissions o P* per unit. Tis

ecient outcome refects the act that emis-

sions abatement should continue until the

point at which the marginal benets equal

the marginal costs. Additional abatement

beyond Q* is inecient because the margina

costs exceed the marginal benets.

In the preceding example, the marginalbenet and cost curves were assumed to be

known with certainty. Tis is highly unlikely

as it is very dicult to pin down either the

benets or the costs o reducing carbon emis-

sions. For example, the benets o reducing

the atmospheric concentration o carbon

dioxide rom 380 to 325 parts per million are

not easily calculated. Not surprisingly, widely

divergent views are held.4 A more realistic

assumption is one o uncertainty, which allows

By Cletus C. Coughlin and Lesli S. Ott

Regulating Carbon Emissions:The Cap-and-Trade Program

micl

P*

MC

QQ*

P

O (emissions abated)

MB

Cap-and-Trade

gr 1



13/24

E N DN O T E S

1

Te largest active cap-and-trade program or

greenhouse gases is the European Unions

Emission rading Scheme. In the United

States, the Regional Greenhouse Gas Initiativ

has implemented a cap-and-trade program o

greenhouse gas emissions rom power plants.

2

Details on this legislation can be ound

at: www.govtrack.us/congress/bill.

xpd?bill=h111-2454.

3 For a discussion o important design issues,

see Metcal.4

See Economist.5

Tose well-versed in economics wil l recognize

that the welare loss associated with the cap-

and-trade program in the present example is

represented by the triangle ABC.

6

Tis allocation is to last until 2030, at which

time all per mits are to be auctioned.

R E F E R E NC E S

Economist. Cap and rade, with Handouts and

Loopholes. May 23, 2009, pp. 33-34

Metcal, Gilbert E. Market-based Policy

Options to Control U.S. Greenhouse Gas

Emissions. Journal of Economic Perspectives

Spring 2009, Vol. 23, No. 2, pp. 5-27.

or ones expectations to dier rom what

actually occurs. Assume that the expected and

realized marginal cost curves are identical,

but that the realized marginal benet exceeds

the expected marginal benet. In other

words, the benets o reducing carbon emis-

sions are higher than originally anticipated.

In Figure 2, this is represented by a realized

marginal benet (MBR) curve that lies above

the expected marginal benet (MBE).

Under a cap-and-trade program, regula-

tors, basing their decision on expected costs

and benets, would require abatement o QQ

o carbon emissions. In Figure 2, the ideal

level o abatement is Q*; so, the cap-and-trade

program would result in too little abate-

ment because QQ is less than Q*. O course,

i the realized marginal benet curve was

at a lower level than the expected marginalbenet curve, too much abatement would

occur. Te key point in this illustration is

that, because o uncertainty, the cap-and

trade program is unlikely to produce an ideal

outcome all the time.5 Excessive volatility

in the price o pollution is also a possibility.

When unintended, large adverse conse-

quences result, specics o the cap-and-trade

program will probably need to be modied.

Unortunately, uncertainty comes into play

with all regulatory approaches.

Who Receives the Permits?

Aer the amount o allowable carbon

dioxide emissions is determined, decisions

must be made as to who is allowed to emit

and how much they are allowed to emit. One

approach, which is avored by the Obama

administration, is to have the government

auction o permits that allow the holder to

engage in actions that emit carbon. A xed

number o permits would be auctioned that

would be purchased by those who placed the

highest value on them. Subsequently, as time

passes and circumstances change, those with

excess permits could sell them to those who

desired more permits.

Government sales o the permits would

generate revenue, which could be returned to

taxpayers or used or other projects, some o

which might be directly related to energy and

climate change issues. Currently, auctioning

all the permits does not appear to be accept-

able politically. A House-passed version o

the American Clean Energy and Security Act

o 2009 would allow 85 percent o the per-

mits to be allocated administratively, while

15 percent would be auctioned.6 Electricity

distributors would receive the largest share,

while the rest would be divided among

energy-intensive manuacturers, carmakers,

natural-gas distributors, states with renew-

able energy programs and others. Tiscompromise was viewed as necessary or

passage. Such an allocation would mean that

the government would receive little revenue

because only 15 percent o the permits would

be auctioned and that the initial allocation

would probably not go to those who value

the permits the most. However, this does

not necessarily mean that the permits would

not eventually be used by those who value

them the most. Aer the initial allocation o

permits, subsequent trading might lead to an

allocation o the permits to those who valuethem the most. O course, the sellers o the

permits rather than the ederal government

would receive the money rom these sales.

Economics vs. Politics

Te cap-and-trade legislation illustrates

the interplay between economics and politics.

