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» Blowing in the Wind »The Downzoning Effect »Serving the Unbanked
»An Interview with Kenneth Elzinga »Economics of Baseball

S U M M E R

2 0 0 4

T H E

F E D E R A L

R E S E R V E

B A N K

O F

WHICH WAY
NOW?
The Economic Odyssey of Displaced Workers

R I C H M O N D

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VOLUME 8
NUMBER 3
SUMMER 2004

COVER STORY
12

The Road To Recovery: Retraining programs throughout the
Fifth District are preparing displaced manufacturing workers
for new niches in the global economy
Thousands of manufacturing workers across the region have lost their jobs
in recent years, with little hope of finding employment in those same
industries. Many have entered retraining programs to acquire new and
salable skills to compete in a global job market.

FEATURES
18

The Downzoning Effect: When rural communities lower the
density of residential development, the merits of land
conservation collide with market forces. What happens next?
Policies to reduce the density of development have been widely used in
Maryland and Virginia to preserve open space and agricultural land. But
downzoning can create an artificial shortage of land for residential growth
and erode property values for certain landowners.
22

Our mission is to provide
authoritative information
and analysis about the Fifth
Federal Reserve District
economy and the Federal
Reserve System. The Fifth
District consists of the District
of Columbia, Maryland, North
Carolina, South Carolina,
Virginia, and most of West
Virginia. The material
appearing in Region Focus
is collected and developed by
the Research Department of
the Federal Reserve Bank
of Richmond.
DIRECTOR OF RESEARCH

Jeffrey M. Lacker
D I R E C TO R O F P U B L I C AT I O N S

John A. Weinberg

Spanning the Chesapeake Bay: For 40 years, the world’s largest
bridge-tunnel has connected the Virginia mainland to the
Delmarva Peninsula

EDITOR

The Chesapeake Bay Bridge-Tunnel has provided an alternate route for
commercial traffic and linked once economically isolated communities to
major metropolitan areas for four decades.

BUSINESS WRITERS

Aaron Steelman
MANAGING EDITOR

Kathy Constant
Charles Gerena
Betty Joyce Nash
CONTRIBUTORS

26

On the Outside Looking In: Millions of Americans do not use
conventional banking services, but is that necessarily bad?
Roughly 10 percent of U.S. households are “unbanked,” frequenting
nontraditional firms, such as check-cashing outlets. Should government do
more to move these people into the “mainstream” financial sector?
28

Blowing in the Wind: North Carolina acts to cut upwind pollution
Pollution transport is becoming a touchy issue as states work to clean up
dirty air. North Carolina petitioned the Environmental Protection Agency
to force neighboring states to crack down on pollution heading its way.
31

What the Doctor Ordered? The economics of drug reimportation
American drug companies routinely sell their goods to Canadian
pharmacies at prices lower than those found in the United States. So why
not allow the drugs to be sent back to the United States for sale at
Canadian prices, a practice that is currently prohibited by law?

DEPARTMENTS

1 Noteworthy
3 Federal Reserve/The Fed & the ECB
6 Jargon Alert/Elasticity
7 Research Spotlight/Learning to Compete
8 Short Takes
32 Book Review/Moneyball: The Art of Winning an Unfair Game
35 Legislative Update/Virginia Budget Brings Fiscal Fitness But Not Reform
36 Interview/Kenneth Elzinga
40 Economic History/Knowledge = Power
44 Regional/District Economic Developments
52 Opinion/Hey, A Little Service Here?

COVER ART: CORBIS

Robert W. Kidd
Eric Nielsen
Christian Pascasio
Karl Rhodes
Jennifer Sparger
ECONOMICS ADVISERS

Andrea Holland
Robert Lacy
Ray Owens
C I RC U L AT I O N

Walter Love
Shannell McCall
DESIGN

AURAS Design
Published quarterly by
the Federal Reserve Bank
of Richmond
P.O. Box 27622
Richmond, VA 23261
Phone: (804) 697-8000
Fax: (804) 697-8287
E-mail: rich.regionfocus@rich.frb.org
www.rich.frb.org/pubs/regionfocus
Subscriptions and additional copies:
Available free of charge by
calling the Public Affairs
Division at (804) 697-8109.
Reprints: Text may be reprinted
with the disclaimer in italics below.
Permission from the editor is
required before reprinting photos,
charts, and tables. Credit Region
Focus and send the editor a copy
of the publication in which the
reprinted material appears.
The views expressed in Region Focus
are those of the contributors and not
necessarily those of the Federal Reserve
Bank of Richmond or the Federal
Reserve System.
ISSN 1093-1767

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NOTEWORTHY
Parting Shots

y first “Noteworthy” column appeared in the inaugural issue of Region Focus,
back in the summer of 1997.
It has been a great pleasure
to write these columns every
quarter. I’m trained as an
economist, but serving as a
Reserve Bank president naturally requires me to spend
substantial time on administrative and managerial tasks.
Writing these columns has
ensured that I would spend
at least some time, on a regular basis, focusing on economic issues outside the ones
I encounter as a monetary
policymaker. And the list of
these issues is rich — from
international trade to farm
policy to education reform,
to name just a few.
Since I will be retiring at
the end of July 2004, this will
be my final “Noteworthy” column, and I want to take a
slightly different approach.
Region Focus, and my columns
that appear within it, address
many issues with ramifications that extend well beyond
the geographic region we

M

serve. But, as its name implies, the central mission of
Region Focus is to share information about the Fifth Federal Reserve District — Maryland, the District of Columbia,
Virginia, North Carolina,
South Carolina, and most of
West Virginia — with our
principal constituents: the
people who live and work in
our region. With this in mind,
I thought it might be useful
to reflect a bit on the merits
of the Federal Reserve’s regional structure.
For me, the most important word in our name — Federal Reserve System — is
“Federal.” It did not have to
be this way. The framers of the
Federal Reserve Act, or those
who subsequently amended it,
could have opted for a “Central Reserve System” or a
“Central Bank of the United
States.” Such a system might
have been seen as offering
some benefits: Tough decisions, for example, might be
made more quickly in a more
centralized system.
Fortunately, the framers
and their successors recognized what would be lost in
a centralized structure. The
United States obviously is a
much more integrated society and economy now than
it was in 1913, when the original Federal Reserve Act was
written, or in the 1930s, when
many of the most important
amendments were made, but
it is still a vast country made
up of identifiable regions with
clearly distinct cultures and
economic bases. Federal Re-

serve monetary policy, of
course, by its nature affects
the entire national economy,
and cannot be differentiated
across individual regions of
the country. It is critically important, however, that policy decisions be made with full
awareness of conditions in
particular regions, and the
Fed’s 12 regional Reserve Banks
are ideally structured to provide this awareness.
The Banks gather detailed
economic intelligence in the
respective regions — statistical data, to be sure, but also
often highly useful anecdotal, “grassroots” information
from the business and community leaders on their boards
of directors and advisory councils. I have made it a point to
augment this knowledge with
information from regular visits to smaller communities in
our District, such as Aiken,
S.C.; Cambridge, Md.; and
Logan, W.Va., where my colleague Kemper Baker and I
have conducted town meetings on local economic conditions. With the help of Ray
Owens and other members
of our regional economics
staff, I include summaries of
this information in my statements at Federal Open Market Committee meetings.
Sometimes a director, or another of our business contacts, or a participant in one
of our town meetings will
make an especially insightful
point, often in a particularly
blunt or colorful manner, and
I frequently pass such remarks
along pretty much verbatim

to the Committee. Reporting that factories in a particular industry are operating
“flat out” says more than a
statement in a published statistical report that “operating rates at factories in industry X are approaching
capacity limits.”
All this may strike some
readers as trivial, but I
believe that Fed policy decisions are enhanced by being
made in an outside-theBeltway atmosphere, even
though the meeting room is
in the heart of Washington,
D.C. Conversely, I believe the
public’s confidence in Fed
policy is reinforced by the
knowledge that policymakers
are in close touch with the
views of — and, indeed, are
neighbors of — large and
small businesses and households across the country.
Let me offer my warmest
thanks to all the wonderful
people in our District who
have helped me do my job
more effectively over the years.
It has been a great privilege
and pleasure to work with you
and serve you. I won’t say I will
miss you after I retire, because
I look forward to staying right
here with you, and hopefully
crossing paths frequently with
many of you, in what I like to
call “God’s Country.”

AL BROADDUS
PRESIDENT
FEDERAL RESERVE BANK OF RICHMOND

Summer 2004 • Region Focus

1

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Richmond Fed Appoints New President

J

effrey M. Lacker has been
appointed president of
the Federal Reserve Bank
of Richmond, effective August 1, 2004. He succeeds J.
Alfred Broaddus, Jr., who in
November announced his intention to retire. Lacker is
currently senior vice president and director of research
at the Richmond Fed.
The appointment was
made by the Board of Directors of the Federal Reserve
Bank of Richmond and approved by the Board of Governors of the Federal Reserve
System in Washington, D.C.
Wesley S. Williams, Jr.,
chairman of the Federal Reserve Bank of Richmond’s
Board of Directors, made the
announcement. “After conducting a nationwide search,
I am pleased to say that Jeff
Lacker, the Bank’s current director of research, proved to

2

be a natural choice to lead the
Federal Reserve Bank of Richmond. Jeff is a respected economist with sound knowledge
of monetary policy, the nation’s banking system and the
Federal Reserve’s role in the
payments system. Jeff has the
rare combination of knowledge and Federal Reserve experience to provide the
vision needed in facing the
challenges of the future,”
Williams said.
“Additionally, he is a brilliant manager, and is uniquely attuned to the community development responsibilities
of the Federal Reserve Banks
and System. My colleagues
on the Richmond Fed board
concluded that Jeff was clearly the best possible choice to
carry forward the laudable
traditions of this great institution, and to serve our Fifth
District communities.”
Williams also expressed
appreciation to Al Broaddus
for his 34 years of service to
the Federal Reserve Bank of
Richmond. Broaddus turns
65 in July, the age at which
Fed presidents usually retire.
“It has been a great pleasure working with Al Broaddus,” Lacker said. “He leaves
behind an outstanding legacy of contributions to monetary policy, the Richmond
Fed, and the Federal Reserve

Region Focus • Summer 2004

System. I am honored to have
been chosen for this post, and
I look forward to working
with community, business,
and banking leaders around
the District.” Lacker is only
the seventh person to lead
the Richmond Fed in its 90year history.
“I have known and worked
closely with Jeff for many
years,” Broaddus said. “He is
a strong and collegial leader
and an excellent economist.
He is a superb choice to lead
our Bank on the next stage
of its long journey of distinguished public service.”
Lacker, 48, received a Ph.D.
in economics from the University of Wisconsin, and was
on the faculty of Purdue University’s Krannert School of
Management from 1984 to
1989. He is the author or coauthor of numerous articles
in professional journals, including the Journal of Political Economy, the Journal of
Monetary Economics, and the
Journal of Macroeconomics.
Lacker joined the Richmond
Fed in 1989 as an economist,
and was appointed director
of research and senior vice
president in May 1999. RF

Chief Executive
Officers of the
Richmond Fed
George J. Seay
Governor
October 5, 1914 February 29, 1936
Hugh Leach
President
March 12, 1936 February 28, 1961
Edward A. Wayne
President
March 1, 1961 March 31, 1968
Aubrey N. Heflin
President
April 1, 1968 January 16, 1973
Robert P. Black
President
August 6, 1973 December 31, 1992
J. Alfred Broaddus, Jr.
President
January 1, 1993 July 31, 2004

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

FEDERALRESERVE

The Fed & the ECB
Their regional
structures are
strikingly similar,
but important
differences remain
BY JOHN A. WEINBERG

fter a long period of feudal rule
by the shoguns, imperial rule
returned to Japan in 1863. The
emperor sought to outfit the nation
with the institutions of a modern state.
His attempt to modernize the military
is what brought Tom Cruise’s character
to the country in the recent film, The
Last Samurai. A less cinematic part of
the emperor’s reform program was the
founding of the Bank of Japan, to centralize and govern the issue of currency.
From the perspective of the 21st
century it may seem only natural that
a central bank should be considered an
integral part of a modern state. But
that wasn’t always the case, and even
at the time when the Bank of Japan
opened its doors for business, such
institutions were not universal. For

A

20th century, as colonial power receded
and the number of sovereign states
grew. By 1997, the world’s group of
central banks numbered 172. One could
even argue that recent decades have
witnessed a new era in which central
banks’ visibility among economic and
government institutions has reached
new highs.
The Federal Reserve’s success at
achieving and sustaining low inflation
under the Chairmanships of Paul
Volcker and Alan Greenspan has
brought heightened public attention to
this country’s central bank. Another
recent phenomenon has been the
efforts by a number of countries to
strengthen their monetary institutions.
Notably, the late 1990s saw major revisions to the laws governing the Banks
of England and Japan.

AP PHOTO/BERND KAMMERER

The Founding of the European
Central Bank

The Euro sign is
illuminated in
front of the
European Central
Bank (ECB) in
downtown
Frankfurt,
Germany.

instance, with the closing of the Second
Bank of the United States in 1836, the
United States was without a central
bank until the founding of the Federal
Reserve System in 1913.
When the Fed was founded, the
United States joined a club of 20 countries with central banks. This number
rose rapidly in the second half of the

The focus in this period was the refinement of the relationship between a
country’s central bank and its government. This focus reflects a growing
appreciation of the importance of
central bank independence. Since all
central banks are created by the authority of a nation’s government, no central
bank is really totally independent. Still,
the ability of central banks to exercise
independent judgment in their pursuit
of monetary and financial stability has
grown considerably in many countries.
An independent central bank is free
to make its own decisions without direct
government intervention in the control
of such monetary policy instruments
as the interbank interest rate. At the
same time, the central bank is typically
accountable to the government for the

Summer 2004 • Region Focus

3

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

European Union (EU) Member
States in the European System
of Central Banks (ESCB)
➤Austria*
➤Belgium*
➤Cyprus
➤Czech Republic
➤Denmark
➤Estonia
➤Germany*
➤Greece*
➤Finland*
➤France*
➤Hungary
➤Ireland*
➤Italy*

➤Latvia
➤Lithuania
➤Luxembourg*
➤Malta
➤Poland
➤Portugal*
➤Slovakia
➤Slovenia
➤Spain*
➤Sweden
➤The Netherlands*
➤United Kingdom

*EU states that have adopted the Euro and participate
in the implementation of monetary policy for the
Euro area

results of monetary policy. This arrangement is a far cry from the origins of
many central banks, which started as
banks for the government, with a main
mission of facilitating war finances.
The crowning event of this wave of
central bank developments was the creation in 1998 of the European Central
Bank (ECB). The ECB is unique in that
it is the first supranational central
bank, serving a community of sovereign states. An institution of this kind
would not have been thinkable in an
earlier time when central banks were
thought of more as arms of the government treasury than as independent
monetary institutions.
The ECB’s creation raises new questions about central bank governance.
Just as a consensus was emerging about
the importance of independence for a
national central bank, the ECB came
along and upped the ante. Now the
issue is the relationship between a
central bank and multiple governments, as well as the relationships
among governments in the operations
of the European monetary system.
The other unique aspect of the ECB
is that it did not simply replace the
national central banks of its member
countries. Rather, the ECB was placed
at the center of the European System
4

Region Focus • Summer 2004

of Central Banks. In this regard, the
ECB’s closest precedent is the Federal
Reserve System.
Like the ECB, the Fed is a system
of central banks, with 12 regional Banks
and central authority resting with the
Board of Governors. In the Richmond
Fed’s 1999 Annual Report, economist
Marvin Goodfriend examined the similarities and differences between these
two institutions, and discussed how
their shared decentralized structure
helps build credibility in the pursuit of
price stability.

The Makeup of the Eurosystem
The European System of Central Banks
(ESCB), or “the Eurosystem,” came
into being when many of the nations
of the European Union (EU) decided
to adopt a common currency, the Euro.
If these nations were going to abandon
their national currencies in favor of a
single, continent-wide currency, they
needed a new institutional framework
for controlling the supply of money
over the Euro area. The Eurosystem is
made up of the 12 national central
banks in the Euro area (see chart) and
the ECB.
The terms Eurosystem and European System of Central Banks are
sometimes used interchangeably, but
they actually refer to two slightly different entities. While the Eurosystem
includes only those countries that have
adopted the Euro as their common currency, the ESCB includes all 25 member
nations of the EU. Three countries —
Denmark, Sweden, and the United
Kingdom — were parties to the original treaty that established the Euro and
the ECB but have so far elected not to
give up their national currencies. In
addition, the 10 countries that joined
the EU in 2004 — many of them part
of the former Soviet bloc — have not
yet adopted the Euro.
Only those countries that are part
of the Eurosystem participate in the
formation and implementation of monetary policy in the Euro area. The
broader ESCB provides a forum for
cooperation among all the central
banks in the EU on a number of issues.

It is, for instance, one of the means by
which the 25 member nations coordinate their efforts in bank supervision
and regulation.

The Fed and the Eurosystem
On its face, the monetary policy setup
of the Eurosystem is quite similar to the
Federal Reserve System. The key policymaking body is the Governing
Council, which is comparable to the
Fed’s Federal Open Market Committee (FOMC). The Governing Council
is made up of the Governors from the
12 national central banks and the six
members of the ECB’s Executive Board.
Since they represent the distinct economic perspectives of their individual
countries, the national central bank governors play a role similar to that of the
presidents of the 12 regional Federal
Reserve Banks. Similarly, the Executive
Board is like the Fed’s Board of Governors. The members of both of these
Boards are government appointees.
As one might expect, the appointment process for members of the
ECB’s Executive Board is a little more
complicated, given the need for the
multiple national governments to make
a coordinated decision. In the United
States, the President makes Board
appointments with the consent of the
Senate. ECB Board members, on the
other hand, are appointed through the
consent of the heads of all 12 of the
national governments.
While the makeup of the Fed’s and
Eurosystem’s policymaking committees
are similar, there is a difference in how
they vote on monetary policy decisions.
The FOMC has 12 voting members at
any given meeting. The seven members
of the Board of Governors vote at
every meeting, as does the president of
the New York Fed. The other 11
Reserve Bank presidents vote on a
rotating basis, with four voting in any
given year. In the Eurosystem’s Governing Council, all the members vote
all the time. As a result, decisionmaking power is more decentralized in the
Eurosystem.
The relationship between the ECB
and the national central banks in the

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

Eurosystem is also different from the
relationship between the Reserve
Banks and the Federal Reserve Board
of Governors. The Board of Governors
exercises general supervisory authority
over the Reserve Banks. For instance,
the Board approves the appointments
of Reserve Bank presidents and directly
appoints a third of all Reserve Bank
directors. The ECB does not have the
same sort of central authority in the
Eurosystem. In fact, the governors of
the national central banks have ultimate control over the staff of the ECB.
Such decentralized control was useful
in getting the many countries that
make up the Euro area to agree to give
up their own monetary sovereignty.
Finally, responsibility for the safety
and soundness of a member country’s
banking system lies primarily with that
country’s national government and
central bank. So the ECB does not take
a direct part in bank regulation or in
the provision of emergency credit to
banking institutions. This is different
from the Fed, where the Board has ultimate responsibility for bank supervision, together with the other federal
bank regulatory agencies. The Reserve
Banks implement bank supervisory and
regulatory policy, but they do so under
“delegated authority” from the Board.
Despite their differences, the
Eurosystem and the Federal Reserve
play a fundamentally similar role. Each
provides a unified monetary framework
for a large, diverse, and integrated
economy. In addition to the formulation
and implementation of monetary policy,
both systems also provide infrastructure
for the clearing and settlement of interbank payments, facilitating the
integration of commercial and financial
activity over wide geographic areas. In
the case of the Eurosystem, the ECB’s
“TARGET” system links the interbank
payment mechanisms of the national
central banks.
Of course, the most significant similarity between the two institutions is
their regional structure. According to
Goodfriend, this brings distinct benefits. Perhaps most important, the
regional structure can enhance credi-

bility. Credibility is important, because
it enables a central bank to better
manage the public’s expectations
regarding inflation. Managing expectations, in turn, facilitates the achievement of price stability.
Historically, central banks have
sometimes come under political pressure to stray from price stability, often
to help finance government deficits
with inflationary monetary policy. The
diffusion of power in a system of
regional central banks like the Fed or
the Eurosystem, says Goodfriend,
“makes it more difficult for outside
pressure to be brought to bear on a
central bank.”
After presiding over high and variable inflation throughout much of the
1970s, the Federal Reserve faced the
daunting task of credibly claiming that
it could achieve the goal of price stability. But over a long period beginning
in the 1980s, the Fed brought inflation
down and kept it low in a way that convinced the public that earlier inflationary policies were unlikely to return.
The ECB and the Eurosystem, by definition, came into being without such
an institutional history. So in order to
establish credibility as an inflation
fighter, it had to do so through other
means. Its founding document, the
Maastricht Treaty, states that the
primary objective of the Eurosystem
will be to maintain price stability. This
is a less ambiguous mandate than has
ever been given to the Fed.
It’s important to note, though, that
however credibility is established, the
dispersed power of the regional structure should help in its preservation.
This is true for both the Federal
Reserve System and the Eurosystem.
The regional structure also allows a
central bank to have a significant presence in the diverse areas served by the
common monetary policy. This regional
presence has many beneficial effects.
Contact with and knowledge of regional
economic conditions permit diverse perspectives to enter policy deliberations.
And the regional presence also makes
it easier for a central bank to communicate with and explain its policies to a

wide set of participants in the economy.
Specialized regional knowledge can also
be useful for monitoring conditions in
the banking industry to help make
prudent decisions about the provision
of emergency central bank credit to
private financial institutions.

The Future of Supranational
Central Banks
Should we think of the design of the
Eurosytem as a conscious attempt to
mimic the Federal Reserve, the way
Japan’s creation of a central bank in the
19th century was directly modeled on
European central banks of the time?
Probably not. Given the distinct political and institutional histories of the
countries involved, the regional structure adopted was probably the only
practical way to link the countries in a
unified monetary system. The similarities seem to follow naturally from the
comparable size and diversity of the
U.S. and EU economies. Perhaps, as
other regions experience growth and
economic integration, and as the
economies of other large nations continue to grow, we will see more entries
into the ranks of regional systems of
central banks.
RF
READINGS
Dornbusch, Rudiger, Carlo A. Favero, and
Francesco Giavazzi. “The Immediate Challenges
for the European Central Bank.” National Bureau
of Economic Research Working Paper no. 6369,
January 1998.
Feldstein, Martin. “The Political Economy of the
European Economic and Monetary Union:
Political Sources of an Economic Liability.”
Journal of Economic Perspectives, Fall 1997, vol. 11,
no. 4, pp. 23-42.
Goodfriend, Marvin. “The Role of a Regional
Bank in a System of Central Banks.” Federal
Reserve Bank of Richmond Annual Report,
1999, pp. 2-17.
Pollard, Patricia S. “A Look Inside Two Central
Banks: The European Central Bank and the
Federal Reserve.” Federal Reserve Bank of St.
Louis Review, January/February 2003, vol. 85,
no. 1, pp. 11-30.
Visit www.rich.frb.org/pubs/regionfocus for
links to relevant Web sites.

