Full text of Econ Focus (Federal Reserve Bank of Richmond) : Winter 2009, Volume 13, Number 1

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WINTER 2009

THE

FEDERAL

RESERVE

BANK

OF

RICHMOND

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VOLUME 13
NUMBER 1
WINTER 2009

COVER STORY
14

Know When to Fold ’Em: How the corporate bankruptcy
system benefits and hinders the economy
It’s important to distinguish between firms that are merely distressed
and those that are no longer viable. Does the current corporate
bankruptcy system provide the most efficient means to this end?

FEATURES
18

The Language of Local: Community papers survive
by sweating the small stuff
While many big metro dailies are floundering, community newspapers
seem to be weathering the storm.
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

Science Panel May Study Virginia Uranium Plan

John A. Weinberg

Uranium found in Virginia’s rural Pittsylvania County opens up a new
front in the national debate over the future of nuclear energy.
24

EDITOR

Aaron Steelman
SENIOR EDITOR

Stephen Slivinski

Ballpark Boom: New minor league stadiums spring up
across the region

MANAGING EDITOR

Kathy Constant
STA F F W R I T E R S

Since 2005, four minor league baseball parks have been built in the
Fifth District. Are they really engines of economic growth?
28

Renee Courtois
Betty Joyce Nash
David van den Berg
E D I TO R I A L A S S O C I AT E

Learning Curves: The economics behind high school
economic education

Julia Ralston Forneris

Standards for how Fifth District students learn about supply and
demand have been established. But a debate remains about the
effectiveness of economic education and personal finance programs.

Sonya Ravindranath Waddell

R E G I O N A L A N A LY S T

33

CONTRIBUTORS

Matthew Conner
Robert Greene
Sarah Watt
DESIGN

Housing Cools State-to-State Migration: But Carolinas
remain a magnet

Beatley Gravitt Communications
C I RC U L AT I O N

People aren’t moving as much these days. But that hasn’t stopped
the Carolinas from ranking among the fastest-growing states in the
United States last year.
36

The Banking Landscape in the Fifth District
A look at the size and scope of the region’s depository institutions.

DEPARTMENTS

1 President’s Message/Time to Rethink “Too Big To Fail”
2 Upfront/Economic News Across the Region
6 Federal Reserve/Last Stop Lending
10 Jargon Alert/National Debt
11 Research Spotlight/Does Democracy Lead to Economic Growth?
12 Policy Update/States Receive Funding from Stimulus Bill
13 Around the Fed/How Consumers Use Plastic — and Why
38 Interview/George Selgin
43 Economic History/West Virginia Glass Houses
47 Book Review/When Altruism Isn’t Enough
48 District Digest/Economic Trends Across the Region
56 Opinion/No Time for Protectionist Impulses

Alice Broaddus
Shannell McCall
Published quarterly by
the Federal Reserve Bank
of Richmond
P.O. Box 27622
Richmond, VA 23261
www.richmondfed.org
Subscriptions and additional
copies: Available free of
charge through our Web site at
www.richmondfed.org/publications
or by calling Research
Publications at (800) 322-0565.
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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PRESIDENT’SMESSAGE
Time to Rethink “Too Big To Fail”
he cover story of this
issue of Region Focus
discusses the U.S. corporate bankruptcy system. The
article points out some of the
strengths and weaknesses of
that system, from the standpoint of economic efficiency.
The system is not perfect.
For instance, firms that are no
longer economically viable may
be able to find sympathetic
judges who postpone liquidation beyond a period that would be optimal for the
economy as a whole. It would be better, in some of those
cases, to expedite the liquidation, freeing up valuable
resources that could be more effectively used elsewhere.
But, in the main, the corporate bankruptcy system,
which has evolved over many decades, works relatively
well. It provides an opportunity for fundamentally sound
companies that are experiencing temporary difficulties to
reorganize and get back on their feet. And it includes
measures that guide the orderly closing of firms which
cannot effectively compete in their respective markets.
An example of such a firm, which the article discusses in
some detail, is the electronics retailer Circuit City, based
here in Richmond. It operated in an extremely competitive
environment in which consumers are highly discriminating.
Ultimately, enough of those consumers opted to shop with
Circuit City’s competitors that the firm could not survive.
For many of the former employees of Circuit City, this is no
doubt painful. The change that results from competition is
not always pleasant, but it is essential to the functioning of
a healthy market economy.
For most sectors of the economy, policymakers recognize
that there should and will be frequent change, including the
failure of some firms. And the corporate bankruptcy system
helps to facilitate those closures in a way that is generally
beneficial to the economy.
There are, however, a few exceptions: sectors that many
policymakers believe include firms which simply cannot be
allowed to fail. The most obvious example is the financial
sector. Financial institutions are, of course, crucial to a market system. They provide the liquidity needed by businesses
across the economy. But because of their unique function in
the economy, should they be protected from failure?
That is a difficult question. It is possible that the failure
of a particularly large firm could cause great harm to the
economy. But first we should ask why so many big financial
institutions came under enormous stress over the past year.

T

There are several reasons, to be sure, but a significant factor
was that many of them believed they were “too big to fail” —
that is, they were willing to take excessive risks because they
were confident they enjoyed either explicit or implicit public support. And, of course, such support has been
forthcoming in numerous cases.
As a result, some people have called for the creation of a
systemic risk regulator to oversee all financial institutions.
Ultimately, such a regulator could prove useful, though I am
generally skeptical of the idea. One thing seems clear,
however. Redesigning our financial regulatory system
before establishing clear boundaries around the federal
financial safety net — boundaries that I believe should be
much tighter than at present — would be like putting the
cart before the horse.
The financial crisis should lead us to think hard about the
incentives that financial institutions face — and what we
can do to reform them to bring greater stability to the
system, while at the same time not discouraging innovation.
At the top of the list is rethinking whether “too big to fail”
protections move us toward that goal or away from it.

JEFFREY M. LACKER
PRESIDENT
FEDERAL RESERVE BANK OF RICHMOND

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UPFRONT

Economic News Across the Region
Silver Screen

Cinemas Prosper During Recession
Bow Tie Cinemas opened a 17-screen movie theater in Richmond, Va., in
February. The multiplex, named Movieland at Boulevard Square, is the largest
the company has ever opened.

PHOTOGRAPHY: COURTESY OF BOW TIE CINEMAS

From blockbusters
to classic films to
screenings of
cult movies ...
you’ll see them
all at Movieland.

2

While declining to provide specific ticket sales numbers, Bow Tie Chief Operating Officer
Joe Masher said the Richmond multiplex had a “phenomenal” opening weekend. In part, that’s
because people seem to like going to the movies during
recessions. For many, it’s seen as a relatively cheap form of
entertainment.
According to Patrick Corcoran, the director of media
and research for the National Association of Theater
Owners, from Jan. 1 through March 2, 2009, national box
office receipts were 13.1 percent higher than the same
period in 2007, when the economy was still growing.
And from the third week of September 2008, when the
stock market became volatile and the credit crisis a
national discussion, through the second week of
December 2008, receipts rose 15 percent over the same
period in 2007.
Business is up at Regal Cinemas, according to Chad
Browning, marketing manager with Regal Entertainment
Group, based in Knoxville, Tenn. The chain owns 30 theaters in Virginia, 24 in North Carolina,
16 in South Carolina, and 15 in Maryland. “I think people just kind of want to escape from the
sluggish economy,” he said.
Movies are also making more money this year. Many moviegoers have found respite through
stories of a dim-witted mall security guard and of a father trying to rescue his kidnapped
daughter. “Paul Blart: Mall Cop” and “Taken,” released in 2009, have each grossed more than
$100 million. “Gran Torino,” a drama starring Clint Eastwood, released in late 2008, has made
more than $100 million in 2009 alone, Corcoran said. From January through May of 2008, only
one film grossed more than $100 million.
In choosing where to open theaters, Bow Tie looks for communities with active arts,
medical, and educational communities. “Richmond was a perfect storm for all three,” Masher
said. Bow Tie’s Richmond multiplex is the company’s third in the Fifth District, joining two in
Annapolis, Md.
Bow Tie isn’t the only company bringing a new theater to Richmond in 2009. Regal opened
the Westchester Commons Stadium 16 in suburban Midlothian this spring. That multiplex
comes online just before studios start releasing their summer blockbuster films, including
“Harry Potter and the Half Blood Prince,” among others. “We’re hoping for big grosses out of
those films,” Browning said.
While box office numbers are on the rise in 2009, DVD sales have fallen off, Corcoran said.
Those revenues had started to plateau before the economic slump. People have “very full
libraries” of DVDs and are no longer looking to add to them.

R e g i o n F o c u s • Wi n t e r 2 0 0 9

— DAV I D VA N D E N B E RG

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Smoking Bans

Smoke-Free Mandates Come to Tobacco Country
Starting December 1, Virginia will ban smoking in both bars and restaurants.
The only exceptions to Virginia’s ban will be private clubs as well as restaurants and bars that have separately
ventilated smoking rooms. Outdoor smoking on patios will be allowed. And employers won’t be allowed to
require their staff to work in smoking areas.
Lately, smoking bans have tended to come with no exemptions, says Michael Pakko, an economist with the
Federal Reserve Bank of St. Louis. The exemptions should help reduce the losses that Virginia businesses will
experience from the ban, he says.
At press time, the North Carolina Legislature was also debating a smoking ban. The House has passed a bill
that bans smoking in restaurants, but allows it in private clubs and businesses that ban minors. A House committee had passed a more comprehensive smoking ban that prohibited smoking in restaurants, bars, and most
public places, according to the Asheville Citizen-Times.
Virginia and North Carolina, where tobacco is a major part of the history and economy of each state, would
join Maryland and the District of Columbia in banning smoking in bars and restaurants around the Fifth District.
West Virginia and South Carolina do not have statewide bans, although certain cities and counties in South
Carolina ban smoking. The cities of Charleston, Columbia, and Greenville have bans.
Critics of smoking bans suggest that restaurants and bars already have an incentive to cater to consumer
demand — including demand for smoke-free establishments.
Also, smoking bans could have some unintended consequences. Economists Chad Cotti of the University of
Wisconsin-Oshkosh and Scott Adams of the University of Wisconsin-Milwaukee found a higher number of
fatal traffic accidents involving alcohol in locations where smoking is banned in bars compared to locations
where smoking in bars is allowed. That’s because the bans provide an incentive for smokers to drive longer distances to — and from — where they can smoke in bars. In a different paper, they also found smoking bans
reduce employment by a statistically significant amount at bars, but have a neutral effect on restaurant
employment, on average. States with a larger number of smokers see more negative effects, but as the number
of smokers continues to drop, these effects will too, Cotti says.
Tax and price increases have played a major role already in reducing the number of smokers. Economists
traditionally view tax policy as a way to curb smoking or recover costs from externalities that smoking causes.
While there is disagreement about the magnitude of smoking’s health care costs, “that there are costs I think is
pretty clear,” says Frank Chaloupka, a University of Illinois-Chicago economist. While taxation is a “blunt instrument,” he says, tax increases can have a significant impact on the smoking habits of young people, who tend to
be more responsive to price increases than older smokers.
— DAV I D VA N D E N B E RG

Lights Out

Incentive and Retention Pay OK’d for Circuit City Employees
hese days the subject of bonuses to executives of troubled
firms incites strong reactions. But are there circumstances
in which they are justified?
Maybe so, according to Circuit City. The 60-year-old
electronics retailer based in Richmond, Va., filed for Chapter 11
bankruptcy in November 2008 and announced its liquidation in
January 2009. Many were surprised when the company
appealed to bankruptcy courts in February 2009 for more than
$4 million to provide additional pay to executives and staff

T

overseeing the liquidation process.
These funds are not bonuses, however, argues Bill Cimino,
Circuit City’s head of corporate communications. He says the
funds are being provided to incentivize executives and retain
critical nonexecutives throughout the liquidation process.
“They are primarily being used to maximize the value of the
‘estate’ for Circuit City’s unsecured creditors,” Cimino says.
Unsecured creditors of a liquidating company can be
the biggest losers from bankruptcy, since they are the last of the

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Page 4

PHOTOGRAPHY: DAVID VAN DEN BERG

Empty parking lots are
a common sight at the
567 Circuit City retail
locations that closed in
the first quarter of
2009 after the company
announced its
liquidation in January.

4

creditors to get paid
from the remaining
value of the company. The relationship between the
payout to unsecured
creditors and the
orderliness of the liquidation process is
clear: The more efficient the liquidation,
the greater the
remaining value of the estate. That means the
unsecured creditors are able to recoup more of
what they are owed by the company.
The Circuit City plan works like this: A
group of 14 top executives and officers will
receive roughly $2 million through the plan.
The pay will be awarded gradually, as executives meet a set of 20 goals relating to the
liquidation. The amount they receive will vary
according to how successfully the tasks or
goals are completed. As a result, the final
amount ultimately paid out may be less than
the $4 million approved for the overall retention and incentive plan.
Circuit City estimated that each of the 20
targets would increase the total value of the
estate by $250 million if completed at the maximum success level, while the corresponding
cost in executive pay would be less than 1 percent of that amount. “The amount of revenue
they bring in determines how much is paid out
to them,” Cimino says.
The company knew it would be a “hot
button” issue to allocate incentive pay to its
top executives when 34,000 other staff would
lose their jobs as a result of the liquidation. As
a result, it agreed to take chief executive
officer James Marcum out of the incentive
package.
The company also views stopping the drain
of essential nonexecutive employees as critical
to maximizing the revenue from liquidation. A
group of 137 employees at director-level and
below will receive up to $1.62 million in retention pay if they stay with the firm through
specified dates. This is in addition to a “discretionary” pool of up to $750,000 to be
distributed to any of 250 employees (top-level
executives excluded) to stem any sudden

R e g i o n F o c u s • Wi n t e r 2 0 0 9

turnover or to hire anyone with needed skill
sets. It would also finance more mundane tasks
that are essential to winding down the company’s operations.
“People don’t realize what has to happen
behind the scenes to make a liquidation happen,” says Scott Carpenter of Great American
Group, one of four companies collaborating in
Circuit City’s liquidation. “Despite the liquidation, you have to keep systems going,
lights on, and heat and water flowing, in addition to more obvious needs like payroll,” he
says. “Those people who stay on are a critical
function.”
After some negotiation, the retention and
incentive plan was approved by the company’s
unsecured creditors. Since they get only what’s
left of the estate after secured and preferential
creditors have exhausted their claims, they
have strong incentive to contest any expenses
that may not be offset by increasing the value
of the estate. “Ultimately,” Cimino says, “this
money belongs to the creditors. They believe
the retention and incentive plan is a good
investment to keep people motivated, and to
achieve the liquidation goals and thus maximize the value to them when the estate is
finally settled.”
Critics of the plan have argued that the
dour job market is incentive enough for someone to stay with the company, but Carpenter
disagrees. “In this economy it may be hard to
get a new job, but the most competent people
typically won’t have any problem,” he says.
Talented employees who know the business are
precisely the ones needed most to stay on to
meet the goals of Circuit City’s liquidation
process, according to Carpenter.
Although Circuit City’s nationwide retail
locations closed several weeks ahead of schedule in March, it could take the company’s
corporate operations up to 18 months to completely close its doors. Cimino and Carpenter
say the court-approved retention and incentive
plans had nothing to do with retail stores closing early; it was purely a result of demand for
inventory during the company’s close-out
sales. The success of the remainder of the
wind-down process, however, will depend
on remaining staff and executives.
— R E N E E CO U RTO I S

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eBang

University Auctions a Demolition Trigger
n implosion took down the 11-story Union Carbide headquarters building near the
University of Charleston in South Charleston, W.Va., in March, with alumnus Chris
Belcher paying $5,207 for the privilege of activating the demolition on eBay. But Belcher
didn’t stop there. He donated the privilege to the university’s baseball program where
he and his brother played in the 1980s on scholarships. In turn, the team raffled off the
right to “push the button” at $10 per ticket, generating about $5,000 in sales.
“I’ve been contacting my clients and vendors — it’s been a full-time job on top of
my full-time job,” Belcher said. He is president and owner of Cincinnati, Ohio-based Pinnacle Environmental.
The general fund will receive the original amount Belcher paid on eBay, but the raffle money will go to the baseball program. “Without those scholarships, neither one of us could have afforded to go there,” Belcher said. “When
I saw what it [the auction] was going to close for, I said, ‘I know we can raise more money than this.’”
Dow Chemical, which bought Union Carbide in 2001, donated the 1948 structure to the university in 2006, but
the university would like to sell the 6.5-acre site. The university had planned to house classrooms, faculty offices,
and living quarters for pharmacy students in the building, but the cost of compliance with the Americans with
Disabilities Act, estimated to be as much as $10 million, was deemed too high.
The building formerly served as regional headquarters for Union Carbide and was considered a symbol of West
Virginia’s chemical industry. The land is priced at $3.5 million. The land is flat and easily accessible to the interstate, an attractive combination in the Mountain State. Two firms handled the $1.6 million demolition project.

A

— B E T T Y J OYC E N A S H

Smart Grid

The University of
Charleston
auctioned the privilege of setting off
the implosion that
demolished a
building which Dow
Chemical donated to
the school in 2006.
The $5,207 will go
to the university’s
annual fund.
The lot
will be sold.

uke Energy plans to test an energy efficiency program on 100 of its Charlotte, N.C., customers by
early summer. It integrates electronic devices such as
digital meters and thermostats that can provide details
about electricity consumption. Automatic switching for
various appliances, heating, and air systems can save
energy and money as well as smooth electricity demand.
The goal is to reduce consumption without affecting
convenience or productivity.
The final program has yet to be determined, but
components are likely to include heating, ventilation,
and air-conditioning switches that could be programmed to operate for shorter periods of time. “If you
aggregate that across millions of customers, that’s a
huge amount of energy saved,” says spokesman Dave
Scanzoni. “Long term, where the industry is headed is
time-of-day rates, [where you’re] charged less if you use
electricity off-peak.”
Participants will receive $100 at the start of the pilot
and another $100 if they finish the program. That’s in
exchange for allowing the smart technology to be
installed, completing surveys, and offering feedback for
Duke Energy.
The plan was approved in March by the North
Carolina Utilities Commission. If it works, the system
may be expanded. Duke Energy already has installed
100,000 digital meters across the five states (including

D

the Carolinas) where the firm operates, including
12,000 in Charlotte alone.
In the Charlotte pilot program, residents can manage energy use online. Or the utility can manage it for
them, according to their “personal energy profile,”
which tracks the times of day that they run air conditioners, heat pumps, water heaters, dryers, ranges,
ovens, pool pumps, lights, outlets — you name it.
“Right now, electricity is one price, 24-7,” he says.
“There’s no incentive to use less or use it at different
times.” If consumer demand could be shifted, he notes,
the need to build more plants that handle electricity at
peak hours could be alleviated.
To boost development of smart grid technologies,
the American Recovery and Reinvestment Act of 2009,
better known as the stimulus bill, contains $4.5 billion
to upgrade the grid. Many times that amount will be
necessary to overhaul the nation’s transmission system.
Duke Energy may apply for those grants once the details
are finalized. Any grants would be in addition to its
commitment to spend $1 billion on smart grid efforts
over five years.
Reduced energy demand is also a relatively inexpensive way to reduce carbon emissions. Cutting carbon
will be essential for electricity producers if the nation
prices carbon through a tax or cap-and-trade program.
— B E T T Y J OYC E N A S H

PHOTOGRAPHY: COURTESY OF UNIVERSITY OF CHARLESTON

Digital Devices Will Save Energy

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FEDERALRESERVE
Last Stop Lending
How a railroad
bankruptcy helped
form modern
Fed policy

In the early years of the
Federal Reserve, bankers could
literally walk up to the discount
window in the lobby of their
regional Fed bank to borrow funds.