Uncertainty about the benets and costs

guarantees that any proposal to regulate

carbon emissions will be controversial. While

the cap-and-trade program working its way

through Congress contains desirable economiceatures, the prospects or an auction process

covering all permits or carbon emissions does

not seem to be a viable option politically.

Cletus C. Coughlin is an economist at the Fed-eral Reserve Bank of St. Louis. For more on hiswork, see http://research.stlouisfed.org/econ/coughlin. Lesli S. Ott is a research associate atthe Bank.

MCB

C

A

Q Q* Q

MB

MB

P

O Q

E

R

(emissions abated)

gr 2

Cap-and-Trade with Benet Uncertainty



14/24

Housings Great Fall:Putting Household BalanceSheets Together Again

By William Emmons

Declining U.S. house prices have contrib-uted signicantly to the deepest globalrecession and the most severe nancial crisis

in many decades.1 At the level o individual

U.S. households, alling house prices appear

to be a signicant cause o mortgage deaults.2

At least 7 million mortgage oreclosures wereinitiated during 2007 and 2008 combined,

and all indications are that the rate o oreclo-

sures will remain high or some time.3

Falling house prices have inficted severe

damage on many banks and other nancial

institutions, such as Fannie Mae and Freddie

Mac, the government-sponsored mortgage

lenders, because many repossessed houses

now are worth less than the mortgage debt

they secure. Likewise, the market values o

securitized residential mortgages have al len,

imposing losses on investors around theworld.4 Continuing distress among mil-

lions o homeowners, together with many

weakened nancial institutions, may delay

the economic recovery.

Why are house-price declines so danger-

ous and disruptive? Can we prevent this

rom happening again?

More Damaging Than Stock Declines

Perhaps surprisingly, U.S. households

$4 trillion loss o value since the end o 2006

on the houses they own is ar less than thedecline in households stock-market wealth

o $10 trillion that occurred aer mid-2007

or the $8 trillion loss o stock-market wealth

that occurred during 2000-02. Yet, many

economists believe declining house prices

have been more damaging than either o the

two recent large stock-market declines.

Tree eatures o homeownership in the

U.S. help explain the severe allout rom

declining house prices. First, unlike stock

ownership, homeownership is widespread

among households at most income levels.

(See able 1.) About two-thirds o ami-

lies are homeowners, while only about hal

owned stock directly or indirectly in 2007,

with most stock-market exposure concen-

trated at upper income levels.5

Second, or the vast majority o households,

the value o their house (i they own one)

is much larger than their stock portolio (i

they have one) or any other investment. Te

median value o a house was about $191,000,

while the median stock holdings among

households with a portolio were $35,000,

both measured beore the recent declines.

Tird, houses usually are nanced, in part,

with mortgage debt. (See able 1.) For all

but the lowest quarter o amily incomes, a

majority o homeowners have mortgage debt.Leverage, or borrowing to nance an asset

purchase, causes the owners gains and losses

on the asset to be magnied.6 Tus, amilies

are more likely to own houses than stocks;

or most home-owning amilies, the value o

their house ar exceeds their stock portolio;

and housing oen is a leveraged investment.

Declining house prices, thereore, directly

aect more amiliesand more signi-

cantlythan does a alling stock market.

Why This Time Is Different

High rates o homeownership and mort-

gage borrowing are not new developments

in the U.S. What seems to have made this

house-price decline so severe is, rst, that

house prices rose so ar, so astespecially

in some areas, such as Caliornia, Nevada,

Arizona and Floridaand then ell hard and

ast. Second, the amount o mortgage debt

taken on by millions o households appears,

in retrospect, to have been excessive. House

prices, thereore, have declined more than

at any time since the 1930s precisely when

many more households were vulnerable to

the magnied eects o high leverage than

ever beore.

Chart 1 shows the ratios o house prices to

per-capita personal incomes in Florida andMissouri, examples o boom and quiet

markets, respectively. Average house prices

in Florida rose much aster aer 2000 than

incomes, and those prices have allen sharply

since 2006. Not surprisingly, oreclosure

rates in Florida have skyrocketed, as shown

in Chart 2. House-price-to-income ratios

and oreclosure rates also increased and then

decreased in Missouri, but by much less.

Meanwhile, the burden o servicing all

types o debt averaged across all amilies rose

rom 10 percent o amily income in 1989 toabout 12.5 percent in 2000 to almost 15 per-

cent in 2007.7 Tese three years correspond

to the respective peaks o the past three

economic expansions, just beore recessions

began and house-price growth slowed. Its

clear that a long-term trend toward larger

debt burdens occurred across the U.S., mak-

ing many households more vulnerable to

economic and nancial shocks.

As most house prices ell aer 2006, mort-

gaged homeowners equity ell even aster.