Summer 2004 • Region Focus

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JARGONALERT
Elasticity
BY A A RO N ST E E L M A N

ILLUSTRATION BY TIMOTHY COOK

I

6

n April and May, gasoline prices rose to nearly $2 per
gallon in most areas of the country. Did this cause people
to drive less? Probably. For instance, some people may
have foregone the proverbial Sunday drive in order to conserve gas. But it probably didn’t deter many people from
driving their cars to work. They figured that the convenience
of using their own vehicles, instead of relying on mass transit
or hitching rides with co-workers, was well worth the extra
money paid at the pump.
This means that demand for gasoline is relatively price
inelastic: Even though the price went up, people still decided
to buy it. (Of course, if gasoline had shot up to $5 per gallon,
it might have been a different story. Public transit might have
started to look a lot better then.)
Not all goods are as price
inelastic as gasoline. For
instance, it is possible to
buy fresh peaches in the
winter — if you are willing
to pay the price. But most
people are not. Perhaps the
biggest reason is that many
substitutes are available. For
instance, you might prefer
a peach but decide that an
apple will do instead. The
availability of substitutes
boosts the price elasticity
of fresh peaches.
Or consider coffee. You
might think that coffee is one
of the most price inelastic goods
around. After all, some people would rather forego a shower
in the morning than a cup of coffee. But if the price of coffee
tripled, you would probably see a lot of coffee drinkers switch
to tea or soda. The reason: It’s not the coffee itself they crave
so much as it is the caffeine the coffee provides. As long as
low-cost caffeineted substitutes are available, coffee will
remain a relatively price elastic good.
So when thinking about elasticity in economic terms, it
can be useful to imagine a rubber band. Imagine that you
are able to stretch the rubber band with ease if you switch
to a substitute or stop consuming a good when its price rises.
The good in that case is relatively price elastic. Now imagine
that you have a hard time moving the rubber band if you
continue to buy the good even though its price rises. The
good in that case is relatively price inelastic.
In each case, demand and price move in opposite directions. The difference is one of degree, not principle. The

Region Focus • Summer 2004

demand for peaches is reduced much more than demand for
gasoline. But higher prices means less demand in both cases.
Are there examples where price and demand actually
move in the same direction — that is, goods for which
demand increases as price increases? The early 20th century
economist and sociologist Thorstein Veblen thought so. He
argued that people bought expensive goods to boost their
status. The higher the price, the better the good, or so the
thinking goes. There may be some cases of such conspicuous consumption. Indeed, many people can probably think
of isolated examples from their own experience. But those
examples are just that — isolated — and not the norm.
When economists discuss elasticity, they usually consider
how sensitive people are to
changes in prices. But prices are
not the only thing that can
affect demand for goods.
Income can as well. For
example, you might really
like cashmere sweaters but
decide that a polyester
pullover is a more sensible
option. But that could all
change if you got a higherpaying job. With more
money at your disposal,
cashmere sweaters might
suddenly become part of
your wardrobe. If so, the
demand for cashmere
sweaters is pretty income
elastic. Items that fall into this
category are called “normal goods.” People demand more of
them as their income increases. In contrast, the demand for
“inferior goods” actually falls when income increases. In the
example above, polyester pullovers are an inferior good,
because you demand fewer of them after you get a raise.
Another common example of an inferior good is bus service.
With higher income, you may decide to fly or take the train
to New York, instead of going by Greyhound.
Some products can move from normal goods to inferior
goods relatively quickly as technology improves. Consider
video cassettes. Until recently, if you wanted to watch a movie
at home, you either rented or bought VHS tapes. But now
most people choose DVDs instead. DVDs are generally more
expensive, but they offer better picture quality and more
special features. Video cassettes have gone from being a
normal good to an inferior good, and the same may happen
to DVDs as newer technologies emerge.
RF

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

RESEARCHSPOTLIGHT
Learning to Compete
BY A A RO N ST E E L M A N

T

according to a new paper published by the National Bureau
he market system is based on competition. Firms
of Economic Research.
compete for consumers’ dollars and, in the process, tend
In “Does School Choice Increase School Quality?” econto improve each other’s performance. The consumer
omists George M. Holmes, Jeff DeSimone, and Nicholas G.
is rewarded with higher-quality products at lower prices.
Rupp examine standardized test scores for students enrolled
This is true for nearly every industry, including those
in North Carolina’s public schools from 1996 to 2000 — a
essential for human existence, such as food, clothing, and
period in which the number of charter schools jumped from
housing. But in the area of education, competition is relazero to nearly 100. They find that when a traditional school
tively limited. Parents are taxed to pay for government-run
faces competition from a charter school, test scores at the
schools that their children are assigned to attend. There are,
traditional school increase considerably.
of course, private schools that operate outside this system.
One might say this stands to reason: Students who are
But only about 11 percent of elementary, middle, and high
faring the worst in traditional schools are those most likely
school students are enrolled in such institutions.
to leave for charter schools, thus increasing average test scores
A major reason for the relatively low rate of private school
at the traditional schools. Actually, quite the opposite is true.
attendance is cost. Many families simply cannot afford to
Of students the authors were
pay twice for education —
able to identify, “approxonce with their tax dollars
imately 75 percent of those
and then again when the
who switched had a higher
tuition bill from the private
“Does School Choice Increase
score than the average score
school arrives.
in the traditional school the
Some education analysts
School Quality?” by George H.
year before they left. This is
have argued that the best
Holmes, Jeff DeSimone, and
direct evidence that chartersolution is to give parents
induced growth in traditional
vouchers roughly equal to the
Nicholas G. Rupp. National
school performance is not a
amount of money they pay
manifestation of an exodus of
each year to fund their local
Bureau of Economic Research
low-scoring students.”
public school. If they are
Working Paper 9683. May 2003.
Instead it is probably a
happy with that school’s permanifestation of competition.
formance, they could con“When a charter school opens,
tinue sending their children
the traditional school, which
to it and not use the voucher.
previously held a monopoly on public education in a feeder
But if they think their children could do better elsewhere,
district, faces the prospect of losing students to the new
they could use the voucher to help pay the tuition bill at a
competitor,” the authors write. “To the extent that the school’s
private school of their choosing.
agent (ostensibly a principal) experiences disutility from a
Some cities, such as Cleveland and Milwaukee, have impledecline in enrollment, this might lead to an increase in the
mented limited voucher systems. But well-organized oppotraditional school’s quality in order to retain students.”
sition from teacher unions and other groups have prevented
In other words, the charter school represents a threat to
their adoption in most places.
the traditional school’s market. This can encourage the traSo reformers have turned to a less controversial option:
ditional school to improve its level of instruction — just as
charter schools. These schools receive public funds but are
the opening of, say, a new restaurant might encourage nearby
allowed greater flexibility in setting their curricula than are
eateries to improve the quality of their food and service.
traditional public schools. Currently, about 685,000 students
But in both cases the competitor must be relatively nearby,
are enrolled in charter schools across the country. (Charter
otherwise it does not pose a credible threat to the incumschools are permitted in the District of Columbia and 41 states,
bent. The authors argue that the effects of charter schools
including all of those in the Fifth District except West Virginia.)
beyond roughly 15 miles from a traditional school are likely
The most obvious benefits of charter schools accrue to
to be quite small. Fortunately, though, this is not a huge
the students who attend them. They are able to opt for an
problem in North Carolina. In those counties with charter
educational environment that better suits their needs and
schools, 90 percent of traditional schools are located within
interests. But those students who remain in traditional public
12.5 miles of the charter.
RF
schools also benefit from the existence of charter schools,

Summer 2004 • Region Focus

7

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

SHORTTAKES
LOSING POWER

Duke Power
Struggles with
Textile Load Loss

D

DUKE POWER

uke Power’s roots are intertwined with those of
the textile industry in the Carolinas. Duke’s first power
plant was built on the Catawba River in 1904 to supply
electricity to a cotton mill.
Textiles in the region flourished throughout most of the
20th century, as did Duke
Power, providing low-cost
electric power crucial to the
industry’s success—and sharing in its prosperity.
Earnings and employment
in the Carolinas’ textile business have declined dramatically. Textile manufacturing

Duke Power’s Marshall Steam
Station is located near
Charlotte, N.C. Duke is
working to attract
manufacturing customers to
offset declines in its sales of
electricity to textile firms.

8

employment in the Carolinas has fallen by 44 percent
just since 1997. And Duke
Power has suffered a sharp
drop in sales as a result of textile plant closings and curtailed operations. Its kilowatt-hour sales of electricity
to textiles firms have tumbled 37 percent since 1997.
But sales to residential and
commercial customers have
risen, helping to offset the
decline in industrial sales.

Region Focus • Summer 2004

Duke wants its industrial base
growing again and is aggressively pursuing opportunities
to bring new industrial firms
to the region. Since growth
prospects in textiles are slim,
the company has turned to
other industries.
“We want to reverse the
loss of manufacturing,” says
company spokesman Tom
Williams. “We are expanding
our economic development
efforts and focusing on the
manufacturing sector.” Such
efforts have led to identifying and targeting industries
that have the best potential
for growth in coming years,
such as pharmaceuticals, plastics, paper products, and motor
vehicle assembly and parts.
Manufacturing is believed
to create more jobs, spinning
off employment in other sectors, including services. Duke
cites BMW’s automobile assembly plant in South Carolina as an example. According to research conducted at
the University of South Carolina, 4,327 jobs were created at BMW’s manufacturing
plant and 16,691 total jobs
were added in the region as
a result of the investment.
Manufacturers also have
attractive electric load characteristics, using lots of electricity during off-peak periods when it’s easier for electric
systems to handle the loads.
Industrial customers also consume a lot of electricity.
Despite the textile industry’s contraction, Duke still
sells massive amounts of power
to textile firms. (Sales to the
sector represented 31 percent
of the company’s industrial
sales in 2003.) There’s also
reason to believe that the

decline in the industry may
be slowing, and that the firms
left are more specialized and
thus more competitive.
Diversifying can’t hurt,
though. It would mean higher industrial sales growth and
less risk for Duke Power.
— R O B E RT L AC Y
ASIAN IMPORT

Testing the Bay
Waters

T

he Suminoe oyster is at
the center of proposals
to revive the Chesapeake Bay.
This Asian import promises to supplement native Eastern oysters that clean the bay
and support the livelihoods
of fishermen in Maryland
and Virginia. But public officials, the seafood industry,
and researchers are wrangling over how to introduce
a nonnative species into the
bay without sparking a destructive invasion.
Commercial landings of
Eastern oysters in the Chesapeake Bay have rapidly fallen
over the last century to a fraction of historic levels. Two
deadly diseases, MSX and
dermo, and overfishing are
widely considered the culprits.
In 1995, Virginia lawmakers asked the Virginia Institute of Marine Science (VIMS)
to evaluate the introduction
of nonnative species as a way
to reverse the bay’s decline.
Their first tests focused on
Pacific oysters, which thrive
off the West Coast and other
fisheries worldwide. The oysters didn’t respond well to the
bay’s environment and they
didn’t taste as good as the
Eastern oyster.

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

R I C H M O N D R E TA I L

Open-Air Centers
Compete for
Luxury Shoppers
COURTESY OF MARYLAND WATERMEN’S ASSOCIATION

R

Compared to oysters native to the Chesapeake Bay, Suminoes grow
faster and larger, and they are more resistant to disease.

Field and laboratory tests
of Suminoe oysters by VIMS
and the Virginia Seafood
Council were far more successful. The nonnative organism grew to market size
two to four times faster than
native oysters and resisted
MSX and dermo. And the
meaty oyster tasted good.
This excited aquaculture firms,
commercial fishermen, and
government officials in bay
communities looking to improve the regional economy.
Suminoe oysters could be
ecologically beneficial as well
as commercially so. They could
improve water quality in the
Chesapeake Bay by feeding
on algae, whose massive
blooms deprive fish of oxygen and block sunlight from
nourishing underwater sea
grasses, promoting dead zones
in the bay.
A 2004 report from the
National Research Council
was more cautious. “Introducing these nonnative oysters in the Chesapeake Bay
is not a magic bullet for either saving the oyster industry or restoring the bay,” noted
Dennis Hedgecock, co-chair
of the 11-member team that

worked on the report. “But
contained aquaculture of infertile nonnative oysters on
a small scale would provide
more information for industry and policymakers to make
a sound decision on further
use of nonnative oysters.”
The report’s authors and
other researchers are concerned that little is known
about the biology of Suminoe
oysters, making it difficult to
predict whether their net effect on the bay would be positive or negative. The nonnative species could invade,
spread throughout the bay and
crowd out Eastern oysters and
other native marine life. It
could also serve as a carrier for
nonnative pathogens. For example, an earlier effort to introduce the Pacific oyster in
the 1950s may originally have
brought MSX to the bay.
To fill the knowledge gap,
the U.S. Army Corps of Engineers and a team of state
and federal regulators are evaluating the introduction of
Suminoe oysters. Eight aquaculturists are testing largescale cultivation of Suminoes,
scheduled to end in April 2005.
— CHARLES GERENA

ichmond, Va., is shopping
these days at two upscale
malls that opened within
weeks of each other in September 2003. Richmond’s two
regional malls were the only
two such centers that opened
in the nation.
Though unusual, it was
happenstance helped along by
competition between the two
mall owners, says Brian Glass,
vice president of retail brokerage at the real estate firm
Grubb & Ellis/Harrison &
Bates. Forest City Enterprises
owns the new Short Pump
Town Center. Taubman Centers Inc. built its competing
mall, Stony Point, to complement its existing indoor mall,
Regency Square. Until the new
malls were built, Regency
dominated Richmond’s mall
landscape. “We ended up with
dueling malls,” Glass says.
Stony Point Fashion Park
and Short Pump Town Center are outdoor malls, decked
out lavishly with fountains
and brick facades.
“[These] tend to be higher-end in the tenant mix and
inclusion of streetscapes and
entertainment,” says Patrice
Duker, spokesperson for the
International Council of Shopping Centers. “Very atmospheric.” The expensive stores
and boutique retailers are new
to Richmond retail. The general manager of Stony Point
and Regency, Sid Welch, says
stores selling luxury items are
riding high, particularly Saks
Fifth Avenue. Stony Point is

99 percent leased and occupied, according to Welch, and
many stores are exceeding sales
expectations, especially the
sporting-goods retailer, Galyan’s.
(Galyan’s has been acquired
by rival Dick’s Sporting Goods.)
“I think Richmond was
thirsty for upscale shopping,”
he says, adding Richmonders
had been driving to high-end
malls in the Washington, D.C.,
area or Norfolk’s MacArthur
Center. “Saks, for example,
could look at the zip codes
and tell you how many dollars were being spent in Northern Virginia from Richmond.
There was definitely a hunger
for that upscale shopping that
didn’t exist in Richmond.
Hopefully we’ve captured the
majority of that.”
But one of the most chichi tenants, Lord & Taylor,
never showed up at Short
Pump. Instead, the company backed out and sent the
mall scrambling to find new
businesses that would generate comparable sales.
Whether Richmond can support luxury retailers such as
Louis Vuitton at Stony Point
and Nordstrom’s at Short
Pump is still a question yet
to be answered, Glass says.
But his informal retail survey
indicates that the restaurants
at both malls are faring especially well.
“It turned out that the
restaurants were the components reaping the harvest –
Maggiano’s at Short Pump,
Flemings and P.F. Chang’s
China Bistro and Brio Tuscan Grille at Stony Point,”
he notes, adding that the
Cheesecake Factory will replace Lord & Taylor at Short
Pump Town Center.

Summer 2004 • Region Focus

9

As for open-air mall shopping, it’s popular because it
saves time for today’s destination-oriented consumer.
Shoppers spend an average
of 56 minutes at an outdoor
mall and 76 minutes in an enclosed shopping center, Duker
says. These days, people like
to park nearby, shop at two
or three stores, and head home.
— B E T T Y J OYC E N A S H

DEAL SOLIDIFIES
REGIONAL PRESENCE

SunTrust Enters
the Carolinas

S

unTrust Banks Inc., of Atlanta, has agreed to purchase National Commerce
Financial Corp., of Memphis,
Tenn., the parent company of
Central Carolina Bank. The
$7 billion deal will fill in SunTrust’s market with some 233
branches in the Carolinas,
pushing it to No. 3 in market
share in the Southeast. The
merger will rank SunTrust No.
7 in the United States, with
$148 billion in assets and $97
billion in deposits.
SunTrust’s branches stretch
from Maryland to Florida.
Until this deal, there was one
huge void in its service area:
the Carolinas. The bank’s new
branches will include significant clusters in some of the
fastest-growing metropolitan
areas in the Carolinas: 71 in
Raleigh-Durham, 57 in Greensboro-Winston Salem, 47 in
Greenville-Spartanburg, and
36 in Charlotte-Gastonia.
Bank officials say branch consolidations will be limited.
SunTrust had attempted
to establish a presence in the
Carolinas in 2001 by acquir10

ing Winston-Salem-based
Wachovia Corp. But Charlotte-based First Union Corp.,
beat them, creating the fourth
largest bank in the United
States. (The consolidated firm
retained the Wachovia name.)
SunTrust hopes the acquisition of Central Carolina
Bank will help it compete with
Wachovia and another southeastern rival, Bank of America. The deal remains subject
to shareholder and regulatory approval.
—A A RO N S T E E L M A N

MORE MONEY FOR MOORE

Donation To Fuel
USC’s Effect on
State Economy

F

inancier Darla Moore
made history last April by
donating $45 million to the
business school at the University of South Carolina.
Combined with her $25 million contribution in 1998 to
the school bearing her name,
Moore became the nation’s
largest private donor to a business school.
She explained the motivation behind her generosity in a statement. “If our students are prepared with
state-of-the art training and
a rigorous educational environment, then they can add
fuel to the economic engine
of our state’s future, as well
as our nation’s.”
Her money will be combined with matching funds
from the USC Board of
Trustees and donations raised
over the next few years to upgrade the business school’s
decades-old facilities. It will

Region Focus • Summer 2004

KEITH MCGRAW

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

The Moore School of Business will use its $45 million donation to
expand programs such as its Professional MBA, which offers
instruction at multiple classrooms via satellite.

also augment the school’s $62
million endowment, positioning it to expand its role
as a source of talent and technical assistance for South Carolina businesses.
In today’s competitive
global economy, developing
human capital — the collective knowledge, skills and abilities of a population that make
them productive — is essential for making a work force
responsive to change. Business schools supply this capital through degree programs
and executive education for
working professionals. Each
institution finds its own way
to balance instruction on the
fundamentals of business and
economics with practical, specialized coursework to meet
the needs of employers.
“It’s not just an academic enterprise in an ivor y
tower,” says Philip Quaglieri,
dean of the College of Management at the University of
Massachusetts-Boston. “We
like to think of it as the human
resources department for
business and industry.” As
part of a workgroup of the
Association to Advance Collegiate Schools of Business,
Quaglieri examines how
schools contribute to met-

ropolitan area economies.
In the case of the Moore
School of Business, only some
of its human capital stays in
South Carolina. Most students leave the state after
graduation because of the lack
of challenging employment
opportunities and the demand for MBAs elsewhere,
according to the school’s dean,
Joel Smith III. Still, Smith
views out-of-state alumni as
ambassadors who can raise
South Carolina’s visibility and
send new industry back home.
Business schools also offer
expertise to companies.
Moore’s research division
produces economic data and
analysis that help inform the
decisionmaking of businesspeople. More directly, Moore
sends its faculty and students
into the trenches as consultants. For example, the
Faber Entrepreneurship Center pairs students with local
small businesses to assist in
accounting, marketing, and
other areas.
In addition, business
schools support businesses via
incubators for startups, small
business development centers,
and research centers. The
Moore School’s Center for International Business Education

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

and Research studies how to
improve U.S. competitiveness
in the global economy. The
school also operates the South
Carolina Real Estate Center,
and the Center for Information Management and Technology Research.
With millions in new
funds, the Moore School of
Business will do more to invigorate the state’s economy,
a mutually beneficial effort.
“We want to contribute to
the building of an economic
system in South Carolina that
provides greater opportunities for the graduates we are
producing in the process,”
notes Smith.
—C H A R L E S G E R E N A

A S P H A LT A N T I D O T E

“Living” Roofs
Absorb Runoff

W

Logics. “The additional layer
of a soil medium and the planting on top of that is where
the extra dollars come from,”
says Taylor.
The cost of living roofs
may decline as they gain acceptance and competition increases, says Roger Schickedantz, an associate partner
with the Charlottesville, Va.,
firm, William McDonough +
Partners. A green roof adds
about $11 to $13 per square
foot to the cost of a conventional roof, he says. The Charlottesville firm designed the
world’s largest living roof on
the Ford Motor Company’s
renovated Rouge assembly
plant (see “Dollars in the Dirt”
in the Winter 2004 issue of
Region Focus).
Before he began specializing in green roof plants, Ed
Snodgrass, owner of Emory
Knoll farms in northern Maryland, discovered the value of
drought-tolerant perennials
while trying to make his farm

more sustainable. With a
background in environmental education, Snodgrass realized that plant cover would
“become an issue with the explosion of the suburbs around
Washington, Baltimore, Richmond, and Philly.”
As farmland turns to asphalt and rooftops, green
roofs could play a big role in
storm-water prevention. Roofs
represent 15 percent to 30
percent of the total land area
in major cities. That’s a lot of
potential for green space.
But rooftop renewal won’t
happen quickly without
incentives. “Having watched
the slow pace at which solar
panels are being accepted in
the United States, I wouldn’t
expect green roofs to fall into
place any faster,” Schickedantz
notes. “Both these technologies seem to flourish only
where there are incentives or
regulations in place.”
—J E N N I F E R S PA RG E R

JOAN KELSCH

hile we are well aware
of the aesthetic and
ecological value of growing
plants and trees on lawns and
indoors, most people don’t
realize that growing plants on
a rooftop can drastically reduce
storm-water pollution.
Living roofs, also known
as green roofs, consist of multiple layers that promote plant
growth, provide proper water
drainage and filtration, and
prevent roots from growing
into a building—all while absorbing up to 100 percent of
rainfall. Living roofs have
been covering European industrial and office buildings
for more than a quarter
century. But Chris Taylor,
director of marketing and
operations for Building
Logics in Virginia Beach, Va.,
says such roofs have been slow

in coming to the United States.
“We’ve been doing this
now for three years, and it’s
a hot topic with architects
and designers,” Taylor says.
“I think you will find more
and more of it in the future,
but the practicality of it needs
to be demonstrated.”
Living roofs cost about 30
percent more than a conventional roof, but the roofs
partly pay for themselves in
storm-water runoff prevention, among other benefits.
Runoff is dirty water, full of
sediment, drippings from automobiles, and litter. It infiltrates rivers and streams and
can be blamed for half of the
water pollution in the United States, according to the
U.S. Environmental Protection Agency.
Local government officials in Arlington County, Va.,
hope to show the benefits of
the green roof with Courthouse Plaza in Arlington. The
retrofit roof covers the
original tar and gravel roof
making it pleasant to gaze on
from surrounding buildings,
says Joan Kelsch, an environmental planner for Arlington County. “The roof
also makes the building cooler, thus saving energy on air
conditioning. … The soil and
plants protect the waterproofing layers so they last
up to two to three times longer
than a standard roof, which
saves significant amounts
of money in the long run,”
says Kelsch. And, the roof
mitigates the impact of stormwater runoff.
The structure of a green
roof is not significantly more
expensive than a conventional
roof, says Taylor of Building

Completed in October 2003, this retrofit living roof atop the
Arlington County Government Center is filling in quickly. The
county also plans to top a community center and a fire station
with sections of vegetative roofing.

Summer 2004 • Region Focus

11

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

Recovery
T H E

R O A D

T O

Retraining programs throughout the Fifth District are preparing displaced
manufacturing workers for new niches in the global economy

BY KARL RHODES

F

or the first 30 years of her life,
Shirley Smith rarely left her home
state of North Carolina. After
high school, she settled into a factory job
in the small town of Dunn, about 40
miles south of Raleigh, where she spent
the next 13 years making components for
electric motors.
Smith was no world traveler, but she
started thinking more globally three years
12

Region Focus • Summer 2004

ago when her employer — Morganite Inc.
— began talking about building a plant
in China. As the new factory came on
line, the company began laying off employees at its plant in Dunn.
The company let Smith go in March
2003, and within a week she had
enrolled in the North Carolina Truck
Driver Training School at Johnston
Community College in Smithfield. “It

was something I had been thinking
about,” Smith explains. “I went into
truck driving because everything that’s
going overseas is being shipped back to
the United States. …Whether it’s coming
by train or by boat or by plane, it has
to get on that truck to get to the stores.”
Across the Fifth District, thousands
of displaced workers like Smith need
retraining to compete in an increasingly

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

global job market. If they return to the
work force with new skills that are in
high demand, the economy surges
ahead. If they fail to return to the work
force at all, the economy suffers.
“One of the most significant things
I have experienced in my professional
career is the sheer number of people
from traditional industries who have
been displaced either due to outsourcing or automation,” says Larry Keen,
vice president for economic and work
force development for the North Carolina Community College System.
The community colleges are trying
to rise to the challenge, but their
budgets are tight. Four-year universities and private vocational schools are
meeting some of the new demand, but
community colleges are the primary
delivery mechanism for retraining in
the Fifth District.
President George W. Bush highlighted that fact in April during a visit to Central Piedmont Community College in
Charlotte, N.C. Bush praised the college
for working closely with employers to ensure that its retraining programs are relevant, and he pledged to make retraining a higher priority nationwide.
“We’re not training enough people
to fill the jobs of the 21st century,” Bush
said. “There is a skills gap. And if we
don’t adjust quickly … and if we don’t
properly use our community colleges …
we’re going to have a shortage of skilled
workers in the decades to come.”
The president touted North Carolina’s transition from tobacco and textiles to computer technology and
biotechnology, but employment opportunities in these growth industries are
dwarfed by job openings in restaurants
and stores. Created and supported by
heightened consumer spending, these
jobs are characterized by low pay and
high turnover. They are viewed as a last
resort by many displaced factory
workers, but they provide important
entry-level opportunities for people
who are willing to learn on the job and
work their way up into better positions.

Where The Jobs Are Now
The occupational divide between
selling potato chips and fabricating
microchips is filled by dozens of pro-

fessions that are constantly seeking
qualified employees. In the Fifth District, demand is particularly high for
nurses, teachers, truck drivers, and construction workers.
It’s not just nurses, it’s all allied
health occupations, says James Skidmore, chancellor of the West Virginia
Council for Community and Technical
College Education. West Virginia has
many qualified people on waiting lists
to enter health-care training programs,
he says. “If we had money to put in the
nursing programs and really expand
them … we could put a lot more people
to work in high-paying jobs.”
West Virginia has the opposite
problem filling jobs in its chemical
manufacturing industry, where there is
strong demand for chemical technologists. The community colleges have a
program that trains people to enter
that high-paid, high-skilled occupation,
but the program struggles to attract
students who have the academic background to be successful, Skidmore says.
“That’s a little bit frustrating.”
Sometimes the people who need
retraining don’t want retraining,
observes Pat Sherlock, supervisor of
the Dislocated Worker Unit for the
South Carolina Employment Security
Commission. “They want their next
job,” and they want it next week, she
says. So it can be difficult to convince
them “that if you don’t get that GED,
you’re going to have a hard time getting
your next job, even though you’ve
worked the past 30 years without a
GED. In today’s climate, that’s probably not going to happen again.”
One exception to that rule is truck
driving. Students don’t need a GED to
enter the North Carolina Truck Driver
Training School, says Paul Jump, the program’s acting director. What they need,
he says, is a flexible, easy-going nature.
The school gets its share of displaced factory workers, Jump notes,
“but we get students from almost every
walk of life including lawyers, sales professionals, teachers, and airline pilots.”
They range in age from 18 to 72, and
they receive 384 hours of instruction,
most of it hands-on. Full-time students
complete the course in eight weeks,
learning everything from safety and

map reading to maneuvering the
tractor-trailers in and out of tight
spaces. Graduates who are willing to
travel extensively generally have no
trouble finding jobs that pay pretty
well, Jump says.
Construction is another industry
that offers career opportunities to
people who are willing to retrain.
“Anybody who wants to go into residential construction can get a job
immediately,” declares Steve Vermillion,
executive director of the Associated
General Contractors of Virginia.
Some construction trades are taught
at vocational schools and community
colleges, but “training is more on the
job than anywhere else,” Vermillion says.
The average age of highly skilled construction workers keeps going up, he
notes, so “filling those positions is going
to get interesting in the coming years.”