6

R e g i o n F o c u s • Wi n t e r 2 0 0 9

f you walked into the lobby of a
Federal Reserve Bank in the early
part of the 20th century, you’d
see a teller window. If you were a bank
manager, walking up to that window
would literally allow you to borrow
money from the Fed under certain
conditions. Eventually, these windows
would disappear from Fed lobbies.
But their function — the power of
the Fed to lend through figurative versions of that window — wouldn’t disappear.
This window, called the “discount
window,” was originally conceived as
the means by which the Federal
Reserve would serve as a lender of last
resort to its member banks. The idea
was to provide an outlet by which the
Fed could supply liquidity to banks in
the event of a credit-tightening economic shock.
Yet, within that seemingly simple
mission is a bundle of implications
and policy approaches that are still
being debated by
economists and policymakers today. And, as
an unpredictable turn
of history would have
it, the precedent for
the modern version
of that debate is, at
least in part, the bankruptcy of a railroad
company in 1970.
The history of the
Fed’s role here is
important to understand first. For this we
have to look back 200 years and across
the Atlantic Ocean. The central bank’s
role as lender of last resort has, as former Richmond Fed economist
Thomas Humphrey points out, its
first “and in many respects still its
most rigorous, complete, and systematic” explanation in the early 19th

I

century writings of British economist
Henry Thornton. When his bestknown work on the subject was published in 1802 (An Enquiry Into the
Nature and Effects of the Paper Credit of
Great Britain), he was a member of
Parliament with a particular expertise
on matters of monetary policy. Not
only was his brother one of the directors of the Bank of England, but he
was also a member of the various
legislative committees that oversaw
the operations of the banking system
in Great Britain.
In Thornton’s conception of an
independent central bank’s role, the
main focus should be the stability of
the money supply. An element of that
role was the need to serve as a lender
to banks in a case of economic shock
for the purposes of meeting an
increase in demand for money. In what
economist Joseph Schumpeter later
called the “Magna Carta of central
banking,” Thornton outlined the need
to make this sort of lending by the
central bank temporary in nature and
restrained enough not to interfere
with the Bank’s main goal of price stability. To violate this rule would invite
political gaming of monetary policy by
interest groups: “To suffer either the
solicitations of merchants, or the
wishes of government, to determine
the measure of the bank issues, is
unquestionably to adopt a very false
principle of conduct.”
Thornton clearly realized that
allowing the central bank to be an
emergency lender made it that much
more important to remember that its
primary responsibility is to the market
generally and not to individual banks.
Indeed, he was quite concerned about
the “moral hazard” that such a lending
arrangement might produce in the
form of risky practices at individual
banks. Thornton’s view was that the

PHOTOGRAPHY: CURATING SECTION, FEDERAL RESERVE BANK OF NEW YORK

BY ST E P H E N S L I V I N S K I

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tions of buying and selling
lender of last resort should not try
Treasury bills were the preferred
to prevent economic shocks.
Thornton realized
tools of monetary policy, the disInstead, the central bank should
count window was an important
aim to neutralize the secondary
that the central bank’s
mechanism in controlling the
repercussions of those shocks.
money supply.)
Roughly 70 years later,
primary responsibility
But the Thornton-Bagehot
Thornton’s intuition was elaboratsynthesis would soon meet the
ed by Walter Bagehot, the British
is to the market generally
political realities of hard economwriter and editor-in-chief of the
ic times. On the heels of the
Economist from 1861 to 1877. In
and not to
national bank crisis of the early
doing so, he advanced Thornton’s
1930s, Congress passed an amendanalysis and set up the framework
individual banks.
ment to the Federal Reserve Act
that economists still use today to
which was approved by President
discuss these issues.
Franklin Roosevelt on June 19, 1934. It added a new section
In his famous book, Lombard Street (1873), Bagehot laid
— 13(b) — that removed most of the conditions constraining
out the broad rules by which the lender of last resort role
the Fed’s ability to lend in a crisis. It essentially authorized
would best function, summed up by the dictum, “lend freely
the Fed to extend credit to nonbank business enterprises
at a high rate, on good collateral.” The penalty interest rate
directly for up to five years without any limitations as to the
would encourage not just the speedy repayment of the debt
type of asset that could be offered as collateral and without
but also would encourage banks to look for private financing
limits on any single loan.
before resorting to the central bank loan as a true last resort.
Originally, Fed lending was targeted toward banks that
The collateral requirement would help weed out those banks
would then lend to distressed businesses. Now the Fed could
that were not just facing a temporary liquidity crunch but
provide working capital directly to established businesses.
were indeed insolvent.
The genesis of this role was a 1932 amendment to paragraph
It was also important that the emergency lending policy
3 of section 13 that allowed the Fed to award loans to nonbe announced in advance of the economic shock so there
banks in “unusual and exigent circumstances.”
would be certainty in the market about the backstop measIn the first year after the creation of section 13(b), Fed
ures the central bank would be willing to take. Like
lending spiked. It became less popular over time because the
Thornton, however, Bagehot was concerned about political
federal government’s Reconstruction Finance Corporation
pressures on central banks and the temptation to lend to
was a much more generous lender.
specific institutions as a means to prop them up in an ecoThe Fed’s role as banker to a variety of industries continnomic crisis. As Humphrey explains, “the job of the central
ued until the 1950s. Fed policymakers, however, were
bank is not to prevent failure at all costs but rather to conbeginning to sour a bit on their new role by then. In 1951, a
fine the impact of such failure to the unsound institutions.”
bill to further the ability of the Fed to lend to nonbank businesses was not supported by the Fed’s Board of Governors
The Early Federal Reserve and the
because of their concerns about the inflationary impact of
Rise of Crisis Lending
expanded lending. Chairman William McChesney Martin’s
Such was the thinking of some economists when the Federal
public statement in opposition to an expanded lending role
Reserve was created. The men who constructed the U.S.
for the Fed helped repeal section 13(b) in 1958. But thanks to
central banking system indeed looked at the British experithe still-intact paragraph 3, the ability to lend to nonbanks in
ence for guidance on how best to approach the conduct of
“unusual and exigent circumstances” remained as long as five
monetary institutions and how these institutions should be
members of the Board of Governors concurred with the
designed.
decision to provide such liquidity.
They envisioned the Fed’s role of banker to the banks as
being decentralized. The 12 regional Fed banks would allow
the banks in their area to borrow reserve funds against the
The Penn Central Bankruptcy
security of their business loans, an act known as “redisDespite this, some critics argue that the assumptions of the
counting.” Presumably this sort of operation would best be
Fed as a crisis lender to all sorts of businesses would therehandled by a bank closest to the borrowers where the local
after be baked into the market’s expectations. And there
knowledge of business conditions could best be utilized.
were indeed other changes to federal law that kept the Fed
Indeed, specialized knowledge of local conditions was espein the lending game after 1958. Of particular note is the
cially important in an economy where, in certain areas,
Defense Production Act’s “v-loans” program, a carryover
credit demand was heavily influenced by the seasonal nature
from World War II and utilized during the Korean War, in
of agriculture. In this way, the demand for money in the
which the Federal Reserve served as guarantor of defense
economy as a whole could be satisfied at a dozen “discount
production loans made by the federal government. Keeping
windows.” (In a world before modern open market operathe possibility of lending to nonbank industries temporarily

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open in this way would, in 1970, converge with a recession
and a potentially disruptive corporate bankruptcy that
would nudge the Fed into a return to its Depression-era role.
Many firms fell on hard times in the recession of 19691970, but one of the biggest was the Penn Central railroad.
The company had issued a substantial amount of debt, or
“commercial paper,” more than $84 million in outstanding
debt at the time, much of which was coming due between
June and August of 1970. The firm appealed to the Nixon
administration for a loan in May 1970, claiming it could not
survive without federal support.
The White House was sympathetic and proposed to a
syndicate of about 70 banks a federal guarantee for a $200
million, two-year loan. The administration proposed to
Congress that the loan guarantee would fit under the
umbrella of the v-loan program. The implication of the
White House seemed to be that keeping Penn Central alive
was vital to national security interests even though the company had no explicitly defense-related business.
On Friday, June 19, after six weeks of debate, Congress
refused to approve the loan guarantee. On the heels of that
defeat, the Nixon administration asked the Federal Reserve
Board to authorize the New York Fed to lend directly to
Penn Central. After it ran through its procedures to determine the firm’s creditworthiness, the New York Fed
reported back to the Board that Penn Central would likely
not be able to repay any credit it received. That’s when the
Board declined President Nixon’s request. The company
declared bankruptcy on Sunday, June 21. (It would operate
under bankruptcy protection for the next five years. Some of
their rail routes were assumed by Amtrak upon its creation
in 1971. By 1976, Penn Central was unable to emerge from
bankruptcy as a reorganized company and was basically
nationalized when Congress folded it and five other failed
small railroads into the federally chartered Consolidated
Rail Corporation, also known as Conrail.)
In 1970, however, many inside the Fed were concerned
about the consequences of Penn Central’s bankruptcy filing.
It was thought that the default of the company’s commercial
paper could spur a contagion where other large companies
that relied on the Penn Central debt contracts as a source of
funds for their daily operations might default on their debts,
and so on. There was also a concern that the market would
be rattled by uncertainty and investors would be unable to
discern which commercial paper issuers were likely to
default next if at all. The sense among some was that the discount window should be used to head off these potential
ripple effects.
So, the Fed decided to contact member banks over that
weekend and told them that if they made loans “to enable
their customers to pay off maturing commercial paper and
thus needed more reserves, the Federal Reserve discount
window would be available.” Columbia University economist Charles Calomiris has noted that the word “available” is
the most important part of this statement. It effectively
meant that member banks could borrow from the Fed for

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R e g i o n F o c u s • Wi n t e r 2 0 0 9

the purposes of “pass through” loans to commercial paper
issuers and would be able to do so without incurring any
costs other than paying the discount rate — in other words,
the sorts of restrictions put on discount window borrowers
in the form of additional bank audits or other nonpecuniary
penalties would be lifted for this sort of lending. Indeed, the
Federal Reserve Board’s Annual Report in 1970 confirmed
that the approach to discount window lending at this time
was meant to finance borrowing by companies uncertain
about whether they could rollover their soon-to-mature
commercial debt.
Consequently, borrowing of reserves by large commercial
banks — the institutions that were the main source of funds
for these companies — tripled between June 24 and July 15.
Calomiris estimates that this almost exactly offset the
amount of the decline in the value of the commercial paper
outstanding in the debt markets.
That wasn’t the only step the Fed took. There were some
small actions to increase the money supply through open
market operations. The Board also changed what was known
as “Regulation Q” which mandated a ceiling on the interest
rates banks could pay to depositors. This limit, in place since
1933, had the effect of making bank deposits a less attractive
option for investors. The Fed’s action in 1970 exempted
deposits above $100,000 from the interest rate ceilings. The
result was a flood of new deposits into commercial banks.
This larger pool of loanable funds amounted to an increase
from $14 billion in June 24 (the day after the change to
Regulation Q was approved) to $26 billion by year’s end.
Liberalization of this obviously counterproductive policy is
perhaps the one thing that economists can agree was a good
outcome of the Fed’s response to the Penn Central bankruptcy. It was a formative step in the eventual demise of
Regulation Q, which was eliminated altogether in 1986.
As a lender of last resort, however, the approach that was
favored by some policymakers at the Fed was one that
harkened back to the Depression-era conception of the
Fed’s role. The chairman of the Federal Reserve at the time,
Arthur Burns, made no secret of his interest in expanding
the Fed’s presence. In a statement to Congress on July 23, he
revealed that during the events of the previous month, the
Fed had prepared “standby procedures” to allow them to
make direct loans to all sorts of firms unable to secure credit in private markets.
For the next 20 years, the Fed would assist in the
federal government’s awarding of emergency credit, but in a
different way. They served as the fiscal agent for the federal
government’s loan guarantees to Lockheed in 1971 and
Chrysler in 1979. The same goes for the emergency loans
that went to the city of New York in 1975. These forms of
assistance, however, were launched on an ad hoc basis.
In 1991, more than 30 years after section 13(b) was
repealed, a broader conception of the Fed’s role as lender of
last resort was finally codified by the Federal Deposit
Insurance Corporation Improvement Act. The new amendment to paragraph 3 of section 13 clarified that the Fed could

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advance credit directly to nondepository institutions — for
example, securities firms.

The Past and Future of Fed Lending Policy
Even today, debates still occur over whether the Fed made
the right decision about its discount window operations in
that fateful summer of 1970.
Some argue that it’s not immediately clear that the discount window actions were necessary to head off any ripple
effects in the Penn Central episode. Open-market operations alone could have expanded the money supply to meet
the demand for credit that would have resulted from any
commercial paper default. In a case like that, intermediaries
in the private banking system, not the Fed, would be the
ones determining where the demand for the loanable funds
was highest. Some economists, like former Richmond Fed
economist Marvin Goodfriend, suggest that the discount
window is unnecessary for this reason and is no longer
required for maintenance of the money supply as it once
might have been.
Nor does everyone buy the contagion argument used to
justify the lending actions of the Fed. Anna Schwartz suggested in a speech at St. Louis University in 1992 that
commercial paper issuers that faced difficulty in 1970
weren’t in that position because of turmoil in the credit

markets. Instead, it was because they were companies that
might have deserved to fail for a variety of reasons, all of
them particular to the companies themselves. Reliance on
commercial paper was a by-product, not a cause, of their
troubles. From a policy perspective, Schwartz suggests that
the Penn Central episode “fostered the view that bankruptcy proceedings by a large firm [can create] a financial crisis,
and that, if possible, bankruptcy should be prevented by
loans and loan guarantees: a ‘too big to fail’ doctrine in
embryo.”
Meanwhile, economist Allan Meltzer of Carnegie Mellon
University, who has written a history of the Federal Reserve,
channels Bagehot when he wonders what the Fed policy
really is. As he wrote in the Wall Street Journal on July 16,
2008, “In its 95-year history, the Fed has never made a clear
statement of its policy for dealing with failures. Sometimes
it offered assistance to keep the bank or investment bank
afloat. Other times it closed the institution. Troubled institutions have no way to know in advance whether they will be
saved or strangled.”
The assumptions about a central bank’s role as a lender of
last resort have come a long way since the days of Thornton
and Bagehot. The wisdom of those changes is something
economists continue to debate — especially during the
current period of financial turmoil.
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READINGS
Calomiris, Charles W. “Is the Discount Window Necessary? A
Penn-Central Perspective.” National Bureau of Economic
Research Working Paper No. 4573, December 1993.

Schwartz, Anna J. “The Misuse of the Fed’s Discount Window.”
Federal Reserve Bank of St. Louis Review, September/October
1992, vol. 74, no. 5, pp. 58-69.

Humphrey, Thomas M. “The Lender of Last Resort: The Concept
in History.” Federal Reserve Bank of Richmond Economic Review,
March/April 1989, vol. 75, no. 2, pp. 8-16.

A Closer Regional Look
at Fifth District
trends and issues
Check out
District Digest
on page 48.

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JARGONALERT
National Debt
hen you hear debates about the fiscal health of
the nation, it’s important to put the rhetoric
into context. Many observers worry about the
amount of money that the U.S. government owes to its
bondholders — the “national debt.” But how the debt grew
to its current size and the trend of federal expenditures
are important matters to keep in mind when sorting out
the arguments about the national debt.
When the federal government spends money, that money
has to come from somewhere. Most government spending is
financed by tax revenue. But the federal government usually
spends more than it takes in, resulting in a budget deficit. So,
to pay for expenses beyond the amount of
taxes collected, the government borrows by
selling Treasury securities — short-term
“Treasury bills” or long-term “Treasury
bonds” — to the general public. In short,
unbalanced budgets drive an increase in the
federal deficit which in turn is added to the
total sum of the national debt.
America’s total gross national debt is
roughly $11 trillion today. Of that, about
$6.8 trillion is the amount of debt held by
the public. Of the two components that
comprise the national debt, this is the one
that is the most commonly reported. It
includes all federal debt held by individuals,
corporations, state or local governments, foreign governments and other entities outside the federal government.
These numbers are reported by the Bureau of Public Debt
of the U.S. Treasury Department. China and Japan are the
largest foreign holders of this publicly held debt.
The rest, about $4.2 trillion, is held in intergovernmental
accounts, like the respective trusts funds for Social Security,
Medicare, and the retirement accounts for military and civil
service personnel. The reason these trust funds hold
Treasury securities is that the payroll tax which finances
most of the spending on these programs generates more revenue than needed to pay for current services that the trust
funds finance. Congress often borrows this surplus revenue
for spending on other programs and issues Treasury securities to these trust funds in return.
These debt numbers might sound big, so it’s important
to put them in context. The national debt figures are typically measured as a percentage of gross domestic
product (GDP), the primary measure of the nation’s economic activity.
In the past, debt held by the public rose substantially during periods of war and, later, during periods of increased

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spending during economic downturns. The debt was 90 percent of GDP in the early 1950s, after World War II had
ended and the Korean War was underway. By the 1970s, it
was below 30 percent. It crept back up to 49 percent by
1996, but it has declined to about 41 percent in the last complete fiscal year (FY 2008). The decline after 1996 was due
to a four-year period of budget surpluses that allowed the
U.S. government to slowly pay off debt.
Currently, debt held by the public is about 47 percent of
GDP. The total gross national debt is 74.6 percent of GDP.
But that doesn’t mean the full burden of the debt is borne by
current taxpayers. The year-to-year burden of the national
debt is the cost of paying the interest on the
Treasury securities. Today, this “carrying
cost” for the national debt is $249 billion, or
1.7 percent of GDP.
Economists and policymakers are divided about whether the current debt levels
could have adverse consequences for economic growth or the country’s future. Some
are concerned that a growing debt burden
will “crowd out” private investment —
money that might have gone to other
investments will instead go to purchasing
safe Treasury bills. Others suggest that current debt levels are sustainable and point
out that there is no correlation between
interest rate changes on Treasury bonds and the present
level of the national debt.
If history is any guide, government debt will always be
with us. For starters, emergency military actions are unpredictable and have been funded by the issuance of debt
throughout U.S. history. In addition, the purchase of
Treasury securities is an important tool used by the Federal
Reserve to conduct monetary policy.
The size of the gross national debt may be the least of our
worries, however. An additional obligation that is not
included in the national debt calculation is the future
benefits that the U.S. government will pay to retirees in
the years to come. The number of retirees — who receive
their benefit payments out of current revenue — will soon
dramatically outstrip the number of workers paying into the
Social Security and Medicare system. This mismatch over
time will result in trillions of dollars of “unfunded obligations” that will have to be financed by more Treasury debt,
greater tax revenue, or cuts in benefits to retirees. Some
argue that this implicit debt could have the potential to substantially dwarf the gross national debt and indeed harm the
U.S. economy.
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ILLUSTRATION: TIMOTHY COOK

BY DAV I D VA N D E N B E RG

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RESEARCHSPOTLIGHT
Does Democracy Lead to Economic Growth?
BY M AT T H E W C O N N E R

growth of gross domestic product. During the transition to
or years, the debate about which form of governdemocracy, however, growth drops significantly, due to the
ment is economically optimal has raged among politihigh costs related to the transition. But examination of longcians and economists. Some believe that democracy
run trends shows a higher stabilization level. Their analysis
is essential to sustained economic growth, while others
also shows that even moderate democratic reform can yield
remain skeptical of the evidence supporting this view.
decent growth gains, while “reverse transitions” (backsliding
Meanwhile, the world has seen a move toward democracy
away from democracy) are associated with slower growth.
during the past 30 years, with many totalitarian states
Yet it still might be unclear that democratic reform is
becoming democratic. However, there is still one question
solely responsible for economic growth. Perhaps economic
at the center of this debate: Do democratic reforms bring
reforms either precede or accompany political reforms. The
economic growth?
authors point out that their model does not distinguish
In a recent article, researchers Elias Papaioannou and
between different types of democGregorios
Siourounis
of
racies, for example, presidential or
Dartmouth College and the
“Democratisation and Growth”
parliamentary. That would be vital
University of Peloponnese,
to addressing the traditional
respectively, sought to challenge
“public choice” and “institutional”
previous findings that democracy
by Elias Papaioannou and Gregorios
schools of analysis, which state
had little to no statistically signifthat certain built-in frictions,
icant effect on economic growth.
Siourounis. Economic Journal,
such as checks and balances in a
In contrast with prior analysis
that mostly focused on differOctober 2008, vol. 118, pp. 1520-1551. representative system, might be
more important to checking cerences between countries, this
tain legislative impulses — like
paper explores “within-country”
restrictions on various economic freedoms — which can
growth effects. To do that, the authors compared economic
hinder economic growth. Also, because the authors do not
outcomes before and after the enactment of democratic
take into account whether specific legal rights — say, how
reforms around the world during the four decades between
well the legal system protects property rights — exist in each
1960 and 2003. This includes the so-called “Third Wave of
country, it is hard to determine whether democracy is the
Democratization” mainly in Africa, Asia, and Latin America
main determinant of the increased economic growth or
and the reforms adopted in many formerly communist counwhether the growth can be traced to the legal regimes that
tries during the early 1990s.
might accompany the presence of democracy.
To avoid some of the pitfalls associated with categorizing
Other researchers choose to focus on specific types
different democratic reforms, the authors created a new
of cultural or legal precursors for economic growth. In a
dataset of what they call “permanent democratic transiwidely cited article, Rafael La Porta, Florencio Lopez-detions.” To classify the transitions, the authors answered four
Silanes, Andrei Shleifer, and Robert Vishny have stated that
general questions:
other variables have a more positive influence on growth
1) Were the legislative or presidential elections free
that the mere presence of democracy. For example,
and fair?
common law countries fare better than civil law countries,
2) Were civil liberties and political rights respected?
while predominantly Protestant countries perform better
3) Was the franchise inclusive of the majority of
economically than either Catholic or Muslim nations.
the population?
While economic growth may be correlated with demo4) Did the elected officials enjoy real governing capacity?
cratic reform, the direction of the causation remains
The study focuses on whether the shift to a democratic
a question. Papaioannou and Siourounis concede this possigovernment accelerates, decelerates, or has no effect on ecobility when they write that it could be “growth that
nomic growth by examining the annual real per-capita GDP
consolidates the democratic process rather than political
before and after reform. The timing of initial democratizareforms causing growth.” Although their paper is a useful
tion is defined by the authors as the date of the first “free
contribution to the empirical analysis of how governmental
and fair” election or the adoption of a new “democratic coninstitutions influence development, their conclusions
stitution” after prolonged autocratic rule.
should — and, no doubt, will — be subjected to careful
The authors found that shifting to a democratic governexamination.
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ment resulted in a nearly 1 percent annual increase in the

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POLICYUPDATE
States Receive Funding from Stimulus Bill
BY DAV I D VA N D E N B E RG

oney from the American Recovery and Reinvestment Act of 2009, better known as the
stimulus bill, is flowing to states around the
country and the Fifth District.
The $787 billion legislation will provide at least $18
billion to the states of the Fifth District to fund a variety of
projects like road building and school improvements,
according to the National Conference of State Legislatures
(NCSL). The amount of money states should expect to
receive is based on funding formulas that take into account
a state’s population, unemployment rate, and number of
low-income residents, said Michael Bird, federal affairs
counsel with the NCSL.
Most of the money provided is for specific programs and
must be used for those purposes. North Carolina’s allocation
is the largest in the District, at about $6 billion, while West
Virginia will get $1.4 billion and the District of Columbia
will get $876 million. Virginia will receive $4.5 billion;
Maryland will receive $4 billion, while South Carolina is slated to get $2.9 billion. These allocations exclude additional
funds they will receive later this year through grant programs, disbursements for traditional unemployment
benefits, and the food stamp program. This money is not
meant to be a permanent fixture in the federal budget:
The new money is slated to stop flowing to the states on
Sept. 30, 2010.
Here’s a look at some of the funding coming to the Fifth
District, based on numbers obtained from the NCSL:

M

Medicaid
The formula by which the federal government allocates
Medicaid matching dollars will be altered so as to allow an
increase in federal spending on that program. Additional
amounts of funding will be given to a state if its unemployment rates rise higher. In the Fifth District, North Carolina
will receive the most additional Medicaid funding, $2.35
billion. Maryland will receive $1.63 billion, while Virginia
will receive $1.47 billion. South Carolina’s Medicaid allocation will rise by $860 million, while West Virginia’s will rise
by $450 million.
All together, this amounts to a two-year increase (FY
2009 and 2010) in Medicaid spending of $6.7 billion for the
Fifth District states (excluding the District of Columbia).
According to preliminary estimates from the National
Association of State Budget Officers, that is almost double
the amount — $7 billion — that these states received from
the federal government for that program in fiscal years 2007
and 2008. This growth is partly a result of an expansion in
the number of people who can now qualify for Medicaid.

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Fiscal Stabilization Fund/Education
Of the $54 billion in the bill’s “fiscal stabilization fund,”
about $45 billion is directed at education. States will receive
a total of $40 billion for education-related purposes.
Another $5 billion goes to the U.S. Secretary of Education to
allocate to states for school improvement projects.
However, there is a pot of money in the “fiscal stabilization fund” over which state governments will have complete
discretion. States will receive a total of $9 billion, allocated
by a formula, to use as they see fit. North Carolina
will receive $254.3 million of this money, while Virginia will
receive $219.15 million. Maryland and South Carolina
will receive at least $125 million each. West Virginia will
receive $49 million, while the District of Columbia will
receive $16.3 million. “This was seen as money the states
could use to help balance their budgets without being stuck
in a specific funding silo,” Bird said.