Homeowners overall have lost almost $5 tril-lion o homeowners equity through the rst

quarter o 2009, even though house values

ell only about $4 trillion. Te greater decline

in homeowners equity refects the act that,

as house prices ell aer 2006, mortgage debt

continued to rise until recently.8 Considering

only homeowners with mortgage debt (about

two-thirds o all homeowners), the average

loss o homeowners equity is in the neigh-

borhood o 70 percent, due to the magniying

F n n c L L t r c Y

tys mglsDF/www.mu



15/24

E N DN O T E S

1 For a discussion o the role o alling house

prices in the economic downturn and nan-

cial crisis, see Bernanke.2 See Hatzius.3 See Mortgage Bankers Association.4 See Kohn.5 See Bucks et al. a nd Census Bureau.6 During the early part o this decade, when

house prices generally were rising, the

homeowners equity o any household with

mortgage debt increased aster, on a percent-

age basis, than the va lue o the house itsel.

For example, a doubling o the value o a

$100,000 house on which there is a $50,000

mortgage results in a tripling o homeown-

ers equity (rom $50,000 to $150,000). Aer

house prices began to decline in about 2006,

the same magnication eect has been work-

ing in reverse.7 See Bucks et al.8 See Federal Reserve Board.

R E F E R E NC E S

Bernan ke, Ben S. Four Questions about the

Financia l Crisis. Speech presented at More-

house College, Atlanta, Ga., April 14, 2009.

See www.ederalreserve.gov/newsevents/

speech/bernanke20090414a.htm.

Bucks, Brian K.; Kennickell, Arthur B.; Mach,

racy L.; and Moore, Kevin B. Changes

in U.S. Family Finances rom 2004 to 2007:

Evidence rom the Survey o Consumer

Finances, Federal Reserve Bulletin, February

2009. See www.ederalreserve.gov/pubs/

bulletin/2009/pd/sc09.pd.

Census Bureau. 2007 American Housing

Survey. See www.census.gov/hhes/www/

housing/ahs/ahs.html.

Federal Reserve Board. Flow of Funds Accounts.

See www.ederalreserve.gov/releases/z1/

deault.htm.

Hatzius, Jan. Beyond Leveraged Losses: Te

Balance-Sheet Eects o the Home-Price

Downturn, Brookings Papers on Economic

Activity, Fall 2008, pp. 195-227. See www.

brookings.edu/press/Journals/2009/brook-

ingspapersoneconomicactivityall2008.aspx.

Kliesen, Kevin. Survey Says Families Are

Digging Deeper into Debt. Federal Reserve

Bank o St. Louis e Regional Economist.

Vol. 14, No. 3, July 2006, pp. 12-13. See www.

stlouised.org/publications/re/2006/c/pages/

debt.cm.

Kohn, Donald L. Comments on Financia l

Intermediation and the Post-Crisis Financial

System by Hyun S. Shin et al., at the Eighth

Annual Bank or International Settle-

ments Conerence, Financial System and

Macroeconomic Resilience: Revisited, in

Basel, Switzerla nd, June 25, 2009. S ee www.

ederalreserve.gov/newsevents/speech/

kohn20090710a.htm.

Mortgage Bankers Association. National Delin-

quency Survey o May 28, 2009. See www.

mortgagebankers.org/ResearchandForecasts

ProductsandSurveys/NationalDelinquency-

Survey.htm.

eects o leverage. O course, many home-

owners have deaulted on their mortgages

already and, unortunately, many more arelikely to do soparticularly i house prices

continue to all and the unemployment rate

rises urther.

Lessons Learned

One clear lesson rom the housing crash

and oreclosure crisis is that house prices

can all sharply, even on a nationwide basis.

Remarkably, it had become almost an article o

aith earlier in this decade among many mort-

gage lenders and borrowers that house prices

would not all signicantly, even in overheatedmarkets. It was assumed that most homeown-

ers simply would wait to sell their houses until

demand recovered, rather than dumping their

properties into a alling market. As it turned

out, deaults increased sharply in 2006 and

2007. Banks and other owners o oreclosed

properties did sell a large number o houses,

even in alling markets. Tis unleashed a

downward spiral o house prices which, in

turn, contributed to more deaults.

Fa or nddanoe aeor

n 2007

er of faen h aeor

(on)

f hh, nerof fae haare hoeoner

(on)

f hh, nerof fae hahae oraede (on)

peren of faen h noe

aeor ha arehoeoner (%)

peren of hoe-onn faen h noeaeor h

orae de (%)

le han $20,000 23.2 10.1 3.4 43.7 33.9

$20,000 o $39,999 27.6 16.1 8.1 58.5 50.4

$40,000 o $79,999 31.3 23.6 16.7 75.3 70.9

$80,000 or ore 28.2 25.8 20.6 91.3 79.9

Totl popultionof fmilies

110.4 75.6 48.9 68.5 64.6

suc: 2007 eran on sre, brea of he cen.