Where The Jobs Will Be
Retraining programs struggle to hit
moving targets. Even if they knew
exactly how many truck drivers are
needed right now, it’s difficult to accurately predict how many will be needed
two years down the road.
Providing specific training incentives to relocating or expanding businesses is one way to target resources,
but even these programs sometimes
miss the mark. (See “The Baiting
Game” from the Spring 2004 issue of
Region Focus.)
“There is very little information out
there about job opportunities and what
kinds of skills people will need in the
future,” says Aaron Fichtner, director
of research and evaluation for the John
J. Heldrich Center for Workforce
Development at Rutgers University.
The 10-year occupational projections
that states submit to the U.S. Bureau
of Labor Statistics provide a good starting point, Fichtner says, “but we need
qualitative information … that can help
form the foundation of education and
training programs” that will meet specific industry needs. “Right now our
feeling is that the education and training system isn’t as efficient as it could
be … because there is very little information about the demand side,” he says.
The Heldrich Center recently con-

Summer 2004 • Region Focus

13

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

vened business advisory groups that profiled the skills needed for key occupations
in New Jersey’s “cutting-edge industries”
including biotechnology, security, e-learning, e-commerce, and food/agribusiness.
“What we are trying to do is build a system where you have ongoing dialog between employers and educators and the
work force development system,” Fichtner says. “You are never going to get it
right all the time, but it’s worth trying. It’s
a big improvement.”
This idea also appealed to North Car-

olina’s Golden LEAF Foundation, an organization that uses half of the state’s tobacco settlement money to fund economic development projects. Last summer, after consulting with the state’s
biotechnology employers, the foundation earmarked $60 million to establish
and support a statewide Biotech Training Consortium. The commitment included $33.5 million for a Biomanufacturing Training and Education Center at
North Carolina State University, $17.8
million for a Biomanufacturing Research

and Training Enterprise at North Carolina Central University, and $8.7 million
for “BioNetwork” training and education
programs at several community colleges.
H. Martin Lancaster, president of
the North Carolina Community
College System, has called BioNetwork
“the most important and most exciting economic development effort in
the North Carolina Community
College System right now … and for the
foreseeable future. It is our commitment to meeting the long-term skills

Hot Jobs
Ranked by average annual job openings in the Fifth District
Occupation
NC
Cashiers
7,290
Retail Sales
6,880
Food Prep/Service
5,540
(Including Fast Food)
Waiters/Waitresses
5,440
Laborers/Freight, Stock,
3,790
and Material Movers
Registered Nurses
3,470
General Office Clerks
2,730
Customer Service
2,000
Representatives
Postsecondary Teachers
2,790
Janitors/Cleaners
2,320
Computer Support Specialists
1,500
Stock Clerks and Order Fillers
2,720
General/Operations Managers
2,720
2,180
Elementary School Teachersb
Nursing Aides, Orderlies
2,200
and Attendants
Teacher Assistants
2,180
Truck Drivers
1,990
(Heavy and Tractor-Trailer)
Maids and Housekeepers
1,870
Security Guards
1,370
First-Line Supervisors/
2,300
Managers of Retail Sales Workers
Landscaping/Groundskeeping
1,490
Computer Software Engineers
810
(Applications)
Child Care Workers
2,100
1,130
Secondary School Teachersb
Executive Secretaries/
1,570
Administrative Assistants

VA
5,450
5,600
5,660

MD
560
770
630

SC
810
700
1,020

WV
1,220
1,030
1,100

DC
30
10
100

5th
District
15,360
14,990
14,050

Salary a
$16,940
22,260
15,260

4,150
2,470

510
560

650
730

740
730

40
50

11,530
8,330

15,780
21,650

2,290
2,720
2,560

710
720
1,160

830
530
500

590
430
240

80
270
70

7,970
7,400
6,530

51,230
23,780
28,560

1,960
2,220
2,230
1,960
NA
1,660
1,510

630
450
950
170
1,100
240
570

320
390
350
120
680
660
350

310
420
90
300
360
210
260

90
300
200
NA
150
NA
40

6,100
6,100
5,320
5,270
5,010
4,950
4,930

NMF
20,320
42,640
21,490
88,700
44,350
21,050

1,620
1,440

340
270

600
870

140
220

50
10

4,930
4,800

20,220
34,330

1,530
1,780
1,030

400
410
510

370
610
240

270
220
260

170
110
NA

4,610
4,500
4,340

17,520
21,520
35,560

1,580
2,270

420
560

430
220

170
70

20
60

4,110
3,990

21,610
75,750

1,060
1,420
1,260

320
400
490

230
640
150

200
170
120

30
10
70

3,940
3,770
3,660

17,400
46,790
35,810

aMean annual salary from the “May 2003 National Occupational Employment and Wage Estimates” from the U.S. Bureau of Labor Statistics
bDoes not include special education or vocational education teachers
NA — Not Available
NMF — No Meaningful Figure (Salaries vary widely by specialty)
SOURCE: 2000-2010 occupational projections submitted by each state to the U.S. Bureau of Labor Statistics

14

Region Focus • Summer 2004

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

Lifelong Learning
Four-year universities in the Fifth District report that some displaced workers
are going back to school to earn bachelor’s degrees and master’s degrees, but
work force development experts are not
predicting shortages of college graduates with liberal arts degrees.

Changing Lanes
After Michael Fermaglich lost his information
technology (IT) job at Bank of America, he
got retrained at Catawba Valley Community
College. Then he commuted two hours each
way to a job that paid about half what he
was earning at the bank. And he loved it!
Fermaglich, 30, used to manage computer
networks for Bank of America’s asset management group in Charlotte, N.C. It was one of
those rock-solid, high-tech, high-finance jobs
that was supposed to be the staple of the
“new economy.” But when the bank laid him
off in November 2002, Fermaglich decided to
abandon the IT field to pursue his dream of
building race cars.
“While I was working at the bank, I had
been helping out some of the smaller teams
in the ... Automobile Racing Club of America,”
Fermaglich recalls. But to turn his hobby into
a career, he knew he would need more
intensive training. So he enrolled in the Bobby
Isaac Motorsports Program at the community
college, where he learned how to build race
cars from scratch.
Fermaglich completed the community
college program in four months by taking two
or three courses at a time to accelerate his
retraining. His timing was good. The Bank of
America severance pay was running out when
Andy Petree Racing Inc. called the school
looking for students who were ready to start
working in a real race shop. At that time, the
Petree team was competing in NASCAR’s Busch
Series with Paul Menard as its driver.
Fermaglich joined the team in May 2003,
and he commuted two hours each day to the
team’s shop in Asheville, N.C., where he helped
assemble the cars.
The community college program was good
preparation, but “when I got a job with Andy
Petree Racing, I found out that I didn’t know
as much as I thought I did,” Fermaglich admits.

In a recent speech at the University of
Richmond, Virginia Gov. Mark Warner
said: “We’ve created this notion that the
only way to meaningful success is to get
a college degree and then an advanced
degree of some kind. We should put more
value on technical education. Acommunity
college degree produces more earning
power than going to UVA for three years
and dropping out.”

CATAWBA VALLEY COMMUNITY COLLEGE

needs of North Carolina’s biotechnology and biomanufacturing cluster.”
In a presentation to the State Board
of Community Colleges last year, Lancaster said that “over the next three
years, 6,000 new workers with less
than baccalaureate degrees will be
needed in biotechnology and biomanufacturing. … That’s a huge opportunity and challenge for community
colleges.” The payoff, he concluded,
“will be a secure economic future
founded on good jobs that pay well.”
Biotechnology has replaced computer technology as the darling of work
force development efforts in several
states, but some economists maintain
that the demand for computer skills is
bouncing back faster than expected.
“Many people who lost information
technology (IT) and telecom jobs in
2001 and 2002 started their own companies, and we’re starting to see the
benefits of that,” says William F.
Mezger, an economist with the Virginia
Employment Commission. “The big
thing in Virginia was the loss of
WorldCom,” he says, “But we seem to
be getting a pretty strong rebound, particularly in Northern Virginia.” And the
same is true for Maryland and Washington, D.C., Mezger says.
The demand for computer skills has
been down somewhat in West Virginia
during the past two or three years, says
Skidmore. But “those are still highwage, high-skill jobs … and certainly I
think that’s one of the areas that will
rebound quickly.” IT jobs are more
broad-based than they originally were,
he notes. “Hospitals, banks and different organizations need IT workers.”
Despite several high-profile IT
layoffs in the Fifth District in recent
years, Mezger says the Virginia Employment Commission is not reducing its
hefty projections for IT jobs in its
2002-2012 occupational forecast.

Building race cars from scratch is what the
motorsports program at Catawba Valley
Community College is all about. Here students
measure a frame for a Nextel Cup race car.

“There is so much to learn in this business
with the cars and how to set them up and
put them together to gain an advantage.”
Fermaglich enjoyed working for Petree very
much. “I love working on the cars, so it’s not a
big deal to work late hours or long hours.”
Fermaglich isn’t married, and he has no
children, so the long hours are easier for him
to manage, but he says that the cut in pay
made him hesitant to leave IT. “I was making
about twice as much money in the IT area,”
he says. “But as you gain experience, and if
you stay in racing long enough, the pay
dramatically increases.”
In mid-June Fermaglich was testing that
theory by looking for a new job. Petree laid
off the majority of its employees after losing
its corporate sponsor. “That goes with the
business,” Fermaglich says. “You just have to
deal with it.”
Just one week after losing his job,
Fermaglich was interviewing with other racing
teams. He was weighing one opportunity, and
he was anticipating a second job offer. Now
that he has some experience in the industry,
he says he can “pretty much pick and choose
who I want to work for. ... I don’t have any
plans to go back to corporate America.”
— K ARL R HODES

That may be true, but the value of
a four-year college degree is going up
fast, counters Robert Silberman,
chairman and CEO of Arlington, Va.based Strayer Education Inc., the
parent company of Strayer University.
“Independent of anything that is going
on in the economic cycle … the most
compelling reason why people go back
to school and finish their bachelor’s

Summer 2004 • Region Focus

15

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

Digital Dominion
Virginia predicts the most computer-related job openings per year
Occupation
Computer Support Specialists
Computer Software Engineers
(Applications)
Computer Systems Analysts
Computer Software Engineers
(Systems)
Network/Computer Systems
Administrators
Computer/Information Systems
Managers
Computer Programmers
Network Systems/
Data Communications Analysts
Data Entry Keyers
Database Administrators
Computer Hardware Engineers
Computer Operators
Computer/Information Scientists
(Research)
Total Computer-Related
Job Openings

VA
2,230
2,270

NC
1,500
810

MD
950
560

SC
350
220

DC
200
60

WV
90
70

5th District
5,320
3,990

Salary*
$42,640
75,750

1,350
1,610

740
650

660
600

130
190

310
160

60
20

3,250
3,230

66,180
78,400

900

660

400

120

90

40

2,210

59,140

790

540

370

110

120

60

1,990

95,230

1,180
470

390
310

80
260

40
110

10
60

30
30

1,730
1,240

64,510
62,060

430
320
110
110
70

140
170
40
70
NA

20
90
60
NA
80

10
20
10
NA
NA

40
60
NA
NA
20

40
20
NA
10
NA

680
680
220
190
170

23,590
61,440
79,350
31,870
84,530

11,840

6,020

4,130

1,310

1,130

470

24,900

*Mean annual salary from the “May 2003 National Occupational Employment and Wage Estimates” from the U.S. Bureau of Labor Statistics
NA — Not Available
SOURCE: 2000-2010 occupational projections submitted by each state to the U.S. Bureau of Labor Statistics

degrees is that the earnings power of
someone in the work force with a
college degree is twice what it is with
a high school degree,” Silberman says.
As the Fifth District moves from a
manufacturing-based economy to a
knowledge-based economy, the value
of a college degree, as a factor of production, is going up, and the value of a
high school degree is going down, Silberman contends. “In a manufacturingbased economy, a college degree just
wasn’t that important. There were a
number of well-paying, professionally
satisfying jobs that did not require a
college degree, but the kind of skill sets
that are necessary to prosper in a
knowledge-based economy really do
require a college degree.”
Whether it’s pursuing a Ph.D. or a
GED, lifelong learning is becoming the
watchword among retrainers throughout the nation. “How do you create a
system that encourages lifelong learning and supports lifelong learning for
people who are employed, as well as
16

Region Focus • Summer 2004

people who are unemployed? That’s a
key issue,” says Fichtner at Rutgers
University. “People are going to have to
be constantly improving their skills,
even when they think they are in a
stable job. … That starts, obviously,
with basic education and literacy and
then moves up to professional and
technical skills. … People don’t tend to
think about these issues until it’s
almost too late.”

On The Road
Truck driver Shirley Smith admits that
she had grown complacent in her manufacturing job. “After you’ve stayed with a
company so long … you don’t think there’s
anything else out there,” Smith explains.
Luckily for her, though, she was able to
quickly land a long-haul truck-driving job
with Colonial Freight Systems Inc. —
thanks in no small part to graduating
fourth in her class at the North Carolina Truck Driver Training School.
Smith’s first training run was to California, and it “seemed like everything

that could go wrong did go wrong with
that load,” she recalls. She and her
trainer blew a tire in Arkansas, and
Smith got terribly homesick after the
first three days.
“If you really love your family and
you want to be with your family, overthe-road truck driving is going to be a
hard job for you and for your family
too,” she says. Smith wants to do more
for her father, who is in poor health,
but she is often gone for two or three
weeks at a time.
Ironically, Smith’s father was the one
who insisted that she pursue long-haul
trucking because it pays better than
local trucking and provides a more
secure future. Smith brings home about
$700 a week — $1,000 if she works the
weekend too. At the Morganite plant,
her take-home pay was less than $350
per week.
Truck driving isn’t for everyone,
warns Paul Jump, who was Smith’s
instructor at the school. Long-distance
drivers can be on the road 30 days at a

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

Getting The Most Bang
For The Buck
In his speech at Central Piedmont
Community College, President Bush
praised workers like Smith who are
getting retrained and meeting critical
needs in the work force. He also proposed more funding — coupled with
greater accountability — for retraining
programs at community colleges.
“We’ve got money coming your
way,” he pledged. “Tell us how many
people have actually found a job, how
much they earn on their jobs, and how
long they stay on those jobs. That’s
what ought to be measured and
nothing else.”
Under the Workforce Investment
Act, one-stop employment centers
already compare displaced workers who
get retraining to those who don’t. The
results seem to show that retraining
gives workers an advantage but not
necessarily a huge one. In South Carolina, for example, 92 percent of
retrained workers found jobs in the
2002-03 fiscal year, but 86 percent of
workers with no retraining also found
jobs. The retrained workers replaced
99 percent of their earnings, while the
workers with no retraining replaced 92
percent of their earnings.
Such results are pretty bright — perhaps surprisingly so. In a widely cited
study published in the American Economic

TWYLA CASEY WELLS

time, he says. They sleep in their
trucks. And their schedules for sleeping, eating and personal hygiene are
erratic. One reason there are so many
jobs available to truck drivers is
because the annual turnover rate for
long-haul truckers is nearly 100
percent, Jump notes.
Smith says she still has second
thoughts during those long stints away
from home, but she prefers the open
road to a closed factory. “They don’t
put windows in factories.” she explains.
“Whenever you go to work, you want
to be happy. You don’t want to be upset
or stressed out. The only stress that I
have found in [trucking] is in traffic,
whenever cars are trying to take your
bumper off, and you know that if you
hit them, it’s automatically going to be
your fault.”

Instructor Paul Jump (far left) with
graduating students at the North Carolina
Truck Driver Training School.

Review, economists Louis Jacobson,
Robert LaLonde, and Daniel Sullivan
tracked more than a decade’s worth of
wage data for a group of Pennsylvania
workers. They found that people displaced from manufacturing jobs experienced a roughly 20 percent decrease in
long-term earnings if they took a job
within the same industry, and an 18 percent drop if they moved to a new one.
The figures for non-manufacturing workers were similarly dismal.
“Our results indicate that there is
something intrinsic to the employment
relationship itself that is lost when
workers are displaced,” Jacobson,
LaLonde, and Sullivan conclude. For
instance, many job skills may be firmspecific and not particularly valuable
to a new company, even if that company is part of the same industry.
Moreover, evaluating individual work
force programs is extremely difficult, says
Fichtner at Rutgers University. You really need perfect experiments where people are randomly assigned to get training
or not to get training, and “you don’t want
experiments that are going to impact people’s lives in that way,” he says.
Even when researchers compare displaced workers who have similar
“observable characteristics,” as they did
in a recent Rutgers study, there are too
many “unobservable characteristics,”
Fichtner explains. “It may be that
people who don’t get training … know
that their uncle has a job for them, or
they know that they have a good

resume, and they are going to get a job,
and they are confident. So they may
self-select out of getting training. … Or
it may be that people who get training
are those people who are really committed to improving their education
level and their skill level, and maybe
those people are more likely to get
employment without training also. …
There’s no way to know.”
But there is general agreement that the
value of retraining is increasing rapidly
as all jobs become more intellectually challenging and globally portable. In a recent speech, Federal Reserve Chairman
Alan Greenspan hailed “the increased flexibility of our labor market” as an important contributor “to economic resilience
and growth.” He was referring primarily
to companies’ ability to hire and fire workers on short notice, but he tipped his
hat to community colleges for providing
“new job skills that meet the evolving opportunities created by our economies.”
Greenspan also noted that “workers,
of necessity, migrate with the capital.”
Historically, those migrations have been
from one region to another — leaving behind neglected towns and other wasted resources. Those geographic migrations are
likely to continue, but for more and more
people, retraining can create intellectual migrations from dying industries to
thriving industries, from lower skills to
higher skills, and from working class to
middle class.
RF
READINGS
“Evaluation of the Workforce Development
Partnership Program in 1994, 1995 and 1996.”
John J. Heldrich Center for Workforce
Development, Rutgers University, January 2000.
Greenspan, Alan. “Economic Flexibility.” Speech
to the HM Treasury Enterprise Conference,
London, January 2004.
Heisler, Eric. “After the Shutdown.” A series of
articles appearing in the Greensboro News & Record,
April, July, and October 2001.
Kuhn, Peter J. Losing Work, Moving On:
International Perspectives on Worker Displacement.
Kalamazoo, MI: W.E. Upjohn Institute for
Employment Research, 2002.
Occupational Outlook Handbook, 2004-2005
Edition. Washington, D.C.: Bureau of Labor
Statistics, U.S. Department of Labor, 2004.
Visit www.rich.frb.org/pubs/regionfocus for
links to relevant Web sites.

Summer 2004 • Region Focus

17

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

THE

ZONING
DOWNE F F E C T
When rural communities lower the density of residential development,
the merits of land conservation collide with market forces. What happens next?

BY CHARLES GERENA

A

middle-aged woman knits as
she patiently waits in one of
the hard plastic chairs lined up
in the large meeting room at Cecil Community College in northeast Maryland.
She has come with her husband and
dozens of other residents on this April
evening to learn about a proposed
change in land-use management that
could affect every farmer and landowner
in Cecil County.
Cecil is like many rural communities in Maryland and Virginia. Its population has swelled in recent decades,
more than doubling from 1950 to July
2003, according to the U.S. Census
Bureau. As residential development
grows, so do concerns about preserving the thousands of acres of farmland
that cover one-third of the county.
In response, the local planning commission recommended changes to Cecil
County’s comprehensive plan in March.
The recommendations included a
drastic “downzoning” of two rural
zoning districts.
Downzoning is the practice of
restricting the type or amount of development allowed on a property. Usually

18

Region Focus • Summer 2004

this is accomplished by reducing the
ratio of housing units per acre that can
be built, or the allowable density of the
property. In the case of Cecil County,
planners want to reduce the allowable
density in the northern part of the
county from one house for every five
acres to one house per 20 acres. They
also want to lower the density in southern Cecil further from a 1-8 ratio to a
1-30 ratio.
This isn’t a recent phenomenon.
Twenty-two years ago, officials in
Fairfax County, Va., downzoned 41,000
acres along the rivers and tributaries
that feed the Occoquan Reservoir to
help protect the drinking water supply.
Other local governments in Maryland
and Virginia have downzoned to
protect environmentally sensitive areas,
to prevent sprawl from gobbling up
farmland, and to preserve open space.
In addition, cities have implemented
downzoning to keep commercial development from encroaching on residential neighborhoods.
While downzoning has been widely
embraced, the practice also has been
widely criticized because it can create

an artificial shortage of land for residential growth as well as cause a
supply-demand mismatch for private
development and public infrastructure.
It can also alter land-use options so drastically that landowners don’t get the
price they want for their property and
residents don’t get the development
they want in the future.
Land conservation advocates like
Robert Etgen counter that downzoning can succeed in preserving space
while accounting for these issues. It’s
a matter of balancing “the benefits and
burdens to the greatest number of
people,” says Etgen, executive director
of the Eastern Shore Land Conservancy in Maryland. Any government
action that restricts the use of property is going to have a cost. The question is whether the benefits outweigh
the costs and how those costs are
spread out.

Working Against the Tide
Localities like Cecil County are grappling with the costs and benefits of
downzoning as housing development
consumes a growing amount of rural

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

removing regulatory barriers to denser
development in urban areas, and offering redevelopment incentives.
Montgomery County uses transfer
of development rights (TDRs), a policy
tool commonly implemented in conjunction with downzoning. When
downzoning reduces the allowable
density of a property, the landowner
retains the right to develop at the original density in the form of a TDR. The
TDR cannot be used on downzoned
property, which is called the sending
area. It can be used to build only in
receiving areas, which are usually where
development is already dense and
public infrastructure is already in place.
The idea is that developers will buy
TDRs from landowners so that they
can exceed the allowable density in
receiving areas. In the process, development shifts from sending areas to
receiving areas.

This Land is My Land
While downzoning can preserve rural
landscapes, landowners are usually
apprehensive about how it will affect
the equity they have built up. Cecil
County residents are no exception.
While some support the proposed

A Growing Appetite
Over a 15-year period, every Fifth District state
saw the pace of development exceed population
growth. This accelerated the rate of per-capita
land consumption. However, Maryland and Virginia
had lower growth in per-capita land consumption,
partly because they were relatively better at
reigning in land development.

30

I

10

I

0

I

20

I

40

I

50

I

60

I

Total Developed/Urbanized Land
Total Population
Per-Capita Land Consumption

-10

I

growing suburbs of Northern Virginia,
including Loudoun and Fairfax counties.
“That’s the backdrop of why jurisdictions look at downzoning; they are
faced with patterns of development that
are ultimately unsustainable,” explains
Paul Gilbert, president of the Northern Virginia Conservation Trust.
“Downzoning is one way to take a
broad-brush approach. It takes a large
area and says, ‘We’re going to reduce the
building potential for this area because
otherwise it will be gobbled up.’ ”
In several rural communities, downzoning has succeeded in keeping development out of designated areas. Just
north of the nation’s capital, Montgomery County, Md., has remained
predominantly rural due to its aggressive land management activities, which
included a 1980 downzoning of more
than 90,000 acres in its western and
northern sections. Water quality has
remained stable or improved in the
Occoquan Reservoir thanks in part to
Fairfax County’s 1982 downzoning.
But working against the tide of market forces can cause unexpected problems. For instance, Basu says that downzoning in rural areas where government
has allowed some growth to occur results in surplus public infrastructure.
“The public makes its intended
investments to serve a particular area,
a community forms around that infrastructure, and then community leaders
ask that the area be downzoned
because they are unnerved by the
prospects of school overcrowding and
increased traffic,” he describes. If the
opponents of excessive development
get their way, “what you get is less
dense development than had been
anticipated. … That leads to the underutilization of infrastructure.”
Another problem with downzoning
is that it doesn’t address the unmet
demand for residential development.
Consequently, constraining the supply
of land in one location may cause development to spread farther out, which
feeds sprawl rather than curbs it.
Therefore, planning experts and
land conservationists agree that downzoning must accompany other policy
actions that accommodate future development in some way. These include

PERCENTAGE CHANGE , 1982-1997

land (see table). Other factors besides
population growth are driving development into the countryside.
For one thing, developed areas often
don’t have the modern houses with spacious landscaping that people want, nor
do they have sufficient land to build
this type of housing.
Some blame these shortfalls on
zoning policies. “Lot prices are driven
up by downzoning and other restrictions on development in more urbanized jurisdictions,” notes economist
Anirban Basu, chairman and CEO of
the Sage Policy Group in Baltimore. In
contrast, “rural jurisdictions are often
able to supply homebuilders with cheap
lot prices.”
Also, rural communities often are
perceived as healthier places for families because of lower crime rates and
better schools. “There is a growing
number of households who are empty
nesters … free to move anywhere they
want,” observes Basu. Still, “more households are moving away from center
cities than moving back to them.”
At the same time, workers aren’t as
“place-bound.” Michael Peddle, an economist and faculty associate at Northern
Illinois University’s Center for Governmental Studies, says there is a reduced
need to be close to densely populated
areas because “more people are able to
work at home or telecommute.”
Interstates enable people to reach
jobs within a wider radius of their
homes. For instance, 33 percent of
Cecil County’s residents travel over the
state border into New Castle County,
Del., for work.
Cecil is just one of the counties mentioned in a December 2003 report on
downzoning by the Maryland Center for
Agro-Ecology. The report identified
several regions of Maryland as experiencing development pressure: the
middle and upper Eastern Shore, which
includes the counties of Cecil, Kent,
Caroline, Queen Anne’s, Dorchester,
and Talbot; and the southern Western
Shore, which encompasses the counties of Calvert, Charles, and St. Mary’s.
Many of these counties have either considered or implemented downzoning to
alleviate this pressure. Interest in downzoning also has increased in the rapidly

I
MD

I
NC

I
SC

I
VA

I
WV

SOURCE: Outsmarting Smart Growth: Population Growth, Immigration, and
the Problem of Sprawl, Center for Immigration Studies, August 2003

Summer 2004 • Region Focus

19

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

Getting Something in Return
All David Lucas wanted to do was make some
money building beach houses on the Isle of
Palms, a scenic barrier island near Charleston, S.C.
He started a residential project in the late 1970s,
but it came to a halt when the state passed
legislation in 1988 that prohibited new beachfront structures seaward of an erosion line. Two
of Lucas’ lots were affected, rendering useless
property that cost almost $1 million to acquire.
As far as Lucas was concerned, the state’s
zoning change was a “taking.” Under the Fifth
Amendment, landowners are entitled to “just
compensation” when the government physically
takes private property for public use, like a road
or a school. He sued the state and won $1.2
million, then appealed a reversal of that decision
all the way to the Supreme Court. In 1992, the
court sided with Lucas, finding that landowners
suffer a taking when a government regulation
eliminates all economically beneficial uses of
their property.
This sounds like an equitable outcome, right?
Well, the situation gets more complicated when
a government’s downzoning affects the development value of rural land. Some believe that when
farmers get a lower price for their land because
it isn’t zoned for dense development, that lost
value should be considered a partial taking.