Unemployment Benefits
Most of the stimulus bill does not require state legislative
changes for states to receive money. But to receive all available money for expanded unemployment benefits, states
that have not already done so will have to change their laws
about eligibility for those benefits. These changes would
expand the benefits to workers not formerly covered by
state unemployment insurance programs.
Not all governors are interested in making these changes,
which could have a long-term impact on state budgets.
South Carolina Gov. Mark Sanford opposes changing his
state’s laws. “After the federal money runs out, we’re left to
pick up the tab at the state level,” said Joel Sawyer, a Sanford
spokesman. Twenty states have changed their laws regarding
unemployment eligibility and how those benefits are calculated. All of those states did so before President Obama took
office, Bird said.

Infrastructure
Expenditures in this funding category include money to
build or improve highway and bridges. North Carolina and
Virginia will receive the District’s largest allocations for this
construction, at $736 million and $694 million, respectively.
South Carolina will get $463 million, followed by Maryland
with $431 million. West Virginia ($210 million) and the
District of Columbia ($123 million) will receive the least.
Taxpayers will be able to monitor stimulus expenditures
on a federal government site, www.recovery.org. Maryland,
Virginia, West Virginia, North Carolina, and South Carolina
have launched similar Web sites to allow their residents to
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AROUNDTHEFED
How Consumers Use Plastic — and Why
BY M AT T H E W C O N N E R

“Credit Card Debt and Payment Use.” Charles Sprenger and
Joanna Stavins, Federal Reserve Bank of Boston Working
Paper 08-2, May 2008.

early half of credit card holders in the United States
can be referred to as “revolvers” — those who regularly carry balances on their cards. Those who pay off their
balance every month can be called “convenience users” of
credit cards because they use the cards as an easy form of
payment technology. The authors of this study examine
the differences in the use of payment technologies between
these two groups of people.
Using data from the Survey of Consumer Payment
Preferences for more than 1,800 individuals who use both
debit and credit cards, the authors examine the four different ways these people can pay for goods: credit cards, debit
cards, checks, and cash. They report significant evidence
that individuals regularly carrying revolving debt are more
likely to substitute the use of a debit card for that of a credit card. In other words, these individuals use credit cards for
a significantly lower percentage of their total payments than
do convenience users of credit cards. However, there is no
significant difference in the use of cash and checks between
the two groups.
From the same survey, the authors infer that revolvers use
debit cards more often not because they perceive it as an
easier form of payment at the check-out. Instead, they are
more likely to use debit cards because they see them as a
good way to control their spending.

N

“Are Children ‘Normal?’ ” Dan Black, Natalia Kolesnikova,
Seth G. Sanders, and Lowell J. Taylor, Federal Reserve Bank
of St. Louis Working Paper 2008-040C, October 2008.

n 1960, Gary Becker first posed the question: Does the
demand for children follow the pattern of a “normal”
good? In consumer theory, increases in income induce
greater consumption of “normal goods.” So, to restate
Becker’s question: As the incomes of married households
rise, will that lead to an increase in fertility?
The authors of this paper evaluated this question using
data from the 1990 census. They discovered that fertility
and household income are inversely related for nonHispanic white married women. This suggests that children
are not “normal goods.” However, when the amount of education the women have is held constant — that is, when you
compare a college graduate to another college graduate — a
positive correlation between the husband’s income and
fertility appears. From this brief cross-sectional examina-

I

tion, the authors conclude that in the United States, fertility exhibits the characteristics of a normal good if the women
being compared have similar human capital.
In order to more fully answer the paper’s motivating
question, the authors turn to a natural experiment: They
examine the effect of a large increase in coal prices in
Appalachian coal-mining counties during the energy shock
of the 1970s. The large increase in the price of coal had its
largest positive impact on the income of men because mining mostly employs males. Fertility data for the same period
shows an increase in births in high-coal counties relative to
non-coal counties during the coal price boom. Thus,
children do indeed appear to be “normal.”
“The Role of Lenders in the Home Price Boom.” Richard J.
Rosen, Federal Reserve Bank of Chicago Working Paper
2008-16, November 2008.

ome prices rose at a steady rate of approximately 1 percent annually from 1983 to 1996. After that, prices
started to increase at the much faster pace of 2.8 percent
from 1997 to 2001 and an even sharper 7.6 percent from 2001
to 2005. In this paper, Rosen examines the effect that competition among lenders had on this price boom.
The two main types of mortgage lenders are depository
institutions (like banks) and mortgage brokers. Comparing
home price data collected from the S&P/Case-Shiller Home
Price Index, Rosen discovers that the rate of home price
increases began to rise when the share of mortgages in an
area were issued by banks instead of mortgage brokers.
Rosen notes that this phenomenon might be explained by
the nature of the institutions. Banks naturally have higher
overhead than the mortgage brokers, but the banks can capitalize on their reputation and the fact that they often have
pre-existing relationships with potential borrowers who
hold other accounts with the bank (checking, saving, etc).
Thus, banks can offer lower interest rates to these customers
and increase their market share.
When national housing markets get hot, however, mortgage brokers chip away at the market share of the banks.
The increase in mortgage securitization allows mortgage
brokers to compete with banks because it allows them to
make loans without raising much capital. Yet that is also true
of banks. So, to compete in an environment of high rates
of growth in housing prices, banks seem to become
more risky in their lending compared to earlier periods.
Between 2002 and 2005, for instance, Rosen notes that the
average ratio of the loan amount to the borrower’s income
increased substantially.
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HOW THE
CORPORATE

BANKRUPTCY
SYSTEM BENEFITS
AND HINDERS
THE ECONOMY
BY ST E P H E N S L I V I N S K I

W

hen Richmond-based Circuit City — the second-largest consumer electronics
retailer in the nation — declared bankruptcy on Nov. 10, 2008, the company still

had some options to keep itself alive. Although the withdrawal of the $1 billion bid for
the company by Blockbuster Inc. in July must have been fresh in the minds of the firm’s
managers, they declared in the bankruptcy filing their intent to emerge from the court
proceeding in the first half of 2009.
On paper, the immediate problem that afflicted the
company was the massive amount of debt it had accumulated to sustain its operations in the face of slow sales. The
managers were hopeful that the company could be valuable
to a new owner and scrambled to cobble together a deal
with some interested buyers, and the judge in the case set
a January date to auction off the firm.
On the morning of January 16, the company’s creditors
and nearly 34,000 employees found out the end had

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arrived. That’s when Judge Kevin Huennekens agreed to
Circuit City’s request to close its doors for good and liquidate its inventory.
The firm’s demise might not have been much of a surprise to the creditors and vendors who supplied Circuit
City’s inventory in those dying days. Fearing poor sales at
the store’s locations in the 2008 holiday shopping season,
vendors began to restrict the flow of merchandise as early
as November. The creditors of the company, led by Bank

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of America, told the firm’s managers they simply could
not provide funding to keep the 500-plus locations in
operation. Market players seemed to be saying what
Circuit City’s corporate heads feared: The company was no
longer economically viable, unable to compete in a world
full of popular online retailers and other low-cost shopping
options.
In all bankruptcy proceedings, the most important
question is whether a particular company has simply fallen
on hard times or whether it’s not economically viable anymore, such as a typewriter manufacturer in a world where
typing has migrated almost universally to computer keyboards. For many businesses, the day may come when the
question their managers have to answer becomes one
familiar to poker players: When do you fold? Not to grapple with such a question could cause a variety of firms that
should whither away to survive instead, and vice versa.
Either outcome would be bad for economic growth.
The institutions in the United States that have been
created to officiate the process are the bankruptcy courts.
Of course, simply declaring bankruptcy doesn’t automatically imply that a company is doomed. The system has two
tiers. The form of bankruptcy that Circuit City entered —
called “Chapter 11” after the title of the section of the federal Bankruptcy Code that created it — was originally
designed to create a means by which firms could reorganize themselves and survive by renegotiating costly
contracts or restructuring their debt obligations. That’s a
distinctly different approach than that taken in Chapter 7
of the Bankruptcy Code in which a company is liquidated.
As in the case of Circuit City, liquidation can be the outcome of a Chapter 11 proceeding that does not result in a
reorganization or sale of the firm.
There are many companies battered by bad economic
times that can still survive if they just have a safe harbor in
the storm. Reorganization in Chapter 11 gives them such
an option, and it’s an important one. But if a company is
likely to be liquidated anyway because it simply isn’t able to
survive in a modern marketplace, why would it go through
the hassle and cost of trying to reorganize? And since
bankruptcy proceedings ask a single judge to be the arbiter
of whether a firm is viable as an economic entity, it’s also a
concern to some that current bankruptcy practice assumes
one person with incomplete knowledge will be able to
accurately predict the future contours of the U.S. economy.
Firms that probably shouldn’t be reorganized might be
able to survive for a bit longer if they find a sufficiently

sympathetic judge, and that creates economic inefficiency.
“There is an opportunity cost to keeping a nonviable firm
alive for too long,” says Todd Zywicki, a professor at
George Mason University Law School. For instance, economists Ricardo Caballero, Takeo Hoshi, and Anil Kashyap
have argued that subsidies to money-losing “zombie” firms
have helped keep those businesses afloat, while depressing
the creation of new competitors.
These concerns have sparked a debate within academic,
legal, and economic circles about how bankruptcy functions in the United States. In the view of some, the current
system could lead to adverse consequences alongside its
benefits.

Railroads and the Logic of Bankruptcy
You can’t understand modern bankruptcy law without
knowing the story of the 19th century U.S. railroad industry. “If you talk to most legal scholars about Chapter 11,
they usually bring up the railroads as the poster children
for why we need a law of corporate reorganization,” says
Douglas Baird of the University of Chicago Law School.
After the Civil War, the American economy became
increasingly national in scope thanks in part to the evolution of rail travel. The number of miles of train track more
than tripled between 1870 and 1900, allowing the expanded movement of goods and eventually an increase in the
number of newly industrialized manufacturing centers.
In fact, the railroad companies would become the first
modern corporations in U.S. history. Before 1860, the railroads were financed mainly by the farmers and merchants
who benefited from the lines. After 1860, however, railroad
companies had to seek capital from New York financial
houses. This effectively made them a trans-state operation
in terms of capital structure as well as in the services they
provided.
Between 1865 and 1890, railroad competition intensified. Cartels formed and collapsed. Then the early 1890s
witnessed one of the United States’ worst economic downturns at the time. By the mid-1890s, many railroad
companies were unable to make the payments on their
bonds, leading judges to reckon with how to deal with
high-cost operations that had numerous investors.
The approach the courts took was a reorganization of
the companies. The goal was to rearrange the capital
structure and allow a firm to provide ongoing value to
creditors beyond the temporary economic tumult. The
only other alternatives would have been to sell the firm to

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new owners or to terminate the company’s operations, tear
up the railroad tracks, melt them, and sell them for scrap.
The second option would have destroyed a tremendous
amount of economic value. The railroad companies were
surely still more valuable than the sum of their parts.
But capital markets were relatively undeveloped at the
time and that made it very difficult to engineer a sale at a
price acceptable to both parties. So the simplest way to
save the company was to reorganize it and allow the railroad, as the legal scholars say, to retain the value it had as a
“going concern.”
Also, there was the sticky matter of the type and number of creditors. “One of the reasons that it was compelling
to reorganize the railroad companies is because they had
massively chaotic capital structures,” says Baird. “The
Atchison, Topeka and Santa Fe Railroad Company, for
instance, issued over 40 different types of bonds held by
thousands of bondholders all over the universe.”
The disparate nature of this large group of creditors
meant they would not have been able to collaborate
and agree on whether to sell the company or how to
restructure it. The transaction costs of working out a reorganization agreement would have been very high. “One
of the main reasons to have a collective procedure
is that the creditors can’t work together outside of bankruptcy,” explains Baird.
That alone seems like a big enough problem. But imagine what might happen if a group of creditors decides they
don’t want to restructure and rush to stake their claim to
the railroads assets? That could set off a rush to disinvest
in the company, throwing it further into financial straits
and leaving those who are late to the feeding frenzy without much to show for it. A system of bankruptcy that
provides a “safe harbor” for firms is important in such an
environment.
So it should be no surprise that the railroad example is
one of the most common historical examples in the literature on bankruptcy law. But there’s a catch, argues Baird:
It’s really hard to argue that the logic of the example
applies to the modern world. “The traditional justification
for reorganization is that the firm cannot be sold as a going
concern, there’s a lot of firm-specific value at risk, and the
creditors cannot cooperate outside of bankruptcy.
Reorganization can only be justified if all three of those
are true at the same time. Today, in many cases, they are
not all true.”
Baird suggests that most firms today don’t own specialized assets that are only valuable in their current
firm-specific context. Most companies own or lease assets,
like machinery — or, in the Circuit City example, retail
space — that would indeed have valuable alternative uses
to another firm. In fact, much of the value of many modern
firms is portable: It consists of the human capital of the
employees.
Business success instead rests largely on the originality
of a company’s approach. “Today, bankruptcy law can

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affect your capital structure, but it can’t make you successful in the marketplace. That depends on your business
model,” explains Robert Rasmussen, dean of USC Gould
School of Law.
The specter of the collective action problem has been
lessened in the modern world too. It’s rarely the case that
a single firm has a large number of creditors. “If you look at
many firms filing for bankruptcy today, there is often one
creditor that has a revolving credit line and that person or
firm is basically making many of the important decisions.
There’s no coordination problem there,” says Baird. In
fact, many corporations have been able to renegotiate
their debt contracts outside of court and never have to
declare bankruptcy.

The Rules and Costs of the Bankruptcy Game
Even if the traditional railroad paradigm were applicable
today, the bankruptcy proceeding may still have shortcomings as a result of its structure. Like any legal proceeding,
the bankruptcy process has its own unique set of rules
and players.
As Zywicki notes, the players with the most power in
the bankruptcy process are the firm’s managers. While
creditors can force a company into a bankruptcy proceeding, those cases tend to be rare. Instead, it’s usually the
firm’s managers that are in the driver’s seat. “They control
when the bankruptcy is going to happen and they control
where the bankruptcy will be declared,” Zywicki says.
Because current law doesn’t require companies to declare
bankruptcy in the state where they are incorporated, managers retain the ability to “forum shop” and scope out the
landscape for a friendly judge.
Once a firm’s managers choose to declare bankruptcy,
they have a set period of time in which to present a reorganization plan that must win the approval of the
creditors. If they don’t approve the plan or they can’t get a
buyer for the firm, then the company could head to liquidation.
According to economist Michelle White of the
University of California at San Diego, these rules create
the wrong incentives and cost the economy in the process.
“In Chapter 11 there is a tendency for too many firms to be
saved,” she says.
The main reason is that the firm’s managers should be
expected to know more about the actual state of the firm
than the creditors or stockholders. If a firm is actually in
worse shape than the creditors realize, the managers have
an incentive to get them to agree to a reorganization plan
rather than liquidate the firm. Inability to do so might
result in those managers losing their jobs and equity in the
company. “It gives an incentive for bad firms to pretend
they’re good firms,” says White. “Those voting on the reorganization plan may not know which type the firm is.”
If the current system leads to keeping alive too many
firms that should be liquidated, it could lead to capital
being trapped in a less-efficient use. This deadweight cost

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to the economy has been estimated by White as potentially 20 times as big as the amount of money spent on direct
costs like lawyers’ fees.
The success rate of corporate reorganizations has come
into question by other scholars. Finance professor Edith
Hotchkiss of Boston College found that one-third of the
firms that successfully restructured in Chapter 11 required
further restructuring in three years. “Her results are consistent with a model in which some inefficient firms
reorganize even though they should liquidate,” points out
White in a 2005 working paper for the National Bureau of
Economic Research.
So, much of the debate over bankruptcy law really
does come down to the effective use of information. The
ultimate decisions in a bankruptcy proceeding are made by
a single judge. But a single judge is unlikely to have all the
decentralized information that markets can summon, or
even know how to best utilize that information even if he
had it.
“Bankruptcy puts the judge in a position to play central
planner,” says Zywicki. “The fundamental decision the
judge is making is whether the current deployment of
assets is more valuable than an alternative deployment of
assets in the economy.” By that standard, current bankruptcy reorganization procedures may be suboptimal.

Making Bankruptcy More Efficient
Each year, hundreds of thousands of firms fail. In fact,
most firms’ managers never see the inside of a bankruptcy
courtroom. According to the Small Business
Administration over 540,000 businesses fail each year. By
contrast, the number of firms that enter bankruptcy is
only a tenth of that.
Those that do enter bankruptcy, however, are facing a
whole new set of realities. Baird argues that over time
Chapter 11 proceedings have become the most useful when
they serve as a controlled environment in which to conduct the speedy sale of a company, not to haggle over a
reorganization.
A similar approach to bankruptcy is one when Chapter
11 becomes merely a vehicle by which to auction off the
firm. In this “mandatory auction” scenario, bidders —
some of whom could have better information than a typical bankruptcy judge or corporate debtor — would vie for
the ownership of the firm as a going concern. At that point,

the decision whether to liquidate or reorganize would be
made by the new owner.
In any case, the assumptions of corporate bankruptcy
laws would need to change. “In an ideal world, bankruptcy
law would aim to reduce the cost of capital,” says
Rasmussen. “You’d want to have a system that effectively
flushes the losers and salvages the winners. If you could do
that, it should lower the cost of capital because people
know the system won’t burn money trying to resurrect
companies that are not viable.” Making auctions the main
purpose of bankruptcy proceedings would do that.
Rasmussen favors making the system even more decentralized. He advocates what he calls a “menu approach” to
debtor-creditor contracts. If legal rules affect investment
decisions and the cost of capital, then uncertainty about
what might happen during a bankruptcy proceeding in the
future would have an influence on the risk premiums
charged by creditors today. So why not allow the rules to be
set by the companies themselves in their charters?
“You can imagine a world where a company can agree at
the front end to limit its options if it falls into financial distress,” says Rasmussen. An example would be a debt
contract that gives the primary creditors more control
over business decisions in periods of economic distress or
other similar scenarios. Venture-capital investments are
often structured in this way.
This option, however, is difficult to achieve in the current bankruptcy regime. No company can legally bind
themselves never to resort to the bankruptcy courts. Still,
this hasn’t stopped many firms from finding some rather
sophisticated ways of contracting around this prohibition,
although the costs of doing so are quite high. Rasmussen’s
alternative would make reorganization within bankruptcy
courts one of many options, not the mandatory default.
How policymakers deal with the “creative destruction”
that leads economically unviable companies to fold
and allows the resources to be reallocated by the market
to something more useful is important. What mechanisms
we use to assist that transition in an evolving modern
economy are vital. Making sure those same mechanisms don’t hinder that process is potentially even more
crucial. So perhaps, as critics of the current bankruptcy
regime argue, it is about time we get more creative
with our approach to the legal mechanisms of creative
destruction.
RF

READINGS
Baird, Douglas G., and Robert K. Rasmussen. “The End of
Bankruptcy.” Stanford Law Review, 2002, vol. 55, no. 3, pp. 751-790.
Bhandari, Jagdeep S., and Lawrence A. Weiss (eds). Corporate
Bankruptcy: Economic and Legal Perspectives. New York: Cambridge
University Press, 1996.
Caballero, Ricardo J., Takeo Hoshi, and Anil K. Kashyap. “Zombie
Lending and Depressed Restructuring in Japan.” National Bureau

of Economic Research Working Paper no. 12129, April 2006.
White, Michelle J. “Economic Analysis of Corporate and Personal
Bankruptcy Law.” National Bureau of Economic Research
Working Paper no. 11536, August 2005.
Zywicki, Todd J. “Bankruptcy.” In David R. Henderson (ed.),
The Concise Encyclopedia of Economics. Indianapolis: Liberty Fund
Inc., 2007.

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The Language of Local
Community papers survive by sweating the small stuff
BY B E T T Y J OYC E N A S H

t the Pilot in Southern Pines, N.C., editor David
Woronoff ’s office sits smack-dab by the front door.
He brags about it.
“We are accessible, and I think that is what makes us
unique,” he says. The Pilot, a thrice-weekly newspaper with a
circulation of about 15,000, finished 2008 with revenues up
5 percent over 2007, although Woronoff calls November and
December receipts “dismal.” Still, he’s convinced that community news is a valuable commodity. “You can’t get what we
do anywhere else. That kind of unique selling proposition is
what will keep community newspapers going for a very
long time.”
The big metro dailies are in trouble. Many have bailed
out of covering satellite towns, and that’s helping community papers like the Pilot, with circulation less than 30,000.
The paper’s circulation numbers are stable. It’s surviving on
community advertising and local news, including photos of
4-year-olds on their birthdays.
“Community newspapers have a franchise for local news
that in most cases is not being invaded by some information
source using the Internet,” says Al Cross of the University of
Kentucky’s Institute for Rural Journalism and Community
Issues. They’ve established a product that’s valuable to a
small group of people, the news in their local community.

A

Niche News
You don’t have to read the fine print to see how the big
metro dailies are struggling — they publish fewer pages,
they’ve let staff go, they’ve had their lunch eaten (and dinner,
too, since half of newspaper revenues came from classifieds)
by Web outfits like Craigslist and Monster. Auto company
and real estate woes have choked off the remaining classified
revenue. To add insult to injury, there’s even a Web site to
chronicle their demise: www.newspaperdeathwatch.com.
But community papers, says longtime media analyst John
Morton, are doing reasonably well. They have traditionally
earned less than big metro dailies from classified ads (about
30 percent on average), which means they weren’t as vulnerable when those ads migrated from print. Of course, the
recession has eroded everybody’s ad revenue, including electronic media, but community papers are “certainly not in
any kind of calamitous state on their profit and loss statements.” In fact, small papers in a metro daily’s portfolio, like
those in the New York Times Regional Newspaper Group,
may subsidize bigger siblings like the Times, Morton says.
But a community newspaper isn’t a daily. They are found
in dense urban neighborhoods with retail, small towns out-

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R e g i o n F o c u s • Wi n t e r 2 0 0 9

side cities, and rural communities, including very small
towns. They can be weekly, twice, or thrice weekly and, by
Cross’ definition, circulate fewer than 30,000 copies.
“Above that, and you’re serving communities that don’t have
enough in common.” They are typically subscription papers
that cover at least the cost of postage, and in rural areas are
delivered by mail.
This category usually does not include the pure “shopper,” a paper that has no editorial content, and also excludes
the alternative weekly — such as the Washington City Paper —
which is in a category all its own. (Alt-weekly readership
declined in 2008.)