Tab 1

Homeownership and Mortgage Borrowing By Family Income Category

charT 1

Ratio of House Prices to Per-CapitaPersonal Income

90 95 00 05 10

180

160

140

120

100

80

Florida Missouri

A V E R A G E L E V E L IN 1 9 9 1 E Q U A L S 1 0 0

sucs: Federa on Fnane en and brea ofono na. Qarer daa hroh Q1 2009.

charT 2

Mortgage Foreclosure Rate

90 95 00 05 10

12

10

8

6

4

2

0

Florida Missouri

% OF 1ST-LIEN MORTGAGES ENTERING FORECLOSURE (ANNUAL RATE)

sucs: morae baner oaon. Qarer daahroh Q1 2009.

Another key lesson is that mortgage bor-

rowing can be excessive. Rather than ocus-

ing merely on the aordability o the initialmonthly payments a household must make, it

clearly is necessary to plan or any increases

that could occur and to build in a margin o

saety or unexpected nancial stresses, such

as unemployment or unexpected medical or

other expenses.

Te simplest way to avoid another devas-

tating housing crash and oreclosure crisis

probably is to reduce and maintain much

lower levels o household leverage. Not only

might less mortgage borrowing make house-

holds better able to withstand any uturehouse-price declines or any other nancial

shocks that might occur, but it also might

reduce the chance o house prices again ris-

ing to unsustainable levels.

William Emmons is an economist at the Fed-eral Reserve Bank of St. Louis. For more on hiswork, see www.stlouisfed.org/banking/pdf/SPA/Emmons_vitae.pdf.



16/24

hrough the 1980s, a railroad bridge,a two-lane highway bridge and a lockand dam, all decrepit with age, dominated

the riverront at Alton, Ill. Aer the variousagencies in charge slated all three eyesores

or demolition, the city25 miles north o

St. Louis and across the Mississippiset to

work on a master plan to re-create the

riverront along lines that were more

image-enhancing.

In 1991, the plan was done, and the river-

ront got its rst new attractionthe Alton

Belle, Illinois rst foating casino.

Arriving as the city was ast losing its

longtime industrial base, the boat came

as a welcome shot o economic adrenalin,bringing the city hundreds o new jobs and

a wellspring o new revenue rom its local

shares o state casino taxes. o build on

those gains, the city imposed its own sepa-

rate per-person tax on boat customers.

Although the casino was privately

nanced, the next big riverront improve-

menta marinareceived a hand rom

the city in the orm o $5 million in bonds,

repayable in part rom marina revenue.

Since opening in 1996, the acility has been

expanded three times; nearly 300 boats can

dock there now.

Te latest and most ambitious riverrontprojects yet are a $4.4 million amphitheater

and a $2.5 million pedestrian bridge. Te

amphitheater, which seats 4,000 under a

canopy, opened in May with a Miles Davis

jazz estival, named or one o Altons avor-

ite sons. Te bridge wil l span the railroad

tracks and our-lane highway that separate

the riverront rom Altons downtown; it is

slated or completion in November.

Te city nanced the bridge and amphi-

theater with a combination o tax increment

nancing (IF) money on hand and $5.5million in IF-backed bonds, all made pos-

sible by a IF district consisting o the citys

downtown plus some other commercial and

industrial properties. Te city earmarks or

development all real estate taxes collected in

excess o the amounts in eect when the city

enacted the district in 1994.

Te city has used IF money to spruce up

several downtown blocks with new lights,

sidewalks and plants. Developers can also

c o M M n t Y P r o F L

Alton, Ill. by he umbes

PPTIN .................... .................... .............. 29,393BR FRE.................. .................... .............. 13,968

NEPyENT RTE ............................10.3 percent

PER PIT PERN INE

adison ount ................... ................... $33,585

* .. Bureau of the ensus, estimate Jul 1, 2008

** HVER (B), June 2009

*** BE/HVER, 2007

TOP EMPLOES

t. nthons Health enter .................... ............... 851

lton emorial Hospital .................. .................... .. 842

lton ommunit nit chool District No. 11........ 835

rgos asino .................... ..................... ............... 549

merican Water ..................... .................... ............ 530

RE: elf-reported.

Includes part-time

***

**

***

Alton Comes to Gripwih dusial elieArticle and photos by Susan C. Thomson

Te aosy csino rn no on a o of ah a o

of oor o on rerfron. in 1991, he ano eae

he r araon ne a aer an a dran oredeeo he reh of he aon he m er.

get IF grants o $7,500 or each new busi-

ness or residential unit created in downtown

buildings, which are up to 150 years old. In

the past our years, 30 new apartments or

condos and 10 new oces have resulted. A

number o new shops and restaurants have

also opened in an area that ell on hard



17/24

times aer Alton Square Mall opened on the

edge o town in 1978 and became the go-to

local shopping place.