But requiring governments to compensate
owners of downzoned land for a partial taking
would be a mistake, according to Philip Pryde,
a former geography professor at San Diego State
University. “The courts, in decisions going back
to at least 1922, have noted that government
would be hard-pressed to function normally if
compensation were required any time a decision
had an adverse effect on property values,” he
wrote in a 2000 position paper for Republicans
for Environmental Protection, a New Mexicobased advocacy group.
There are mechanisms for “achieving equity”
when property values are affected by zoning
changes, says Paul Gilbert, president of the
Northern Virginia Conservation Trust. The owner
of downzoned land could receive a transfer of
development rights (TDR), which could be sold
to developers to give them the ability to build
in densely urbanized areas.
TDR programs help spread the cost of land
conservation rather than have farmers shoulder
all of it, notes Kevin Schmidt, director of the
Mid-Atlantic regional office for the American
Farmland Trust. “Downzoning is a very effective
tool, but to be palatable to the landowner and
to be as equitable as possible … you couple it
with some type of incentive.” —C HARLES G ERENA

downzoning, “others, many of whom
are farmers, are threatened by any
attempt of government to take away
their right to sell their land to a developer, claiming it is like taking away
their retirement,” wrote reporter
Cheryl Mattix in the April 2 edition of
the Cecil Whig. This sentiment was
echoed in several letters to the editor
following the article’s publication.
While it seems counterintuitive to
landowners, several studies claim that
downzoning doesn’t automatically
wipe out the development value of
rural property.
The Center for Agro-Ecology’s
report analyzed sales of agricultural
land in eight counties, excluding parcels
that were smaller than 20 acres, located
near a waterfront or marsh, or had
other traits that would skew their value.
For each county, researchers averaged
together land sales over a period of
years, then compared the average peracre value of land in four counties that
20

Region Focus • Summer 2004

had downzoned against average land
values in four counties with similar real
estate markets that didn’t downzone.
“We found that, for the most part,
either the acreage value was consistent
between [downzoned and non-downzoned] counties or the value had
increased for the county that had
downzoned,” says Sarah Taylor-Rogers,
lead author of the report and former
secretary of the Maryland Department
of Natural Resources. She has
explained these findings at several
public forums, including the April
informational meeting on downzoning
in Cecil County.
Robert Gray, an Alexandria, Va.-based
planning consultant who contributed to
the Center for Agro-Ecology report,
reached a similar conclusion in a 1991
study for the state of Maryland. His
team of researchers looked at four
counties that had enacted downzoning,
comparing sale prices of large plots of
land three years before they were

downzoned and several years after to
detect any changes.
Gray’s explanation is that real estate
markets don’t always take downzoning
into account when valuing a property.
Although a typical middle-income subdivision cannot be developed on the
site, he says that developers figure they
can lobby to remove the downzoning
in the future.
However, community groups have a
strong incentive to lobby for keeping
the zoning in place. Economist Anirban
Basu says that downzoning creates an
infrastructure windfall for existing residents. “There is more public capacity
on a per-capita basis,” he explains.
Even if the property remains downzoned, Gray believes it may still have
value in the real estate market. There
have always been homebuyers willing
to pay a half million dollars for a nice
home surrounded by a huge area of open
space, he notes. (Indeed, such a buyer
can find several high-dollar properties
by thumbing through the Cecil County
Real Estate guide.) According to Gray,
this demand has increased as disposable
incomes have increased, enabling more
retirees and city dwellers to fulfill their
desire to move out into the country.
In fact, there are a few examples of
downzoned property becoming more
valuable. Usually, this occurs when the
property offers a waterfront view or other
desirable natural characteristics that are
safeguarded by downzoning. The initial
price of downzoned land may not reflect
how much people value preserving the
land’s esthetic qualities, notes Michael
Peddle. In the long run, however, the market might recognize the value of land
preservation. “In many cases, the original landowner may not be the person who
ends up benefiting. It may be a subsequent landowner or a developer.”
There is another possible explanation behind the studies’ conclusions on
downzoning and property values. In
rural communities far from development, the demand for land is lower and
the development potential is much
smaller. Peddle says this is due to greater
uncertainty about the property’s future
use. “If you are in the path of development, you can see the logical path of
infrastructure and the demand for the

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

land.” Therefore, landowners likely have
little to lose from downzoning.
On the other hand, demand is
greater in rural communities that are
close to densely developed communities. Therefore, the development
potential of properties is higher and
downzoning could result in a major loss
in value for landowners.
Another study in progress will likely
come to a different conclusion than
those arrived at by Gray or TaylorRogers. Michael Samuels, a real estate
consultant at Clarion/Samuels Associates in Wayne, Penn., compared properties within townships in New Jersey.
His preliminary findings show that
when townships increased the
minimum lot size for residential development from one acre to 10 acres, land
values decreased. In markets where
there was a demand for 10-acre lots,
the value of downzoned property fell
more than 50 percent. In markets
where there was no demand for such
lots, downzoned property lost all of its
development value.
What accounts for these differing
conclusions? The Center for AgroEcology’s study took a macro view by
doing a county-to-county comparison
of land values, so the negative effects
of downzoning on individual properties may not show up when they are
averaged together. In contrast, Samuels
took a micro view by comparing land
values within communities.
Samuels’ approach arguably is more
methodologically sound, but both
studies have a hard time distinguishing
“causation” from “correlation.” For
instance, land prices could rise in areas
where downzoning has occurred, but
that doesn’t necessarily mean that one
event led to the other. Instead, they may
simply be associated with each other
and something else is the real cause.
What is certain is that downzoning
takes some development options off
the table. Whether that results in an
increase or decrease in land prices
depends on the property in question,
the availability of suitable land for
development nearby, and the local
demand for lower density housing.
In graduate school, Peddle and his
friends would debate whether height

restrictions on buildings in Washington, D.C., increased or decreased the
value of land. “It’s not an unambiguous
answer,” he says. “You can’t develop the
land as intensively, so that would tend
to decrease the price of land. But it
decreases the supply of useable space,
which would increase the price.”

What’s It Good For?
Another way of describing the effect
of downzoning is that it alters what real
estate appraisers refer to as the “highest
and best use” of a property. The Appraisal
Institute defines this as the use of land
that is “physically possible, appropriately
supported, financially feasible, and that
results in the highest value.”
During his presentation at the April
informational meeting on downzoning,
Samuels explained to Cecil County residents that there is a point at which
downzoning becomes so restrictive
that the typical developer isn’t willing
to pay a higher price than farmers for
rural property.
Instead, agricultural land will probably remain agricultural. That would be
good news if the landowners can continue to profit from it. Some tobacco
farmers, for example, have converted
their fields to grow grapes and other
high-demand crops. Still, pricing pressures continue to weigh on a variety of
agricultural sectors, so farming may not
turn out to be the most profitable use
of downzoned land.
Someone could purchase the land
for low-density development. That
would be bad news for local government officials who enacted downzoning to preserve land for agriculture. On
the plus side, low-density development
doesn’t lead to big jumps in population,
which require additional roads, utilities, and schools.
Downzoned land could even
become a luxury estate. That’s not considered welcome news to neighboring
landowners. After the April informational meeting, several farmers stood
around complaining about downzoning
benefiting the rich. The president of
the Cecil County Farm Bureau, for
instance, expressed his disdain about
downzoning resulting in “an increase
in affluence.”

Why should residents care if downzoning causes upper-income people to
move into their community, especially
since they make big bucks from the sale
of their land? Aside from raising the
usual suspicions about the well-to-do,
it could make housing less affordable.
By reducing the supply of land available for dense residential development,
downzoning makes the remaining land
more valuable and, thus, more costly
for developers acquire. Those costs are,
in turn, passed on to consumers.
Bottom line: Homebuyers pay more.
In the end, local planners and
elected officials must weigh the costs
of downzoning against the anticipated
benefits. But in order to do that, their
constituents have to be informed, and
it’s easy to get lost in planning jargon
and statistical analysis of property value
impacts. Halfway through the informational meeting in Cecil County, the
slides of scatter graphs caused many
eyes to glaze over.
The challenge is to ensure that a
community knows what it is getting
into with downzoning and why. If they
don’t perceive downzoning as a worthwhile endeavor for the community and
fair to landowners, they’ll revolt as they
did in Loudoun County, Va., where
voters kicked out members of the
board of supervisors after they enacted
downzoning last year.
RF
READINGS
Gray, Robert J., et al. The Effects of Agricultural
Zoning on the Value of Farmland. Washington, D.C.:
Resource Management Consultants, Inc., 1991.
Peddle, Michael T. “Farmland Protection Policy:
The Effects of Growth Management Policies on
Agricultural Land Values.” Working Paper CAE/WP
97-7, Center for Agriculture in the Environment,
American Farmland Trust, 1997.
Plantinga, Andrew J., Ruben N. Lubowski, and
Robert N. Stavins. “The Effects of Potential Land
Development on Agricultural Land Prices.”
Working Paper RWP02-012, Kennedy School of
Government, Harvard University, February 27, 2002.
Taylor-Rogers, Sarah, et al. Downzoning: Does It
Protect Working Landscapes and Maintain Equity for
the Landowner? Queenstown, Md.: Maryland Center
for Agro-Ecology, Inc., December 2003.
Visit www.rich.frb.org/pubs/regionfocus for links
to relevant sites.

Summer 2004 • Region Focus

21

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

S PA N N I N G T HE

Chesapeake
Bay
For 40 years, the world’s
COURTESY OF THE CHESAPEAKE BAY BRIDGE–TUNNEL

largest bridge-tunnel has connected the
Virginia mainland to the Delmarva Peninsula
BY CHARLES GERENA

efore the first cars crossed the
Chesapeake Bay Bridge-Tunnel
on April 15, 1964, the governor
of Virginia and other leaders touted the
significance of connecting Virginia
Beach, Norfolk, and other cities in the
Hampton Roads region to the two rural

B
22

Region Focus • Summer 2004

counties of Virginia’s Eastern Shore.
They heralded the 17.6-mile system of
concrete trestles, steel bridges, and
mile-long tunnels as a faster, more reliable transportation link for the growing
number of motorists and truckers
wanting to cross the bay.

The bridge-tunnel’s anniversary this
past April was observed with less
hoopla than its momentous debut as
one of the seven engineering wonders
of the world. A restaurant on one of
the bridge-tunnel’s man-made islands
served free cake, toll takers passed out

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

Busy Across the Bay
The Chesapeake Bay Bridge-Tunnel has seen steady
growth in automobile and truck traffic in the last
20 years. Changes in the toll seemed to have little
effect on demand.

I

2250

1750

I

1500

I

2000

Toll Increase
October 1991

Round-Trip Commuter
Discount Created
March 2002

I

2500

I

2750

I

3000

I

Traffic by Fiscal Year, Passenger Cars
and Light Trucks, 1984-2003

’88
’86

’84

’03
FY
’02
FY 0
’0
FY
’98
FY 6
’9
FY
’94
FY
’92
FY 0
’9
FY

FY

FY

FY
I

250

I

300

200

I

350

I

400

I

Traffic by Fiscal Year, Heavy Trucks
and Recreational Vehicles, 1984-2003

Toll Increase
October 1991

’88
’86

’84

’03
FY 02
’
FY 0
’0
FY
’98
FY 6
’9
FY
’94
FY
’92
FY 0
’9
FY

FY

FY

FY

Before Interstate 95 was substantially
completed through Virginia in 1964,
drivers traveling between New York
and Florida often hugged the coastline.
But to cross the southern section of
the Chesapeake Bay, they had to hitch
a ride on one of the steamer ships or
private ferries that ran between
Hampton Roads and the southern tip
of the Eastern Shore.
When the Pennsylvania Railroad
stopped running steamers, ferries
couldn’t keep up with the growing
demand from interstate travelers and
locals. James Brookshire Jr., executive
director of the Chesapeake Bay Bridge
and Tunnel District, says it took 90
minutes to make the trip by boat, plus
time to load and unload passengers and
vehicles. The ferry crossing was “the
one bottleneck” along the East Coast
that needed help.
Virginia legislators created a private
commission in 1954 to take over the
ferry service and deal with the bottleneck, then decided two years later that
a fixed crossing was the long-term solution. After a study found such a crossing to be financially feasible, the
commission sold $200 million in
revenue bonds in 1960 to finance the
construction of the Chesapeake Bay
Bridge-Tunnel (CBBT).
Today, the CBBT continues to facilitate interstate traffic, supporting three
important industries in the Hampton
Roads area. “We need to get trucks to
our ports, we need to get our tourists
in and out during the summer months,
and we need to get inputs and outputs
to and from our factories,” describes
John Whaley, deputy executive director of economics at the Hampton
Roads Planning District Commission.
Though the CBBT handles fewer
vehicles compared to Hampton Roads’
other entry points (see table), its traffic
volume continues to grow along with

chief financial officer at Farmers &
Merchants Bank-Eastern Shore in
Onley, Va. (Exmore is near the midpoint of the Eastern Shore, with Accomack County above and Northampton
County below.) “A lot of people head
south for entertainment, health care,
and shopping.”
The 51,400 people living in Accomack and Northampton aren’t sufficient to interest mass retailers like
Kmart, which closed its store in
Exmore last year. Only smaller retailers and supermarkets operate in these
counties, and mostly along US-13 to
take advantage of the traffic flow.
The CBBT also enables Hampton

THOUSANDS

The Missing Link

the volume on US-13. This four-lane
road passes through Philadelphia and
Wilmington, Del., and snakes down the
center of the Delmarva Peninsula for
over 200 miles until it reaches the
CBBT. More people are choosing this
route into and out of Hampton Roads
over the busy interstates.
The region’s trucking companies
often serve customers in the Northeast, so they have plenty of big rigs
traveling west on I-64 and north on I95, and vice versa. But the interstates
can be frustrating, notes Whaley. “Lots
of trucks don’t want to have to go
through Washington, D.C., if they are
coming from the north. I-95 is hectic
and I-64 is hectic. Then, you have to
go through the Hampton Roads
Bridge-Tunnel, which in the summertime becomes pretty jammed up. I’m
told that many truckers will get on US13 north of D.C. and have pretty clear
sailing all the way to Hampton Roads.”
By using US-13 and the CBBT,
truckers shave 95 miles off their trip
between Wilmington and Hampton
Roads. This reduces fuel consumption,
which is especially important given
today’s high gasoline costs.
The alternative route also saves fuel
because it provides stretches of smooth
driving with relatively few starts and
stops. Drivers pass through only two
towns of any size – Dover, Del., and
Salisbury, Md. – enabling trucks to
travel 55 miles per hour for most of
their journey. Pat Patterson, a personnel manager at Givens Transportation
in Chesapeake, Va., says this is the
optimal speed for fuel efficiency, but
drivers have a hard time maintaining it
on i-64 and i-95. “If you’re not running
70 miles an hour you have to get out
of somebody’s way,” he complains.
Tourists also turn to US-13 and the
CBBT to save time, and to take a break
from the lack of interstate scenery.
Hampton Roads residents travel the
route to head north, while Canadians
and travelers from Northeast cities use
it to head south.
In addition to facilitating interstate
travel, the CBBT connects Virginia’s
Eastern Shore to the mainland. “It’s our
lifeline to Hampton Roads if you live
from Exmore south,” says Julie Badger,

THOUSANDS

commemorative bookmarks, and one
lucky set of travelers received a gift
basket. After 40 years, the bridgetunnel has become part of the backdrop of Hampton Roads and the
Eastern Shore, playing a different economic role in each region.

SOURCE: Chesapeake Bay Bridge-Tunnel Commission

Summer 2004 • Region Focus

23

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

Roads businesses to provide goods and
services needed in both counties. For
example, residents have seen construction crews making the round-trip
across the bridge-tunnel daily to work
on residential projects throughout the
Eastern Shore. “Anybody who wants to
get a house built has to go outside of
the area because [the locals] are saying
it will be two years before they can get
to you,” notes John Ordeman, a retired
teacher who belongs to a community
group called Citizens for a Better
Eastern Shore (CBES).

The Road to Economic Growth?

Wilmington
95
Dover
•

MARYL AN D
Baltimore

13

DEL AWARE
Washington

• Salisbury
13

AP
EA

KE

95

BA

Y

Region Focus • Summer 2004

Tourists and truckers traveling between Hampton Roads and Wilmington, Del., save 95 miles
by taking the Chesapeake Bay Bridge-Tunnel and US-13 instead of the busy interstates.

ES

24

Scenic Shortcut

CH

Although the Chesapeake Bay BridgeTunnel facilitates the flow of people
and goods, it hasn’t provided the
amount of economic stimulus that
major roadways usually bring to rural
areas. “When the bridge-tunnel
opened, it was expected to have a great
economic impact on the Eastern Shore.
That didn’t happen for quite a long
time,” says Denard Spady, executive
director of CBES.
Spady blames the early completion
of I-95 in 1964 and delays in upgrading
US-13 for dampening traffic flow across
the CBBT in its early years. Even when
the number of people and goods
started growing, eventually requiring
the construction of a parallel set of
trestles and bridges in 1999, it didn’t
always translate into new homes and
businesses on the Eastern Shore.
While the region has a good transportation infrastructure and is rich in
natural resources, it lacks other factors
necessary to support economic activity. These include a sufficient amount
of skilled labor, developable land, and
water and sewer lines.
One industry on the Eastern Shore
that has been able to leverage the
CBBT is tourism. More than 900,000
vehicles passed through the bridgetunnel’s tollgates during the peak
summer months of July and August last
year, a 36 percent increase from the
same period in 1990.
The Travel Industry Association of
America has said that more Americans
are taking driving vacations, staying
close to home, and visiting rural destinations. All three trends have con-

dicted some acceleration in household
growth and a subsequent increase in
traffic in areas closest to the bridgetunnel if the round-trip toll was
lowered from $20 to $14.
“A reduction in the cost of travel
through a toll discount gives the southernmost portions of Northampton
County a comparable commute cost
profile to other outlying areas of the
[Hampton Roads] metropolitan
region,” noted the study’s authors.
“This, combined with other features of
the area, may make it more attractive
to residential development aimed at
the commuter market.”
But some residents opposed a toll

tributed to a growing number of
tourists visiting Virginia Beach and
other parts of the Hampton Roads
area, and the bridge-tunnel has enabled
them to discover the joys of the
Eastern Shore simultaneously. In addition, Hampton Roads residents cross
the bridge-tunnel to escape city life.
To stimulate non-tourism economic
growth in Virginia’s Eastern Shore,
efforts began several years ago to
reduce the $10 toll for motorists crossing the CBBT. Advocates argued that
the toll was a barrier to economic
development. A 2001 study commissioned by the Accomack-Northampton
Planning District Commission pre-

Accomack
County
• Exmore
Northhampton
County

64
Richmond

CHESAPEAKE BAY
BRIDGE-TUNNEL

VIRGIN IA

HAMPTON ROADS*

*The Hampton Roads region includes the cities of Chesapeake, Franklin, Hampton, Newport News, Norfolk,
Poquoson, Portsmouth, Suffolk, Virginia Beach, and Williamsburg; and the counties of Gloucester, Isle of
Wight, James City, Southampton, Surry, and York.
SOURCES: Hampton Roads Chamber of Commerce and Hampton Roads Planning District Commission

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

reduction because it would undercut
the financing of future projects, such
as the construction of additional
tunnels to connect to the CBBT’s
second set of bridges and trestles.
Others feared that development would
accelerate and change the rural nature
of the Eastern Shore.

Tinkering with the
Price of Passage
In March 2002, the commissioners
who oversee the CBBT sided with
growth advocates. They voted to
reduce the round-trip toll from $20 to
$14 for travelers completing the
journey within 24 hours.
In two years, the toll change didn’t
seem to have a big impact. Residents
say they have seen an acceleration of
real estate speculation and residential
construction as developers play up the
cheaper cost of crossing the CBBT, but
some of this activity was probably
taking place before the toll change.
Studies commissioned by the Virginia Department of Transportation
(VDOT) and the CBBT Commission
in 2000 concluded that the bridgetunnel’s traffic flow would not change
significantly in the short term by
cutting the toll a few dollars. In other
words, the demand for the bridgetunnel appeared to be relatively “price
inelastic” for several reasons (see the
Jargon Alert column on p. 6 for a discussion of this term).
First of all, most residents need to
cross the bridge-tunnel only occasionally. They tend to do most of their business locally and a growing number of
them are retirees, either the 65-andolder crowd who no longer have a daily
commute or younger people who run
a business locally or from home.
Many people, in fact, live on Virginia’s Eastern Shore because of its relative isolation. “When people move to
the Eastern Shore, it’s a lifestyle decision,” says Julie Badger at Farmers &
Merchants Bank. “If you … want a Starbucks, a multiplex, chain restaurants,
and a mall, none of that is here. That
kind of person won’t move here.”
Second, more residents earn high
incomes, and the cost of the bridgetunnel toll isn’t significant to them. In

1990, only 3.4 percent of the Eastern
Shore’s households made $75,000 and
more. Ten years later, that percentage
tripled to 10.2 percent of households.
Would a change in the price of
passage across the CBBT affect the
flow of commercial vehicles? The tolls
for trucks are more than double the
motorist toll, but their bottom-line
impact is small. “If you are a trucker
bringing in $50,000 worth of cargo, the
cost of the toll is not really significant,”
says economist John Whaley of the
Hampton Roads Planning District
Commission.
The toll isn’t a big factor for many
Eastern Shore businesses either
because they don’t have to use the
CBBT. For example, Ed Tankard has
seven to eight trucks carrying plants
from his family-owned nursery in
Exmore to customers every day. None
of them head south. Instead, they head
north to markets like Philadelphia,
New York, and Boston. While businesses on the Eastern Shore serve some
customers to the south, Tankard says
that most of their demand has historically been from the north.
A poultry processing facility operated
by Perdue Farms, the Eastern Shore’s
largest employer, reportedly uses the
CBBT to access the port in Hampton
Roads. However, other poultry firms in
the region don’t produce a majority of
their chicken for export. “Most of our
finished product goes north through
Delaware or west … to Annapolis,” says
Bill Satterfield, executive director of the
Delmarva Poultry Industry Inc., a
regional trade group.
Data from a VDOT study of the
US-13 corridor supports this anecdotal
evidence. Average daily volume on US13 is higher at points north of the midpoint of the Eastern Shore compared
to points south of the midpoint, including the bridge-tunnel.
In the final analysis, it would probably take a drastic reduction of the
CBBT toll or its elimination to dramatically affect traffic patterns or residential development in southeastern
Virginia. The likelihood of that happening is slim, however. The bridgetunnel depends mostly on toll revenue
to cover its annual maintenance and

Major Arteries
Among the thoroughfares carrying traffic in and out
of Hampton Roads, Va., the Chesapeake Bay BridgeTunnel accounts for a relatively small share of the
region’s traffic volume.
Est. Vehicles Per
Facility (No. of Lanes)
Day (min.-max.)
Chesapeake Bay Bridge-Tunnel (4)

10,000–20,000

Chesapeake Expressway (4)

10,000–30,000

Hampton Roads Bridge-Tunnel (4)

80,000– 100,000

US-460 (4-6)

40,000 –85,000

Max. capacity for typical 2-lane facility 20,000–25,000
Max. capacity for typical 4-lane facility 75,000– 80,000
SOURCE: Hampton Roads Planning District Commission

operating costs and to pay off construction bonds.
In fact, the commission decided to
boost the price of passage in June 2004
to help finance the new tunnels. The
one-way toll for motorists rose two
dollars to $12, while the round-trip toll
increased three dollars to $17. Also,
five-axle tractor trailers and commercial buses have to pay $5 more.
Officials say the new capacity will be
necessary to handle traffic growth projected for the next 40 years. Since the
toll increases probably won’t slow this
growth, the Chesapeake Bay BridgeTunnel will likely continue to support
economic activity in the Eastern Shore,
Hampton Roads, and beyond.
RF

READINGS
Hill, Robert W. The Chesapeake Bay Bridge-Tunnel:
The Eighth Wonder of the World. New York: John
Day Co., 1972.
Michael Baker, Jr. Inc. Potential Land Use Impacts of
a Commuter Toll Reduction on the Chesapeake Bay
Bridge-Tunnel. Virginia Department of
Transportation, June 2000.
The Louis Berger Group Inc. Chesapeake Bay
Bridge-Tunnel Commuter Toll Impact Study.
Accomack-Northampton Planning District
Commission, October 2001.
Wilbur Smith Associates. Chesapeake Bay BridgeTunnel Traffic Evaluation Study. Chesapeake Bay
Bridge-Tunnel Commission, April 2000.
Visit www.rich.frb.org/pubs/regionfocus for
links to relevant sites.

Summer 2004 • Region Focus

25

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

On the Outside
LO O K I N G I N
B Y R O B E R T W. K I D D

vibrant, 30-something female
is buzzing about her home
preparing for an evening out.
Behind schedule and with curlers in her
hair, she frantically applies mascara.
Suddenly, she remembers her monthly
bills are due. No problem. She calmly
sits down at her computer, logs on to
her bank’s web site, and, voila, those
pesky bills are paid. “All in under three
minutes” is the commercial’s tagline.
Clearly, banking must be a snap — just
point and click.
Plus, the advantages of having a traditional banking relationship can be
significant. A deposit account provides
a cushion for financial emergencies,
facilitates wealth building, and allows for
credit history development. Further,
consumer protection laws regulate mainstream financial service providers to
shield customers from discriminatory
and predatory lending practices. Yet,
despite these obvious benefits, roughly
9 percent to 10 percent of U.S. households are “unbanked” — meaning they
do not have a checking, savings or other
deposit account with a regulated financial service provider like a bank, credit
union or thrift. Why do millions of
Americans forego the traditional
banking system?

A

26

Region Focus • Summer 2004

Millions of Americans do not use conventional
banking services, but is that necessarily bad?