Weekly Reader
A 2008 readership survey found that 86 percent of people
over age 18 read a community paper every week in cities and
towns served by these papers, defined as those with up to
25,000 in circulation. This Community Newspaper
Readership Survey was based on a stratified sample of these
newspapers and conducted by the Center for Advanced
Social Research of the University of Missouri’s School of
Journalism.
Financials — in fact, any data for these small papers —
are tough to track because most of them are in private hands
and, frankly, don’t want the competitor in the next town to
know their business, says Brian Steffens of the National
Newspaper Association (NNA), a lobbying group for community papers. Of NNA members, 54 percent are family
owned, 24 percent corporate owned, and 21 percent are
independent.
Even in publicly owned chains, numbers typically
aren’t broken out by property. Media General of Richmond,
Va., for example, owns 275 community papers, 10 in
North Carolina, but doesn’t comment on earnings or
individual papers, says spokesman Ray Kozakewicz. The
company has cut its staff of 772 by about 22 percent from a
year ago.
In markets where a community paper is the only game in
town, they’re thriving because advertising is local. National
ad budgets get divvied up three ways: print, broadcast, and
Internet. And in a small town, there’s often no local television. “If it is, it’s regional. Your television station might be
from Kansas City or some other large city, but there’s no real
competing media,” Steffens says.
Chris Stadelman, editor and publisher of the weekly
Parsons Advocate in Tucker County, W.Va., says the paper he
runs with his wife, Kelly, earned record revenues in 2008. As

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“the only newspaper in the whole world published by and for
the people of Tucker County,” the Advocate is prospering.
“Our total revenue is up more than 20 percent since
we purchased the newspaper, the bulk of that from advertising.” The Stadelmans make up half of the paper’s four
full-timers.
Community papers are as varied as the towns they
occupy, defying the one-size-fits-all definition, says Cross.
Some thrive on chicken-dinner coverage, news about feelgood events only; others keep a vigilant eye on local issues
and win press awards for doing so. Many aim to do both.
Stadelman reports that his paper has filed a Freedom of
Information Act request for financial details about a
federally funded clinic in town. In addition, the paper has
“forced the mayor to admit inappropriate conduct in executive sessions.”
“At the same time, it’s even more critical to be fair to people in such a small community,” he says. “With 7,000 people
in the county, we deal with a lot of the same faces on a
regular basis.”

PHOTOGRAPHY: COURTESY OF CARRBORO CITIZEN

Legal Ads and the
Phone Book Too
The Pilot was named the best
small paper in the nation
in 2002 by the Inland Press
Association, a trade group.
Woronoff, also part owner, says
the paper will “always be small
town and we will never be small
time.”
Okay, so the Pilot has betterthan-average expertise behind it.
It’s owned by a former associate
and the family of the Raleigh
News & Observer. The McClatchy
Co. bought the N&O in 1995.
(McClatchy also owns the
Charlotte Observer, the Chapel Hill
News, the Cary News, the Herald in
Smithfield, and the Eastern
Wake News in Zebulon, N.C.)
Woronoff ’s relatives are silent
partners and acquired the Pilot
in 1996.
The Pilot set out to become
indispensable for locals. After all,
the residents of the area, the
exact geographical center of the
state, also can get the Charlotte,
Raleigh, and Greensboro newspapers. “We’ve got to be able to
offer a portfolio of products,
be able to tell the community
stories in different media, and
be able to offer our business

community a variety of media to advertise in.”
The Pilot even started publishing the phone book 10
years ago, using big print and including community information. “We harnessed the marketing power of the newspaper,
marketed the hell out of it, and now we dominate the Yellow
Pages,” he says. “We make money on it. A lot of money.” And
the newspaper has been on the Web since 1998, but still
earns 92 percent of ad revenues from print. Site content is
free because they want people to visit for updates, video, and
slide shows.
For rural newspapers located in county-seat towns, and
that includes the Pilot, legal and government notices provide
significant revenue. Newspapers are more likely to close in
noncounty-seat towns if the retail base dries up because they
lack that steady advertising.
As for the quality of community papers — “a lot of them
are really good newspapers and a lot of them are not,” Cross
says. “A lot of them don’t practice accountability journalism
in a meaningful way.”
In that case, the community can always demand a
competitor.
Jerry Bellune’s story is unusual.
He’s been in the community newspaper business in Lexington, S.C.,
since the 1980s. When relations
with a business partner soured, he
and his wife sold their interest, only
to have the community beg him to
return and start a competitor
because they were unhappy with
the new paper. He attributes his
success with the new paper to its
local-issues-only mission (and marketing to the legal community for
public notices didn’t hurt either).
Ultimately, he bought his old
paper back “for pennies on the dollar” and merged the two. Front page
stories one day in January included
news about a public hearing to consider a local smoking ban, among
others. He says his ad revenue in
2008 fell by 50 percent over 2007,
but his circulation of 5,000 is
among the fastest-growing in the
state. “We like to think we’re a
small-town newspaper trying to do
good things,” he says.

Talk the Talk
The Carrboro Citizen (circulation
The Carrboro Citizen in Carrboro, N.C., covers local 5,000) is barely two years old,
news for the town of 18,000, adjacent to Chapel Hill, and its owners might not have
heard that print is dead, even
N.C. The free weekly has a history of posting its
front pages to its Web site and also updates news via
though they’re seasoned in the
its Web site, blogs, and Facebook.
business. The paper grew out of

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dissatisfaction with coverage of Carrboro and a University
of North Carolina at Chapel Hill class project, an Internet
site called “The Carrboro Commons.” A stone’s throw from
Chapel Hill, Carrboro (population 18,000) is nevertheless a
“very different kind of town,” says editor and co-founder
Kirk Ross.
Ross and publisher Robert Dickson met in the class and
partnered in the Citizen venture. Dickson grew up in the
newspaper business. He also owns the Raeford, N.C.,
News-Journal, started by his grandfather in 1905. The
Carrboro paper, unlike the Raeford paper, is a free weekly.
The circulation revenue for the Raeford newspaper pays for
itself and that’s about it, Dickson notes, but in addition to ad
revenue, they run legal and public notices. (The Citizen is
restricted by state law from printing legal notices because it
isn’t a subscription paper.)
Despite its fledgling status, the Citizen has won first-place
awards from the North Carolina Press Association, one in
2009 for a hard-hitting story. “Just because we’re a small

paper, we don’t need to think small,” Ross says. He formerly worked for The Independent, an alternative weekly in
Chapel Hill, known for investigative work.
He attributes the paper’s success, breaking even, to its
language of local. “Almost all the successful community
papers had a style, a voice, and felt like a friend,” he says. As
big media firms bought small newspapers, they often
brought in staff who didn’t “speak the language.” (Of the 180
small papers in North Carolina, more than 100 are owned by
23 media firms, including the New York Times Co., Cox
North Carolina Publications, and the Gannett Co.)
The Citizen, though it’s a print publication, also has a
presence on the Web. “We wanted to be at that party too,”
Ross says. If they wanted to keep the status quo, they’d
be sitting pretty. But the Citizen wants to expand into
Chapel Hill. “We’re hearing the same thing from people
in Chapel Hill and Pittsboro and Hillsborough — they want
their local paper too. The big dailies aren’t covering
them anymore.”
RF

Help Wanted: Business Model for Hard News
BY B E T T Y J OYC E N A S H

he Internet topped all other media except television as the preferred outlet for national and international news for the first time in 2008.
The Internet continues to challenge reliable public
affairs coverage in the print world because Web sites like
Craigslist, a free classified ad service, has usurped that revenue, formerly a subsidy for hard news coverage. Media and
policy experts are looking at ways to save hard news by making the Internet an ally.
Hard news is a public good, expensive to create but cheap
to disseminate via the Internet, even if it’s third-hand content originally published by the big papers. And on top of
that, there is continued decline in newspaper readership
that is fueling “creative destruction” among the big metro
daily newspapers, historically the primary news hunter-gatherers of a democratic society. Media analyst John Morton
points out that 1,350 of the roughly 1,400 dailies average a
circulation of 30,000 and are healthy relative to the papers
in large metro areas. The Rocky Mountain News, for example,
ceased publication in February and the Tribune Co., which
owns the Baltimore Sun, Chicago Tribune, and Los Angeles
Times, filed for bankruptcy in late 2008. As late as 2003, the
average operating profit margin for publicly reporting newspaper companies was about 22 percent, but by early 2008,
the margin had fallen to 10 percent, only because of aggressive cost cutting, says Morton.
Historically, newspaper owners, often in monopoly or
oligopoly markets, enjoyed power and prestige and were
often willing to invest in public affairs coverage out of a
sense of civic duty. But consolidation in ownership and
the electronic revolution have shrunk sections and report-

T

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Wi n t e r 2 0 0 9

ing staffs. Classified ads formerly made up 40 percent to
50 percent of revenues for newspaper firms. The Web site
Monster, although it’s suffering now because of the economic downturn, has poached the newspapers’ help-wanted ads.
This kind of disaggregation, in which digital advertising
splits from content, hurts newspapers, says Rick Edmonds
of the Poynter Institute, a nonprofit school for journalists
that owns the St. Petersburg Times.
If these publicly owned metros decline or disappear altogether, then who will assume hard news and public affairs
coverage? Will fledgling nontraditional press organizations,
profit or nonprofit, file Freedom of Information Act (FOIA)
requests for access to records? Which groups will devote
months to investigations that reveal wrongdoing or ineptitude? What role will private media organizations play?
“The journalism produced by the large newspapers has
been greatly diminished,” Morton says, adding that those
organizations traditionally cover weighty, nonlocal events
that so many in our society depend on, including, by the way,
bloggers.
If the “watchdog” and public affairs function is harmed,
as shareholder demand drives publishers to serve segments
of the population that don’t consume hard news, then
that’s a market failure, says economist Jay Hamilton
of Duke University. He calls hard news a “tough sell.”
People don’t need or want national and international
news the way they need facts about the local schools or
their property taxes. But they do like knowing what
entertainers are up to. So it’s nearly impossible for
the detailed reporting that ultimately led to the
U.S. Attorney General being forced to resign to create much

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of a revenue stream for a media organization.
A ratio of searches to Web sites shows, Hamilton notes,
that an audience is more likely to seek information that
entertains or helps them make buying decisions than they
are to seek out policy details to help make civic choices.
These observations about information and democracy predate the Web and were detailed by economists such as
Anthony Downs and Mancur Olson.
In general, people remain “rationally ignorant” and it’s
not hard to understand why. The odds are slim that one person’s knowledge and subsequent action will influence policy,
and so there’s no immediate payoff to learning the nuts and
bolts of public affairs. But an immediate gain goes to the
reader who finds information that helps buy a decent car at
a good price.
As market forces work against hard news coverage today,
it’s useful to recall that newspapers in the 19th century were
subsidized by political parties because “they were after your
vote,” Hamilton says. In the top 50 U.S. cities in 1870,
Republican papers represented 54 percent of metro dailies
and 43 percent of total circulation in those cities. Thirtythree percent of daily papers were Democratic and held 31
percent of circulation in those cities, according to
Hamilton’s book, All the News That’s Fit to Sell.
Newspapers shed partisan politics, however, when they
needed more subscribers and advertisers. The development
of higher-speed (and more expensive) presses, cheap paper,
and increased population meant that newspapers could
print more copies more quickly and thus reach more readers. They could spread these higher fixed costs across many
readers if that increased circulation; advertisers liked the
idea, too, because they didn’t have to negotiate ads with multiple papers. Newspapers began to tout independence in
political coverage so they could build circulation among
readers of all political stripes, and often cut subscription
rates to expand audience.
Today, Hamilton says, the biggest market failure is in local
investigative reporting “because it’s costly but it’s valuable to
the community, but perhaps not highly demanded.”
Alternatives are emerging as nonprofit Web sites proliferate and foundations fund public affairs reporting projects.
Nontraditional and nonprofit newsrooms such as
ProPublica have popped up on the Web to fill the gaps in
watchdog coverage. The nonprofit Voice of San Diego’s
mission statement says it “aims to increase civic participation by giving citizens the knowledge and in-depth analysis
necessary to become advocates for good government and
social progress.” Josh Marshall of the investigative blog
Talking Points Memo in 2008 won a coveted journalism

award for reporting on a scandal in which U.S. attorneys
may have been dismissed for political reasons.
“The question is how do you maintain the watchdog
function of newspapers, not the newspapers themselves, but
the function?” asks Hamilton, who also directs the new
DeWitt Wallace Center for Media and Democracy at Duke.
Possibilities include nonprofit ownership or subsidies to
fund expensive investigations. For instance, the Knight
Foundation grants money to local foundations to create
information about causes they espouse.
An education foundation, for instance, might take up
information slack in a city where an education reporter’s
position has been cut. Ditto for health care via organizations
such as the Kaiser Foundation’s health care news service.
The nonprofit Sunlight Foundation since 2006 has funded
sites such as OpenCongress and FedSpending, among
others.
The DeWitt Center is examining these ideas and more.
Complex algorithms, for instance, may ultimately cut the
cost of “accountability journalism,” as more local reporters
train to investigate public data by this method. That takes
data-driven reporting farther and, as more public records go
online, may mine information from many sources simultaneously. The Knight Foundation, for instance, has given a
million dollars to Everyblock — five people in Chicago who
transform government data into neighborhood-specific
news on command. You want to know what the City Council
of Charlotte, N.C., is considering for your neighborhood?
Go to Everyblock and enter your address.
Government may play a role, too, by improving the
FOIA process and information infrastructure throughout
federal agencies, making data easier to obtain. In addition to
nonprofit and government involvement, perhaps critical
when maintaining a public good like public affairs coverage,
policies such as tax code changes might encourage family or
individual media ownership. Hamilton points out in All the
News That’s Fit to Sell that individuals or families may
“identify with the communities … and try to encourage civic
participation through information provision.”
Also under scrutiny is how poor people receive and use
information to make choices about payday lending, mortgages, education, and health care.
Still, the big metro papers teeter on the edge of collapse
now, and it’s too bad because when it comes to hard news,
they are household names, says Morton, the newspaper
analyst. They need that advantage. “It’s the brand name and
standing that the dailies still have that is going to help
them translate to the Internet,” he says. “Cutting back on
journalism is going to hamper that effort.”
RF

READINGS
Hamilton, James T. All the News That’s Fit to Sell: How the Market
Transforms Information into News. Princeton, NJ: Princeton
University Press, 2004.

Patterson, Thomas E. “Creative Destruction: An Exploratory
Look at News on the Internet.” Report of the Joan Shorenstein
Center on the Press, Politics and Public Policy, John F. Kennedy
School of Government, Harvard University, August 2007.

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Science Panel May Study Virginia Uranium Plan
BY B E T T Y J OYC E N A S H

enewed attention to nuclear power has stoked a
worldwide rush for the chief constituent of reactor
fuel, uranium. Its rising price makes the ore economically feasible to extract, and people are staking claims even
on public lands, including the Grand Canyon.
Uranium is a metal that’s slightly radioactive, found in
rocks, soils, rivers, and seawater as well as in granite, fertilizers, and coal deposits. It’s fairly common. But uranium in
Virginia? A large deposit of uranium ore — possibly 119 million pounds, if geologists’ assessments bear out — lies
beneath Pittsylvania County’s bucolic pastures.
But in Virginia, there’s the small matter of a 1983 state
moratorium on uranium mining. State legislators had rejected a uranium mine study, but a Virginia Coal and Energy
Commission subcommittee has authorized negotiations
with the National Academy of Sciences to study the idea.
The stakes are high. The study could clarify long-term
effects on air, water, and health. A separate analysis would
compare costs to benefits of a domestic uranium supply,
jobs, and possibly resource-tax money for the region.

R

Virginia’s Southside
Walter Coles Sr. still remembers the early 1950s when a
Geiger counter ticked up in response to what may be the
biggest untapped source of uranium in the United States.
The signal was so strong that the geologist who brought the
device, a friend of his father’s, thought it was broken.
Nuclear was hot then. President Dwight Eisenhower had
pitched “atoms for peace” in a 1953 speech to the United
Nations. Nuclear fuel occupied a prominent place in a future
of military might and peacetime energy.
Back then, as now, the two families who own the uranium
deposits could have sold the land and/or the mineral rights
for cash. But they want to mine it “for and by Virginians,”
Coles says, to shore up the economically depressed region.
The deposit lies six miles north of Chatham, Va., a town of
stately homes built in more prosperous times, in a region
known as Southside. Some of the yards display signs against
the uranium mine. Frankly, Southside could use the jobs.
The company, Virginia Uranium, estimates those could
number 300 to 500, and would include nuclear engineers, as
well as heavy equipment operators, among others. The jobs
and the possible taxes on the resource could spawn economic development and pay for education and conservation,
among other efforts, Coles hopes. About 40 miles away,
Babcock & Wilcox and Areva fabricate nuclear fuel, the
former for military and the latter for commercial purposes.
Area farmers, according to Coles, often supplement farm
income with other employment. Textile and furniture making have eroded, tobacco farming too. “We had raised
tobacco until three years ago, since 1785,” he remarks on a

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drive from the Chatham office to the property. He plants
hay for his hobby, 150 head of cattle. Even he left home as a
young man because there would not have been enough
income to support two families on the farm. He served in
Vietnam, and later worked on peacekeeping there, followed
by a foreign service career with the State Department, from
which he retired in 2004.
Under the property lies a geographical fault, and to the
west of it, “two approximately 350 meter long by 250 meter
wide ellipsoidal mineral deposits.” Those deposits of uranium lie in igneous rocks, hard rocks, but to be used as fuel
must be processed to a gas and then further “enriched” into
uranium oxide pellets. The ore would likely be excavated in
an open pit, using water to damp down the dust. The mill
would crush and chemically extract the uranium. The resulting uranium oxide, “yellowcake,” would go to a conversion
plant such as the one in Metropolis, Ill., and then to the
nation’s only enrichment plant in Paducah, Ky., before it’s in
any kind of geophysical shape to fuel reactors.
Contaminated leftover materials and chemicals used in
this kind of extraction process typically are collected in
retention ponds. The prospect of overflow or failure of
impoundments worries the state’s biggest environmental
group because of Virginia’s comparatively rainy climate.
Most mines are out West, in arid climates, or in remote
regions of Canada. At least one city that gets its drinking
water from reservoirs downstream, Virginia Beach, has
opposed it.
When the mine closes, the property will be placed in a
conservation easement, Coles says. Back on the farm, where
the original land grant that bears Thomas Jefferson’s signature hangs on the wall of the circa 1817 home, nothing
happened after the initial screech of the Geiger counter. In
1979, however, Marline and Union Carbide drilled core samples until 1984 under mineral rights leased from the two
families that own the land. The firms back then also leased
mineral rights to 16,000 acres in Fauquier, Orange,
Culpeper, and Madison counties.

Uranium Supply and Demand
There was even an economic impact study on the possible
Coles Hill uranium mine. But demand collapsed and the
leases eventually expired in the wake of core meltdowns in
1979 at Three Mile Island, and 1986 at Chernobyl. Cost overruns, nuclear disarmament, and overestimates of electricity
demand also killed the 124 nuclear reactors then on the
drawing board.
But nuclear’s looking, if not hot, then lukewarm. Nuclear
reactors don’t directly emit carbon. If carbon is priced anytime soon, then nuclear’s high capital costs might seem
more competitive. Per kilowatt hour, excluding any long-

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term waste or capital costs, nuclear generated electricity is
cheaper than coal or gas. Nuclear does leave a footprint,
though. Worldwide, uranium mines release carbon, processors discharge chlorofluorocarbons, also a greenhouse gas,
and then there’s that unsolved mystery — waste storage.
More nuclear waste repositories such as Nevada’s Yucca
Mountain would be required if reactors really had to take up
the electricity slack.
The Energy Policy Act of 2005 offered investment tax
credits and subsidies for construction, among other nuclear
perks. That and the industry’s longtime federal insurance
caps on accident liability have helped propel nuclear energy,
and, by extension, uranium prices.
Virginia Uranium estimates its gross revenues at about
$280 million annually depending on uranium prices, which
long term are expected to average $70 per pound. An
average mill, says project manager Patrick Wales, is likely to
produce around 3.5 million to 4 million pounds a year, for 30
years, roughly.
Back in the mid-1970s, uranium prices reached roughly
$112 per pound, in 2006 dollars. Uranium sold for $7 a pound
in 2002; the price is now about $42 per pound, down from
$136 a pound in 2007. The $136 was “due to a lot of investors
in this industry looking to buy and hold uranium,” says Nick
Carter of the Ux Consulting Co. “It’s now at a level where, in
order for a lot of these new mines to be developed, there
needs to be a much higher price.”
Production costs help determine viability. “Production
costs at Coles Hill are unknown,” he says. “The costs typically are higher here than say Kazakhstan and the eastern
countries because the regulatory system is much more stringent here than in Asia.” Existing mines in Kazakhstan can
produce below $20 per pound, maybe even $10, he says.
Ux Consulting forecasts uranium prices, but not for the
press. “What I can tell you is that over the next couple of
years, we see prices moving into the $50s and $60s,” Carter
says. “Beyond that, it’s really going to be a function of what
new projects come online. We’re seeing nuclear growth in
Asia, particularly in China and India.”
Exploration expenditures in the United States increased
116 percent from 2006 to 2007. Production in the United
States reached 4.5 million pounds of uranium oxide in 2007,
according to the U.S. Energy Information Administration,
about 4 percent of the world total, at six sites in the West.
Canada currently produces about 23 percent, Australia about
21 percent, according to the World Nuclear Association. In
Africa and Kazakhstan, uranium production is expected to
grow to 40 million pounds annually. About 55 percent of the
world’s nuclear power fuel today comes from uranium, the
rest from former military uses. That includes an annual 18
million to 24 million pounds of Russian high-enriched uranium. The agreement that allows this expires in 2013.
On the demand side, several utilities in the Fifth District
have plans to build new reactors and many have filed for
extensions on existing plants built decades ago. Activity is
high in the District because every state except Maryland

regulates utilities. This nonmarket structure lets firms earn a
rate of return on investments that can include reactors
which ordinary investors might decline to fund. South
Carolina Electric and Gas Co., for example, recently got new
rates approved for building two reactors. Similarly,
Dominion Power customers are already paying, via rate
increases, for a coal-fired plant under construction in
Wise County, Va.