Te citys investments have turned the

once run-down downtown and unsightly

riverront into what Brett Stawar, president

o the Alton Regional Convention & Visi-

tors Bureau, describes as a string o pearls

or tourists.

Te necklace also includes the 15-year-old

Clark Bridge, whose swooping yellow cables

shine in the sun, making a photogenic

background or the riverront. Te our-

lane highway bridge was unded by the state

and ederal governments. Another pearl

is the new lock and dam, erected two miles

downstream rom the riverront by the U.S.

Army Corps o Engineers. Te complex,

which includes a river-themed museum,

logged 61,791 visitors in just the rst six

months o this year.Te convention and visitors bureau,

which gets the biggest share o its unding

rom cuts o the citys taxes on hotels and

restaurant ood and drink, also promotes

Altons longtime historic and natural assets.

Tese include the spot where Lincoln and

Douglas last debated in 1858, several signi-

cant Civil War-era sites, three picture-book

19th-century residential neighborhoods

on the National Register o Historic Places,

and scenic river blus where American

bald eagles come to eed every January andFebruary. Te birds have grown into an

industry, luring 10,620 tourists to eagle-

related events this yearmore than double

the number o two years ago.

As a measure o tourisms growth, Stawar

cites the 70,700 room nights Altons three

hotels sold last year, a 9 percent uptick rom

2007. He says they were quite oen com-

pletely booked.

No count exists o the tourism jobs cre-

ated, and they are too dispersed or any

single tourism employer to make the cityslist o top employers, now led by Altons

two hospitals. Both are expandingAlton

Memorial Hospital with a $45 million addi-

tion and St. Anthonys Health Center with

a $70 million one.

Health care has been great or the local

economy, says Philip S. Roggio, the citys

director o development and housing these

past 20 years. Health care is generally

recession-proo.

Mny emnnts of altons industil eydy ar he n donon and aon he rerfron, he reared

o e tiF o redeeo hee aan e.

Alton was a manuacturing town or most

o the 20th century, but no more. Glass-

maker Owens-Illinois shut down in 1983,

Smurt-Stone Container Corp. closed its

paperboard mill in 1998 and Laclede Steel

liquidated three years later. From thousands

at their peaks, the plants were down at theend to hundreds o jobs eachall lost.

Aer the state o Illinois declared the

glass companys 153-acre property a brown-

eld, the city contributed $6 million in

IF-backed bonds to a private developers

$18 million cost o cleaning up the site, tear-

ing down old buildings, installing utilities

and turning it into a modern business park.

In 2001, New Jersey-based American Water

opened a call center in the park, choos-

ing it or its central U.S. location over ve

other sites in dierent states. Te center,which operates around the clock serving

the utility companys customers in 32 states

and Ontario, has been steadily adding

employees.

In 2003, a group o local investors bought

Lacledes ormer 400-acre site and, on part

o the parcel, opened Alton Steel Inc., a

maker o specialty steel bar products.

Even with the new company and busi-

ness park, Alton has been le with acres o



18/24

Te bell Mnsion, n 1903, oaed on monareo n on. the anon no a e-non ed and

reafa.

amon te sites pomoted o or h onen oon jah p. loejo. e a an aoon her

ho a an a ro-aer o n 1837.

Te $4.4 million mpitete oened n ma on he rer-

fron. in he arond he 15-ear-od car brde, aandar n he s. lo area, han o na ae-

a den and rh eo ae ran.

Downtown en red , han n no a ar

o ax nreen nann. thee o dn had eenanddae for deoon; h tiF nene, deeoer

rned he no 11 aaren and o ore.

abandoned, alling-down actory build-

ings. As with downtown and the riverront,

the city stands ready to use IF money to

improve these properties, Roggio says.

Te city also has its redevelopment

sights trained on Alton Square Mall, where

vacancies, declining sales and deerred

maintenance have taken their toll. o turn

it around, the city created a special taxing

district, which added a cent to the malls

sales tax rate. Te city has pledged up to

$1.5 million o the extra money to the mallsexas owner or renovations. As those

proceed, the city is pursuing deals to add a

12-screen movie theater to the mall and to

lure a new hotel/conerence center to town.

I were going to grow tourism, says

Stawar, we have to have more hotels.

Downtown and the riverront remain

works in progress. Downtown is stil l dotted

with empty buildings, but more IF grant

applications are pending.

On the riverront, a foating restaurant

has been or sale since closing more than ayear ago.

