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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
-
7/30/2019 Regional Economist - Spring 2013
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
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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.
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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
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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.
SOURCE:NaionaCredi UnionAdminisraion.
SOURCE:NaionaCredi UnionAdminisraion.
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
Single GroupMultiple GroupCommunity
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
Single GroupMultiple GroupCommunity
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
Single GroupMultiple GroupCommunity
PERCENT
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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
Fiscal Cliff Scenario
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
Fiscal Cliff Scenario
100
80
60
40
20
0
PERCENT
OF
GDP
CBO Projection
Fiscal Cliff Scenario
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.
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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.
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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.
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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.)
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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.
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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