The Unknown Element
The uranium mine at Coles Hill remains a largely “on paper”
enterprise, with operations and output, employment, and
other possible effects, good and bad, unknown to the larger
community. No current laws address the mining of uranium.
The Virginia General Assembly, if it lifted the moratorium,
would amend mining laws and draft regulations, according
to Mike Abbott of the Virginia Department of Mines,
Minerals, and Energy, which regulates coal mines in the
state, among other duties. “Our agency would be involved in
drafting the language with input from a variety of stakeholders, including the general public.”
Once the mine is decommissioned, then the U.S. Nuclear
Regulatory Commission specifies how the tailings, or waste,
are to be managed. How water flows through rock may
affect that. From 1911 through the 1950s, a Canonsburg, Pa.,
site was inappropriately mined, but remediated by the government in the 1980s. While there were no milling-related
traces in the surface waters of the nearby creek, the groundwater remains contaminated. Both surface and ground
waters will be monitored in perpetuity, according to the
Energy Information Administration. Mines in remote
Canadian locations, however, could prove similar in geology
and hydrology to Virginia, according to Virginia Uranium.
Because this hard rock mine is breaking new ground, the
Piedmont Environmental Council has requested that
Virginia sponsor original research. “The first thing to do is
study those areas comparable to Virginia — rainfall, geology,
hydrology — to see if it’s ever been done properly,” says Todd
Benson, a council attorney. “Show us five places where it’s
been done comparably.”
Virginia Uranium has offered to help pay for any study.
Meanwhile, the firm’s parent has sold an 8 percent stake to a
Canadian resource firm, Santoy, to raise cash, and plans to go
public in Canada first. The United States has been out of the
uranium mining business since the price collapsed, and
Coles notes that there’s little mining expertise left on Wall
Street.
Benson, for now, wants to make sure the study is sound.
“It appears the best possible study will require you do in-thefield research,” he says, because of Virginia’s rainfall
compared to the arid West. Waste lagoons could overflow in
a heavy rain event, and inaccurate predictions would mean
trouble. “Let’s look at where it’s been done -- has it been
done anywhere comparable to Virginia? If it’s never been
mined anywhere similar to Virginia, then at least we know
we’re in uncharted territory.”
RF

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Regency Furniture Stadium — Waldorf, Md.

Ballpark Boom

Fluor Field at the West End — Greenville, S.C.

New minor league stadiums spring up across the region
inor League Baseball gives the game’s future
professional stars and some colorful characters
the chance to perform in large and small cities
around the Fifth District. So it may be no surprise that
the District has experienced a boom in minor league
stadium construction over the past few years.
The minor league teams market themselves as affordable
entertainment for families. The pitch has proved successful,
as more than 43 million fans attended games throughout
Minor League Baseball during the 2008 season. Minor
league teams are big business. Class AAA teams are valued
starting at $15 million, while class AA teams are valued starting at $10 million, says Steve Densa, a spokesman for Minor
League Baseball.
Teams operate in large and small cities at the Class AAA,
AA, A, and Rookie league levels. In Class AAA, the highest
level of Minor League Baseball, teams compete in three
leagues: the Pacific Coast League, the International League,
and the Mexican League. Teams in the Pacific Coast and
International leagues have player development relationships
with Major League Baseball clubs.
Of the 30 teams in the International and Pacific Coast
leagues, 14 play in metropolitan areas that have at least one
franchise in either Major League Baseball, the National
Football League, the National Basketball Association, or the
National Hockey League. Seven of those teams play in
regions that have two or more franchises with teams in the
four major professional leagues.
The Charlotte Knights, one of those seven minor league
teams, are the Chicago White Sox’s Class AAA team. They
currently play in Charlotte’s South Carolina suburbs but
plan to move into the heart of the city.
Charlotte houses the National Football League’s
Panthers and the National Basketball Association’s Bobcats.
Smith College economics professor Andrew Zimbalist says
he doesn’t think the Knights compete much for fans with

M

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R e g i o n F o c u s • Wi n t e r 2 0 0 9

the Panthers and Bobcats because the seasons don’t overlap.
However, that doesn’t mean there’s no competition among
the teams at all. “What they do potentially compete over is
corporate sponsorship dollars,” he says.
There are cases of minor league teams at the Class AAA,
AA, and A levels that play in regions with Major League
Baseball teams. Liberty Media, owner of the Atlanta Braves
and all but one of its minor league affiliates, has moved
the Braves’ AAA farm team from Richmond, Va., to
Gwinnett County in suburban Atlanta. The former
Richmond Braves are now the Gwinnett Braves. In Class
AA, the Texas Rangers’ affiliate plays in Frisco, a Dallas suburb. In Class A, the San Jose Giants are a farm team for the
San Francisco Giants, while the Potomac Nationals, an affiliate of the Washington Nationals, play in Woodbridge, Va.,
a D.C. suburb.
The major league affiliation of minor league teams
doesn’t matter much to fans. “I think a lot of the fans from
one year to the next are not necessarily sensitive to who the
affiliate is,” says Stan Brand, vice president of Minor League
Baseball.
Major league teams can benefit from having their
farm teams closer to home. Cross-promotional activities
can occur when major and minor league teams are close
together, Brand explains. Major league teams may be able to
reduce personnel costs like training staff when their minor
league affiliates are in the same metropolitan area, says
J.C. Bradbury, an economist and health, physical education,
and sports science professor at Kennesaw State University in
Georgia.
To a certain extent, Minor League Baseball teams choose
locations for the same reasons Major League Baseball teams
do, says Bruce Johnson, an economics professor at Centre
College in Danville, Ky. They want to be in the largest markets possible because that’s where they can make the most
money. The decisions local governments make about build-

PHOTOGRAPHY:RICHIE DOWNS; BILLY CROWE /GREENVILLE DRIVE

BY DAV I D VA N D E N B E RG

PHOTOGRAPHY: JOE MOCK/GRAND SLAM ENTERPRISES, INC.

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ing and financing stadiums also
factor into the equation.
Player development contracts govern the relationship
between major league teams
and their minor league affiliates. The contracts last two or
four years. For the 2009 season,
six teams at the class AAA level
The “toast man,” an avid fan at Appalachian
will have new major league
Power Park — Charleston, W.Va.
parent clubs.
Minor league teams are subject to territorial rules, which NewBridge Bank Park — Greensboro, N.C.
creates opportunities for independent leagues, says Chris Allen, general manager of
Greensboro, N.C., is one of four cities in the Fifth
the Southern Maryland Blue Crabs in Waldorf, Md. There
District that has opened new minor league ballparks since
are seven independent leagues with teams in Mexico,
2005. NewBridge Bank Park has proven wildly successful for
Canada, and the United States. Many teams already play
the Grasshoppers. More than 400,000 fans jammed the
in suburban or exurban sections of regions with major
stadium in each of its four seasons. In its December 15 issue,
league franchises, like the Atlantic League’s Blue Crabs.
Baseball America honored the team with its Bob Freitas
“Minor League Baseball has to overlook a lot of great
award, which recognizes outstanding operations at each
markets,” he says.
level of Minor League Baseball. “They’ve just knocked the
Unlike affiliated teams, independent league teams have
lights out for four years in a row,” says former Greensboro
to pay their own players. The added expenses require teams
mayor Jim Melvin.
like the Blue Crabs to be more careful in their calculations
While the Grasshoppers have packed fans into their balland projections, Allen says. The team follows a grassroots
park, it hasn’t spurred much nearby development. Some
advertising approach as well. To attract fans, the team
adjacent properties are vacant, including the site of a
attends county fairs and similar events, and has their mascot
former Chevrolet dealership. Donald Moore, the team’s
stand on the corner by the stadium on game days with a sign
president and general manager, called the lack of developtouting that night’s game.
ment immediately around the stadium the sole
The Professional Baseball Agreement governs the reladisappointment for him since the ballpark opened, but said
tionship between Major and Minor League Baseball. The
the downtown area itself has grown. “Six to eight years ago,
first contract took effect in 1901, and the current version
on a weekend night, the last place you would ever think
expires in 2014. Under the agreement, major league teams
about going would be downtown Greensboro,” he says.
cover player payrolls for their minor league affiliates. Major
Growth has come downtown, including a city park, with
league teams and their affiliates share some operating costs
more planned. At the site of the F.W. Woolworth Building,
like bats and balls, Densa says. The minor league teams pay a
work has started on the International Civil Rights Center &
ticket tax to Major League Baseball based on an attendance
Museum. That’s where four students from what’s now
formula.
known as North Carolina A&T University staged a 1960 sitWhen the two sides negotiated the agreement in
in that proved integral to the civil rights movement.
December 1990 that took effect in 1991, it included new
Residents should have started moving into Center Pointe, a
requirements for minor league ballparks, including recomcondominium development located in a former Wachovia
mended seating capacities for stadiums at each
office tower, says Roy Carroll, president of The Carroll
classification, Brand says. The suggested seating capacity for
Companies, the developer of the complex.
Class AAA stadiums is at least 10,000 seats. One hundred
Major development has been proposed adjacent to the
nine teams have opened new stadiums since 1991, with seven
stadium. Steve and Jim Jones, whose family owns the nowmore slated to open this year. “It’s a much more pleasant
vacant Chevrolet dealership, proposed a $60 million to $100
experience for the fan than it probably was in 1991,”
million complex called Bellemeade Village, according to a
Brand says.
Greensboro News & Record report in May. The development
would have included shops, offices, condos, and apartments.
If You Build It, What Will Come?
The brothers backed away from their plans in 2006.
Carroll said he has an option on that land now and owns
During Greensboro Grasshoppers games at NewBridge
other parcels adjacent to the stadium. He’s planning 200
Bank Park, the team president’s dog, “Miss Babe Ruth,”
luxury apartments on most of the car dealer site, and retail
delivers balls to the umpire and, on Thursday nights,
on the remainder. That project will start once “banks decide
fans gather for “Thirsty Thursdays” when beer costs as
to start lending money again,” he says. Residential and
little as a dollar.

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retail are planned for the other parcels he owns.
Residential and retail space are two of the “three Rs” of
downtown development, with the other being restaurants,
says Andrew Brod, director of the Center for Business and
Economic Research at the University of North CarolinaGreensboro. The city had downtown restaurants before the
stadium opened, but retail and residential space have been
slow in coming to the city. Greensboro is a “city of suburban
neighborhoods,” Brod says. “I don’t think it’s easy to attract
business downtown.”
NewBridge Bank Park has been open for four seasons.
David Hoggard, a member of the city’s parks and recreation
commission and an opponent of the project who wanted the
team’s previous ballpark renovated instead, says development’s been slow because “it’s a ballpark.”
“You would think the building would have happened
during the excitement,” he adds. “Ballparks don’t spur
anything.”
While Greensboro’s ballpark was built as a freestanding
project, two other District cities plan to include their
stadiums as part of larger developments. Construction
has started on a ballpark in Winston-Salem, N.C., which
will have mixed-use development attached. It had been
expected to open at the start of the 2009 season but
faces delays, according to a Winston-Salem Journal report.
That’s because Billy Prim, an owner of the minor league
Winston-Salem Dash, is negotiating to buy out his business
partner.
The second phase of the project will turn adjoining land
into a mix of uses, including offices and retail. Prim controls
about 35 acres of land next to the ballpark. Including the
stadium, the entire development is expected to cost about
$189 million. The city is contributing about $12 million
to the stadium, $5.5 million of which came from the sale
of the team’s prior home to Wake Forest University.
Additional incentives will go to the development around
the stadium.
Derwick Paige, a deputy city manager in Winston-Salem,
says his city learned from Greensboro. It’s important that
the ballpark developer control the land around it, he says. “I
don’t think [the city] would have been involved were it not
for phase two,” he says.
In Richmond, a developer is proposing a more than $318
million complex in the Shockoe Bottom neighborhood
east of downtown. The development would include a
ballpark, retail, offices, and residential space. Taxes the
project generates would be diverted to pay off the stadium
construction cost.
Winston-Salem and Richmond are following a path
Cleveland State University urban affairs professor and sports
economist Mark Rosentraub advocates. “In more cases,
these mixed-use developments have produced success,” he
says. Rosentraub assisted on the Petco Park project in San
Diego, which delivered a new stadium for Major League
Baseball’s San Diego Padres and development around it. He
cites another successful example of this approach: the Arena

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District in Columbus, Ohio, where the National Hockey
League’s Columbus Blue Jackets and the Class AAA
Columbus Clippers baseball team play. “A sports facility is a
very large capital asset,” Rosentraub says. “No one would
buy or place a large capital asset in a specific location without a strategy.”
There are other ways to develop downtown areas than by
stadiums, says Dennis Coates, an economics professor at the
University of Maryland, Baltimore County. He mentioned a
Habitat for Humanity development in downtown
Baltimore, which has seen baseball and football stadiums
constructed since 1992. “I think that revitalizes the neighborhood far better and at far less taxpayer expense,” he says.
There are numerous examples where promises about
stadium-related development weren’t met, Coates says. And,
he adds, that even if it’s done effectively, it isn’t clear that
building a stadium is the right thing to do. “Wouldn’t it be
better to have something anchoring development used 365
days a year?”
Typically, stadium advocates approach debates about subsidies by saying the venue will generate tax revenues and
create new jobs, Coates says. There’s no evidence any of that
happens, but that doesn’t mean the ideal stadium subsidy is
necessarily zero. “What determines the effectiveness of the
subsidies is whether the return on the subsidy is greater than
the opportunity cost,” he says.
While Minor League Baseball has opened more than 100
stadiums since 1991, the big leagues have experienced a ballpark boom too. Since 1990, Major League Baseball — which
has 30 teams — has opened 19 new ballparks. In the same
time period, 17 National Football League teams started playing in new stadiums, and more than two-thirds of National
Basketball Association teams moved into new arenas,
according to an April 2008 article by Coates.
Over the last 20 years, the public has covered an average
of 65 percent to 70 percent of major league stadium costs,
Zimbalist of Smith College says. “The typical situation
involves a lot of one-sided and exploitative arrangements,”
he said. And the economic arguments against public investments in minor league stadiums are similar to those for
major league stadiums. “The same general conclusion holds,
which is a positive economic impact should not be anticipated,” he says.
Cities like Greensboro that have constructed minor
league ballparks have done so in a volatile climate. Since the
new stadium rules took effect, 93 of the 176 minor league
baseball teams that charge admission for their games have
relocated, compared to one major league team since 1973.
“Obviously movement is somewhat more frequent,”
Brand says. “My guess is that over the last almost two
decades, we’ve probably renovated or built 100 stadiums and
spent jointly with our communities in excess of a billion
dollars on these facilities.”
Richmond officials, who saw the Braves move, say the
number of team relocations in minor league baseball doesn’t
concern them when it comes to bringing a team back. “This

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is going to be a locally owned team versus some outside
major corporation,” says Carthan Currin III, the city’s
economic development director.
Baseball is a key part of the city’s history, Currin says. A
Richmond-led investor group hopes to bring a team back. If
they do, the team will have to play temporarily in The
Diamond. In the end, the stadium wasn’t a good enough
home for baseball, Currin says. Attendance dropped at
Richmond Braves games during the team’s final 10 seasons
there. In the 2006 and 2007 seasons, the team averaged
more than 330,000 fans, while the 2008 season drew about
290,000 fans. The 1999 season was the only one of the final
10 in which more than 500,000 fans attended games,
according to Minor League Baseball figures.
Current plans call for the city of Richmond to donate
about 11 acres of land for the potential new stadium in the
Shockoe Bottom area. The city would also cover about $8
million in infrastructure costs like utility relocations, says
Peter Boisseau, a spokesman for the project. Revenues generated at the ballpark and the private development around it
would be used to pay off the bonds. A deal hasn’t been
reached on the ballpark project, but Currin says the city
would not be on the hook for the bonds.
Shockoe Bottom is a great location for the stadium
because of the restaurants around it, says David Wilkins,
senior vice president with CB Richard Ellis in Richmond.
If the city wants land redeveloped, it has to participate.
“Without providing the land to the developer, in this environment, it would not be a viable project in my opinion,”
he says.
To help make the Greensboro ballpark a reality, the
Bryan Foundation acquired land for and constructed a
120,000-square-foot building for Guilford County’s social
services offices. In exchange for the $9.5 million building,
the county traded the land the ballpark was ultimately built
on and paid the foundation $4.5 million, Melvin says.
The foundation borrowed $10 million for the ballpark,
and the team pays $1.2 million a year in rent to service the
loan. The team can buy the stadium at any time for what the
foundation has invested in it. Moore says the team plans to
do that within five years.
In South Carolina, the Greenville Drive ownership
funded construction of its stadium and have paid for
improvements to it since then, says Nancy Whitworth, the
city’s economic development director. The city did buy the
land for the ballpark from the school district and paid for
some “streetscape” improvements to the property. The team
makes a small lease payment to the city.
Fluor Field at the West End, Greenville’s ballpark,
opened in 2006. The Drive is a Class A Boston Red Sox farm
team. The community has responded favorably to the new
team and stadium. According to the Drive’s Web site, the
team averaged 4,784 fans a night in 2006, an increase of 178
percent from 2005. Development, including condos and
restaurants, has sprouted around the ballpark too. “We’ve
been trying to work toward the revitalization of this area

for 15 years at least,” Whitworth says.
Charleston, W.Va., and Waldorf, Md., joined Greenville
and Greensboro as Fifth District cities to have opened
minor league ballparks since 2005. In Charleston and
Waldorf, local and state governments invested more directly in ballparks. The state of West Virginia provided about
$12 million of the more than $20 million ballpark cost
through a state economic development grant. Revenues
from the legalization of video lottery machines funded the
grant program. The Southern Maryland Blue Crabs, who
play in the new Regency Furniture Stadium in Waldorf, paid
a third of the ballpark’s $26 million cost there, says Gary
Hodge, a Charles County, Md., commissioner who supported the project. From day one, he said the ballpark was
designed as a quality of life addition for the community. “We
didn’t build this to make money,” he says. “The communal
experience in the stadium was one of the best things the
county has ever offered the public.”

Television and the Toast Man: Noneconomic
Benefits of Stadiums
Sports teams represent a socially consumed commodity,
writes University of Chicago economist Allen Sanderson, in
“In Defense of Sports Stadiums, Ballparks and Arenas,” an
article published in the Marquette Sports Law Journal.
Even if die-hard fans do not attend games, they can
watch games on television, hear them on the radio, read
about them, and discuss the team and its players with
friends and co-workers. Sports, perhaps like recycling programs, could be considered an activity that does not pass
benefit-costs tests on direct scrutiny but is socially efficient
in a broader context, Sanderson writes.
“I would give stadium advocates more credit if they went
down that line of argument,” says Frank Stephenson, an economics professor at Berry College in Georgia. “There’s
some element of civic culture that comes with having a local
sports team.” Stephenson adds that those benefits are likely
smaller at the minor league level.
Economic research, using contingent value methods, has
been conducted to try to measure these benefits. Bruce
Johnson of Centre College in Kentucky has done some of
that research. He worked with an economist to determine
what people in Lexington, Ky., would pay for a new arena for
the University of Kentucky basketball team and for a new
minor league baseball stadium. For the basketball arena,
community residents were asked about their attendance of
Kentucky Wildcats basketball games, their fan loyalty, and
the highest amount they would take out of their household
budget to make the arena possible. Questions about the
baseball stadium included the number of games the residents expected to attend, and whether they would support
higher taxes to fund the ballpark.
“Whatever willingness there was to pay was almost entirely due to their interest in going to games,” Johnson says. “It’s
not to say Minor League Baseball isn’t fun and a nice
continued on page 46

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• Region Focus

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Resources like these are incorporated into high school
curricula and teacher workshops throughout the
educational system.

Courtesy of the Powell Center for Economic
Literacy, Federal Reserve System, and
Virginia Council on Economic Education.

The economics behind high school economic education
BY R E N E E CO U RTO I S

group of analysts studies the S&P 500 as it plunges
100 points. Stocks have been tanking for days, so
tensions among many are mounting. Others are
guardedly optimistic that a bottom to the decline may be
near. By the end of the trading period, the exhausted parties
retreat to their desks to recap the trading day and discuss
strategy before next session’s opening bell.
These analysts are not stockbrokers; they are 12th-grade
high school students gaining their first introduction to
investing and personal finance through an online stock market simulation. The class session is part of an effort to teach
students economic concepts by immersing them in real-

A

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world scenarios instead of traditional lectures and graphs.
How do students like it?
“Due to the success of the program, the class size has
expanded from 85 students last year to 180 this year,” says
Tim Hudenburg, social studies teacher at Oakton High
School in Vienna, Va.
Stock market simulations are just one way in which
economics teachers try to blend economic theory with realworld application, and this is a scene you might find in any
number of classrooms across the country. About 50 percent
of high school graduates nationally take an economics
course in high school, up from 24 percent of students in the

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early 1980s. This is due in part to the push in recent years
toward adding economics courses as a high school graduation requirement (see chart on page 31).
The primary motivation for educating individuals about
economics and personal finance is fairly straightforward:
Economic and financial decisions pervade our everyday
lives. Yet, the concepts involved are not always intuitive and
are often downright complicated.
Adults face a variety of significant financial choices: what
current and future job opportunities to pursue, where to
live, whether (and when) to purchase a home, what financial
assets to invest in, and how much to save for retirement or
pass down to their children. Despite the fact that people
have an incentive to educate themselves about such financial
decisions, occasional missteps do occur. These range from
behavior that is simply hard to reconcile with standard economic theory — such as underparticipation in
employee-matching 401(k) plans or bypassing advantageous
mortgage refinancing opportunities — to more serious
financial mistakes that result in loan delinquency or bankruptcy. Highly targeted financial education initiatives have
been shown to help adults make better financial decisions.
Clearly, high school students don’t make financial decisions of the same magnitude as adults. They typically are not
in the market to purchase homes and most don’t even have
credit cards. However, many do face choices about jobs, how
to create and follow a budget, and how to save for college or
some other goal. They will most certainly face more complicated financial decisions as college students and adults.
High schoolers also are a captive audience. Economist
William Walstad of the University of Nebraska-Lincoln estimated that high school is the last opportunity for 75 percent
of people to ever formally study economics — either
because they don’t go to college or because only 40 percent
elect to take an economics course if they do go to college.
Together, these factors provide considerable rationale for
targeting educational initiatives in economics and personal
finance toward high schoolers.
Experience-based teaching methods like stock market
simulations have proven particularly effective at the high
school level. Still, quality education in economics and personal finance faces tough challenges, including inconsistent
requirements for graduation across the country, trade-offs
between teaching economics versus personal finance and
how to effectively make them complements, and the lack of
research studies to determine which types of programs work
best at this level of education.