At the casino, now called the Argosy,

business is oenough that the boats

sta is down by about hal rom a decade

ago, according to the general manager,

Rich Laudon. He blames the economic

downturn, competition rom newer casinos

around the St. Louis metropolitan area and

a statewide ban on public smoking that

went into eect Jan. 1, 2008. Nevertheless,

Altons $5.7 million share o state taxes on

the boat added up to about 22 percent o

the citys operating budget last year, and the

total $414,000 rom the citys separate head

tax on casino customers went into a und or

special city projects.

Meanwhile, on the strength o a $200,000

grant rom the National Scenic Byways

Program, plans are aoot or a new river-

ront attractiona food memorial plaza.

With a sculpture, ountain and exhibits, it

will be dedicated to the heroics o Altonscitizens in times o rising Mississippi waters

Construction could start next year.

Dale Blachord, president o Liberty Bank

and an Alton resident or only ve years,

says that, unlike some locals, he sees more

o the positives than the negatives about

the city. Overall, he sees a city that has been

slowly and successully reinventing itsel

these past 20 years and, o necessity, contin-

ues to do so. It takes time, he says.

Alton Mayor om Hoechst also takes a

long view, ocused on the uture. Werestill suering rom the old days when the

industrial jobs were so plentiul, he says.

Tose jobs are gone, theyre not coming

back and people have to get used to that

act.

Susan C. omson i s a freelancer.



19/24

t r c t o V r V W

ecession Takes Tollon Eighth District Tax Collections

Amidst the current recession, decliningstate tax revenue and an increasingdemand or government servicessuch as

Medicaid, unemployment insurance and

various other social programsare putting

increased pressure on state government

budgets. State governments estimate a $230billion gap between expected expenditures

and expected revenue between scal year

2009 and scal year 2011.1 Tat gure rep-

resents roughly 12 percent o total annual

state government revenue (about $1.8 tril-

lion) or recent years.

One culprit behind these gaps is the large

decline in states major sources o tax rev-

enuepersonal income, corporate income

and taxable retail sales.2 Revenue rom

these taxes or scal year 2009 was down

6.6 percent, 15.2 percent and 3.2 percent,respectively, rom scal year 2008 levels.3

As with states across the country, tax

revenue or each o the seven states in the

Eighth Federal Reserve District is generally

lower as a result o the current recession.

able 1 lists state revenue rom the sales tax,

the personal income tax and the corporate

income tax, all or scal year 2008 (pre-

recession) and scal year 2009. In addition,

the percentage change between the two

scal years is given. otal state tax revenue

or the 50 states combined and or the sevenDistrict states combined is also included.

In our o the seven District states, sales

tax revenue or scal year 2009 was lower

than in scal year 2008. Illinois experi-

enced the largest decrease (7.5 percent),

ollowed by ennessee (5.5 percent) and

Missouri (3.7 percent). Sales tax revenue in

Arkansas increased by 1.1 percent between

scal year 2008 and scal year 2009. In

total or the seven states, the percentage

decline in sales tax revenue (3.8 percent)

was slightly greater than the decline or all

50 states (3.2 percent). Te decline in sales

tax revenue or the seven states was less than

the decline in personal income tax revenue

(5.1 percent) and corporate income tax

revenue (20.3 percent).Personal income tax revenue declined in

six o the seven District states between scal

year 2008 and scal year 2009. Illinois and

ennessee experienced the largest declines

o 8.8 percent and 30.1 percent, respec-

tively. It is important to note that ennes-

sees personal income tax only applies to

dividend and interest income, not wage

income (which is the largest component o

personal income) as in the other six states.

Tus, a reduction in ennessees much

smaller personal income tax base yields alarger percentage decrease than an equal

reduction in other states. Mississippi was

the only state to experience a positive, albeit

small, increase in personal income tax rev-

enue (0.4 percent). As a whole, the decline

in personal income tax revenue in the seven

states (5.1 percent) was less than that o the

50 states (6.6 percent).

Corporate income tax revenue declined

in all seven states rom scal year 2008

to scal year 2009. Te largest declines

were in Kentucky (44.4), Illinois (22.0percent) and Missouri (21.1 percent). O

the seven states, Indiana experienced the

smallest decline in corporate income tax

revenue (9.7 percent). For the seven states,

corporate income tax revenue decreased by

a greater percentage (20.3 percent) than

did sales tax revenue (3.8 percent) and

personal income tax revenue (5.1 per-

cent). In addition, the decline in corporate

income tax revenue or the seven states was

about 33 percent greater than that o the 50

states (20.3 percent versus 15.2 percent,

respectively).

otal tax revenue (dened here as sales

tax revenue + personal income tax revenue

+ corporate income tax revenue) or each

state is shown in the last three columnso able 1. All seven states experienced a

decline in total tax revenue between scal

year 2008 and scal year 2009, with the

declines ranging rom a high o 9.6 percent

in Illinois to a low o 2.2 percent in Missis-

sippi. Te decline in total tax revenue or

the seven states (6.0 percent) was slightly

less than that o the 50 states (6.1 percent).