Underserved or Self-Served?
Studies consistently reveal that
unbanked households share similar
socioeconomic characteristics. For
instance, they tend to have lower-thanaverage incomes. The Federal Reserve
Board has estimated that 83 percent of
households without a checking account
earn less than $25,000 annually while
99 percent of households making more
than $50,000 do have an account. In
addition, the unbanked tend to live
paycheck-to-paycheck and spend most
of their income each month.
Some claim that the unbanked lack
access and are purposely “underserved.”
They argue that since low- and moderate-income (LMI) customers are less
profitable, banks are not interested in
serving LMI communities.
To support this criticism, consumer
advocates point to studies that show there
has been a reduction in the number of
bank branches in LMI neighborhoods.
For instance, a Federal Reserve Board
study, “Changes in the Distribution of
Banking Offices,” confirmed that while
the overall number of bank offices between 1975 and 1995 increased, the number in LMI neighborhoods decreased.
However, the authors also point out that
the low- and moderate income areas which

were losing offices were also experiencing declines in population. In 1975, lowincome neighborhoods had the largest
number of offices per capita; by 1995,
there was relatively little difference across
income categories.
The Financial Service Centers of America (FiSCA), a trade organization representing the check-cashing industry, characterizes customers not as “unbanked”
or “underserved” but as “self-banked,”
who “use check cashers to obtain those
specific services they need and they pay
only for what they use.”
Daniel Tatar, an economist and
assistant vice president at the Federal
Reserve Bank of Richmond, agrees.
“We assume that the unbanked need
to be in the banking system but I am
not certain that they should be. I think
there are today some alternative delivery systems that meet certain needs.
Some people are making a very rational
decision by not having a bank account.”
Several surveys of the unbanked
reveal that they choose not to have a
checking account for a variety of
reasons. Most respondents said that
they did not write enough checks to
make it worthwhile, that they did not
like dealing with banks, or that they
did not have enough money. Others

e

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

said that the service charges were too
high. Another reason was the desire to
keep financial records private and safe
from creditors. While a few mentioned
they were uncomfortable dealing with
banks, 49 percent of the unbanked still
cash their checks in banks, even though
they do not have a deposit account
with those institutions.

Where Do The Unbanked Go?
Unbanked households have the same
financial needs as a banked household.
The unbanked must still convert their
payroll checks into a usable form, such
as cash, and pay their monthly rent and
utility bills. But if they are not using
the traditional banking system, how are
they satisfying these needs?
There are approximately 11,000
neighborhood non-bank financial
service centers, such as commercial
check-cashing outlets (CCOs), in the
United States. In addition to cashing
their payroll check, a customer may
choose from a wide range of other feebased products and services. For
instance, many CCOs sell money
orders, prepaid telephone cards,
postage stamps and envelopes, mass
transit fare cards/tokens, lottery tickets,
direct deposit services, photocopier
and fax services, and deferred deposit
accounts. Many CCOs also accept
utility bill payments, process money
transfers, exchange foreign currency,
collect automobile registration and rent
payments for public housing, and
provide income tax preparation.
CCOs offer customers ease and
convenience as a “one-stop shop” —
for a fee of course. For instance, these
centers cash approximately 180 million
checks a year with an estimated face
value of more than $55 billion. The fee
revenue for this service alone is estimated to be almost $1.5 billion a year.
However, given the tenuous financial
condition of most unbanked, there is
obvious concern that these fees are paid
by households that can ill afford them.
According to economist John Caskey
of Swarthmore College, “the problem
created by the regular use of CCOs is
that they are an expensive source for
payment services. Outside of a small
number of states with strictly binding

fee ceilings, most CCOs charge between
2 percent and 3 percent of the face value
of a check to cash it. A family with
$18,000 in take-home pay that uses such
CCOs regularly can easily spend $400
or more of its limited annual income
just to obtain basic payment services.”

Pent-Up Demand
Finding opportunities for growth is a
chief challenge for banks. “Although
mergers will continue to take place,
opportunities to create substantial
value have diminished and relatively
fewer deals will pack the punch of the
1990s,” states a recent report from the
consulting firm McKinsey & Company.
“Executives of large banks must look
for new ways to increase earnings.” The
unbanked population may serve as a
growth engine, especially if as one estimate suggests, the unbanked represent
a $4 billion market.
A niche market that both McKinsey
and Caskey identify as an opportunity
for banks is the unbanked Hispanic population. McKinsey’s Andres Maldonado
and Alejandra Robledo estimate that every
year immigrants in North America and
Europe send more than $60 billion to
their home countries. Over half of all
global remittances originate in the United States, and 65 percent of that money
goes to Latin America.
Convincing Hispanic immigrants to
use the banking system to help handle
these remittances and open bank
accounts involves more than just hiring
Spanish-speaking tellers. According to
Tatar, Hispanic immigrants who have
experienced Latin America’s economic
crises firsthand bring with them a lack
of confidence in institutional banking
systems. This presents considerable
challenges for traditional banks in the
United States.

Banking The Unbanked
Caskey has outlined a strategy for
banks to serve the unbanked. He recommends that banks open “outlets,” or
special branch offices providing both
traditional services and services that
nonbank financial service providers
offer: one-stop shopping for utility and
other household bills, money orders,
and wire transfers. It’s also important

that they locate in areas convenient for
LMI households. He believes that since
banks benefit from economies of scale,
have direct access to check-clearing
systems, and have a relatively low cost
of financial capital, banks should be
able to set fees for services which are
highly competitive yet reasonably profitable. Caskey claims that “assuming
outlets attract moderately high volume
of check-cashing business and that
outlets levy check-cashing fees in the
neighborhood of 1.0 percent to 1.5
percent, outlets should earn about
$100,000 a year from check-cashing
and other payment service fees.”
Caskey points to Union Bank of California as a noted success story of a
traditional firm transitioning unbanked
customers into the banking system. In
1993, Union Bank created “Cash & Save”
outlets that offer check-cashing services
and traditional banking services in LMI
areas. Within a few years of patronizing the outlets, 40 percent of its
check-cashing customers use at least one
traditional bank product.
Whether banks will succeed in providing a compelling option to the unbanked remains to be seen. In the meantime, it is clear to economists like the
Richmond Fed’s Tatar that check-cashing outlets are meeting a need in the market. But a balance must be struck. “People need choices. Don’t take those choices away,” says Tatar. But government also
“has a responsibility to protect people.
You can have viable financial options available as long as they do not exploit. Sometimes these alternative systems are not
wrong. What we need to do is find a way
to make it fair.”
RF
READINGS
Avery, Robert B., Raphael W. Bostic, Paul S.
Calem, and Glenn B. Canner. “Changes in the
Distribution of Banking Offices.” Federal Reserve
Bulletin, September 1997.
Caskey, John P. “Check-Cashing Outlets in a
Changing Financial System.” Federal Reserve
Bank of Philadelphia Working Paper #02-4,
February 2002.
Tillett, Doug, and Liz Handlin. “Tapping the
Potential of the Unbanked: Private Sector Interest
Increases.” Chicago Fed Letter, January 2003.
Visit www.rich.frb.org/pubs/regionfocus for
links to relevant Web sites.

Summer 2004 • Region Focus

27

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Blowing in
theWind
North Carolina acts to cut
upwind pollution

BY BET TY JOYCE NASH

verybody lives downwind from
someone. Just as wind picks up
leaves from a neighbor’s yard
and scatters them onto your raked
lawn, so, too, dirty air drifts from state
to state, miles from original sources.
Pollution transport has grown into
a touchy regional issue as pressure
mounts to clean the air in the wake of
recent reports that more than half the
people in the nation breathe air that
doesn’t meet federal standards.
In Fifth District states, most metropolitan areas don’t measure up. The
United States Environmental Protection Agency (EPA) in April reported
that about 159 million people live
where ozone pollution exceeds standards. Ozone is a gas that damages
lungs and aggravates breathing problems. It forms from a brew of chemical emissions, gasoline vapors, and
solvents, and worsens in summertime.
Theories of pollution control have
changed as scientists gain more information. For example, tall smokestacks,
built in response to existing clean air rules,
thrust dirty air high into the atmosphere
to dilute it. While that helps clean local
air, experts now know that the tall stacks
send pollutants far and wide, borne by
wind and weather patterns.
Epidemiological science has spoken
loudly about health effects of tiny particles of pollution called particulate
matter. The smaller the particles, the
more damage they do. The EPA has set
and courts have upheld a standard of
2.5 microns or smaller, with 2.5 being

E

28

Region Focus • Summer 2004

about one-tenth of the diameter of a
human hair. Because they are minuscule, the particles can lodge in people’s
lungs too deeply to be expelled naturally. Those particles, produced by combustion, can cause a wide range of
problems, from respiratory and pulmonary distress, among others, to premature death.
Dirty air looms large over both
coasts and it won’t dissipate without
substantial costs to power producers
and, by extension, people who use electricity. Sulfates, formed from sulfur
dioxide, are responsible for particle pollution and are emitted primarily from
coal-fired power plants.
Market approaches that set caps
and allocate allowances have helped cut
sulfur dioxide (SO2) pollution efficiently in the EPA’s acid rain program.
Deeper cuts of SO2 and other pollutants are in store and the EPA is suggesting market caps as a way for states
to reach goals.
In the Fifth District, North Carolina has pushed regional air-quality
issues to the forefront by filing a petition with the EPA that would force its
upwind neighbors to reduce pollution.

North Carolina’s Clean
Smokestacks
North Carolina in 2002 passed a law
mandating air pollution standards
stricter than those set by the federal
government. The law will cut nitrogen
oxide (NOx) by 77 percent by 2009 and
sulfur dioxide (SO2) by 73 percent by

2013. Those two chemicals figure
prominently in formation of particulates. The standard is more strict than
the Clean Air Interstate Rule proposed
by the EPA late last year for 29 Eastern
states and Washington, D.C.
North Carolina’s legislators bought
into the strict controls for a variety of
reasons, says Michael Shore, Southeast
air quality manager for Environmental
Defense. For example, there is continuing public outcry over pollution that
obscures visibility in the Tarheel State’s
prized Southern Appalachian region,
degrading the view and the tourist
economy. Since 1948, annual average
visibility in the Southern Appalachians
has decreased 60 percent, 80 percent
in summer and 40 percent in winter.
Visibility should be 113 miles, but averages 25 instead.
The state also knew from its own
data that some areas would not meet the
EPA’s latest particulate matter standards,
says Tom Mather, spokesman for the
North Carolina Division of Air Quality.
North Carolina’s Attorney General
last spring asked the EPA to instruct
upwind states to cut power plant emissions to help clean its air.
Recognizing that certain pollutants,
such as NOx, travel widely, EPA has targeted NOx reduction to clean up
downwind states, says Rona Birnbaum,
chief of assessments and communications for EPA’s Clean Air Markets
Division. “It’s not just a phenomenon
that can be addressed adequately by
local controls,” she says. The Clean Air

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

Interstate Rule would require states to
cut SO2 and NOx emissions. States
would have flexibility to choose what
sources to control and how to achieve
the caps on pollution.
North Carolina submitted its petition after the EPA proposed this rule,
notes Carla Oldham, an environmental
scientist with the EPA’s Air Division.
“Some states showed interest in
developing regulations somewhat similar
to North Carolina’s but they hadn’t
really made any progress,” Oldham says.
Petition 126, which refers to the
clause allowing the appeal, has been
used before. In the late 1990s, Northeastern states could not meet federal
standards for ozone levels. They blamed
interstate transport of NOx and the
states resorted to the 126 petition.
The states weren’t sure the EPA
would finalize the rule or that the
states in question would follow the
rule. The EPA and the states agreed
that if the agency stayed on track with
its requirement that states submit plans
to reduce NOx, the states would defer
action under the petition.
“That worked out nicely for us
because with states knowing 126 was
out there, if they didn’t respond to [the
call for plans to reduce NOx], then the
EPA would regulate their sources. [It
was] a strong incentive for states to regulate,” Oldham says.
Discussions are under way between
the EPA and North Carolina to resolve
the issue, given the proposed rule,
which may be final this fall and affect
the petition’s outcome. The rule would
require states to submit plans to
achieve pollution cuts.

The Price of Air
Further cuts in emissions will cost big
money because even the savviest of power
plant operations will need scrubbing
systems that remove SO2 and NOx. Power
plants emit 63 percent of the nation’s
SO2 and about 22 percent of NOx.
Duke Power last winter began a
$400 million project at the Marshall
Steam Station located near Charlotte,
according to spokesman Thomas
Williams. The effort will cut the plant’s
sulfur dioxide emissions by 90 percent.
Duke Energy will spend $1.5 billion

within seven years to comply with
Clean Smokestacks. (That legislation
allowed North Carolina’s biggest power
producers, Progress Energy and Duke,
to recover costs by freezing rates
through 2007. Rates had been scheduled to decline, as projects were amortized and paid off, but will stay the
same for now.)
Dan Genest, a spokesman for
Dominion Resources, based in Richmond, Va., said the company does not
know how much it will cost to comply
with the EPA’s proposed air pollution
rules. But he says the firm’s 10 coal-fired
plants in Virginia and West Virginia will
likely require scrubbers to remove pollutants. Currently, Dominion Virginia
Power has scrubbers on all three units
at Mt. Storm in northeastern West Virginia, on both units at Clover in Halifax
County, Va., and plans for scrubbers on
the two biggest units at Chesterfield
Power Station in 2010 and 2011.
Continuing to breathe the unavoidable, minuscule particles of soot and
ozone will be expensive, too, though.
Estimates of the annual costs of implementing the rule are $3 billion and $4
billion in 2010 and 2015 respectively.
The EPA’s benefit-cost estimates put
the annual benefits at $58 billion in
2010 and $84 billion in 2015 [both
estimates in 1999 dollars].
The analysis did not place dollar
values on impacts such as the effect on
recreational demand from damaged
forests, damage to ecosystems, effects
of acid deposits to commercial and
recreational fishing, among others. But
benefits include 1 million fewer days
annually lost to workplace absences by
2010 as well as 22,500 fewer hospital
admissions and emergency room visits
by 2015. And the rules are expected to
prevent nearly 10,000 premature
deaths annually by 2010. On linking
particulate matter with premature
death, the EPA’s cost-benefit analysis
notes: “Inhalation of fine particles is
causally associated with premature
death at concentrations near those
experienced by most Americans on a
daily basis. Although biological mechanisms for this effect have not yet been
definitively established, the weight of
the available epidemiological evidence

supports an assumption of causality.”
Cost-benefit analyses are always
controversial, especially when the calculation involves placing value on
human life. The practice raises a host
of ethical issues — as well as tricky
technical questions for those charged
with determining dollar figures. The
EPA’s estimates of a statistical life have
been criticized by some as too low and
by others as too high. “I know that
many economists intimately familiar
with the statistical life estimate the
EPA uses in its analyses feel it is too
high,” says David Evans of Resources
for the Future. The numbers of lives
saved or asthma attacks reduced, for
example, are not disputed but the value
is. “This is particularly true for the benefits of reduced mortality, which constitutes the bulk of the benefits of
reduced SO2 and NOx emissions.”
Power plants will pass on costs to
ratepayers, as any business would, increasing the cost of doing business for
industrial and business users and monthly bills for people. Economic theory would
suggest that if electricity is associated
with pollution, then users should bear as
much of the full cost as feasible.
Clean air, economists have urged, can
be achieved more efficiently through
market-based approaches, which often
can out-perform traditional command
and control regulation. Evidence from
the cap-and-trade program to control
SO2 bears out this notion.
In 1990, the Clean Air Act Amendments capped power plant emissions
at half the 1980 levels. The industry was
allocated a fixed number of allowances
and firms gave up one allowance for
every ton of sulfur dioxide emitted.
Firms may trade allowances among
facilities or bank them for future years.
Birnbaum of the EPA says the capand-trade programs, including a trading
plan among Northeastern states to reduce
NOx emissions, have been an efficient
model for cutting pollution transport.
The operative word when describing a trading program is “cap,” notes
Birnbaum. For example, the EPA’s new
Clean Air Interstate Rule, if adopted,
will cap NOx and SO2 emissions at 65
percent and 70 percent of current
levels respectively by 2015.

Summer 2004 • Region Focus

29

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Ozone and Fine Particle Pollution
Eastern counties that exceed standards for ozone and fine particle pollution

Ozone Only
(218 Counties)
*PM2.5 Only
(43 Counties)
Both Ozone & *PM2.5
(56 Counties)
NOTE: Based on 2000-2002 data of counties with monitors that have three years of complete data
*Fine particle matter that can lodge deeply into the lungs
SOURCE: Environmental Protection Agency Office of Air and Radiation

Trading plans are often misunderstood, with people sometimes confusing credits as rights to pollute.
“One thing you have to realize is that
you can’t just buy a credit,” Birnbaum
explains. “There has to be an emission
reduction someplace above and beyond
where they’re allowed to be.” In the SO2
trading plan, most of the reductions
occurred in higher-emitting states in the
Ohio River Valley, where many older
power plants operate.
“And typically those are the plants that
contribute to a broader scale of problems
in multiple states,” Birnbaum says.
Another distinguishing feature of a
trading plan is that a ton of a pollutant
becomes a commodity. That puts the
focus on monitoring and assessment
rather than prescriptive regulation.
“Stringent, accurate, continuous emissions monitoring is a critical component of that program,” Birnbaum says.
“If they’re [emissions] being sold,
banked, or traded, you need to track
every emission and every allowance
that’s traded.”
Emissions caps, as currently designed, are not adjusted for the size of the
economy. As the economy grows and
electricity demand heats up, sources
30

Region Focus • Summer 2004

must meet demand within the cap.
Flexibility allows power producers to
figure out how to meet the cap in the
most efficient manner.
The SO2 cap-and-trade plan cut
pollution by half at about half the
expected cost, according to Denny
Ellerman, executive director of the
MIT Center for Energy and Environmental Policy Research.
Cap-and-trade plans allow flexibility,
and that sparks innovation. The SO2
program “also has resulted in innovation
through changes in organization and
technology, in the organization of
markets, and through experimentation
at individual boilers, much of which
arguably would not have occurred under
a more prescriptive approach to
regulation,” write Dallas Burtraw and
Karen Palmer. The discussion paper was
written for the Washington, D.C.-based
think tank, Resources for the Future.

Local Gain, Regional Pain
While local cuts in SO2 emissions cleaned
local air, experts realized that power
plants’ tall stacks added to pollution
transport, write Burtraw and Palmer:
“Emitted high in the atmosphere,
SO2 emissions from coal plants travel

hundreds of miles and convert to sulfates that, as particulates, play an
important role in air quality affecting
human health and visibility.”
Contributing to the problem of acid
rain and particulates in the Eastern
United States is the continued burning
of high-sulfur coal found in the
Appalachians and the Midwest. That’s
encouraged by the high cost of transporting low-sulfur Western coal and by
coal industry politics that encourage
using the high-sulfur local coal.
To tackle regional air pollution, the
EPA has expanded the number of
states involved in its original nine-state
NOx cap-and-trade plan to solve summertime smog problems in the Northeast. That plan has been blended into
another plan covering more Eastern
seaboard states. Virginia is among the
states covered by the plan this year, and
the state auctioned 5 percent of its
NOx allowances, raising $10.5 million.
(Virginia and Kentucky are the only
states to sell allowances rather than
give them to electric utilities.)
Ultimately these programs will fall
under the proposed Clean Air Interstate Rule. The rule will cover NOx and
SO2 emissions in 29 Eastern states and
Washington, D.C.
And the market innovations used to
control pollution will make it cheaper
to buy more clean air.
RF

READINGS
Burtraw, Dallas, and Karen Palmer. “The
Paparazzi Take a Look at a Living Legend:
The SO2 Cap-and-Trade program for Power
plants in the United States,” Discussion
Paper 03-15, Resources for the Future,
Washington, D.C., April 2003.
Ellerman, Denny. “Are Cap-and-Trade
Programs More Environmentally Effective
than Conventional Regulation?” MIT
Center for Energy and Environmental
Policy Research Working Paper 2003-015,
October 2003.
U.S. Environmental Protection Agency,
Office of Air and Radiation, “Benefits of the
Proposed Inter-State Air Quality Rule,” EPA
452/03-001, January 2004.
Visit www.rich.frb.org/pubs/regionfocus
for links to relevant Web sites.

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

WHAT

THE

DOCTOR

ordered?
The economics of drug reimportation

I

f there is a concept that enjoys
almost universal support among
economists, free trade is it. According to a survey published in the American
Economic Review, 95 percent of U.S.
economists agreed with the proposition
that “tariffs and import quotas reduce
general economic welfare.” So the case
of drug reimportation should be clearcut, right? Not exactly.
American drug companies routinely
sell their goods abroad at prices lower
than those found in the United States.
For instance, many American consumers
could probably order their prescriptions
more cheaply from a pharmacy in
Toronto than one in Baltimore. Why
not allow those drugs to be sent back
to the United States for sale at Canadian prices, a practice that is currently
prohibited by law?
That’s a good question, says Rep.
Gil Gutknecht (R-Minn.). He says that
people who regularly take prescription
drugs should be able to buy their medicines from pharmacies abroad — and
has introduced a bill that would legalize the practice. Gutknecht, who represents a largely agricultural district,
argues that if free trade in farm products is a good thing, then free trade in
prescription drugs should be as well.
“The more I studied the differences
between what Americans pay for prescription drugs and what the rest of the
industrialized world pays for those
same drugs, the more I came to the
conclusion that if markets work with
pork bellies, they will work with
Prilosec,” he has said.
This analogy may seem apt, but

many economists argue that the case is
more complicated. Drugs are unlike
other goods because they are often
extremely expensive to develop. For
instance, industry estimates put the
average cost of developing a new drug
at $800 million. That cost has to be
recouped in some way. Canadian law,
though, puts strict limits on drug prices,
setting the maximum price just above
the marginal cost of production. That
may seem fair. But it does not take into
account the high research expenses that
drug companies face, which drive up the
average cost of pharmaceuticals. If drug
companies relied on the Canadian
market alone, they probably could not
turn a profit on many of their goods.
So why do they enter the market at all?
Here it might be useful to draw an
analogy with the airline industry. The
cost of putting a plane in the air is
roughly the same whether that plane is
empty or full. So once the airline has
sold enough tickets to make the flight
profitable, it has a strong incentive to
fill the rest of the seats, even if that
means charging less for the 50th ticket
sold than the first.
The case of prescription drugs is
similar. In order to make a profit, the
pharmaceutical company needs a relatively large market that is willing to
purchase its drugs at relatively high
prices. In most cases, that market is
the United States. This allows consumers in other countries with
pharmaceutical price controls, such as
Canada, to effectively act as free riders.
Having already recouped their research
expenses, pharmaceutical companies are

BY AARON STEELMAN

willing to sell their goods abroad at
lower prices, because the cost of making
and distributing, say, the one millionth
Prilosec pill is quite small.
So what would happen under a
regime of drug reimportation? It’s hard
to say for sure, of course. But economists have offered some informed
speculation. American drug companies
might sharply cut their shipments of
drugs abroad, knowing that those
goods would wind up back in the
United States. Or they might try to
renegotiate the prices they can charge
in foreign markets, raising the average
global price, and thus reducing the
potential economic damage they face
from reimportation. Neither scenario
would do much to help American consumers and could potentially harm
foreign consumers a good deal.
A better solution, instead, may be
to encourage other industrialized countries to relax their price control regimes.
The vast majority of pharmaceuticals are
developed in the United States. Part of
that is because American companies
employ researchers — many of whom
are foreign born — with the knowledge
required to produce groundbreaking
drugs. But part of it is also due to the
structure of the U.S. health-care system.
American companies are rewarded in
the marketplace for developing drugs
that make our lives better and longer.
If other countries were to liberalize their
systems, they, too, might become home
to innovative pharmaceutical firms —
companies that could compete with
American incumbents and drive down
prices for everyone.
RF

Summer 2004 • Region Focus

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BOOKREVIEW

Baseball Science
MONEYBALL: THE ART OF
WINNING AN UNFAIR GAME
BY M I C H A E L L E W I S
N E W YO R K : W.W. N O RTO N ,
2 0 0 3 , 2 8 8 PAG E S

REVIEWED BY
AARON STEELMAN

Editor’s Note: Beginning with this
issue, we introduce a book review
department to Region Focus. First
up: Michael Lewis’ Moneyball,
which discusses the economics
of Major League baseball, an
especially appropriate topic for
the summer issue.