The Lay of the Land
Even in states where schools are required to offer courses on
economics or personal finance, students may not be
required to take them. Similarly, despite the large number of
states that have established content standards for economics and personal finance, the number of states requiring
students to take the courses for graduation is dramatically
lower. As of the latest count in 2007 by the Council for

Economic Education (CEE), 17 states require students to
take economics before graduation, while only seven states
require personal finance.
Within the Richmond Fed’s district, only the Carolinas
require students to take an economics course prior to graduation, and no Fifth District state requires students to take a
course devoted to personal finance (see chart below). This is
not for lack of trying. In Virginia, for example, the state CEE
along with the local chapter of the Jump$tart Coalition for
Personal Financial Literacy recently encouraged the Virginia
Board of Education to insert into state graduation requirements a joint course on economics and personal finance.
The provision was passed in February 2009, and it will go
into effect starting with students entering 9th grade in 2010.
One of the main reasons that all states do not adopt
requirements in economics and personal finance is the
trade-offs entailed. For every economic concept a teacher
covers, a topic in another discipline is not. According to a
survey of teachers by Networks Financial Institute at
Indiana State University, the lack of time, state curricula
requirements, and demand are the three greatest challenges
to teaching financial literacy topics, according to K-12 teachers. Teachers also say that they are not sure where to even fit
financial literacy into curricula in which it is not already
required.
Schools are more likely to offer courses in economics and
personal finance if they have faculty available who are
trained in these fields. Indeed, another institutional challenge of this type of education has to do with the
qualification of teachers, a major determinant of how well
economics and personal financial are taught. A 1999 paper
by Walstad and Sam Allgood, another University of
Nebraska-Lincoln economist, argues that teachers need at
least six college-level courses before being qualified to teach
economics effectively — the paper claims that most high
school economics teachers, in actuality, take one or two economics courses in college. To address this issue, many

Fifth District Report Card
ECONOMICS
REQUIRED FOR
HIGH SCHOOL
GRADUATION

IMPLEMENTATION
OF STATE CONTENT
STANDARDS IS
REQUIRED *

PERSONAL FINANCE
REQUIRED FOR
HIGH SCHOOL
GRADUATION

IMPLEMENTATION
OF STATE CONTENT
STANDARDS IS
REQUIRED *

DC
WV
MD
VA
NC
SC
NOTE: *Content standards for the subject have been developed within the
state, and are required to be implemented (used) by schools. In Maryland, no
content standards have been developed for personal finance.
SOURCE: “Survey of the States: Economic, Personal Finance &
Entrepreneurship Education in Our Nation’s Schools in 2007,”
Council for Economic Education, 2007

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nonprofit organizations with an emphasis on economic and
financial education focus their efforts on teaching teachers.
Organizations such as the CEE, Jump$tart, and Federal
Reserve banks are primary contributors in this area, offering
an extensive supply of curricular materials and teacher workshops. The CEE and Jump$tart also get involved in
influencing content standards in states, as with the recent
push in Virginia.
One question raised by the gaps in state requirements
and teacher expertise is whether financial literacy is something better left to parents to teach their children. Whether
this is true may depend on who you are. Students who score
poorly on economic and financial literacy surveys are more

likely to be from households that are either lower in income
or educational attainment, or both. Students of those backgrounds also are less likely to go to college and, consequently,
are likely to earn less as adults.
These findings seem to imply that students who are the
least likely to learn personal finance fundamentals at home
are those who need that sort of training most at the high
school level. Lacking are studies that investigate the cause
of correlations between a student’s socioeconomic standing
and their economic and financial literacy. Regardless, it is
likely true in at least some instances that students cannot
learn at home what their parents themselves do not
understand.

How Well Do Economists Understand Economics?
Could you answer this question?
You won a free ticket to see an Eric Clapton concert
(which has no resale value). Bob Dylan is performing
on the same night and is your next-best alternative
activity. Tickets to see Dylan cost $40. On any given
day, you would be willing to pay up to $50 to see him.
Assume there are no other costs of seeing either performer. Based on this information, what is the
opportunity cost of seeing Eric Clapton?
A)
B)
C)
D)

$0
$10
$40
$50

A survey of 199 Ph.D.-level economists made headlines
in 2005 when, apparently, nearly 80 percent of them
answered incorrectly. Two-thirds of them had an average of
about 15 years post-Ph.D. experience, with the rest being
Ph.D. candidates, and almost half got their degrees from a
top-30 institution. Sixty-one percent of all respondents had
taught introductory economics.
Opportunity cost, as economists call it, is what you give
up in order to get something else. Put differently, opportunity cost is the value of your next-best alternative. It is one
of the most fundamental economics concepts there is, and
underlies all economic assumptions about how people make
decisions. Understanding your opportunity cost is, in theory, the means by which you decide if a given opportunity is
worthwhile.
In the question above, the correct answer is B: The
opportunity cost of seeing Eric Clapton is $10. You value
the Dylan concert at $50 but you would have to pay only
$40 to go, so your net benefit from seeing Dylan would be
$10. However, you forego the option to see Dylan, so you’re
giving up the equivalent of $10 if you choose to see Clapton
after all.
It turns out that the correct answer was the least popular of the economists surveyed, chosen by just 21.6 percent.

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R e g i o n F o c u s • Wi n t e r 2 0 0 9

The most popular answer was $50, which 27.6 percent
chose; 25.6 percent chose $40, and 25.1 percent chose $0. In
other words, economists’ performance on this question was
similar to the likely performance of kindergartners on the
same question: Choosing an answer at random would have
yielded a similar result.
Before we start to lament the state of the economics
profession, a closer look at the question is in order. Those
who thought the opportunity cost was $50 may have
believed that only the benefit received of attending the
Dylan concert was relevant, ignoring the cost of purchasing
the Dylan ticket. Those who chose $40 seemed to focus on
the word “cost,” confusing opportunity cost with the dollar
cost of seeing Dylan. Those who chose $0 may have misread the question, thinking they were being asked to guess
the opportunity cost of seeing Dylan (which would be nothing, since the Clapton ticket was free and the question
implies you don’t place any value on seeing old Slowhand).
These answers are still incorrect, but at least they are
justifiable. Many economists who answered the question
incorrectly probably either read too much into the question
or found the wording to be confusing.
Economic literacy tests like the U.S. Department of
Education’s National Assessment of Educational Progress
seek to separate jargon from basic concepts, attempting
to evaluate comprehension of the underlying idea over
memorization. Based on the survey of economists, this is
a good thing. For the use of economics in the real world, it
is less important that students can define the phrase
“opportunity cost,” and more important that they understand that people make decisions based on their
perceptions of the next-best alternative.
By the survey’s own admission, this study was casual and
extremely narrow. But it highlights a challenge in assessing
economic literacy at any level: Even when seemingly
straightforward, assessment is extremely difficult — and
survey design is key.
— RENEE COURTOIS

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Economics and Personal Finance:
Complements or Substitutes?
How is economics different from personal finance? One
might think of economics courses as developing the intuition behind how markets and economies work, while
personal finance provides a more applied understanding of
some of the financial decisions students currently face and
will continue to face in increasing complexity in adulthood.
In practice, high school personal finance typically
encompasses the fundamentals of saving and investing,
budgeting, and debt — concepts that might help transition
students from being under their parents’ financial wing to
managing their own finances. Its focus tends to be on the
practical application of skills within real-world situations
that students are likely to face.
High school economics, on the other hand, can take one
of two approaches. Some economics courses focus on economic theory: fundamental topics such as scarcity, the
determination of prices through supply and demand, and
the concept of comparative advantage. Other economics
courses are more applied and often linked to civics, covering
the roles of government, taxation, and comparative economic systems in societies. Rarely do high school economics
courses cover the more nuanced fields of economics such as
game theory and behavioral economics, but even the basic
economic principles taught at the high school level can
provide the foundation for students to utilize
economics as a framework for understanding both the financial and nonfinancial world.
Both economics and personal finance reinforce an understanding of how the economy and world operate, so
naturally there is considerable crossover between the two.
However, there is no consensus among states, or even school
districts within a state, on whether economics and personal
finance concepts should be taught together or in completely
separate courses.
This is a shame, according to some who view the two as
complements. Kurt Waters, a high school social studies specialist for Virginia’s Fairfax County Public Schools, says that
teachers who segregate personal finance from economics
miss a unique opportunity for students to recognize their
own patterns of behavior in microeconomic theories about
how people and firms make choices. For them, the juxtaposition of economic theory and the application offered by
personal finance can firmly ground these concepts as well as
create an appetite to learn more. “For kids who study theory
first, it can go in one ear and out the other. Bright kids will
soak up anything, but most kids need relevance to be able to
understand theory. They need to see it played out in reality,
and that makes it exciting to them,” Waters says.” “In my
experience, it is tremendously successful to hook them
with personal finance, and then weave economic theory
throughout.”
Tim Schilling, associate director of the Richmond-based
Powell Center for Economic Literacy, believes that comprehension of both economics and personal finance is critical

Push Toward Personal Finance
Lags Economic Education
18
16
14

NO. OF STATES

RF_WINTER_2009

12
10
8
6
4
2
0

Personal Finance
Economics
STATES REQUIRING A COURSE FOR HIGH SCHOOL GRADUATION
2002
1998
2007
SOURCE: “Survey of the States: Economic, Personal Finance & Entrepreneurship
Education in Our Nation’s Schools in 2007,” Council for Economic Education, 2007

because an understanding of how personal finance decisions
play out in the macroeconomy can help students understand
how aggregate outcomes can affect them personally. “I think
understanding economic principles is a vital component to
being financially literate. Understanding how economics
makes the larger picture work is important in making personal financial choices. Many people don’t understand the
concept of debt as a tool in the overall economy, much less
the macroeconomic implications of defaulting on loans,”
Schilling says.

Assessment Is Key
There are several goals of economic and financial education
at the high school level, including better preparation for
financial independence in college, better performance in
college economics courses, and producing more informed
voters. Ultimately, however, better financial decisionmaking
is largely touted as the primary goal. Unfortunately, research
is notably lacking in whether this is actually achieved.
By one measure, high school seniors’ financial literacy has
never been worse. The biannual Jump$tart Coalition’s 2008
Survey of Personal Financial Literacy Among High School
Students produced the lowest financial literacy scores of
high school seniors since the survey was first conducted in
1997, with high school seniors’ average literacy falling to 48.3
percent. The students were tested in classes unrelated to
business, economics or personal finance, so we cannot link
this performance to the quality of in-class instruction or to
the quantity of related classes taken by students. In other
words, the survey simply assesses high school seniors’ literacy of personal finance issues, not the effectiveness of
education geared toward it.
The U.S. Department of Education’s first-ever National
Assessment of Educational Progress (NAEP) in economics
may present a rosier picture, at least at first glance. This
2006 assessment found that 79 percent of high school students possess at least a “basic” understanding of economics.
The NAEP survey is carefully designed to assess comprehension of the fundamental concepts in macroeconomics,
microeconomics, and international economics — as
opposed to the jargon and algebraic properties that can

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saturate the field — whether students learned the concepts
in school, at home, or elsewhere. While the vast majority of
these students (87 percent) had studied economics in some
form in high school, their performance on the NAEP cannot
be tied to one specific course or method for teaching economics. Researchers will be able to better interpret these
results in the next NAEP study on economics in 2012.
The NAEP and Jump$tart surveys were not designed to
be directly comparable, so we cannot draw conclusions on
the state of economics education relative to personal finance
based on these separate assessments. For example, since the
NAEP test focuses on underlying economics concepts
instead of definitions, it may be easier for students to reason
through even without concrete, or quality, economics training. The Jump$tart personal finance literacy survey, which
can cover investment vehicles, the tax treatment of savings,
and stylized facts on investing, may be thought to require
more direct instruction and retention of definitions in order
for students to perform well. These disparities highlight that
survey design is a major determinant of results on tests of
economic and financial literacy.
There is an even greater challenge on assessing the
efficacy of economic and financial education. Despite the
best of performances on economics and financial literacy
tests, there is no guarantee that students will go on to apply
those concepts later in life. Financial decisionmaking and its
outcomes occur far outside the classroom, long after classes
have been taken. This means that studies which look at the
effectiveness of economic and financial literacy must connect learning experiences in high school with the financial
decisions made years later.
Longitudinal studies that follow individuals over time
run into a classic problem which high school economics students are warned about: the trap of confusing correlation
with causation. It may be that those who study financial topics in high school and go on to make sound financial
decisions are simply better at it to begin with. Researchers
can attempt to correct for this by accounting for factors
such as I.Q. or SAT performance, which have proven to correlate with economic and financial literacy. However, they
cannot capture the intrinsic willingness of some individuals
to engage in financial markets, adapt from past experiences,
and make themselves aware of new opportunities. In those
cases, financial education initiatives may not be the primary
drivers of behavior.
Schilling agrees that there is something inherent about
economics and financial education programs that makes

their assessment difficult. “We sometimes forget that there
are motivational factors beyond the financial that affect
decisions — time, emotions, self-satisfaction, etc. I’m not
sure you can capture that on a standard study.”

Forward Looking
Some conclusions can be drawn from studies on adult financial literacy about what educators could emphasize at the
high school level. First, successful programs for adults are
highly targeted and event driven: for example, homeownership counseling for adults about to purchase a home or
precrisis counseling programs for those making a major refinancing decision are the most effective. Second, programs
for adults tend to focus on their biggest financial risk areas:
debt management, mortgage counseling, and retirement
planning.
How would this be mimicked at the high school level?
From a personal finance perspective, education could be targeted toward the benefits and pitfalls of credit cards, the
basics of budgeting, and how students can form realistic
expectations for their financial future. It would also be helpful to provide students with an understanding that
individuals bear responsibility for their financial health. For
example, it is not the job of credit card companies to see to
it that individuals manage their debt — people must check
and manage their credit reports, and fraud can hit even careful consumers. From an economics standpoint, students
need to understand how to apply basic microeconomic reasoning to major decisions: Start with a cost-benefit analysis,
add incremental degrees of complexity, and keep aware of
unintended consequences. They also need a grasp of
how their financial decisions interact with the broader
macroeconomy.
We also know that experience-based activities which are
fun and involve real-world problem solving, such as popular
stock market simulations, may give students the most
encouragement to absorb and retain information.
Importantly, more assessment is needed on the effectiveness
of specific education initiatives at the high school level.
But who says tests of economic understanding aren’t
associated with changed behavior? Hudenberg’s stock market simulation exercise may have stumbled onto one surefire
method for getting students to absorb the economic and
financial information they’re learning. “The overall winner
of the stock market game does not need to take the final in
June, which has given the students some real incentive to
succeed,” the teacher says.
RF

READINGS
Ferraro, Paul J., and Laura O. Taylor. “Do Economists
Recognize an Opportunity Cost when They See One? A Dismal
Performance from the Dismal Science.” B.E. Journals in Economic
Analysis & Policy: Contributions to Economic Analysis & Policy,
2005, vol. 4, no. 1, pp. 1-12.
Hathaway, Ian, and Sameer Khatiwada. “Do Financial Education
Programs Work?” Federal Reserve Bank of Cleveland

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Working Paper no. 08-03, April 2008.
Martin, Matthew. “A Literature Review on the Effectiveness of
Financial Education.” Federal Reserve Bank of Richmond Working
Paper no. 07-3, June 2007.
“Report Card — Survey of the States: Economic, Personal Finance,
& Entrepreneurship Education in our Nation’s Schools in 2007.”
Council for Economic Education, 2007.

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Housing Cools State-to-State Migration
But Carolinas remain a magnet
BY B E T T Y J OYC E N A S H

eople aren’t moving much these days, but that has
only slowed, not stopped, the tide of migrants, return
migrants, and retirees to North and South Carolina.
Those were among the top 10 fastest-growing states last
year, continuing a longstanding trend broken only by recessionary dips.
Year-over-year U.S. Census Bureau estimates cover
changes from July 1, 2007, to July 1, 2008. The numbers capture the effects of current events, according to demographer
William Frey of the Brookings Institution. “A whole number
of southeastern and inter-mountain western states showed
lower growth last year, and even two years ago compared to
the middle part of the decade due to the inability of people
to get credit and mortgages,” he says. Frey notes that past
recessions were more job or industry related but the
housing crisis has had a lot to do with it this time. “The fastgrowing states are not attracting as many, and slow-growing
states are retaining more population because people aren’t
moving,” Frey notes. Collapsing home values have cut back
on peoples’ ability to sell homes in preparation for a move,
and have impaired mobility.
Even states with more out-migration than in-migration,
such as California and New York, have grown in population.
This is due to new birth and international migration. But
enough people did exit Rhode Island and Michigan that
those states lost population over the period.

P

Still Seeking South
North Carolina grew by 181,000 people overall, an increase
of about 2 percent. Of those, more than half (98,000) moved
in from another state; the rest of the increase stems from
foreign immigrants and births. Still, the domestic migration
numbers were off the 2006-2007 counts, by about 18,000
people. South Carolina grew overall by 1.7 percent year-overyear, and the bulk of those (75 percent, or 50,000 people)
came from other states. But those numbers slipped, too, by
almost 4,400 people.
Virginia and West Virginia netted only about 70,000 and
4,600 people, respectively. International migrants, almost
19,600, made up most of Virginia’s increase; the rest was
from births and domestic migrants. For West Virginia,
3,800, stemmed from state-to-state migrants. Virginia welcomed 2,670 people from other states. Maryland and
Washington, D.C., got 14,700 and nearly 4,000 people,
respectively, but most were international rather than domestic migrants.
Perhaps the biggest surprise in the numbers was Florida,
the granddaddy of all Sunbelt destinations. Florida saw the
first net out-migration in its history, attributed to the economic effects of its high mortgage foreclosure rate and

declining job opportunities. With 385,308 properties filing
foreclosure papers in 2008, Florida had the second-highest
rate in the nation. It’s mostly the housing market slowdown,
Frey says of Florida. People are moving to other parts of the
country.
The Carolinas are accustomed to recessionary dips. They
occurred in the early 1980s, 1990s, and the first part of the
current decade. In 1980, for instance, North Carolina’s net
migrants declined from 31,148 people to 26,081 people in
1981, and fell further to 22,003 in 1982 before growing to
53,714 in 1983, coinciding with the end of the recession.
(However, until 1990, the U.S. Census did not separate
domestic migrants from international migrants.) North
Carolina’s net domestic migration fell from 46,295 in
2000-2001 to 43,785 the following year, a decline of about
1 percent.
Ditto for South Carolina, whose 24,500 in migrants in
1980 plummeted to 1,700 in 1981, and 631 in 1982, before
climbing to 14,000 in 1983.

Carolina Life
Patrick Mason, co-founder of the Center for Carolina Living
in Columbia, S.C., has published a biannual guide, Carolina
Living, for 23 years. With a print circulation of 170,000, he
estimates it reaches about 425,000 people, distributed
by the North and South Carolina tourism departments,
welcome centers, and convention and visitors bureaus.
Mason says the guide is also sold in newsstands and bookstores in markets “known to be origin zips for movers to the
Carolinas.” The magazine contains a 26-question survey, and
“when you run the data all together over time, you get a nice
snapshot of trends,” he says. The idea is not only to collect
demographic information but also what Mason calls
“psycho-graphic” information such as whether the respondents hike or golf.
Newcomers are almost always from the Northeast and
Midwest, he says, and they often have been tourists first.
According to the Internal Revenue Service Statistics of
Income Division, South Carolina between 1990 and 1999
netted more than 20,000 in-migrants from New Jersey;
almost 44,000 from New York; 12,600 from Ohio; and
17,400 from Pennsylvania. Between 2000 and 2007, the state
had virtually the same numbers from New Jersey, but about
32,000 from New York, nearly 15,000 from Ohio, and 13,294
from Pennsylvania.
In the 1990s, South Carolina netted about 9,700 from
Florida, and 9,500 from that state between 2000 and 2007,
possibly quantifying the “halfback” phenomenon. That’s
when people migrate to Florida and then move halfway back
up the coast. Of Mason’s survey respondents, however, only

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Estimates of the Components of
Resident Population Change
July 1, 2007 to July 1, 2008 (Net Migration)
Total
Population Change
Total
International

SC
NC
VA
WV
MD
DC

Domestic

74,886

54,849

5,113

49,736

180,820

120,576

22,502

98,074

70,314

22,243

19,565

2,648

4,632

4,238

450

3,788

14,698

-17,069

15,092

-32,161

3,965

1,210

2,832

-1,622

SOURCE: U.S. Census Bureau

about 37 percent are older than 50, and few are younger than
30. That leaves people in the phase of life he calls “pre-retirement,” those searching for a place to retire.
But at the end of 2008, Mason’s survey response rate was
about 20 percent off. “That’s the first indication we’re seeing
that people are saying, ‘I don’t have time — we’ve got other
priorities.’ ”

Primary and Return Migrants
James Johnson knows the literature of migration as a professor at the Kenan-Flagler Business School at the University
of North Carolina at Chapel Hill and as a return migrant.