Differences across the States

Although the majority o Eighth District

states experienced a decline in revenue romthe three major taxes, the magnitude o

the decline across states is quite dierent.

One reason is that various tax bases may be

more aected by an economic slowdown

than others, and this eect may be dierent

across states. For example, a reduction in

retail sales will reduce sales tax revenues,

whereas a reduction in employment will

more likely infuence personal income tax

revenue and corporate income tax revenue.

Tus, the degree to which an economic con-

traction aects consumption, employmentand income in each state can explain part

o the dierence in the perormance o the

three tax revenue sources across the states.

A related reason is the degree to which

each state relies on, as a percentage o total

tax revenue, each source o revenue. As

seen in able 2, the seven states each rely on

each source o revenue to varying degrees.

For example, 25 percent o total tax revenue

in Missouri is rom the states sales tax,

Th eghth fdal rsv Dstct is

composed of four zones, each of whichis centered around one of the four main

cities: Little Rock, Louisville, Memphis

and St. Louis.

MISSOURI

ILLINOIS

ARKANSASTENNESSEE

KENTUCKY

MISSISSIPPI

INDIANA

Memphis

Little Rock

Louisville

St. Louis

By omas A. Garrett



20/24

whereas over 78 percent o total tax revenue

in ennessee is rom the states sales tax.

Similarly, 69 percent o total tax revenue in

Missouri is rom the personal income tax,

compared with only 3.3 percent in ennes-

see. Tus, equal drops in retail sales activity

(assuming constant tax rates and exemptions)

will infuence total tax revenue much more in

ennessee than in Missouri.

Looking Ahead

States will continue to ace budget pres-

sure until economic conditions improve.

Improvement in revenue streams rom the

sales tax, the personal income tax and the

corporate income tax is dependent upon,

broadly speaking, increased consumer

spending and greater employment and busi-

ness investment. Slow or stagnant growth

in one or more o these areas will hinder

growth in total tax revenue, especially in

those states that generate the majority o

their tax revenue rom only one or two taxes.

Certainly, there are actors other than

the three major taxes that will infuence a

states scal health. Increased ederal money

to state governments as a result o the

American Recovery and Reinvestment Act(the stimulus package) may provide a tem-

porary boost to state government revenue.

Reductions in expenditure on various state-

unded programs, such as higher educa-

tion, social services and corrections, have

occurred in dozens o states in scal year

2009, with urther cuts likely in the next year

or two. Finally, many states are considering

tax increases in scal year 2010 and scal

year 2011.

E N DN O T E S

1 All tax data presented here are rom National

Governors Association and the National

Association o State Budget Ocers.2 State governments obtain revenue rom sources

other than sales ta xes, personal income taxes

and corporate income taxes. Tese sources

include excise taxes, user ees, ederal govern-

ment transers, license ees and selective sales

taxes (sales taxes on specic goods, such as

tobacco). About 40 percent o general und

revenue is rom the personal income tax, 33

percent is rom the sales tax and 8 percent is

rom the corporate income tax. 3 Te scal year or most states, including all o

those in the Eighth District, ends June 30. Te

exceptions are: Alabama and Michigan, Sept. 30;

Nebraska and exas, Aug. 31; and New York,

March 31.

R E F E R E N C E S

National Governors Association and the National

Association o State Budget Ocers. e Fiscal

Survey of States, June 2009. See www.nasbo.

org/Publications/PDFs/FSSpring2009.pd.

Sals Tax rvn Psonal incom Tax rvn Copoat incom Tax rvn Total Tax rvn

Stat FY2008 FY2009 % Change FY2008 FY2009 % Change FY2008 FY2009 % Change FY2008 FY2009 % Change

Arkansas 2,111 2,135 1.14 2,345 2,271 3.16 318 258 18.87 4,774 4,664 2.30

Illinois 7,215 6,674 7.50 10,320 9,417 8.75 1,860 1,450 22.04 19,395 17,541 9.56

Indiana 5,534 5,426 1.95 4,838 4,726 2.32 910 822 9.67 11,282 10,974 2.73

Kentucky 2,878 2,878 0.00 3,483 3,365 3.39 435 242 44.37 6,796 6,485 4.58

Mississippi 1,947 1,950 0.15 1,542 1,548 0.39 501 403 19.56 3,990 3,901 2.23

Missouri 1,931 1,860 3.68 5,210 5,084 2.42 459 362 21.13 7,600 7,306 3.87

Tennessee 6,851 6,475 5.49 292 204 30.14 1,620 1,328 18.02 8,763 8,007 8.63

7 State Total 28,467 27,398 3.76 28,030 26,615 5.05 6,103 4,865 20.29 62,600 58,878 5.95

50 States 214,217 207,358 3.20 276,155 257,805 6.64 50,772 43,034 15.24 541,144 508,197 6.09

SOURCE: National Governors Associat ion and the National Association of State Budget Ofcers (2009). Total tax revenue is the sum of the three individual taxes.