32

Region Focus • Summer 2004

little to recommend him other than raw
alent. For some people it’s a
talent and gaudy high-school statistics.
blessing. For others, such as Billy
He had never proven himself against
Beane, it can seem like a curse.
top-notch competition before the Mets
There are few things as sad as
spent a first-round pick on him.
promise gone unfulfilled, and by all
Unlike another talented young
measures Beane was one of the most
slugger from the San Diego area, Mark
promising baseball talents of his genMcGwire, Beane hadn’t played college
eration. Standing 6 feet 4 inches, with
baseball. McGwire, in contrast, already
blazing speed and a quick bat, Beane
had three years at the University of Southwas labeled a “can’t-miss” prospect. The
ern California and a trip to the 1984
New York Mets selected the 18-year-old
Olympic Games
in the first round
under his belt
of the 1980 amawhen he was
teur draft, along
Bill James’ approach,
drafted. In other
with another high
words, McGwire
school phenom,
called “Sabermetrics,”
had more than
Darryl Strawberjust talent, he had
ry. The two were
employs statistical
a track record.
supposed to be
One could use a
the pillars around
and mathematical
wide range of
which a chamobjective measpionship team
techniques to analyze
ures to evaluate
would be built.
McGwire, while
Strawberry lived
baseball records.
with Beane one
up to this role —
had to rely on
at least for a
subjective measwhile. He was a
ures. McGwire, of course, would go on
star on the 1986 team that won the
to become one of the most prolific
World Series, and had several more
home-run hitters in baseball history,
good seasons for the Mets before perwhile Beane knocked only three
sonal problems and injuries cut short
pitches out of the park during his
his career.
entire career.
Billy Beane’s career, on the other
To longtime baseball scouts, though,
hand, never really got off the ground.
subjective measures were paramount.
He played six mediocre seasons in the
They believed they could spot a future
Major Leagues, mostly as a backup,
star just by looking at him. As long as
compiling a career batting average of
a player was fast, strong, and had a
just .219.
good arm, he could be turned into a
The can’t-miss prospect proved to be
big-leaguer. Billy Beane fit this profile
a bust. Why? Nobody really knew at the
perfectly. He benefited from the way
time, including Billy Beane. Maybe he
scouts judged players. But after his
lacked dedication. Maybe he lacked conplaying days were over, Beane would
fidence. Or maybe he just wasn’t as good
devote his efforts to proving these
as people thought. After all, Beane had

T

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

“baseball minds” wrong. He would
strive to make baseball a science — one
where quantifiable, testable measures
prevailed over subjective evaluations.
Moneyball is the story of Beane’s
efforts to implement his theories as
general manager of the Oakland Athletics, more commonly known as the A’s.
Written by Michael Lewis, the book
follows the team during the 2002
season, a year in which Oakland won
the American League West championship despite having one of the lowest
payrolls in all of baseball. Beane and
his staff, especially his assistant Paul
DePodesta, were able to build a
club that could compete with much
richer opponents, even the hated
New York Yankees, a team that
many fans believed were destroying
the game by buying up the game’s
best players. How did Beane and
his staff do it? Through careful
scouting of amateur players and
shrewd free-agent acquisitions.
Consider the way they
approached the draft. As Beane
could personally attest, many scouts
favored talented high-school
players — young studs, as it were
— over older college players. And
while some of these high-school
players would have fantastic major
league careers — for instance, high
schooler Alex Rodriguez was
selected first overall in the 1993
draft and is now arguably the
game’s best player — many more
would simply fade from the spotlight. College players were much
safer, if less spectacular, bets. Beane and
his staff toured the country in search
of college players who many teams
simply ignored.
For instance, in 1997 the A’s drafted
right-handed pitcher Tim Hudson.
Although Hudson was the Southeastern
Conference player of the year his senior
season, posting a 15-2 record with the
Auburn Tigers, few teams were interested in him. The A’s were able to snap
him up in the sixth round. Hudson
became a regular member of Oakland’s
starting rotation in 1999, and since then
has three times finished in the top 10

for the Cy Young Award, given annually to the league’s top pitcher.
The A’s also have been able to find
bargains in the free-agent market,
including many players that teams were
anxious to discard. These players did
not perform well on certain measures
usually given great weight by baseball
insiders, such as batting average and
stolen bases. But to the A’s, these were
not particularly important statistics.
Beane and DePodesta were followers of baseball writer Bill James, who
published his own Baseball Abstract

from 1977 to 1988. James’ data-heavy
books were the products of intense
research and some controversy. His
approach, called “Sabermetrics,”
employed statistical and mathematical
techniques to analyze baseball records.
Early on, James created his own
formula called “Runs Created.” The
idea was to develop a testable hypothesis about what accounted for a team’s
offensive output. The formula went as
follows: Runs Created = (Hits + Walks)
x Total Bases/(At Bats + Walks).
James tested his formula using
Major League data. If the actual

number of runs scored by a team differed dramatically from his predicted
number, his model was clearly wrong.
“As it turns out, James was onto something,” writes Lewis. “His model came
far closer, year in and year out, to
describing the run totals of every big
league baseball team than anything the
teams themselves had come up with.”
According to the Runs Created
formula, the two conventional measures that contributed most to a team’s
offensive success were on-base percentage and slugging percentage. If a
guy could get on base (it didn’t
matter how — getting a hit or
taking a walk both counted) or hit
for power, he could help his team
score runs. So James combined the
two statistics to create a new one:
On Base Plus Slugging, known
simply as OPS. Beane and
DePodesta searched for players
with high OPS scores, and found
one in Scott Hatteberg.
Hatteberg, in the view of most
Major League executives, was just an
average player. In a single season,
he had never hit above .277 or driven
in more than 43 runs for his former
team, the Boston Red Sox. Still,
Beane and DePodesta noticed that
he consistently had an OPS score
around .800, thanks in large measure
to a good eye at the plate. Hatteberg
was no star. But he was a solid player
who fit into the Oakland system.
And that was exactly what Oakland
was developing — a system.
Before the 2002 season, the A’s
had lost their best player, Jason Giambi,
to the New York Yankees, who signed
him as a free agent. Beane and
DePodesta knew that they could not
replace Jason Giambi. There were few
players in the league as good — and
those who were carried too high a price
tag. But they could try to replace Jason
Giambi’s numbers by acquiring overlooked journeymen who would play
their roles as Beane and DePodesta saw
them. Hatteberg was the prototypical
cog in the Oakland machine. The plan
worked perfectly: Even without their
star, the A’s still won 103 games in 2002

Summer 2004 • Region Focus

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and drew more than 2 million fans.
It’s hard to argue with Beane’s approach. The A’s have performed impressively under his guidance. Since 2000,
they have compiled a win-loss record of
392-255, and have gone to the playoffs
every year. But some questions remain.
First, why do the A’s seem unable to
win the big game? The A’s make it to
the playoffs year after year but fail to
advance to the World Series. Could
there, in fact, be some “intangibles”
necessary to get a team over the hump?
For instance, are there, in fact, “clutch
players,” guys who have an uncanny
ability to deliver when the stakes are
high? If so, Beane and his staff would
not be well prepared to identify such
players since their contributions are, by definition,
erratic and hard to predict.
Also, might the proverbial
“character guys” — players
who lead the team in the
clubhouse instead of on the
field — be a key ingredient
for a championship team?
Again, if this is true, the A’s
would be likely to overlook
them since their real value
doesn’t show up in a statistical formula.
Second, if Beane’s approach
is so good, why haven’t other teams
adopted it? Part of the explanation may
be simple inertia. Baseball, more than
any other sport, is tradition-bound. Old
habits — and prejudices — die hard.
Other general managers may look at the
A’s and simply think that their recent
success has been a fluke. In their minds,
the traditional way of running a baseball
team — from judging talent to managing
a budget — has worked for generations
(even if it really hasn’t) and with time
will be proven superior to Beane’s
unorthodox methods.
To some extent, other teams are
adopting Beane’s approach. For instance,
at the end of the 2002 season the
Boston Red Sox named 28-year-old
Theo Epstein as the team’s general
manager. Epstein first discovered Bill
James’ writings in the fourth grade and
hired the Sabermetrics guru as a team
34

Region Focus • Summer 2004

consultant. J. P. Ricciardi, who worked
closely with Beane in Oakland, was
hired by the Toronto Blue Jays in
November 2001 to run that team’s front
office. The Toronto management was
impressed by what the cash-strapped A’s
were able to accomplish and hoped that
Ricciardi could bring similar success
north of the border. And before the
2004 season DePodesta was lured away
from Oakland to become the general
manager of the Los Angeles Dodgers.
Third, why haven’t Beane’s methods
been applied to other sports? The pressure to win in professional basketball,
for instance, is equally intense. If a
more scientific approach would help a
team win games, one would think that

Oakland was able to build a
club that could compete with
much richer opponents, even
the hated New York Yankees.

coaches and general managers would
move — however gradually — to adopt
it. Yet, if anything, we are seeing the
opposite occur. Teams are increasingly
basing their draft selections on talent
and less on measurable performance.
For instance, the number of highschool players being picked has skyrocketed, while it has become fairly
rare to see a college senior chosen with
a high pick.
Perhaps this has to do with the differing nature of the two games. In
baseball there is a lot of one-on-one
action. In a battle between pitcher and
hitter, for instance, it’s pretty easy to
isolate how each player performed. But
in basketball, it’s not so easy. A guy could
be a 30-point scorer because the offense
is geared to feature him. On another
team he may not look like such a star.
Still, there are some objective measures

— such as free-throw and field-goal
shooting percentages — that could be
used to construct formulas similar to the
ones employed by Beane and his staff.
It’s not clear why this hasn’t been done.
Whatever shortcomings there may
be with Beane’s approach to running a
Major League baseball team — and the
questions above suggest there are some,
arguably minor, issues to be resolved
— there is no doubt that his methods
are interesting. Likewise, Moneyball is a
fascinating read. Lewis has taken a good
story and produced a great book that
will appeal to a broad audience.
For instance, the person who first
recommended Moneyball to me has
only a passing interest in America’s
national pastime. A few years
ago, I took him to a Chicago
Cubs game. He enjoyed
himself. After all, the
bratwursts were tasty and the
weather was good. But the
actions on the field seemed
nonsensical, even chaotic to
him. Why, for example, did
the grounds crew sweep the
infield every three innings? It
would be more reasonable, he
argued, to send them out
there as needed — for
instance, after an especially
long inning in which a lot of runners
reached base. Or why did the manager
have to wear a uniform like the players,
since there was no chance he was going
to enter the game? NBA, NFL, and
NHL coaches didn’t suit up, and he saw
no good reason why baseball managers
should be any different. To my friend,
baseball relied too much on ritual and
convention — and I think that’s one of
the reasons he liked Moneyball. To him,
it was the story of science and order
being applied to a game that, in his
view, was unscientific and disorderly.
Of course, to many fans, that’s the
beauty of baseball. It’s a simple game
whose quirks are to be appreciated, not
scorned, a game with an internal logic
all its own. I suspect that those people
will get as much enjoyment from
reading Moneyball as my friend did,
even if for very different reasons. RF

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

LEGISLATIVEUPDATE
Virginia Budget Brings Fiscal Fitness But Not Reform
BY B E T T Y J OYC E N A S H

V

The filing threshold was increased, too, from $7,000 to
irginia legislators passed a $60 billion two-year budget
$14,000. That removes 141,000 poor people from the tax rolls.
after more than 100 days of haggling. The work paid
The car tax was also frozen. The tax is imposed on car
off: The new budget restored the state’s AAA bond
owners by local governments, and was cut in 1998 by Gov.
rating from Moody’s Investor Service, which should save the
Jim Gilmore. The tax ultimately would have eliminated tax
state money when it issues bonds.
on the first $20,000 of a car’s value. In its current phase,
The budget is noteworthy because it raises taxes. And as
local governments reimburse citizens for 70 percent of the
this issue goes to press, tax revenue is rolling in above prethe tax they pay, and the state reimburses localities for the
dictions, growing at an annual 9.3 percent, nearly 3 percent
lost revenue. The budget agreement caps the reimbursement
above state forecasts.
at its current level, about $950 million annually.
While legislators shied away from raising any motor fuel
Overall, states are digging out of the hole they found
taxes for transportation funding, given uncertainty over gasothemselves in when revenues during the most recent recesline prices, they approved amendments affecting transportation
sion dribbled in rather than deluged
proposed by Gov. Mark Warner. Those
state treasuries. “At least we’re past the
changes will move about $19 million
Virginia’s Budget 2004-2006
shortfall period and we can kind of now
from the general fund to the translook forward,” says Scott Pattison,
portation fund and allow the governor
➤ Raises state sales tax by a half cent
executive director of the National
to designate $50 million more for trans➤ Raises cigarette tax from 2.5 cents to
Association of State Budget Officers.
portation projects.
30 cents
For example, state tax collections,
The spending plan aims to restruc➤ Freezes car tax phaseout
adjusted for inflation, fell 7 percent in
ture the tax code and invest in services.
➤ Adds $450 million to rainy-day fund
second quarter 2002 compared to the
Legislators intended to reduce reliance
same quarter of 2001. Coming on the
on personal income taxes. In the past
➤ Adds $1.5 billion for public schools
heels of a decade of rising revenue, the
the state has received some 20 percent
➤ Adds $1 billion for nursing homes,
shrinking portions put most state
of revenue through sales taxes and
hospitals
budgets on a diet and used up rainyabout 55 percent through individual
day funds.
income taxes.
It’s easy to see why. Revenues fade when economic activThe budget deal will increase the state’s sales tax by a half
ity slows while demand for public services tends to grow.
cent for most products. The plan eventually adds 30 cents
States can fix the problem in two ways — reduce the cycli(up from 2.5 cents) to the cost of a pack of cigarettes. (The
cal variability of the revenue stream or build savings by credeal also gradually lowers sales taxes on food, a move that
ating and properly using rainy-day funds.
many people say is equitable, since poor people spend a disSobel and Wagner found that for states with individual
proportionate amount of income on food.)
income taxes and retail sales taxes that include food, “shifting
Increased revenues will put new funding worth $1.5 billion
the reliance more heavily toward one and away from the other
into public education to pay for rising enrollments, teacher
will not have a significant impact on overall revenue variability.”
pay, health insurance, and retirement costs. The budget also
Virginia’s tax and spending plan did raise eyebrows with
adds $27 million to expand funds to teach English as a second
its tax hike, but analysts don’t see it as reform. Scott Moody
language. Higher education will benefit. Faculty members
of the Tax Foundation, an advocacy group based in Washwill get raises and Virginia students at private institutions
ington, D.C., says that he prefers a flatter tax system without
will get more tuition assistance.
special exemptions. “Anytime you riddle the tax code with
The plan brought tax breaks for some — like Philip
special exemptions … those are social policy programs that
Morris. The cigarette company, which moved its corporate
don’t belong in the tax code,” he says.
home to Richmond in 2003, will get a $6 million credit on
“To a large extent it [reform] is in the eye of the beholder,”
state taxes against income on sales of cigarettes produced
adds Knapp.
for export, a break that expires in 2016.
On the spending side, more money for K-12 and higher
Ordinary taxpayers got a little something, too. “Widely
education might help boost human capital and ultimately
ignored was some modest reduction in income taxes by slightly
economic growth. But whether “that extra dollar is going to
raising the personal exemption,” says John Knapp, director
be efficiently spent, that’s beyond my analytical ability,” says
of the Weldon Cooper Center for Public Policy at the UniKnapp.
RF
versity of Virginia. The exemption went from $800 to $900.

Summer 2004 • Region Focus

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INTERVIEW

Kenneth
Elzinga
Editor’s Note: This is an abbreviated version of RF’s conversation with Kenneth Elzinga. For the full interview, go to our Web
site: www.rich.frb.org/pubs/regionfocus.
Many people think economics is boring — certainly not
the stuff of which mystery novels are made. But those
people probably have never heard of Henry Spearman.
He is the hero of three murder mysteries written by
economists Kenneth Elzinga and William Breit: Murder
at the Margin, The Fatal Equilibrium, and A Deadly
Indifference. (Actually, Elzinga and Breit published those
books under the pseudonym Marshall Jevons, combining
the names of two famous classical economists, Alfred
Marshall and William Stanley Jevons.) Spearman — who
is modeled after Milton Friedman — uses economic
logic to determine who is behind the murders. The
books are both fun and informative. As a reviewer for
the Wall Street Journal remarked of Murder at the
Margin, “if there is a more painless way to learn
economic principles, scientists must have recently
discovered how to implant them in ice cream.”
Since 1967, Elzinga has served on the faculty of the
University of Virginia, where Breit also taught from
1965 to 1983. In addition to his murder mysteries,
Elzinga is well known for his work on antitrust issues
and the economics of the beer industry. He is also an
acclaimed instructor, having won several teaching
awards at UVA, and a former president of the
Southern Economic Association. Aaron Steelman
interviewed Elzinga on June 7, 2004.
36

Region Focus • Summer 2004

RF: When did you and Professor Breit become
interested in using fiction as a way to convey
economic ideas?
Elzinga: Bill and I were in the U.S. Virgin Islands,
on the island of St. John, at a resort called Caneel
Bay Plantation. We were vacationing there with
my wife. At dinner we often discussed the “beach
books” we had been reading. Bill was an avid
reader of mystery fiction, about which I knew
practically nothing, except the Hardy Boys. One
night he described how the genre of mystery
fiction had generated sleuths who used different
methods of analysis to solve crimes.
As I recall, Bill mentioned Rabbi Small’s use
of the Talmud and Hercule Poirot’s use of psychology as examples. Then he added something
that caught my attention. Bill reported that there
had never been a central character in all of mystery
fiction who used economic reasoning to solve the
crime. I suggested to Bill that he ought to create
such a character. He responded that he would do
so if I agreed to work with him on the project.
You have to understand that Professor Breit is an
unusually creative and witty person. And he is my
best friend. So without giving the matter much
thought, I agreed. And we started brainstorming
about a novel during that vacation.
I had no idea, at the time, what hard work I
had signed on for and no idea how much enjoyment we also would get from the collaboration.
RF: I have read that the hero of your novels,
Henry Spearman, is modeled loosely after
Milton Friedman. Is that correct?
Elzinga: I’m not sure I would use the word
“loosely.” Our fictional character, Henry Spearman, is very much like the real-world Milton
Friedman — certainly in appearance. But not only
in appearance: Over and again, as Bill and I
worked on our three books, we would ask ourselves what might Milton Friedman say in this situation. Bill knows Milton much better than I do,
and Bill is a mimic. So I would literally hear what
sounded like Friedman’s voice coming from my
pal as we pondered some idea.
Now having said that, obviously there are
differences. Henry Spearman teaches at Harvard;
Milton Friedman’s fame as an economist was at the
University of Chicago. Milton Friedman’s wife Rose
is herself a skilled economist. That did not work for

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

us with Henry Spearman. We
created a wife for Henry who does
not understand economics, so she
could play the Dr. Watson role.
RF: What difficulties did you
encounter in finding a publisher
for your first novel, Murder at
the Margin?

Our fate hinged on what
Paul Samuelson thought
of a book whose hero
was patterned after
Milton Friedman.

RF: If I may put your fiction writing in a different category, much of your academic work
has focused on antitrust. How would you
describe the evolution of economic thinking
about antitrust over the past 30 years?
Elzinga: The biggest change is the enormous interjection of economic analysis into antitrust enforcement and policy. Every assistant attorney general heading the Antitrust Division, whether the
administration is Republican or Democrat, appoints

an academic
economist as a
deputy assistant attorney
general. David
Sibley of the
University of
Texas now
serves in that
capacity. For
many years, the only people to hold the deputy assistant attorney general rank at the Department of
Justice were attorneys. This is just one snippet of a
profound change in economic influence.
Any major antitrust case today has economists
involved. Cases being considered by either the
Federal Trade Commission or the Antitrust Division are now always assessed by economists along
with attorneys. In antitrust trials, economists now
play an important testifying role.
The intellectual stimulus for much of this has
its locus at the University of Chicago, where Aaron
Director and others began applying economic
analysis to the law, including antitrust law. There
is more to the story than what was happening in
Hyde Park, to be sure. But the Chicago School of
Economics has had an enormous impact on the
way antitrust is considered. Even critics of the
Chicago School have to understand its influence
to offer their critique.

LINCOLN ROSS BARBOUR

Elzinga: Publishing a work of
fiction is a classic chicken-and-egg
problem. Once you have published a successful first
novel, publishers are interested in considering your
second book. You have a track record as an author.
But until that first novel is out, no one seems
interested.
Almost every successful author has a story of
how he or she almost never got published. In our
case, after being rejected by a number of publishers, a small publishing house that had brought out
a couple of books by Milton Friedman and Paul
Samuelson became interested because of the Milton
Friedman-Henry Spearman nexus. This publisher
took our manuscript for Murder at the Margin to
Paul Samuelson at MIT and told us that if Professor Samuelson liked it, he would publish it. And
so our fate hinged on what Samuelson thought of
a book whose hero was patterned after Friedman.
Our first break was that Samuelson liked the
manuscript. It turned out that his MIT colleague,
Bob Solow, also became a fan. Another fan we have
is John Nash. So we have a number of Nobel Laureates who like the exploits of Henry Spearman.
Our second big break was that the Wall Street
Journal reviewed Murder at the Margin and gave it
a great review. A lot of people read the Journal and
a lot of them bought the book. Those two breaks
in large part explain how we came to write The
Fatal Equilibrium and A Deadly Indifference.

RF: Aspiring monopolists are often accused of
using predatory pricing to drive competitors from
the market. In the case of foreign trade, the
United States has tried to stop that behavior
through the enforcement of anti-dumping laws.
What is your view of U.S. anti-dumping laws?
Elzinga: Like most economists, I can restrain my
enthusiasm for anti-dumping laws. They have little

Summer 2004 • Region Focus

37

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or nothing to do with genuine predatory pricing
and a lot to do with rent-seeking by domestic producers of goods seeking import protection. I
admire U.S. companies that face import competition and do not hire lawyers and lobbyists to
protect them from foreign competition.
To win a dumping case, a domestic producer need
not show that the foreign producer is engaging in
predatory pricing. If that were the requirement, there
would be little to fear from anti-dumping enforcement since very few, if any, foreign producers have
even the remote prospect of gaining a monopoly position on sales in the United States through belowcost pricing.
In fact, the economics of predatory pricing as
applied to antitrust enforcement is one of the
great victories of the Chicago School. One of the
most interesting antitrust cases in which I ever
participated was
brought by two U.S.
producers of consumer electronic
Anti-dumping laws have
products
that
charged the bulk of
little or nothing to do
the Japanese television industry with
with genuine predatory
predatory pricing. I
ser ved as the ecopricing and a lot to do
nomic expert for the
Japanese defendant,
with rent-seeking by
and I had the chance
to see the insides of
domestic producers.
a prominent predatory pricing case.
The case went to
the Supreme Court
where the majority showed their understanding
of how unusual it is for predatory pricing to be a
viable monopolizing strategy. The Court ruled that
predatory pricing was “rarely tried and even more
rarely successful.” I think those are the exact
words of the Court. And, of course, even with
their Court victory in hand, the Japanese never
monopolized the sale of television sets in the
United States. I think, today, the largest seller of
television sets in Japan is a Chinese firm! Meanwhile the American consumer has enjoyed a steady
stream of competitive benefits in consumer electronic products.
RF: Some economists have argued that there can
be no such thing as monopoly in a purely free
market — that all monopolies result from grants
of government privilege. What do you think of
that argument?
Elzinga: That’s an argument that has an impor38

Region Focus • Summer 2004

tant lineage in economics. Today, the argument is
held and put forth most cogently by members of
the Austrian School. I admire a lot about Austrian
economics, and I consider it a shame that most
departments of economics do not offer more
opportunities for students to study Austrian economics. Moreover, I think the argument that all
monopolies result from grants of government privilege teaches an important point. The point being:
Markets are largely self-correcting, and that
cartelization and monopolization are not easily
pulled off, notwithstanding the conventional
wisdom (outside of economics) to the contrary.
The problem is the Austrian thesis borders on
being too clever by half.
The real issue is whether the market failure of
monopolies and cartels can be identified and remedied by a government agency at less cost than that
inflicted by monopolies and cartels upon consumers
before the monopolies or cartels are undermined
by new entry or cheating or technological change.
When I teach microeconomic principles at the
University of Virginia, and I come to cartel theory,
I always teach about the instability of cartels
because of the cheater problem. It is a powerful
theory and there is much truth to it. But I had an
opportunity to study the recent vitamin cartel and
this cartel operated for more than 10 years, seemingly without government protection or privilege.
I’m grateful that the antitrust authorities finally
caught the cartel members and that antitrust penalties seek to deter such conduct by other firms.
Aside from cartels, I think if the United States
did not have an antimerger law the country would
go through a wave of mergers-to-monopoly. Over
time, the anticompetitive effects of these mergers
might dissipate through new entry. But we have a
merger law that allows mergers that are efficiencydriven, and that involve an otherwise failing firm.
I’m not sure why consumers should have to wait
for the long run to come around when economics
provides pretty good guidance of what kinds of
horizontal mergers we should try to nip in the bud.
RF: You have done a good deal of research and
writing on the economics of the brewing industry. What do you think of the rise of “microbrews” in recent years?
Elzinga: I have watched the rise of microbreweries with interest, going back to Mr. Fritz
Maytag’s pioneering efforts with Anchor Steam
Beer, beginning in the mid-1960s. Microbreweries
still supply only a small share of the beer market
compared to the major domestic brewers and the
importers. But they have added to consumer
welfare by bringing new flavors and product

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

variety to the marketplace. And in the process, a
place has been made for a group of entrepreneurs
to make some money (not all have) and to produce
a product for which they have a passion.
Let me mention, however, that to my mind an
equally important development in the American
beer market has been the place at the table that
import brands now have, particularly the Mexicans, and especially Corona. It would have taken
a remarkable crystal ball to predict, a decade ago,
that a Mexican beer would not just be a fringe
supplier, but a top-10 seller.
RF: You have written on the relationship
between religion and economics. Many religious
people are often hostile to the market system
because they believe that markets ignore issues
of social justice. Why do you think such concerns are prevalent among people of faith?

RF: Which economists have influenced you the most?
Elzinga: I would have to mention
first, Professor Sherrill Cleland, my
first undergraduate teacher in economics. He influenced me to major
in economics and then pursue a
career in college teaching. In one
sense, he influenced me the most
because he believed I could be an economist at a
time when my goal had been to work in the sporting-goods industry. Professor Walter Adams at
Michigan State was the graduate mentor who
influenced me a great deal. He gave me a passion
to study and understand the institution of
antitrust. My colleague Bill Breit influenced me
enormously at Virginia, not only as a co-author,
but as a teacher. Bill never thought that teaching
and research had to be mutually exclusive. Finally,
Professor Ronald Coase invited me to spend time
at the University of Chicago and that also was an

Summer 2004 • Region Focus

LINCOLN ROSS BARBOUR

Elzinga: I am not sure I have a particularly good
answer to that question, but I’ll hazard three
reasons why so many religious people are hostile
to market allocation.
First, we need to realize that many people,
perhaps especially seminarians, simply do not
understand what Adam Smith called “the obvious
and simple system of natural liberty.” They do not
find the benefits of, indeed the genius of, the
market system to be obvious and simple. Incidentally, many of my students at the University of
Virginia are the same way.
Many people who have not had so much as one
course in economics are confident of their ability
to opine on economic subjects. That said, there are
clergy who do understand the hidden logic of
economic analysis. I admire the work of Father
Robert Sirico at the Acton Institute for the Study
of Religion and Liberty in Grand Rapids, Mich. He
and others are doing pioneering and important work
in bringing knowledge of how markets work to
clergy and seminarians.
Second, we need to acknowledge that many
people do not like the spirit of enterprise that is
part of the market system. There are many members
of the intellectual class who admire the creativity
of writing a poem or composing music. And rightly
so. But many of these same people will not admire
the creativity involved in coming up with a new
product, a new service, or a new form of business
organization. Ask yourself this question: Have you
ever observed a writer in an important journal or
newspaper object to the substantial earnings of an
entertainer? I haven’t. But the earnings of business
entrepreneurs are regularly viewed as somehow
suspect, undeserved, or undertaxed.
Third, people of faith often are marked by a

deep concern for the poor and oppressed. Now
the world was full of poor and oppressed people
long before the development of the modern
market system. Markets have made possible the
prospect of the bulk of an
economy’s population not being
poor and oppressed. Paradoxically,
Kenneth Elzinga
it is the very success of the market
➤ Present Position
system that tempts those who
Professor of Economics, University of
believe in a preferential option for
Virginia (1974-Present)
the poor also to believe that if the
government were to step in, some
➤ Previous Appointments
kind of mopping-up action would
Associate Professor of Economics,
take place and we could end all
University of Virginia (1971-1974); Assistant
poverty.
Professor of Economics, University of
To my mind, the sad thing about
Virginia (1967-1971); Fellow in Law and
many churches is that they have
Economics, University of Chicago (1974);
abdicated the responsibility to help
Special Economic Advisor, Antitrust
the poor, and explicitly or implicDivision, Department of Justice (1970-1971)
itly invited the state to take over
➤ Education
the role of compassion. One of the
B.A., Kalamazoo College (1963); M.A.,
most remarkable things I have ever
Michigan State University (1966); Ph.D.,
read was by Peter Bauer, the great
Michigan State University (1967)
scholar of economic development
who did so much to teach econo➤ Selected Publications
mists how counterproductive govCo-author of three mystery novels: Murder
ernment-to-government aid is in
at the Margin (1978), The Fatal Equilibrium
helping the poor in other nations.
(1985), and A Deadly Indifference (1995).
Bauer was asked in an interview
Author or co-author of numerous scholarly
what a person who wanted to help
articles in such publications as the
the poor in a less developed
American Economic Review, Journal of Law
country should do. His response:
& Economics, Supreme Court Economic
Give your money to a missionary
Review, and Public Choice.
working in that country.