Johnson grew up in Falkland, N.C. (population 114) and
he’s not the only African American from that community to
leave for opportunity elsewhere, make his mark on the
world, and return. Falkland has produced a brigadier general, a top official in the Government Accountability Office,
and at least one dentist and doctor, among other successes.
Like many blacks between 1900 and the 1980s, Johnson left
the South. He graduated from North Carolina Central
University in Durham, and migrated north where he earned
graduate degrees at the University of Wisconsin (master’s)
and Michigan State University (doctorate).
“When I left North Carolina near the tail end of this
massive out-migration in 1975, I bought a one-way ticket,
vowing never to return to the South,” he wrote recently in an
op-ed piece for The Washington Post.
He landed in 1980 at the University of California at Los
Angeles, where he lived until 1992, when UNC successfully
recruited him back home. And Johnson reports other relatives and Falkland natives, including his brother, who have
also returned to North Carolina.
“The structure of opportunity changed dramatically in
the South, with good jobs available for talented people,” he
says. In fact, there’s an “unofficial” recruiting strategy that
state governments and private firms employ to lure former
residents back to their home states, he says. “This notion
that you have talented people who have gone away and done

Southern House-pitality
Southern states have long exerted a pull on people living in
other regions, a trend that gathered steam as the South’s
economy diversified and became less reliant on agriculture
during the years following World War II. Since 1950, the
South’s share of the population has grown from 24 percent
to about 30 percent, and many of those states have boomed.
It’s the housing, among other factors. Harvard
University economist Edward Glaeser has pointed out that
the number of people in an area is “intimately tied (almost
perfectly) to the number of homes. For instance, if states
(like California) restrict housing supply through land-use
regulations, then growth will decline, and that growth will
move elsewhere.” California has had multiyear periods in
which more people moved out of the state than into the
state, both in the 1990s and the current decade.
“We found little evidence to support the view that the
growth of the Sunbelt had much to do with sun-related
amenities,” he writes in a paper on the subject. “However, our
results do not mean that amenity improvements in the South
such as air-conditioning or clean water were irrelevant.”
When people leave other states, it boosts the population
growth elsewhere, including the South. (In fact, about
11,000 people moved to South Carolina from California
between 1990 and 1999, and 9,000 between 2000 and 2007.)
Glaeser wrote the paper, “The Rise of the Sunbelt,” with
co-author Kristina Tobio, published in the Southern

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Economic Journal in 2008. Defining the South as the 11 former Confederate states, Glaeser and Tobio examined
increased productivity, rising demand for sun-related
amenities like warm winters, and flexible housing supply.
The South’s productivity grew faster than the North
through much of the postwar period, Glaeser says. That not
only reflects “catch-up” with the already-industrialized
North — the idea that poorer economies grow at faster
rates than richer ones for a time — but the pro-growth
southern business climate. That includes the right-to-work
philosophy that dominates the South.
The paper found that population growth in the Sunbelt
was driven primarily by productivity increases between
1950 and 1980. After 1980, though, the fast-growing
and flexible housing supply has contributed mightily to
Sunbelt growth, which reflects the influence of a progrowth regulatory environment. Glaeser and Tobio
conclude that “faster housing supply growth in the South
has been at the very least almost an equally important
factor as economic productivity in driving the rise of
Sunbelt population.”
The authors also found little evidence that people are willing to pay for southern amenities such as warm weather.
Incomes are going up more quickly than prices, which leads
one to reject the view that somehow people are valuing
sunshine more, he says.
—BETTY JOYCE NASH

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well — can you entice them back? They have what is called
location-specific capital,” he says. “If you tie economic
opportunity with capital, then home places become a more
attractive place to move.”
The issue of return migration has been studied extensively by demographers. In the years following the Great
Depression, whites and blacks exited the South to find
work. Blacks also wanted relief from Jim Crow laws and the
deference customs in the South.
Whites show the highest rates of return migration (as
well as constituting the numerical majority of such migrants)
to the South over the past several decades, according to
William Falk and Larry Hunt of the University of Maryland,
and Matthew Hunt of Northeastern University. The authors
published “Who is Headed South? U.S. Migration Trends in
Black and White, 1970-2000” in the journal Social Forces in
2008. For blacks, they point out, the South may be more
attractive than ever. More blacks hold elected political
office in the South than elsewhere in the United States and
selected areas — especially metropolitan Washington, D.C.,
and Atlanta — have experienced pronounced concentrations of black wealth.
Results of the paper show that the proportion of blacks,
both primary and return migrants to the South, increased
from 1970 to 2000. “The percentage of blacks who are
recent primary (first-time) migrants increased threefold
from 1970 (0.4 percent) to 2000 (1.2 percent), while the percentage of those who are return migrants increased by
slightly more than a third (from 0.8 percent in 1970 to 1.1
percent in 2000).”
The authors also found that southern migration, while
stable for whites, is increasing for blacks: The percentage of
black non-southern residents who migrated south went
from 2.2 percent to 6.5 percent during the decades between
1970 and 2000. The paper also showed a decline among
whites and blacks leaving the South. For black people, the
decline went from 4.3 percent to 2.0 percent compared with
5.2 percent to 4.1 percent among whites. “In short, more
blacks are both ‘going home’ and ‘staying home,’ relative to
whites,” according to the authors.
Because fewer blacks have left the South in recent years,
there will be fewer migrants returning, so that stream seems
to be drying up. Family connections, though, still reign when
it comes to shaping migration choices.

Family Ties
While the South will no doubt continue to swell as the population ages and some seek the amenities of abundant and
affordable housing, fewer people are moving. And that’s a
continuing trend, according to the Pew Research Center’s

Percent Change in Population for States and
Puerto Rico: July 1, 2007 to July 1, 2008
PERCENT CHANGE IN POPULATION
2.0 or more
1.5 to 1.9
1.0 to 1.4
0.0 to 0.9
Population decline

SOURCE: U.S. Census Bureau, Population Division, 2008

2008 American Mobility Survey. The survey of 2,260 adults
was conducted in October 2008.
The survey found that almost 12 percent of Americans
moved between 2007 and 2008, the lowest share since the
government began tracking the trend in the late 1940s. The
rate was at about 20 percent from 1946 through the mid1960s before it started to fall.
Despite the bad weather rap, Midwesterners are the
most rooted — 46 percent of adults say they’ve spent their
whole lives in one community, compared to the West, where
30 percent have stayed in their hometown. In the South,
that number is 36 percent and in the East, it’s 38 percent.
Education and family ties make the difference. Seventyseven percent of college grads have moved at least once and
have lived in multiple states, compared to 56 percent with a
high school or lesser education. People who’ve never left
their hometowns have more family members — eight —
within an hour’s drive than do others who have moved —
three. Reasons to move include a better job; to stay, raising
children and family proximity.
The survey divides states into “sticky” and “magnet”
states,” with the Carolinas, of course, among the attractive
magnet states, along with every state in the Fifth District
except West Virginia. The share of residents in the District
of Columbia who were born elsewhere and moved into D.C.
is 63 percent; Maryland, 52 percent; Virginia, 49 percent;
South Carolina, 41 percent; and North Carolina, 40 percent.
Among those who cite retirement as a reason for moving,
half say the cost of living was a primary factor in choosing a
locale. Perhaps that’s further evidence that housing supply
and price drives the migration to the South that apparently,
even during recession, remains strong.
RF

READINGS
Cohn, D’Vera, and Rich Morin. “American Mobility: Who Moves?
Who Stays Put? Where’s Home?” Pew Research Center,
December 2008.

Glaeser, Edward, and Kristina Tobio. “The Rise of the Sunbelt.”
Southern Economic Journal, January 2008, vol. 74, no. 3, pp. 610-643.

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ost of the 363 banks in the Fifth District hold
fewer than $5 billion in assets. In fact, most are
community banks with under $1 billion in assets.
Banks of more than $10 billion in assets and located primarily in specific regions are considered regional banks,
while bigger banks (that do business over many regions in
the United States) are considered “large complex banking
organizations” (LCBOs).
Regional banks in the District include organizations
such as Carolina First of Greenville, S.C., and First Citizens
Bank and Trust Company headquartered in Raleigh, N.C.
Large complex banking organizations in the district include
Bank of America, N.A., RBC Bank, and Capital One Bank
(USA), N.A.
In addition to size and operations, banking organizations
are defined by chartering authority. During the formation
of a new bank or even afterward, bankers make decisions
about how, where, when, and why the new bank is going to
be operated.

M

One of the primary decisions is what kind of bank it will
be. Bankers must choose whether to be chartered by a state
authority or by a federal agency and whether to be a member
of the Federal Reserve System. These decisions will set the
regulatory stage and begin to forge the banker-regulator
relationship.
Of the 363 banks in the District, there are 99 state member institutions directly regulated by the Federal Reserve
Bank of Richmond and a state chartering authority. The
remaining banks in the District are regulated either by the
Federal Deposit Insurance Corporation and the state chartering authority or the Office of the Comptroller of the
Currency.
In addition to regulating state member banks, the
Federal Reserve System regulates bank-holding companies
and other financial entities such as foreign banking organizations and U.S. branches and agencies of foreign banks.
—BETTY JOYCE NASH

Largest Banks
Bank of America

Charlotte, N.C.

$1.5 trillion

Wachovia Bank

Charlotte, N.C.

$635 billion

HSBC

McLean, Va.

$182 billion

BB&T Corp.

Winston-Salem, N.C.

$147 billion

Capital One NA

McLean, Va.

$115 billion

Smallest Banks
Community Capital Bank of Virginia

Christiansburg, Va.

$13.1 million

Nuestro Banco

Raleigh, N.C.

$16.8 million

Great State Bank

Wilkesboro, N.C.

$24.3 million

First State Bank

Danville, Va.

$27.7 million

Bank of Westminster

Westminster, S.C.

$29.6 million

NOTE: By asset size as of 12/31/2008. Bank assets include cash, loans, securities, property, and other real estate owned by the bank.

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Assets
$13.2 million to $1 billion
$1 billion to $20 billion

MAP BY SARAH WATT, RESEARCH ASSOCIATE

$20 billion to $1.5 trillion
NOTE: Does not include bank branches
SOURCE: Department of Banking Supervision & Regulation
Federal Reserve Bank of Richmond

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INTERVIEW
George Selgin
Editor’s Note: This is an abbreviated version of RF’s
conversation with George Selgin. For the full interview,
go to our Web site: www.richmondfed.org/publications.
To many, the idea that an economy can function
without a central bank to issue currency or serve as a
lender of last resort will seem bizarre. To economist
George Selgin, the idea is one that needs to be taken
more seriously.
Selgin, a monetary theorist and historian, has recently
published a book titled Good Money: Birmingham Button
Makers, the Royal Mint, and the Beginnings of Modern
Coinage, 1775-1821. In it, he tells the story of how competition between private coin makers provided
much-needed currency during a critical time in Great
Britain’s economic history.

Since 1989, Selgin has been a professor of economics at
the Terry College of Business at the University of
Georgia. Last summer he took leave from Georgia to
serve as the BB&T Professor in Free Market Thought at
West Virginia University.
Stephen Slivinski interviewed Selgin on the WVU
campus on Dec. 11, 2008.

RF: Describe free banking. How does it differ from the
sort of system we have in the United States today?
Selgin: I use the term to mean laissez-faire banking — banking without any special government regulations or
restrictions. Like free trade, it’s an ideal concept. It doesn’t
refer to any specific or actual banking system, although
some, like Scotland’s in the early 19th century, came close.
My own ideal version of free banking would have no special requirements for note issuance. Private banks would be
able to issue their own notes on the same basis as they create
demand deposits. They would also be free to open branches
and invest in all kinds of securities. Finally, there wouldn’t be
any sort of implicit or explicit government guarantees, like
deposit insurance.
RF: Is a commodity standard necessary in your hypothesized free banking environment? Or, to put it another
way, is “fiat money” incompatible with free banking?
Selgin: I think a distinction needs to be made between the
banking regime on the one hand and the monetary base
regime on the other. The way I envision free banking, it does
not rely on a particular base regime. It’s true, as a matter of
history, that if you had free banking from the get-go, you
wouldn’t have central banks and you would almost certainly
have a commodity money standard, probably gold. But one

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PHOTOGRAPHY: TIM TERMAN, DIRECTOR, PR AND COMMUNICATIONS, WEST VIRGINIA UNIVERSITY

Selgin’s interest in monetary economics was piqued
after he graduated from Drew University in 1979 with
degrees in both economics and zoology. Upon reading a
paper on “free banking” — a system in which private
banks are able to compete with each other in the issuing
of currency and operate without government restrictions — Selgin decided to pursue graduate studies at
New York University under the paper’s author,
Lawrence H. White. After graduating from NYU
in 1986, Selgin became a leading alternative voice in
monetary economics.

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of it to have a stable monetary
can conceive of free banking in a
regime. Those
self-styled
modern fiat money setting.
We should take private
Austrian economists, mostly folWhat would make it free is that
production and issuance of
lowers of Murray Rothbard, who
the central bank would not have
insist on its fraudulent nature or
a monopoly on issuing paper
circulating money more seriously
inherent instability are, frankly,
currency the way central banks
than we do.
making poor arguments. I don’t
do today almost everywhere.
think the evidence supports
A modern proposal for free
their view, and that they overlook overwhelming proof of
banking that doesn’t radically alter the monetary base
the benefits that fractional reserve banking has brought in
regime is one that freezes the monetary base, lets banks
the way of economic development by fostering investment.
issue any sort of liabilities — including currency — and gets
The main thing to keep in mind is that a competitive
rid of deposit insurance. The central bank would still mainbank of issue is one that can issue circulating currency but
tain the monetary base but, in principle, it would just be a
has no monopoly on doing so. So it isn’t in a position to print
question of making sure it mopped up old central bank notes
up its own reserves or to print anything that other banks can
and otherwise maintained a fixed stock of reserve credit for
be counted on to treat as reserves. Free banks compete, as it
banks to settle with. In that case, you’d have free banking
were, on an even playing field in issuing paper IOUs, which
with a fiat money standard.
are basically what banknotes are. They have to redeem those
The fiat money we currently have is purely the product of
IOUs on a regular basis: The competition among different
central banks. I think it’s pretty clear that if we never had
issuers means that their notes will be treated the same way
central banks, we wouldn’t have fiat money. Instead, we’d
that checks are treated by banks today. They will be accustill have commodity money. I don’t think there were any
mulated for a day or so and then sent through the clearing
evolutionary forces at work that would have weaned monesystem for collection. It’s this competition among issuers
tary systems off of established commodity standards,
that assures that none of them has the power to lead the sysparticularly gold and silver. What would have happened
tem into a general overexpansion.
instead, and what was tending to happen while we still had
That’s quite unlike the situation you have when you have
those standards, was that the actual need for gold and silver
a monopoly bank of issue. Even in the presence of a gold
as money would have fallen, thanks to financial innovations,
standard, when the privileged banks’ IOUs are themselves
to very trivial amounts.
claims to gold, a monopoly bank of issue can expect other
In the Scottish free banking system, for example, actual
banks to treat its paper notes and its deposit credits, which
gold coin reserve ratios had already fallen to as low as 1
are close substitutes, as reserve assets — that is, to treat
percent to 2 percent of the banks’ outstanding demand liathem as if they were gold themselves. As a result of that tenbilities by the 1820s. Most of the liabilities were banknotes
dency, which exists only because the recipient banks are
back then — deposits weren’t so important. At any rate, the
deprived of the right to issue their own paper currency, the
Scottish banks didn’t need a lot of gold, and the system
less privileged banks become dependent on the monopoly
was always finding new ways to economize on it. But the
currency provider and, therefore treat its notes as reserve
ultimate standard was still gold, and I think it would have
money. Now that monopoly bank has the power to generate
remained so in the absence of government interference.
more reserves for the whole system and it, in turn, is free
of the discipline of the clearing mechanism. That’s where
RF: Do you consider fractional reserve banking
central banks’ power comes from. This is what allows central
inherently problematic? Does free banking require a
banks to promote a general overexpansion of credit and
commodity standard so private banks don’t issue too
inflation.
much currency?
What I just described is exactly the sort of thing that
triggered many of the financial crises of the 19th century.
Selgin: The advantages of free banking are distinct from
The irony is that people now see these periodic crises, espethose of the gold standard or any commodity standard. That
cially in England, as proving the need for a central bank and
doesn’t mean that I think there is no advantage to a gold
a lender of last resort. Walter Bagehot, on the other hand,
standard. As a matter of history, I think it’s a shame that the
recognized that the boom-and-bust cycles were a product of
gold standard was dismantled. That dismantling really began
a monopoly in currency issuance.
in earnest during World War I, and the gold standard that
Today, poor Bagehot must be spinning in his grave,
was restored afterward was a jury-rigged and, ultimately,
because your average central bank apologist likes to cite him
very unstable standard. But one can have a better banking
as having argued that every country should have its own censystem under free banking whether there is a gold standard
tral bank. That is a calumny. Bagehot in fact wrote very
or not. Fiat money would also work better with free banking
explicitly that he thought it would have been best had there
than without it.
never been a Bank of England, and if England instead had a
As for fractional reserve banking, I think it’s a wonderful
competitive banking system like Scotland’s. In that case
institution and that it’s crazy to argue that we need to get rid

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there would have been no need for any lender of last resort.
In recommending that the Bank of England serve as such a
lender, Bagehot wasn’t recommending a solution to problems inherent in unregulated banking. He was just
trying to get an inherently flawed Bank of England to behave
itself.
RF: You’ve already mentioned the Scottish banking system of the early 19th century as the best historical
example of a functional free banking system. How did
the Scottish system emerge?
Selgin: The Scottish system was unique, and that’s because
of politics. After the 1707 Treaty of Union, English authorities did not want Scotland to end up with an institution with
the same power and prestige as the Bank of England. They
more or less insisted that Scotland allow open entry into the
note-issuing business. So the Bank of Scotland, chartered in
1695, was followed by the Royal Bank of Scotland, and then
by other note-issuing banks, until Scotland had a couple of
dozen banks of issue — some big, some small — all competing. In this way the English quite unintentionally gave
Scotland the world’s most stable, most envied banking
system, and one far superior to its own. For one thing,
Scotland was relatively free of crises while England was buffeted by one crisis after another.
By the way, the same comparison can be made between
the U.S. banking system and the Canadian banking system in
the last half of the 19th century. Neither was a free banking
system, but the Canadian system was freer in crucial
respects, like allowing banks to issue notes without special
collateral requirements and allowing nationwide branch
banking. This greater freedom made the Canadian banking
system the envy of U.S. commentators at the time.
RF: Supporters of central banking claim it is superior to
free banking because the central bank can serve as a
lender of last resort in a crisis or a contagion. Are there
characteristics of a free banking environment that
would obviate the need for a lender of last resort?
Selgin: The standard view is that banking systems are
inherently fragile and that they’ll be subject to frequent
bank runs, which with fractional reserve banking will have
very serious consequences. But there’s no good evidence for
this view.
Two things need to be said. First, truly irrational and random runs on banks, out of pure ill-informed panic, are the
exception. In most cases the runs turn out to be based on
relatively accurate information about which banks are insolvent and which ones aren’t. In other words, so-called bank
“contagions” tend to be very limited.
Secondly, the tendency for banking systems to suffer failures, especially big clusters of failures, depends on the
regulatory environment. Had we had nationwide branch
banking all along in the United States, that alone would have

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allowed us to avoid many of the bank failures and problems
we’ve experienced.
So, the question that has to be asked is not whether
heavily regulated and structurally weak banking systems in
the past could have benefitted from a lender of last resort.
Perhaps they could have. It’s whether the first-best solution
is to get rid of the regulations that rendered these systems so
artificially fragile in the first place. I don’t think that laissezfaire or free banking systems, or the closest approximations
we have been able to study, have demonstrated the sort of
fragility that suggests the need for a lender of last resort at
all. In my opinion, a lender of last resort is a second-best
solution to problems caused by misguided regulation of
banking systems.
Freedom to issue notes is important too. When banks
can’t issue their own notes, well, they need a lender of last
resort to supply them with notes. If we told companies that
manufacture shoes that henceforth they could only make
shoes for left feet, lo and behold, there would be a need for
an “emergency” source of shoes for right feet, which could
be created by establishing a new government agency for the
purpose. Eventually people would say, “Thank goodness for
the Government Shoe Agency. How would anyone be able to
walk otherwise?”
RF: What is the “big problem of small change?”
Selgin: The big problem of small change — which is the title
of a very good book by Thomas Sargent and François Velde
— refers to the problem of trying to keep smaller denomination coins circulating alongside larger denomination
coins. Say you have a gold standard. If the mint strikes only
full-bodied gold coins, the smaller denominations will end
up being too tiny. You actually have historical examples of
very tiny coins being issued. But people lost them, and they
were otherwise very inconvenient. So, what else can you do?
You can switch to silver or copper, but then your large
denomination coins would be huge. In practice, no one
metal can be convenient for the full range of denominations
people need.
Instead, you can have two kinds of metal circulating as
coins — that’s called “bimetallism.” But bimetallism has its
own problem. So long as the mint sticks to a single unit of
account, its coining rates will imply a fixed relative price for
the two metals. But that price is bound eventually to differ
from the world relative price. When it does, the metal that’s
relatively undervalued at the Mint will no longer be offered
to it, and already-existing coins made from it will disappear
from circulation unless they’re badly worn.
The other solution, and the one that was adopted everywhere, is to use “fiduciary” or “token” coins. Here, the metal
isn’t the source of the coins’ value, which instead rests on a
contrived scarcity or their convertibility into nonfiduciary
money. The trouble with respect to such coins is that they
can be a tempting object for counterfeiters.
This brings us to the British case. By the 1780s, it was

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Very few people know this story.
estimated that more than 90 percent
What’s more, it was only thanks to
of the token copper coins in circulalessons learned from Great Britain’s
tion in Great Britain were fake. And
➤ Current Positions
private coiners, both concerning
the real ones were in terrible condiBB&T Professor in Free Market
how to make coins and how to
tion. Merchants and factory owners
Thought, West Virginia University
administer the coining system, that
could not get hold of enough decent
(2008-2009); Professor of Economics,
the British government and other
coins for making change and paying
University of Georgia (1989-present)
governments were finally able to get
workers. Of course, these problems
➤ Education
their official coinage arrangements
were interrelated. The lack of decent
B.A., Drew University (1979);
in sufficient order to allow them to
official coins just made it easier for
Ph.D., New York University (1986)
provide for the coinage needs of
forgers to market counterfeit coins,
➤ Selected Publications
industrial economies. Yet governwhile the extent of the counterfeiting
Good Money: Birmingham Button Makers,
ments still aren’t very good at doing
discouraged the Royal Mint from
the Royal Mint, and the Beginnings of
this. To this day there continue to
producing more legitimate coins. At
Modern Coinage, 1775-1821 (2008);
be serious coin shortages around
last, for several decades starting in
The Theory of Free Banking (1988);
the world. Argentina has been in
1775, the Mint decided not to proco-author, with Lawrence H. White, of
the grips of one for years. As long as
duce any copper coins at all.
“How Would the Invisible Hand Handle
we insist on letting government
Great Britain also used silver coins
Money?” in the Journal of Economic
monopolize coinage, we can expect
as not-so-small small change, but
Literature (1994)
such shortages to occur.
because Great Britain’s official
That’s where Sargent and Velde
bimetallic ration caused silver to be
go wrong in their book. They insist on treating the smallundervalued at the Royal Mint throughout the 18th century,
change problem as being due either to government
no silver was being brought to the Mint to be coined. In
authorities not having the right theory about how small
other words, from 1775 onward, the Royal Mint produced
change should be supplied or to their not having the right
hardly any small change of any kind.
equipment with which to implement the theory. They never
Now, this was no small matter. Britons needed small silver
really consider what one might call the “public choice” proband copper coins for all payments under a guinea. Banknotes
lems behind change shortages, including the perverse
didn’t help, because the smallest until 1797 were for five
incentives involved in a bureaucratic and centralized mechapounds sterling. This was at a time when the average British
nism for supplying coins. If you look carefully at the British
worker was lucky to get 10 shillings, or half of one pound
story, the problem there was very clearly not a lack of sound
sterling, per week. So, retail exchange, wage payments — any
theory or a lack of adequate equipment. Most of Great
transactions among the poor — there was no decent, official
Britain’s private or “commercial” coins were made using
money for any of it. At the same time, the Industrial
ordinary screw presses and were designed, issued, and
Revolution was gearing up. But that revolution depended
administered by people who never lost a moment’s thought
crucially on the growth of retail exchange and the expansion
to any theory, new or otherwise.
of the factory system. It depended, in other words, on precisely the sort of exchange media that the government was
RF: How is your book relevant today to monetary policy?
no longer supplying. So the small-change shortage threatened to slow down the process of British industrialization.
Selgin: The real lesson I want to get across with the book is
Yet the British government, instead of trying to fix the
that we should take private production and issuance of cirproblem, threw its hands up at it, leaving it to private merculating money more seriously than we do. Through their
chants and industrialists to figure out a solution, which they
unthinking failure to question governments’ coinage “predid, ultimately, by minting and issuing their own coins.
rogative,” economists set a precedent that made it all too
easy for them to excuse governments’ subsequent monopoRF: Tell me about your research into this historical
lization of paper currency, which in turn paved the way to
episode.
fiat money, unlimited government guarantees, and the prevailing international monetary chaos.
Selgin: This private coinage episode, which is the subject of
I wrote Good Money to challenge the oldest and most funmy book, was not a small thing. It was not a sideshow. In the
damental belief behind modern governments’ control of
course of 10 years, from 1787 to 1797, private coiners issued
money, by looking at a rare case where government didn’t
half again as many copper coins — in tons as well as in value
issue coins, but the private sector did. Contrary to what
terms — as the Royal Mint had issued throughout the previpeople assume, the episode suggests that the private sector
ous half century. Later, the private coiners would issue silver
alone is fit to coin money.
coins too. So, for a big chunk of the early Industrial
Revolution, the greatest part of the exchange medium used
RF: Do you see reforms such as currency boards in
to sustain that revolution came from the private sector.