Tbe 1

Stat Sals Tax % Psonal incom Tax % Copoat incom Tax %

Arkansas 44.2 49.1 6.7

Illinois 37.2 53.2 9.6

Indiana 49.1 42.9 8.1

Kentucky 42.3 51.3 6.4

Mississippi 48.8 38.6 12.6

Missouri 25.4 68.6 6.0

Tennessee 78.2 3.3 18.5

50 States 39.6 51.0 9.4

NOTE: Percentages are computed using the data in Table 1. Numbers may not add up to 100 percent due to rounding.

Tbe 2

Regardless o the actions taken by state

governments to shore up their balance

sheets, only an economic recovery will

provide or growth in state tax revenue. As

long as state governments rely on revenue

sources that are linked to economic peror-

mance and ail to adequately save during

prosperous times, it is certain that states

will once again nd themselves acing

budget shortalls during the next economic

slowdown.

omas A. Garrett is an economist at theFederal Reserve Bank of St. Louis. For moreon his work, see http://research.stlouisfed.org/econ/garrett/.

Tax Collections, Eighth District States ($ millions)

Tax Revenue as Percentage of Total Tax Revenue (2008)



21/24

B o o K r V W

By Kevin L. Kliesen

(e authors book review of In Fed We rust

takes the place of our usual National Overview

feature, which will return in the next issue.)

he nations economic policymakers areentrusted with helping to ensure eco-nomic and nancial stability. Oen, though,

a policymakers thought process is clouded

by the storm and stress o the crisis. In his

bookIn Fed We Trust: Ben Bernankes War

on the Great Panic (published in August 2009by Crown Business), the Wall Street Journals

David Wessel walks us through a detailed,

behind-the-scenes narrative that attempts to

portray the diculties acing Federal Reserve

policymakers (and those in the ederal

government) as they ormulated an evolving

response to the nancial crisis that roughly

began in August 2007.

From Page 8:

Tis is the story o the Bernanke Fedabandoning ailed paradigms in

order to do what needed to be done.

It is a story o what the Fed saw and

what it missed, what it did and what

it didnt, what it got right and what

it got wrong. It is a story about Ben

Bernanke deciding to do whatever it

takes. Above all, it is a story about

a handul o peopleoverwhelmed,

exhausted, beseeched, besieged, con-

stantly second-guessedwho ound

themselves assigned to protect the U.S.economy rom the worst economic

threat o their lietimes.

Heading into the last ew months o 2009,

it appears that these eorts have produced

some tangible benets: Te economic and

nancial headwinds that have hammered

the U.S. economy over the past year or so

appear to be calming. Indeed, a majority

o economists believe the recession that

ocially began sometime in December

2007 has nally ended.

Riders on the Storm

As the books subtitle suggests, much

o the narrative is ocused on the Federal

Reserves response to the nancial cri-

siswhat Wessel calls the Great Panic.

Te design and implementation o these

policy responses are seen mainly through

the lens o Chairman Ben Bernankeand his key colleagues on the Federal

Open Market Committee. Wessel also

added a second subtitle to the book: How the

Federal Reserve Became the Fourth Branch

of Government. By this, Wessel has in mind

the Federal Reserves special lending powers

that were invoked under Section 13(3) o the

Federal Reserve Act. Under the auspices o

unusual and exigent circumstances, the

Federal Reservevia the three special lend-

ing acilities named Maiden Lane I, II and

IIIhelped to nance the purchase o BearStearns by JPMorgan Chase and to prevent

the ailure o American International Group

(AIG). Wessel also relates how Bernanke

and other Federal Reserve ocials urged the

governments other key economic players

to take aggressive actions at key moments

in the Great Panic. Tese included policies

designed to stabilize the nations 19 largest

depository institutions deemed too systemi-

cally important to ail.

In Fed We Trustis an entertaining read,

but it is generally written rom a Washington,D.C., and New York City perspective. Indeed,

the key Federal Reserve ocials in the nar-

rative are Bernanke, Govs. Don Kohn and

Kevin Warsh, and then-New York Fed Presi-

dent im Geithner. Wessel reers to them

as the our musketeers.

Documents

Regional Economist - October 2009