39

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

ECONOMICHISTORY

Knowledge=Power
Historically black
colleges and
universities have
helped African
Americans tap into
the potential of
higher learning

B

HISTORIC PHOTO COLLECTION, HARPERS FERRY NHP

BY CHARLES GERENA

efore the U.S. Supreme Court
opened new doors to learning
in 1954 with its historic ruling
in Brown v. Board of Education of Topeka,
Kan., historically black colleges and
universities (HBCUs) played a major
role in bringing African Americans the
education they sought.
“When black children had no other
source of elementary or high school
education, the early black ‘colleges’ …
taught them,” noted a 1971 report by
the Carnegie Commission on Higher
Education. “When elementary and
high schools for Negroes became available, these colleges provided them with
teachers.” When young blacks were
barred from most predominantly white
colleges, HBCUs “provided all but a
very small portion of the higher education available to them.” Even a
decade after the Brown decision, they
enrolled half of the nation’s black
college students.

Delegates to the Second Niagara
Conference pose in front of Anthony Hall
on the Storer College campus in Harpers
Ferry in 1906. The Niagara Movement
was a precursor to the NAACP.
Storer College was West Virginia’s
first HBCU when it opened in 1867.

40

Region Focus • Summer 2004

Today, HBCUs serve 14 percent of
African Americans pursuing a college
degree, although the 105 schools comprise just 3 percent of the nation’s
higher education system. Most of these
schools are in the South, with one-third

operating in the Fifth District. They
continue to offer tangible and intangible benefits to blacks as they try to
broaden their missions and enrollments
in order to survive.

A Quest for Knowledge
In the antebellum South, access to
higher education was limited. Only the
privileged class among whites could
afford to attend college, an experience
they considered an essential part of a
person’s intellectual development.
In contrast, many working-class
Southerners didn’t pursue higher education. “From an economic view, there
may not have been as strong a push,”
surmises Jessica Gordon Nembhard, an
economist and assistant professor of
African-American studies at the University of Maryland-College Park.
“There was such a strong demand for
farm labor that there wasn’t as big a
place for educated people.” While
teachers and other professionals
required post-secondary schooling,
farmers, textile mill workers, tradesmen, and merchants could learn from
experience or through apprenticeships.
As for blacks, they received training to be more productive and handle
new tasks as slaves on plantations. Only
the favored few obtained any formal
schooling, much less a college education. “Most Southern whites declared
blacks did not have the mental capacity to be educated, yet feared literacy
would encourage escape or revolt,”
wrote the authors of a 2000 National
Park Service essay on desegregation in
public education. “Southern colonies
grew increasingly restrictive toward
teaching slaves to read or write and
giving books or pamphlets to a slave.”

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

Blazing a New Trail
Still, education was not equally available
to all blacks in the South. While private

schools operated throughout the region,
about half of them were in Virginia,
North Carolina, and Louisiana, according to Henry Allen Bullock’s book, A
History of Negro Education in the South.
Meanwhile, states didn’t fund public
education until Reconstruction, then
Jim Crow laws and the Supreme Court’s
“separate but equal” ruling in 1896
forced blacks into separate schools.
Unfortunately, black schools were hardly
equal, receiving less funding and
resources than white schools.
HBCUs filled the gap. Most were
private schools founded by churches,
mutual aid societies and businesspeople from the South’s black communities, as well as by missionaries and
wealthy benefactors from the North.
They served as central institutions for
the black community’s educational
needs in the same way that race-specific business districts formed to meet
its economic needs.
The earliest HBCUs were colleges in
name only. A few schools taught Latin,
music and other liberal arts, says Littlefield, but most provided basic instruction on reading, writing, and arithmetic
to prepare blacks for college-level studies.
“The educational foundation wasn’t there
yet,” she explains.
As students caught up, many HBCUs
began offering training for occupations
that were open to blacks and had strong
employment demand. Bennett College
in Greensboro, N.C., Coppin State
University in Baltimore, Md., and others
started out as “normal schools” that
trained teachers, mostly female students.
Hampton University in Virginia and
other HBCUs emphasized agriculture
and industrial arts such as mechanical
engineering because educators like
General S.C. Armstrong, Hampton’s
founder, believed that these fields of
study were best suited for blacks.
“[Armstrong] presented industrial
education as the character-building
force capable of elevating Negroes to
a level of acceptance by the South and
the nation,” wrote Bullock in his 1967
book. “Not only would [such training]
render Negroes self-supporting … but
they would make them valuable,

COURTESY OF HAMPTON UNIVERSITY

Despite the continued threat of legal
sanctions and physical harm, slaves
sought to advance and elevate themselves through education. Among those
with permissive owners, some gained
enough knowledge and skills to take on
more responsibilities and be hired out.
A few even won their freedom and
developed their own businesses.
How did antebellum slaves satisfy
their quest for knowledge? Aside from
altruistic masters, such as the Baltimore
mistress who first introduced Frederick Douglass to reading, there were few
options. Quakers and other missionaries opened elementary and secondary
schools for blacks in the South. Colleges
above the Mason-Dixon Line — as well
as institutions of higher learning in
England and Scotland — accepted some
black students. Only a few colleges in
Pennsylvania and Ohio catered to blacks
before the Civil War.
Then four years of war between the
North and South put an end to slavery
in 1865 and blew the gasket of the agricultural engine that had driven the
Southern economy. For the next dozen
years of Reconstruction, blacks had to
rebuild their lives alongside the whites
who had oppressed them. Education
was an important tool in that process.
“Coming out of slavery, African
Americans equated education with
power [because] whites who were educated had power,” notes Valinda Littlefield, assistant professor of history
and African-American studies at the
University of South Carolina. They also
saw education as a means of maintaining their freedom.
Thousands of blacks took advantage
of new learning opportunities during
Reconstruction. Between 1865 and 1870,
the federal Bureau of Refugees, Freedmen,
and Abandoned Lands spent about half
of its $11 million congressional appropriations on helping existing schools for
blacks and building new ones. Blacks
themselves, though destitute in many
cases, also invested in schools.

Starting with an industrial arts focus,
Hampton University has broadened its
curriculum into fields ranging from
chemistry to sport management.

thereby giving the South a labor force
of great potential wealth.”
While Booker T. Washington and
other leaders inside and outside of the
African-American community wanted
to emphasize practical training for
blacks, some felt that wasn’t enough.
Several HBCUs — including Howard
University in Washington, D.C., and
Shaw University in Raleigh, N.C. —
broke racial stereotypes to teach law
and medicine because blacks couldn’t
obtain these professional services
within the white community.
Other schools like Johnson C. Smith
University in Charlotte, N.C., stressed
liberal arts over vocational or professional training. Their mission was to
prepare students for leadership roles
within the black community.
W.E.B. DuBois was a leading advocate of HBCUs developing what he
called the “Talented Tenth.” These were
the “best of the race,” the select group
of blacks who needed to be developed
in order to lead the African-American
community. Still, “the nation decided
that vocational education for AfricanAmericans was in the best interest of
the nation [and] a lot of money went

Summer 2004 • Region Focus

41

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

Important Dates in Black Higher Education
1823 Alexander Twilight became
the first known African American to graduate from college.
1837 The Institute for Colored
Youth opened in Philadelphia.
The school evolved into
Cheyney University, the nation’s
first historically black college
and university (HBCU).
1862 The federal Morrill Act funded
state-run land grant colleges to
expand access to higher educa-

tion. None of these colleges
opened in the South until the
former states of the Confederacy rejoined the Union.
1865 The American Baptist Home
Mission Society established
the predecessor to Virginia
Union University and Shaw
University in Raleigh. These
institutions were among the
first HBCUs in the South.
1867 Howard University opened in

to schools that had vocational programs,” says John Fleming, a historian
and vice president of museums at the
Cincinnati Museum Center.
These differences in curricula illustrate a tension that exists in higher education in general. Should colleges
prepare students for specific careers,
or make them better thinkers? In the
black community, this tension fueled
debates over the purpose of HBCUs
well into the 20th century.

New Paths Forged
With the Brown v. Board of Education
decision 50 years ago, the dismantling
of the legal framework for segregation
began. However, that process took time
and didn’t immediately eliminate the
need for separate institutions for blacks.
“A lot of people think that in 1954
segregation was all over; everybody
could go everywhere. That wasn’t the
case,” describes Jill Constantine, senior
economist at Mathematica Policy
Research in Princeton, N.J., who has
studied HBCUs. “There are some public
higher education institutions, particularly in the South, that did not admit a
black student until the late ’60s.”
For many of today’s black students,
an HBCU is still the first choice
because their parents and grandparents
attended one. “People shouldn’t think
of all of these barriers as being 100
years in the past,” stresses Constantine.
“This is the first generation that hasn’t
faced profound, structural barriers.”
42

Region Focus • Summer 2004

Washington, D.C., with four
students. With funding from
the federal Freedmen’s Bureau
and other sources, Howard
expanded rapidly.
1890 The second Morrill Act prohibited federal funding to states
for land grant colleges if they
made distinctions of race in
admissions, unless there were
separate schools for blacks. As
a result, southern states opened

Still, now that new paths are open to
blacks, are separate institutions of higher
learning necessary? HBCU boosters
argue that these schools still provide
tangible benefits to black students which
they cannot find elsewhere.
By lowering the bar for admissions
and providing financial assistance and
remedial training, HBCUs enable students to attend college that otherwise
wouldn’t have sufficient money or academic credentials. That’s why research
has shown that “black students with
lower test scores from poorer high
schools are more likely to attend black
colleges,” says Constantine.
HBCUs also provide a supportive
environment that fosters camaraderie
and a sense of common purpose. This
encourages students to be more involved
in campus activities and take leadership
roles. In Jessica Nembhard’s opinion,
students are more marketable as a result.
“In this day and age, a lot depends
on ‘soft skills’ like leadership and initiative,” notes the University of Maryland professor. “Even if you don’t have
the same credentials as somebody
coming from Harvard, you might have
built up enough self-confidence, leadership skills, and networking ability
that would show in [a job] interview.”
The supportive environment of
HBCUs also supposedly helps black students persist in their studies. Several
studies have shown that black students
who attend these schools are more likely
to finish their four years of studies and

several land grant colleges for
blacks, including North Carolina
A&T, South Carolina State, and
Virginia State.
1896 The Supreme Court’s ruling in
Plessy v. Ferguson upheld “separate but equal” institutions for
blacks and whites.
1954 The Supreme Court’s ruling on
Brown v. Board of Education of
Topeka, Kan. struck down the
“separate but equal” doctrine.

get a bachelor’s degree than those who
attend predominantly white colleges.
Of course, other factors could
explain this phenomenon. Constantine’s
research found that a high percentage
of black students who forego an HBCU
choose a two-year college, where they
are less likely to continue to a four-year
institution for a bachelor’s degree. Most
HBCUs are four-year institutions.
Her study also demonstrated that
graduates of HBCUs earn higher wages.
However, it is difficult to determine how
much these schools contribute to the
wage equation. For example, black students who decide to attend HBCUs may
share certain traits that make them
more productive but are independent of
their college experiences.
The supportive environment at
HBCUs has intangible value as well. On
the HBCU Network web site for
alumni of black colleges, the feedback
page has numerous postings from graduates talking about having a special
connection to their school, sharing in
tradition, and belonging to a family.
In the turbulent years when blacks
frequently faced violence and racism,
HBCUs became safe havens to learn and
develop. “For a while, you were isolated
from some of the worst stereotyping
and discrimination,” says Nembhard.
“You had the entire community of black
scholars who wanted to make sure that
you succeeded, whereas in the white
universities you didn’t necessarily have
that same mission and commitment.”

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

A year later, the court ordered
that states desegregate public
schools with “all deliberate
speed.” However, they could
ask for more time if necessary.
1955 Storer College, the first HBCU
to open in West Virginia, closed
after losing its funding.
1958 Virginia Tech graduated Charlie
Yates, reportedly the first
African American to earn a
bachelor’s degree from a white

land-grant university in the
former Confederacy.
1962 James Meredith became the
first black student to attend
the University of Mississippi,
despite the school’s legal maneuverings. Resistance to his
admission peaked during a violent riot in September 1962.
1965 The Higher Education Act provided aid for HBCUs to improve
their academic programs and

Are these historical advantages
enough? Higher education is a tough
business. Colleges and universities are
always under pressure to expand and
modernize to compete for students.
This has forced tuition upward, especially as private colleges have seen their
endowments drop in value and public
colleges have lost state funding.
These challenges can be difficult for
HBCUs to handle. Black colleges are
usually reluctant to increase tuition
because it would reduce access; yet they
tend to bear heavier costs for student
aid, student services, and remedial
instruction compared to predominantly
white colleges. “For the HBCUs that are
already more on the margins, they go
down for the count” during difficult
financial times, notes Constantine.
However, few HBCUs close down
because they are used to operating
under tight financial circumstances.
They also receive federal aid – $223
million in fiscal year 2004 alone.
HBCUs also have the unique
problem of trying to hold on to their
no-longer-exclusive clientele. Most
blacks still live in the South where
many HBCUs operate, but that concentration diminished over the last
century as millions of blacks migrated
to the Northeast and Midwest looking
for new opportunities. Among the
region’s remaining blacks, the best-prepared high school graduates are wooed
by predominantly white colleges
looking to increase their diversity.

facilities. The act was amended
in 1998 and is pending reauthorization this year.
1981 The University of North Carolina reached an agreement
with a federal district court to
boost white enrollment at its
non-white campuses, increase
black enrollment at its white
campuses, and devote more
funding to its five HBCUs.
1985 The U.S. Department of Edu-

Black colleges have been recruiting
students of all races to combat declining
enrollment. This isn’t always easy to do,
given that whites and Hispanics don’t
always feel welcome at these schools and
may perceive them as inferior.
One success story is West Virginia
State College, which was founded in
1891 when the federal government
threatened to remove its funding for
West Virginia University unless it admitted blacks or created a separate land
grant school for them (see 1890 Morrill
Act in timeline). The college voluntarily desegregated in 1954, enrolling nearly
400 white students and making diversity one of its defining traits. Today, the
school bills itself as a center for black
culture, even though 4,000 of its 4,800
students in fall 2001 were white.
Besides becoming more diverse,
HBCUs must compete with community colleges that offer a similar handup to the world of higher education.
An Aug. 28, 2003, article in Black Issues
in Higher Education noted that changes
in state higher education systems have
shifted remedial education to the community colleges. This has led some
HBCUs to drop their open-admissions
status and be more selective. Others
like Norfolk State University have partnered with community colleges to
allow students to transfer from twoyear programs to four-year programs.
What else can HBCUs do? John
Fleming believes they can find new
ways to fulfill their traditional mission

cation’s Office for Civil Rights
and the Maryland Higher Education Commission reached an
agreement to foster equal opportunity in the state’s higher
education system.
1992 The Supreme Court’s ruling on
United States v. Fordice found
that Mississippi failed to desegregate its state university system, despite efforts to remove
discriminatory practices.

of meeting societal needs. For example,
HBCUs could help supply teachers for
urban school systems that have failed
to educate black students adequately.
“There are problems facing the black
community that can be addressed by
HBCUs if they refocus their missions,”
he adds.
Black colleges cannot afford to be
static. They must evolve and venture
into new territory in order to distinguish themselves in the competitive
higher education market. Not all
schools may be willing or able to do
this, though, especially those that view
their mission as sacrosanct.
RF
READINGS
Anderson, James. The Education of Blacks in the
South: 1860-1935. Chapel Hill: UNC Press, 1988.
Bullock, Henry Allen. A History of Negro
Education in the South; From 1619 to the Present.
Cambridge: Harvard University Press, 1967.
Carnegie Commission on Higher Education.
From Isolation to Mainstream: Problems of the
Colleges Founded for Negroes. New York: McGrawHill, 1971.
Constantine, Jill. “The Effect of Attending
Historically Black Colleges and Universities on
Future Wages of Black Students.” Industrial and
Labor Relations Review, April 1995, vol. 48, no. 3,
pp. 531-546.
Salvatore, Susan, et al. Racial Desegregation in
Public Education in the United States. Washington:
National Park Service, August 2000.
Visit www.rich.frb.org/pubs/regionfocus
for links to relevant Web sites.

Summer 2004 • Region Focus

43

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

District Economic D
BY ROBERT LACY

An upswing in payroll employment
numbers in the first
quarter of 2004 was
just the tonic for a
District economy
suffering from a
touch of “jobless
expansion” anxiety.
Output of goods
and services continued to increase at a
solid pace, but stiff
price hikes for key
commodities rattled the District’s
manufacturing and
commercial construction sectors.
Did You Know. . .

Despite higher costs, the Fifth District’s manufacturing sector posted impressive gains in
the first quarter. Our contacts tell us that shipments and new orders rose at the strongest
pace in several years.
There were even scattered reports of a
pickup in the textiles industry. A manager at a
North Carolina textiles firm reported in February that shipments, new orders, and capacity
utilization were all higher, adding, “Business has
improved each month for the last six months.”
Manufacturing job losses have slowed or
ended in most District states, though North
Carolina remained a troubled area.

Labor Markets Coming Around
First-quarter payroll employment in the Fifth
District was 0.7 percent higher than a year ago.
Employment growth was particularly strong
in Virginia, up 1.9 percent year over year.

Population Growth (%), April 2000 to July 2003
30.7

20.1

19.3
15.9
12.8

12.5

12.3

ley
rke )
Be WV
(
r
pe
lpe )
Cu (VA

Region Focus • Summer 2004

rt
lve
)
Ca MD
(
am
illi
W
e )
nc (VA
Pri
nia
va
syl
ot A)
Sp (V

rd
ffo )
Sta (VA

44

North Carolina managed slight growth in total
employment during the quarter, despite continued losses in manufacturing jobs.
The District’s unemployment rate continues to trend lower. At 4.9 percent in the first
quarter, the Fifth District’s rate remained well
below the U.S. rate of 5.6 percent. Unemployment rates in Virginia and Maryland were at
or below 4.0 percent in March, and North
Carolina’s rate dropped to 5.2 percent, its best
showing in three years.

Manufacturing Shows Strong Gains

n
ou
ud )
Lo (VA

Loudoun County, Va.,
less than an hour’s
drive from Washington, D.C., is blessed
with beautiful
scenery and rich
equine and hunting
traditions. It’s a great
place to visit and,
for an increasing
number of people, to
live. The population
there increased by
30.7 percent from
April 2000 to July 1,
2003, making it the
fastest-growing
county in the nation.
Six other counties
in the sprawling
Washington metropolitan area were
also among the top
100 fastest growing
in the United States
during that period.

The Fifth District economy expanded at a
somewhat quicker pace in the first quarter of
2004, boosted by stronger manufacturing
activity and a pickup in employment. Growth
in the broad services sector was brisk and the
housing and retail sectors showed solid gains.
But prices of some raw materials—steel, oil,
natural gas, and lumber in particular—surged,
raising production costs for manufacturers and
construction costs for commercial builders.

Housing Hot
Declining mortgage interest rates throughout
much of the first quarter fueled strong growth
in the District’s housing markets. Home
buying activity was reported to be frenzied in
some areas as mortgage rates slipped below 5.5
percent. Multiple offers on houses for sale
were commonplace, and home prices rose
rapidly in many markets. New construction
was very active; the number of residential
building permits issued during the quarter was
16 percent higher than a year earlier.

Raw Materials Prices Rising
Expanding output in the District was accompanied by substantially higher prices for raw
materials in the first quarter. Price hikes in
excess of 30 percent for steel and lumber roiled
the manufacturing and construction industries.
Strong demand for materials destined for
rebuilding efforts in Iraq and Afghanistan and
rapid economic expansion in China were
among the reasons cited for the surge in prices.
“Surcharges from steel suppliers have
thrown us for a loop, causing us to increase
our prices,” reported a machinery manufacturer in North Carolina, expressing a concern
typical of those coping with escalating raw
materials prices. Suppliers in a few instances
invoked “force majeure” clauses in contracts
because they couldn’t secure the steel needed
to manufacture products.
Lumberyards reported substantially higher
lumber and plywood prices and a host of District businesses experienced rising oil and
natural gas costs.

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

c Developments
Nonfarm Employment

Unemployment Rate

Personal Income

First Quarter 2004

Percent

Fourth Quarter 2003

DC
MD
NC
SC
VA
WV
5th District
US

Employment
(Thousands)
670
2,492
3,807
1,824
3,556
723
13,071
130,367

% Change
(Year Ago)
0.5
0.7
0.1
0.5
1.9
-0.7
0.7
0.2

1st Qtr.
2004
6.5
4.1
5.7
6.4
3.5
5.4
4.9
5.6

DC
MD
NC
SC
VA
WV
5th District
US

1st Qtr.
2003
6.8
4.5
6.4
6.5
4.1
6.3
5.4
5.8

Fifth District

DC
MD
NC
SC
VA
WV
5th District
US

Income
($ billions)
27.6
209.2
241.5
110.2
253.1
44.7
886.3
9,362.3

United States

Nonfarm Employment

Unemployment Rate

Personal Income

Change From Prior Year

First Quarter 1992 - First Quarter 2004

Change From Prior Year

First Quarter 1992 - First Quarter 2004

4%

8%

3%

7%

% Change
(Year Ago)
2.9
4.8
4.1
4.4
5.2
3.4
4.5
4.3

First Quarter 1992 - Fourth Quarter 2003

9%
8%
7%

2%

6%

6%

5%

1%
5%

4%

0

3%

4%

-1%

2%

-2%
1992

1994

1996

1998

2000

2002

2004

3%

1992

1994

1996

1998

2000

2002

FRB—Richmond
Services Revenues Index

FRB—Richmond
Manufacturing Shipments Index

First Quarter 1994 - First Quarter 2004

First Quarter 1994 - First Quarter 2004

2004

1%

1992

1994

1996

1998

2000

2002

2004

Nonfarm Employment
Change From Prior Year
First Quarter 2001 - First Quarter 2004

40

40

3%

30

30

2%

20

20

10

10

0

0

-10

-10

-20

-20

MD
NC

SC
VA

1%
0%

-30

-1%
-2%
-3%

-30
1994

1996

1998

2000

2002

2004

1994

1996

1998

2000

2002

2004

2001

2002

2003

NOTES:

SOURCES:

1) All data series are seasonally adjusted.
2) FRB-Richmond survey indexes are diffusion indexes. Positive numbers represent expansion, negative
numbers contraction.
3) State nonfarm employment estimates are based on surveys of establishments. These employment
figures differ from those used to calculate state unemployment rates.

Income: Bureau of Economic Analysis, U.S. Department of Commerce, http://www.bea.doc.gov
Unemployment rate: LAUS Program, Bureau of Labor Statistics, U.S. Department of Labor,
http://stats.bls.gov
Employment: CES Survey, Bureau of Labor Statistics, U.S. Department of Labor, http://stats.bls.gov

2004

For more information, contact Robert Lacy at 804-697-8703 or e-mail Robert.Lacy@rich.frb.org.

Summer 2004 • Region Focus

45

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

DISTRICT OF COLUMBIA

BY ANDREA HOLLAND

As shown in the chart, the house price affordability
index for the Washington, DC MSA broadly tracked
the national and districtwide indexes from 1996 to
2000. Since the onset of the 2001 recession, however,
the index has inched lower, indicating that housing has
become somewhat less affordable for Washington, DC
MSA residents earning the average salary.
Housing affordability is influenced by a number of
economic fundamentals, such as home price appreciation, interest rates, and personal income growth. The
dip in affordability in the Washington, DC MSA in
recent years is a result of above-average appreciation
in house prices and a sharp decline in personal income,
which combined, outweighed the effect of a favorable
interest rate environment.
Looking first at home price appreciation, annual
growth in the Washington, DC MSA has been roughly
double the national rate each year since 2001. Over the
12-month period ending in March of this year, average
house prices rose 14.3 percent, the fourth fastest
growth rate nationally.
Turning next to personal income, the District of
Columbia recorded the steepest drop in income growth
among Fifth District jurisdictions during the last recession, pushing home ownership out of reach for some
residents. The latest data show that personal income
began to rebound in early 2003, however, positive
growth has yet to increase affordability.
The modest decline in affordability in recent years
hasn’t kept prospective buyers at home. In the first
quarter of 2004, sales of existing housing units hit
16,400, slightly below the fourth-quarter level, but
well above year-ago levels. Adding to the positive
news, new building permit authorizations also rose,
nearly doubling from their fourth-quarter level.

46

Region Focus • Summer 2004

Housing Affordability Index
120
100 = QUALIFYING INCOME = PER-CAPITA INCOME

espite the rapid appreciation of District of
Columbia home prices in the last several years,
the housing stock remains relatively affordable and
home sales continue to soar.

D

110
100
90
80
70

US
5th District
Washington, DC/MD/VA MSA

60
50

90

92

94
96
98
00
02
Shaded Bars Represent Recession

NOTE: MSA=Metropolitan Statistical Area
SOURCE: National Association of Realtors, Bureau of Economic Analysis, and author's calculations

1st Qtr
2004

Nonfarm Employment
Manufacturing, NSA
Professional/Business Services
Government
Civilian Labor Force

Unemployment Rate
Building Permits, NSA
Home Sales

Percent Change
at Annual Rate From
4th Qtr
1st Qtr
2003
2003

669.8
2.5
143.8
230.4
304.6

3.2
-14.7
5.0
-0.7
5.0

0.5
-5.1
2.5
-0.7
0.6

1st Qtr
2004

4th Qtr
2003

1st Qtr
2003

6.5
153
16.4

7.0
87
16.7

6.8
619
14.3

NOTES:
Nonfarm Employment, thousands of jobs, seasonally adjusted (SA); Bureau of Labor Statistics (BLS)/Haver Analytics
Manufacturing, thousands of jobs, not seasonally adjusted (NSA); BLS/Haver Analytics
Professional/Business Services, thousands of jobs, SA; BLS/Haver Analytics
Government, thousands of jobs, SA; BLS/Haver Analytics
Civilian Labor Force, thousands of persons, SA; BLS/Haver Analytics
Unemployment Rate, percent, SA; BLS/Haver Analytics
Building Permits, number of permits, NSA; U.S. Census Bureau/Haver Analytics
Home Sales, thousands of units, SA; National Association of Realtors®

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

U

MARYL AND

BY ANDREA HOLLAND

n the first quarter, Maryland ranked sixth nationwide in terms of the fastest home price appreciation rate over the last 12 months. Even so, home sales
continue to set records in the state, due in part to the
continued affordability of the housing stock.

I

Housing Affordability Index
100 = QUALIFYING INCOME = PER-CAPITA INCOME

130
120

As depicted in the chart, the house price affordability
index for the Baltimore MSA has edged lower since
the onset of the recession in early 2001, indicating that
housing affordability has declined slightly. By comparison, homes nationally and districtwide have become
more affordable.

110
100
90
80
70
50
40

Housing affordability is influenced by a number of
measures of economic activity, such as home price
appreciation, interest rates, and personal income
growth. Despite historically low interest rates —
which decrease the cost of buying a home — sluggish
personal income growth during the last recession and
the sharp spike in home prices have caused housing
affordability in the Baltimore MSA to decline in
recent years.

US
5th District
Baltimore, MD MSA
Washington, DC/MD/VA MSA

60

90

92

94
96
98
00
02
Shaded Bars Represent Recession

NOTE: MSA=Metropolitan Statistical Area
SOURCE: National Association of Realtors, Bureau of Economic Analysis, and author's calculations

1st Qtr
2004

Nonfarm Employment
Manufacturing
Professional/Business Services
Government
Civilian Labor Force

Unemployment Rate
Building Permits, NSA
Home Sales

2,491.7
144.7
361.4
460.3
2,940.9

Percent Change
at Annual Rate From
4th Qtr
1st Qtr
2003
2003

0.8
-0.6
1.4
0.5
4.6

0.7
-4.1
0.2
-0.3
1.4

1st Qtr
2004

4th Qtr
2003

1st Qtr
2003

4.1
5,876
141.9

4.5
6,878
139.3

4.5
5,931
130.7

NOTES:
Nonfarm Employment, thousands of jobs, seasonally adjusted (SA); Bureau of Labor Statistics (BLS)/Haver Analytics
Manufacturing, thousands of jobs, SA; BLS/Haver Analytics
Professional/Business Services, thousands of jobs, SA; BLS/Haver Analytics
Government, thousands of jobs, SA; BLS/Haver Analytics
Civilian Labor Force, thousands of persons, SA; BLS/Haver Analytics
Unemployment Rate, percent, SA; BLS/Haver Analytics
Building Permits, number of permits, not seasonally adjusted (NSA); U.S. Census Bureau/Haver Analytics
Home Sales, thousands of units, SA; National Association of Realtors®

On the price front, annual home appreciation in
Maryland has run at a double-digit pace since 2002. In
the first quarter of 2004, Maryland home prices were
12.9 percent above a year ago.
Turning to personal income, annual growth has been
less than 3 percent each year since 2001— not enough
to offset the run-up in home prices. But recent income
data suggests improvement. In the fourth quarter of
2003, Maryland posted the second fastest personal
income growth rate in the Fifth District — 3.2 percent
compared to the same time last year.
The modest decline in affordability has not squelched
the demand for Maryland homes. Sales of existing
housing units reached 141,900 in the first quarter of
2004, surpassing the level posted in the last quarter of
2003 as well as the year-ago level. First-quarter building permit authorizations were not as positive, however; they registered a modest loss from a year ago.

Summer 2004 • Region Focus

47

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

hN O R T H

CAROLINA

BY ANDREA HOLLAND

Although the level of housing affordability varies
greatly by MSAs across North Carolina, the affordability index has trended higher in all MSAs since the
onset of the recession in early 2001. As shown in the
chart, the Greensboro/Winston-Salem/High Point
MSA boasts the most affordable housing, followed
closely by the Charlotte/Gastonia/Rock Hill MSA.
The Raleigh/Durham MSA is the outlier, with housing
affordability significantly less than the Fifth District
or national average.
Housing affordability is influenced by a number of
economic factors, such as home price appreciation,
mortgage interest rates, and personal income growth.
In North Carolina, affordability has increased since
the last recession due to favorable interest rates and
sluggish house price acceleration, which has offset a
steep decline in personal income growth. The disparity in the Raleigh/Durham MSA stems in part from
the high-tech sector, which spurred the development
of high-end housing stock but also contributed to a
sharp drop in income growth, when that sector stumbled following high growth in the late 1990s.
Housing price appreciation in North Carolina ranked
44th nationally in 2003 — the slowest rate in the Fifth
District. In the first quarter, home prices in the state
were only 3.9 percent above a year ago and 0.8 percent
above the previous quarter. Looking next at personal
income growth, North Carolina was the only state in
the District to post two consecutive quarters of contraction during the 2001 recession. But growth has
firmed of late — personal income expanded 2.5 percent in the fourth quarter, marking the strongest
annual growth rate since early 2001.
Sluggish income growth, however, proved not enough
to decrease the demand for new homes. As shown in
the table, sales of existing housing units rose to
282,000 in the first quarter of 2004, slightly below the
number sold in the last quarter of 2003 but well above
the number recorded a year before. First-quarter
building permit data — often used as a gauge for future
demand — were also bright, surpassing levels recorded
during the first quarter of 2003.

48

Region Focus • Summer 2004

Housing Affordability Index
120
100 = QUALIFYING INCOME = PER-CAPITA INCOME

ompared to other Fifth District states, home
price appreciation in North Carolina has been relatively slow. As a result, housing has become increasingly affordable and the residential real estate market
continues to thrive.

C

US
5th District
Raleigh/Durham, NC MSA

110
100
90
80
70
60

Greensboro/Winston-Salem/High Point, NC MSA
Charlotte/Gastonia/Rock Hill, NC/SC MSA

50
40

90

92

94
96
98
00
02
Shaded Bars Represent Recession

NOTE: MSA=Metropolitan Statistical Area
SOURCE: National Association of Realtors, Bureau of Economic Analysis, and author's calculations

1st Qtr
2004

Nonfarm Employment
Manufacturing
Professional/Business Services
Government
Civilian Labor Force

Unemployment Rate
Building Permits, NSA
Home Sales

3,807.0
587.1
423.8
649.4
4,198.2

Percent Change
at Annual Rate From
4th Qtr
1st Qtr
2003
2003

0.0
-1.8
-0.7
-2.4
-5.4

0.1
-5.2
1.4
1.8
0.3

1st Qtr
2004

4th Qtr
2003

1st Qtr
2003

5.7
22,329
282.0

6.3
19,448
299.1

6.4
17,122
255.2

NOTES:
Nonfarm Employment, thousands of jobs, seasonally adjusted (SA); Bureau of Labor Statistics (BLS)/Haver Analytics
Manufacturing, thousands of jobs, SA; BLS/Haver Analytics
Professional/Business Services, thousands of jobs, SA; BLS/Haver Analytics
Government, thousands of jobs, SA; BLS/Haver Analytics
Civilian Labor Force, thousands of persons, SA; BLS/Haver Analytics
Unemployment Rate, percent, SA; BLS/Haver Analytics
Building Permits, number of permits, not seasonally adjusted (NSA); U.S. Census Bureau/Haver Analytics
Home Sales, thousands of units, SA; National Association of Realtors®

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

SOUTH CAROLINA

o

BY ANDREA HOLLAND

odest home price appreciation in South
Carolina in recent years has promoted affordable housing for the average resident and led to higher
home sales in the state.

M

Housing Affordability Index
100 = QUALIFYING INCOME = PER-CAPITA INCOME

130

US
5th District

120

With the exception of the Charleston MSA, housing is
more affordable in South Carolina MSAs than in the
Fifth District or nation. As shown in the chart, the
Columbia MSA lays claim to the most affordable
housing in the state, followed closely by the Greenville/
Spartanburg MSA. Also depicted in the chart, housing
has become increasingly affordable in South Carolina
since the onset of the recession in early 2001.

110
100
90
80
70

Charleston, SC MSA
Columbia, SC MSA
Greenville/Spartanburg, SC MSA

60
50
40

90

92

Housing affordability is influenced by a number of economic fundamentals, including home price appreciation,
interest rates, and personal income growth. In South
Carolina, declines in interest rates coupled with modest
increases in house prices since the 2001 recession has
countered a sharp decline in personal income growth
and resulted in an increase in housing affordability.

94
96
98
00
02
Shaded Bars Represent Recession

NOTE: MSA=Metropolitan Statistical Area
SOURCE: National Association of Realtors, Bureau of Economic Analysis, and author's calculations

1st Qtr
2004

Nonfarm Employment
1,823.7
Manufacturing, NSA
270.1
Professional/Business Services, NSA
184.1
Government
331.0
Civilian Labor Force
2,042.9

Unemployment Rate
Building Permits, NSA
Home Sales

Percent Change
at Annual Rate From
4th Qtr
1st Qtr
2003
2003

2.3
-5.5
-8.4
-1.2
5.5

0.5
-4.0
0.4
1.2
3.0

1st Qtr
2004

4th Qtr
2003

1st Qtr
2003

6.4
9,474
152.3

6.9
8,212
152.9

6.5
8,439
130.6

NOTES:
Nonfarm Employment, thousands of jobs, seasonally adjusted (SA); Bureau of Labor Statistics (BLS)/Haver Analytics
Manufacturing, thousands of jobs, not seasonally adjusted (NSA); BLS/Haver Analytics
Professional/Business Services, thousands of jobs, NSA; BLS/Haver Analytics
Government, thousands of jobs, SA; BLS/Haver Analytics
Civilian Labor Force, thousands of persons, SA; BLS/Haver Analytics
Unemployment Rate, percent, SA; BLS/Haver Analytics
Building Permits, number of permits, NSA; U.S. Census Bureau/Haver Analytics
Home Sales, thousands of units, SA; National Association of Realtors®

The pace of house price appreciation in South
Carolina has been measured — ranking only 37th
nationally in 2003. In this year’s first quarter, home
prices in South Carolina were 4.0 percent higher from
a year ago and 0.8 percent above the level recorded at
year-end 2003.
Switching gears, income growth has finally begun to
recover from the loss of high-paying factory jobs during the last recession. In the fourth quarter, personal
income grew 2.8 percent over the year, the best performance since late 2000.
With lower interest rates offsetting sluggish income
growth in recent years, home sales in South Carolina
have generally been strong. Sales of existing housing
units hit 152,300 in the first quarter of 2004, slightly
below the number sold in the last quarter of 2003 but
well above the number recorded at the same time last
year. Suggesting strong activity going forward, firstquarter building permits were also positive, exceeding
the number of authorizations recorded in the first
quarter of 2003.

Summer 2004 • Region Focus

49

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

uVIRGINIA
BY ANDREA HOLLAND

As depicted in the chart, housing in the Richmond/
Petersburg MSA and Norfolk/Virginia Beach/Newport
News MSA is significantly more affordable than average
housing in the nation, the Fifth District, and the nearby
Washington, DC MSA. Tracking the national and districtwide trend, both affordability indexes have been
steadily rising since early 2000, indicating that housing
has become increasingly affordable for the average resident since the beginning of the last recession.
Housing affordability is influenced by a number of economic factors, such as home price appreciation, interest
rates, and personal income growth. Since the recession
began in 2001, home prices have risen markedly across
most Virginia MSAs, but low interest rates tended to
contain the cost of buying a home and personal income
declined modestly compared to other Fifth District
states. As a result, affordability has increased, enabling
more residents to become homebuyers.
As noted above, homes prices have accelerated rapidly
in Virginia. First-quarter home prices were 10.1 percent higher than the level recorded a year ago and 1.7
percent above the price in the fourth quarter of 2003.
Recent income growth has also advanced at a healthy
clip, however, making up for some of the rise in prices.
In the fourth quarter of 2003, Virginia posted the
fastest personal income growth rate in the Fifth
District — 3.6 percent compared to 12 months earlier.
Increased affordability has led to solid growth in
Virginia’s residential real estate market. Sales of existing housing units reached 173,900 in the first quarter
of 2004, slightly under the level posted in the last
quarter of 2003, but well above the level recorded at
the same time last year. First-quarter building permit
authorization data were also bright, with growth
jumping 12.4 percent from the same time last year.

50

Region Focus • Summer 2004

Housing Affordability Index
140
100 = QUALIFYING INCOME = PER-CAPITA INCOME

ver the last 12 months, home prices in Virginia have
risen at the 11th fastest rate nationwide. Still, home
sales continue to set records, largely because the Old
Dominion boasts some of the most affordable housing
in the Fifth District.

O

US
5th District

120
100
80
Washington, DC/MD/VA MSA
Richmond/Petersburg, VA MSA
Norfolk/Virginia Beach/
Newport News, VA MSA

60
40

90

92

94
96
98
00
02
Shaded Bars Represent Recession

NOTE: MSA=Metropolitan Statistical Area
SOURCE: National Association of Realtors, Bureau of Economic Analysis, and author's calculations

1st Qtr
2004

Nonfarm Employment
Manufacturing
Professional/Business Services
Government
Civilian Labor Force

Unemployment Rate
Building Permits, NSA
Home Sales

Percent Change
at Annual Rate From
4th Qtr
1st Qtr
2003
2003

3,556.2
295.7
568.1
644.1
3,833.7

4.5
-1.7
9.5
1.5
5.2

1.9
-5.8
4.4
1.4
2.0

1st Qtr
2004

4th Qtr
2003

1st Qtr
2003

3.5
14,931
173.9

3.9
14,069
185.7

4.1
13,278
165.4

NOTES:
Nonfarm Employment, thousands of jobs, seasonally adjusted (SA); Bureau of Labor Statistics (BLS)/Haver Analytics
Manufacturing, thousands of jobs, SA; BLS/Haver Analytics
Professional/Business Services, thousands of jobs, SA; BLS/Haver Analytics
Government, thousands of jobs, SA; BLS/Haver Analytics
Civilian Labor Force, thousands of persons, SA; BLS/Haver Analytics
Unemployment Rate, percent, SA; BLS/Haver Analytics
Building Permits, number of permits, NSA; U.S. Census Bureau/Haver Analytics
Home Sales, thousands of units, SA; National Association of Realtors®

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

WEST VIRGINIA

w

BY ANDREA HOLLAND

luggish population growth in West Virginia has
kept housing demand from overheating in recent
years and led to a more modest acceleration in home
prices than recorded nationally. With prices largely in
check, the state’s housing remains relatively affordable
and home sales have advanced at a balanced pace.

S

Housing Affordability Index
100 = QUALIFYING INCOME = PER-CAPITA INCOME

130
120
110

As shown in the chart, the Charleston MSA affordability index has trended higher since the beginning of
the 2001 recession, suggesting that homeownership
has become more feasible for the average resident.
Housing is more affordable in the Charleston MSA,
on average, than in the Fifth District or the nation.

100
90
80
US
5th District
Washington, DC/MD/VA MSA
Charleston, WV

70
60
50

90

92

Housing affordability is influenced by a number of
measures of economic activity, including home price
appreciation, mortgage interest rates, and personal
income growth. In West Virginia, modest increases in
house prices and lower interest rates offset a steep
decline in personal income growth during the 2001
recession. The combination of these measures
boosted affordability and increased homeownership.

94
96
98
00
02
Shaded Bars Represent Recession

NOTE: MSA=Metropolitan Statistical Area
SOURCE: National Association of Realtors, Bureau of Economic Analysis, and author's calculations

1st Qtr
2004

Nonfarm Employment
Manufacturing
Professional/Business Services
Government
Civilian Labor Force

Unemployment Rate
Building Permits, NSA
Home Sales

Percent Change
at Annual Rate From
4th Qtr
1st Qtr
2003
2003

722.9
64.4
56.8
142.0
796.7

0.4
3.0
3.6
3.5
8.7

-0.7
-1.8
-0.1
-0.5
0.6

1st Qtr
2004

4th Qtr
2003

1st Qtr
2003

5.4
1,255
31.8

5.7
1,126
34.4

6.3
860
28.0

NOTES:
Nonfarm Employment, thousands of jobs, seasonally adjusted (SA); Bureau of Labor Statistics (BLS)/Haver Analytics
Manufacturing, thousands of jobs, SA; BLS/Haver Analytics
Professional/Business Services, thousands of jobs, SA; BLS/Haver Analytics
Government, thousands of jobs, SA; BLS/Haver Analytics
Civilian Labor Force, thousands of persons, SA; BLS/Haver Analytics
Unemployment Rate, percent, SA; BLS/Haver Analytics
Building Permits, number of permits, not seasonally adjusted (NSA); U.S. Census Bureau/Haver Analytics
Home Sales, thousands of units, SA; National Association of Realtors®

Looking first at home price growth, price appreciation
in West Virginia over the last 12 months ranked 31st
nationally. In the first quarter of this year, home prices
were 4.8 percent above a year ago and 0.6 percent
above the level recorded in the last quarter of 2003.
Turning to personal income, the state is only recently
beginning to recover from the loss of high-paying
goods-producing jobs during the 2001 recession. West
Virginia posted the second weakest growth rate districtwide in the fourth quarter; personal income
advanced only 1.9 percent over the year.
Despite sluggish income growth, existing home sales
hit 31,800 in early 2004, slightly below the number
sold in the fourth quarter of 2003, but well above the
level recorded at the same time last year. Adding to the
good news, first-quarter building permit data forged
ahead — authorizations were nearly double the number recorded in the first quarter of 2003.

For more information regarding state summaries, call 804-697-8273 or
e-mail Andrea.Holland@rich.frb.org.

Summer 2004 • Region Focus

51

Region Focus Summer 04.ps - 7/12/2004 3:52 PM

OPINION
Hey, A Little Service Here?
BY C H A R L E S G E R E N A

A

The field of customer relationship management or CRM
ggravated with late repair people, rude cashiers, and
arose to deal with this gap in market intelligence, but the
unhelpful help-desk operators? Economists would
industry’s software and systems haven’t always lived up to
argue that the market is emphasizing what consumers
their promise. Many firms still don’t respond to complaints
value the most these days: low prices and convenience instead
or detect service problems in a timely manner. Scott Broetof courteous, attentive service. Yet, there seems to be an
zmann, a customer service consultant based in Alexandria,
unmet demand for the latter. What’s going on?
Va., places part of the blame on well-intentioned companies
Retailers like Wal-Mart and Home Depot have made bilthat execute their CRM efforts poorly.
lions of dollars offering inexpensive goods and a broad selecIn addition, employees may not receive sufficient traintion under one roof, even though one can wander around
ing in addressing customer needs or relaying problems to key
these massive stores and never find someone to answer a
decisionmakers. Even with training, they may lack the motiquestion. Web sites offer a variety of goods and services along
vation to care about customers because they work at a lowwith information about each option, but they don’t neceswage, high-turnover business like a convenience store.
sarily provide guidance on navigating the whole mess or a
Broetzmann thinks companies aren’t
means to follow up.
doing enough to find out what’s hapIn fact, some e-commerce firms like
pening on the frontlines. “Many
Amazon.com are notorious for being
“Some firms have been
organizations base their judgments of
difficult to contact by telephone with
able to carve out niches
what constitutes good customer care on
a problem or a complex question that
intuition as opposed to research and
isn’t covered in their Web site’s FAQ.
for themselves by making
facts,” he explains. “It’s hard to build the
Even when virtual companies and their
right plan, let alone execute it, when you
bricks-and-mortar counterparts have a
customer satisfaction
are guessing about what people want
customer service line, people get angry
a top priority.”
and what’s most important.”
when they have to navigate an autoClaes Fornell, director of the
mated response system instead of
National Quality Research Center,
talking to a human being.
acknowledges that automation can create a communications
In general, economic forces have driven companies to
gap between companies and their customers. But he believes
reduce labor costs and improve efficiency using technology.
that the effect is only temporary in many cases.
In addition, firms have given their customers more to do for
Regardless, there are opportunities for entrepreneurs
themselves, partly because they like the increased autonomy.
willing to listen and be responsive to consumers. Some firms
The trend probably started with self-service gas stations and
have been able to carve out niches for themselves by making
ATM machines. Now, travelers use the Internet to make
customer satisfaction a top priority. Ukrop’s Super Markets,
their own arrangements, while shoppers scan and bag their
a 28-store chain based in Richmond, Va., has built a reputaown groceries at special express checkouts.
tion for service and quality that enables it to hold its own
For manufacturers, the substitution of automation for
against lower-priced competitors. Community banks have
employees has been largely invisible to customers. For service
opened throughout the Fifth District to serve homebuyers
providers, however, automation has resulted in fewer workers
and local businesses that feel underserved after mega-mergers.
with less time to provide the amount of individual attention
Some companies have become nationwide successes by stressthat consumers want. This leaves many people unsatisfied.
ing customer service, including hotelier Marriott InternaSo what? According to the National Quality Research
tional headquartered in Washington, D.C.
Center at the University of Michigan, customers who are
The trade-off with “customer-intensive” companies,
satisfied with a company’s product or service are more likely
however, is that they often face greater labor costs and lack
to be repeat buyers and are less sensitive to price increases.
the economies of scale that benefit high-volume businesses.
Dissatisfied customers are more reluctant to buy again until
That usually translates into higher prices.
the company reduces prices. No surprises there.
But some consumers may feel they have traded away too
But the problem seems to be a communications gap
much customer service for other things, so they’ll be willing to
between companies and their customers. Research suggests
cough up more. In general, we need to make our preferences
that as the distance between certain producers and users
known to sellers in the marketplace, not just recount horror stoincreases, there are fewer face-to-face interactions when
ries through message boards and talk at the water cooler. RF
information on markets can be exchanged.
52

Region Focus • Summer 2004

Summer 04 Covers1-4.ps - 7/19/2004 3:57 PM

NEXTISSUE
The Creative Class
Economist Richard Florida argues that to prosper cities need to
attract members of “the creative class.” These people, Florida
says, “do a wide variety of work in a wide variety of industries
— from technology to entertainment, journalism to finance,
high-end manufacturing to the arts. They do not consciously
think of themselves as a class. Yet they share a common ethos
that values creativity, individuality, difference, and merit.” A
number of cities have picked up on this concept, including
several in the Fifth District. Is Florida onto something? Just
what should cities do to thrive in the 21st century?

Living Wage Laws
Across the country, roughly 90 communities have passed
“living wage” laws. The measures typically require companies
that do business with city or county governments to pay their
workers more than the federal minimum wage of $5.15 an
hour. The exact amount varies from place to place. The basic
idea is that the wage should be sufficient to support a family
of four at a level above the federal poverty line. How have
living wage laws affected employers — and the working-class
families they were designed to help?

Economic History
The sometimes painful story of unionization
and labor unrest in West Virginia’s coal
industry.
Jargon Alert
Whoever coined the phrase “time is money”
knew something about opportunity cost.
Find out why.
Research Spotlight
A growing field called “behavioral
economics” has challenged some of
the premises of mainstream economic
theory. But how far can behavioral
economists take their critique?

The Economics of Obesity
According to some estimates, roughly 60 million American
adults are obese — and that number appears to be on the
rise. The problem is particularly acute among certain minority
groups, especially blacks and Hispanics. Economists have
offered a number of theories of why so many Americans are
overweight — and have cautioned about the potential costs
that obesity may impose on society. We’ll review what
economists have been saying, and see if there is a reasonable
solution to America’s obesity problem.

A Conversation with Al Broaddus and
Tom Humphrey
Economists Al Broaddus and Tom Humphrey joined the
Richmond Fed’s research department within one week of each
other in 1970 — and they will leave together also. Broaddus,
who rose through the ranks to become the Bank’s director of
research and then its president, will retire on August 1, while
Humphrey, an expert in the history of economic thought who
has edited the Bank’s Economic Quarterly for many years, will
depart at the end of the year. They will discuss the changes
they have seen over the last 34 years and consider what the
future may hold for them as well as the Bank.

The Fall 2004 REGIONFOCUS will
be published in October.
Articles will also be available
online at www.rich.frb.org/
pubs/regionfocus.
To receive an e-mail notice
when each new issue of
REGIONFOCUS can be viewed
online, please contact
rich.regionfocus@rich.frb.org.

Summer 04 Covers1-4.ps - 7/19/2004 3:57 PM

Sustaining Price Stability
A

fter decades of trying, the Federal Reserve has finally achieved price stability.
The question now is how best to sustain it.

In the Federal Reserve Bank of Richmond’s 2003 Annual Report feature article,
“Sustaining Price Stability,” the Bank president and a senior policy advisor make
recommendations based on an analytical framework for understanding inflation
and deflation. They contend that open and effective
communication is critical to a central bank’s credibility
and thus its ability to maintain the price level. And,
as one recommendation for meeting these challenges,
they suggest that the Federal Reserve, in particular,
commit to holding inflation within a target range
of 1 percent to 2 percent and communicate this
policy stance to the public.
The Annual Report also includes a message from
the president and first vice president, in which
they discuss the national and Fifth District
economies, and an overview of the Bank’s 2003
financial activity.
The Bank’s 2003 Annual Report is available
free of charge by contacting:
Public Affairs
Federal Reserve Bank of Richmond
P.O. Box 27622
Richmond, VA 23261
Phone: 804-697-8109
Email: Research.Publications@rich.frb.org
Or by accessing the Bank’s Web site at
www.rich.frb.org/pubs/ar/2003

Federal Reserve Bank
of Richmond
P.O. Box 27622
Richmond, VA 23261

PRST STD
U.S. POSTAGE PAID
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