George Selgin

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developing countries as a step toward your ideal of free
banking?
Selgin: I think the view that currency boards represent a
step toward free banking, perhaps even a big step, is partly
due to the tendency to equate free banking with the lack of
a central bank. I’m not saying that tendency is wrong, but it’s
a little bit misleading. There are ways of getting rid of central
banks that may still leave commercial banks far from free,
and currency boards are an example.
My perspective on currency boards is somewhat different. I agree that currency boards and dollarization can help
us move toward free banking, but they do so by eliminating
vested interests that tend to be among the most powerful
opponents of granting greater freedom to banks. Once you
dollarize, for example, whose concern is it domestically to
prevent local banks from issuing their own currency? The
currency profits — the seigniorage — are all going to another country. Allowing private institutions to supply currency
would convert at least some of it to domestic consumers’
surplus. There’s no central bank to capture the seigniorage
itself, and the treasury, which might otherwise look to a central bank to buy its debt, is now more likely to gain by
encouraging than by standing in the way of currency privatization. So what dollarization and currency boards do is to
get rid of at least some of the bureaucratic support for
restrictions on commercial banks. In that sense, they represent a movement toward free banking.
RF: Do you see recent approaches to monetary policies
and Fed actions as contributors to the current economic tumult?
Selgin: I agree entirely with those who blame the Fed for
fueling the subprime housing boom by holding interest rates
at such low levels for the early part of this decade. I think
that was a very irresponsible policy. It was so even according
to a conventional sort of Taylor rule, which, in my opinion,
would itself have been too easy. Elsewhere I’ve defended the
view that, in periods of growing productivity, central banks
ought to allow some deflation — that is, monetary policy
ought to be tighter than a standard Taylor rule would have it
be. If you view the Fed’s actual policy in light of this argument, then the policy was very expansionary. Taylor’s own
simulations suggest that if his rule had been followed, the
housing boom would have been something like two-thirds as
big. If the “productivity norm” I favor had been followed
instead, the boom would have been much smaller still.
Still, it’s a mistake to blame the Fed alone for the crisis.
And, to some extent, one wants to pity the Fed because the
truth is that central banks cannot get the money supply
right. They are trying to centrally plan it and they do not
have adequate information to go by. They could do better
than they have done, I think, by adopting the right rules. But
they are fundamentally flawed institutions.
In any event, the Fed provided fuel for the fire, but the
fuel was being directed into the mortgage market, and
42

R e g i o n F o c u s • Wi n t e r 2 0 0 9

specifically into the subprime market, by an array of other
government policies all aimed at increasing homeownership,
especially among less creditworthy persons, and at helping
the construction industry. The story is more complicated
than that, of course, but these are the essential points.
RF: What do you think are the prospects for achieving
something resembling free banking in the United
States?
Selgin: Financial innovations tend to take us in the direction
of free banking. Such innovations have already privatized
the greater part of national money stocks, and will keep
doing so in the absence of a wholesale nationalization of
banks. It’s only currency and coin that private firms have
long been prevented from supplying.
So long as private currency remains illegal, and even if it
doesn’t, further financial innovation will tend to make us less
and less dependent on any sort of paper currency or coins.
Smart cards, debit cards, that sort of thing, have already
made some inroads. And global pressures tend to favor the
loosening of other kinds of bank regulations. There is, however, one kind of regulation that is growing instead of
retreating and that market forces can’t or won’t resist, namely, government guarantees. Here things have been going the
wrong way for a long time. The spread of deposit insurance
and other explicit guarantees has been obvious enough.
Everyone thinks you can’t possibly have a stable banking system without deposit insurance, as if it weren’t the case that
only one country had deposit insurance nationally before
1967 and only two countries for a while after that. I think the
spread of deposit insurance has been very unfortunate, and
that the spread of implicit government guarantees has been
still more unfortunate, because implicit guarantees really
have no limits.
Thanks to government guarantees, moral hazard is the big
problem in banking today. We’ve got branch banking in the
United States, finally. We’ve got many good private substitutes for government currency. We’ve gotten rid of other
restrictive regulations like Glass-Steagall. Banks have a lot
of freedom now that they didn’t have in the 1940s and that,
so far as I’m concerned, is a good thing. But, tragically, back
in the 1930s, when the government was busy saddling banks
with regulations that would prove counterproductive, which
it justified using false claims about banks’ excessive risk-taking, it also saddled banks with deposit insurance, thereby
encouraging them to take excessive risks.
I don’t know how we’re going to get away from deposit
insurance and guarantees, but as long as we have them and
expand them, we can look forward to bigger and bigger
crises. So to me, the biggest banking reform we need —
bigger than allowing banks to issue their own notes, bigger
than allowing private mints to spring up — is to roll back
federal guarantees to the banking industry. Unfortunately,
doing that may prove to be an even bigger challenge
politically than trying to privatize all the world’s paper
money and coin.
RF

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ECONOMICHISTORY
West Virginia Glass Houses
BY B E T T Y J OYC E N A S H

A woman marks a design on a glass for
the cutter at Seneca Glass Co., opened in
1896 and closed in 1983 in Morgantown,
W.Va. Seneca leaded crystal was favored
by Eleanor Roosevelt and
President Lyndon Johnson,
among others.

he gatherer hoists a gob of hot
glass at the end of an iron rod,
a “punty” or “pontil” in trade
lingo. A shop mate clips it off so that
it drops into a water-soaked mold for
another craftsman to hand spin until
the mixture coats the inside. The
bowl, now cooled slightly, is emptied
onto a tray to await the oven that will
reheat and evenly cool the ware to
eliminate stress cracks.
It’s a frigid March day inside the
shop at Blenko Glass, located on the
Mud River near Huntington, W.Va.
The company shut down in late
January after a dispute when its former
gas supplier emptied its bank account.
The amount remains contested. But,
for now, the shop is back in business.
Blenko glass has retained its reputation for color (using more than 500
proprietary chemical concoctions)
and distinctive shapes, and is one of
just a few handmade glass factories
still operating. Blenko sells a variety
of ware, including architectural brick
and stained glass to just about every
stained-glass maker in the United
States. There is Blenko glass in countless collections, churches, and
sculptures, including pieces in the
National Cathedral in
Washington, D.C., and
the glass brick at
Fenway Park.
While Blenko shop
artisans rely on the
company’s century old
formula for success, the
world of sheet glass,
tableware, and container glass production has
largely vanished from
West Virginia. Glass
manufacturing offered
an alternative to natural

T

resource extraction, but didn’t pan
out the way some of the early
20th century boosters had hoped.
Comparative advantages of cheap
natural gas, sand, and river transportation eroded over the latter half of the
20th century in the face of falling
demand and growing competition in a
paper and plastic, free-trade world.
Gas can be piped anywhere these days,
but its growing cost is hurting the glass
industry.

Growing Glass
The glass industry in the United States
began in Jamestown, Va., at the time of
the founding of the first English
settlement, but did not thrive, even
though craftsmen immigrated from
Poland and Germany and helped
develop the industry. The most
successful glass houses grew up in
New Jersey, New York, and the New
England states. In those days, wood
fueled the ovens that melted the raw
materials.
By 1820, glass houses started to
specialize and hire blowers for window
glass and tableware. (To make sheet
glass at that time, blowers formed
cylinders that were then sliced and
flattened. Irving Colburn mechanized
the flat glass process in the United
States around 1910.)
The industry expanded as factories
grew, and tasks were divided, with the
more routine jobs performed by
the less skilled. A gatherer, blower,
finisher, and, when press molds were
invented in Pennsylvania in 1827, a
presser, represented the chief glass
jobs. Today, at Blenko, where the glass
is still made by hand, this shop system
of production remains intact, and
some workers have logged more than
40 years in the shop. Often, they

Wi n t e r 2 0 0 9 • R e g i o n F o c u s

PHOTOGRAPHY: LOC, PRINTS AND PHOTOGRAPHS DIVISION, HAER WVA, 31-MORG, 1-8

Natural gas,
sand, and river
transportation drew
glass makers to
West Virginia in the
19th century until
those advantages
dwindled

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follow the footsteps of fathers or uncles. The most skilled
jobs are finishing and blowing.
“We’ve never hired glass workers as such. We’ve always
trained our own people,” says the founder’s grandson, Bill
Blenko Jr. “They know that no one will be promoted over
them.”
By 1880, about 57 percent of U.S. glass house output came
from Midwestern states such as Ohio as well as western
Pennsylvania, especially around Pittsburgh. While there are
reports of West Virginia glass works at Wellsburg and
Wheeling as early as 1815 and 1831, respectively, it wasn’t
until the final decade of the century that industry numbers
grew substantially.
The Mountain State share of the national glass industry
labor grew from 3 percent in 1890 to 12 percent in 1915 and
15.3 percent by the onset of the Great Depression, according
to Kenneth Fones-Wolf, a West Virginia University historian
who wrote Glass Towns. Beginning in 1890 “West Virginia
glass plants and the capital invested in them would expand
by a factor of five and its numbers of glass workers would
triple.”
Between 1890 and 1920, mechanical improvements, especially the bottle-making machine, changed glass production
so that “large-scale production became typical rather than
exceptional, and the manufacture of glass products could no
longer be considered ‘backward’ as compared with other
industries,” wrote another economic historian, Warren
Scoville, then of the Massachusetts Institute of Technology.

by 1832 powered the New England glass works. He migrated
in 1888 with 115 skilled workmen, according to Walter Lezius
in another academic paper written in 1937. Michael Owens,
a glass blower originally from Wheeling, W.Va., went to
work for Libbey, an ironic twist because Owens had participated in the labor demonstrations at Libbey’s Massachusetts
plant. In an illustration of the glass industry’s often-cozy
relationship between management and labor, Libbey and
Owens became partners. They developed a research and
development business, Toledo Glass, to improve manufacturing processes, and they did. Owens invented the
automatic bottle-blowing machine in 1903. By 1920, there
were about 200 automatic Owens Libbey Suction Blow
machines in the United States.
In 1917, the Libbey-Owens-Ford sheet glass plant opened
in S. Charleston, W.Va., and cranked out sheet glass for 60
years. That plant and the Pittsburgh Plate Glass Co. in
Clarksburg, W.Va., dominated that branch of the glass
industry. Today, float glass, perfected by Sir Alastair
Pilkington in 1959, has replaced sheet glass and is no longer
made in the United States.
The bottle blowing machine also cut down on child labor
because the bottle industry had previously depended on
“mold boys” to open and close molds as well as boys to work
as blow-pipe cleaners, among other jobs. By 1890, the number of children in glass factories had begun to dwindle —
from 30 percent of the labor force to 20 percent — and by
the end of the century, there were laws against child labor.

Gas for Glass

Technology, War, and Unions

William John Blenko’s West Virginia shop was his second
U.S. endeavor, and he arrived at the tail end of an industry
restructuring driven by Friedrich Siemens’ changes in furnace technology in the 1860s and 1870s. The continuous
tank furnace promoted efficiency — around-the-clock production using plentiful and cheap natural gas.
Blenko in 1893 had established one of the first natural-gas
fired stained-glass factories in the United States, in
Kokomo, Ind. Born and trained in London, he aimed to sell
his product to domestic glass artists. However, they weren’t
interested. These studios, headed by European artisans,
insisted on European-made glass. Discouraged, Blenko
headed back to London to export the same product he had
crafted in Indiana, but later returned when he was in his 60s
to start a glass house in West Virginia in 1921.
The West Virginia glass business benefited from the
industry migration that followed the opening of the
Midwestern gas fields around 1880. “Entrepreneurs had to
weigh the advantages of being close to their materials
against the savings which they could effect by locating near
their own customers; and in the majority of cases they decided to construct their works near important sources of fuel,”
wrote Scoville in 1944.
For example, Edward Drummond Libbey moved to Ohio
from East Cambridge, Mass., partly because of labor problems but also because of the cost of transporting coal, which

Factory production ebbed and flowed with the push and pull
of economic forces. For instance, domestic spending that
had been deferred during World War I and increasing interest from abroad sparked heavy demand. But by the last half
of 1920, consumer purchases slacked off and that caused
inventories to build. Management enlisted the support of
labor to help ease the pain. In the July 11, 1921, edition of
China, Glass, and Lamps, a trade magazine, an article reported
that the president of the American Flint Glass Workers
Union urged members to “adjust the situation with the
manufacturers in the best way possible … American manufacturers have not yet reached that stage where they can
keep on producing without letup when they have no orders
for their goods.” But by 1922, production shifted as imports
outpaced exports. In another example of the industry’s ups
and downs, Prohibition slashed demand for barware and
glass bottles until it was repealed in 1933.
This was reflected in employment, which fell to 55,000 in
1921 from 77,520, before it stabilized at about 67,000
between 1925 and 1929. In West Virginia, employment grew
to 13,144 by 1929, but during the Depression fell to 8,759,
with annual earnings declining by more than one-third from
1929 to 1932, according to Fones-Wolf. The industry
rebounded by 1937, and a 1938 survey listed 62 glass plants in
West Virginia, second only to Pennsylvania.
The state, however, had attracted the less valuable

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Glass blowers at Seneca Glass Co. in Morgantown, W.Va., are
shown working with a bubble of hot glass in the factory’s
massive blowing room, with 14 clay ovens.

branches of the industry. Even though 22 percent of the
nation’s glass plants were in West Virginia, it had only 15.3
percent of its workers and produced 13.8 percent total value,
Fones-Wolf ’s research shows. Almost half, 45 percent, of the
state’s glass workers produced tableware, and that represented only 28 percent of the annual product value, while
bottles and containers represented 37 percent of product
value and employed 25 percent of the state’s workers.
The decline had been foreshadowed even in the 1920s:
That’s when investment in manufacturing stopped growing.
“The industry’s share of manufacturing capital invested fell
from 5.1 percent in 1909 to 2.6 percent by 1948, despite the
enormous advances in mechanization,” writes Fones-Wolf in
Glass Towns.

PHOTOGRAPHY: LOC, PRINTS AND PHOTOGRAPHS DIVISION, HAER WVA, 31-MORG, 1-41

Immigrants, Unions, and Tariffs
Early glass craftsmen like William John Blenko were immigrants, connected through family and professional contacts
to worldwide glass production. Even in the 1880s and 1890s
glass worker newspapers featured articles on the industry,
not only from Europe and England but also from faraway
Egypt and Russia, Fones-Wolf says in an interview. The hot
glass industry furloughed every summer because of the heat,
and immigrants returned home for family visits.
He cites an article from a glass industry newsletter about
Belgian glass workers in West Virginia. Original plans had
called for them to take guild positions in 1905 in Russia,
but they immigrated to West Virginia instead because
of timing — the Russian Revolution, which resulted in a
series of industrial strikes. And Fairmont, W.Va., was home
to several cooperative glass-making ventures, initiated by
Belgian and French glass craftsmen.
As glass shops reshaped in size, location, and work force
composition, attempts to unionize had culminated in the
organization of the American Flint Glass Workers Union in
1878. Fones-Wolf notes that the “flints” went on strike in
1879, 1883, and 1888, for higher wages. Materials costs

decreased in all three parts of the industry: sheet, tableware,
and bottles — while labor costs rose. In part, that’s because
glass required highly developed craft skills, such as blowing,
until the first part of the 20th century.
The union and glass employers also were aided by tariffs
first levied in 1789 to protect domestic industries. For example, between 1860 and 1890, heavy tariffs helped the
industry gain market share, but supply began to exceed
demand and led to plant closings and layoffs. In 1894, lower
tariffs increased imports. By 1939, glass ranked 38th of 351
manufacturing groups surveyed by the Census Bureau, with
70,000 people employed in 229 companies nationwide.
Relations between labor and glass management were
tight over the union’s early years in part because the industry
was composed mostly of descendants of the pre-industrial
glass houses. They were from craft families and artisans
themselves before becoming foremen and glass house managers. Labor and management sometimes worked together
to support favorable legislation to benefit the industry.
Historians have debated the effects of tariffs on technological change in the glass-making industry. Scoville has
suggested that high tariffs in part may have slowed innovation by cutting foreign competition in the 19th century. But
historian Dennis Zembala, who has written about specialization in the industry, notes that press molds were invented
in 1827, and innovations in furnace design came in the 1860s,
among smaller developments. It was the bottle-making
machine, invented in 1903, that revolutionized glass manufacturing and ultimately curtailed employment.
For example, Depression glass is simply machine glass
made during the Depression. “It helped and hurt the industry,” says Tom Felt, a collector who heads the West Virginia
Museum of American Glass in Weston. “It allowed production, but then handmade glass became high end glass, and in
the long run, it was too expensive to buy. The big costs are
fuel and labor.”
Union membership dwindled, hurt by industry mechanization as well as the chilling effect of crackdowns during
coal miners’ strikes in the teens and 1920s. The American
Flint Glass Workers merged with the United Steel Workers
in 2003, and their records are housed at the glass museum.

Bottles, Sheets, and Strands
Nationwide, the glass industry employs some 100,500 people and makes $23 billion worth of product, according to the
2005 Annual Survey of Manufactures by the U.S. Census
Bureau. That number declined from $27.7 billion in 2001.
The industry suffers from escalating energy costs and competition from low-cost labor markets.
Very little glass is manufactured in West Virginia anymore, and the West Virginia Museum of American Glass is
working to chronicle and display the history of the oncethriving industry.
“The factory was the best-paying job,” says Marcia
Radcliff, a Weston woman who worked for 20 years at Louie
Glass Co., one of at least three glass houses in the town, now

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all closed. About eight firms remain in West Virginia,
including firms like Blenko that manufacture glass by
hand. Marble King in Paden City, W.Va., makes decorative,
industrial, and play marbles. Masterpiece Crystal manufactures stemware in Jane Lew, W.Va. One of the most
famous is the Fenton Art Glass Co. in Williamstown,
W.Va., which sells via special order through its online catalog. And countless individual studio glass artists ply the

trade in shops throughout the state.
But for a generation, glass manufacturing influenced the
culture and economy of West Virginia towns and created a
flourishing middle class. The industry might have diversified
the state’s economy but did not, Fones-Wolf writes in Glass
Towns: “It was, unfortunately, never enough to completely
remake the region into an area that had a balanced and
self-sustaining development.”
RF

READINGS
Chandler, Alfred D., Jr. “Anthracite Coal and the Beginnings of the
Industrial Revolution in the United States.” Business History
Review, Summer 1972, vol. 46, no. 2, pp. 141-181.

Nutting, P. Bradley. “Selling Elegant Glassware during the Great
Depression: A.H. Heisey & Company and the New Deal.”
Business History Review, Autumn 2003, vol. 77, no. 3, pp. 447-478.

Fones-Wolf, Kenneth. Glass Towns: Industry, Labor, and Political
Economy in Appalachia, 1890-1930s. Urbana, Ill.: University of Illinois
Press, 2007.

Scoville, Warren C. “Growth of the American Glass Industry to
1880.” Journal of Political Economy, September 1944, vol. 52, no. 3,
pp. 193-216.

Lezius, Walter G. “Geography of Glass Manufacture at Toledo,
Ohio.” Economic Geography, October 1937, vol. 13, no. 4,
pp. 402-412.

Six, Dean. West Virginia Glass Between the World Wars. Atglen, Pa.:
Schiffer Books, 2002.

B A L L P A R K S • continued from page 27
amenity for people to have who are interested in that
sort of thing.”
Minor league sports don’t put cities on the map or make
outsiders think of them as “major league cities.”
They’re intensely local and don’t produce the public-good
benefits that major league sports do, Johnson says. He’s
worked with economists on similar research about the
National Hockey League’s Pittsburgh Penguins and the
National Football League’s Jacksonville Jaguars. But some
subsidy could be justified for major league venues, he says.
“The willingness to pay is always much much lower than the
cost of a stadium.”
Appalachian Power Park in Charleston, W.Va., hasn’t
delivered nearby economic development to the city. But the
ballpark, which houses the South Atlantic League’s West
Virginia Power, has still benefited the community, City
Manager David Molgaard says. “The overriding benefits, at
least to this point, have been intangible,” he notes. “It’s just

really become a gathering spot and the place to be in
Charleston.”
Events other than Power games have come to Charleston
and are planned there because of the stadium. It’s hosted the
finals for the World’s Strongest Man competition, boxing
matches, community events like Oktoberfest celebrations,
and more.
Appalachian Power Park also houses one of Minor
League Baseball’s colorful fans, the “toast man.” He’s Rod
Blackstone, the assistant to the mayor. Blackstone is mentioned on multiple Web sites that offer reviews of ballparks.
During Power games, Blackstone runs a toaster in the
stands. When an opposing batter strikes out, he throws
toast into the crowd to remind the player that he is, well,
toast.
“He’s part of the local flavor for sure,” Molgaard says.
“I tease him that we built the whole park around him and
his toaster.”
RF

READINGS
Graff, Laura. “Ballpark is Far From Ready.” Winston-Salem Journal,
Jan. 18, 2009.
Johnson, Bruce K., and John C. Whitehead. “Value of Public
Goods From Sports Stadiums: The CVM Approach.”
Contemporary Economic Policy, January 2000, vol. 18, no. 1,
pp. 48-58.
Johnson, Bruce K., Peter A. Groothuis, and John C. Whitehead.
“The Value of Public Goods Generated by a Major League
SportsTeam: The CVM Approach.” Journal of Sports Economics,
February 2001, vol. 2., no. 1, pp. 6-21.

46

R e g i o n F o c u s • Wi n t e r 2 0 0 9

Johnson, Bruce K., Michael J. Mondello, and John C. Whitehead.
“The Value of Public Goods Generated by a National Football
League Team.” Journal of Sport Management, January 2007, vol. 21
no. 1, pp.123-136.
Patterson, Donald W. “Bellemeade Parcel Has Potential Buyer.”
News & Record, May 8, 2008.
Sanderson, Allen R. “In Defense of New Sports Stadiums,
Ballparks and Arenas.” Marquette Sports Law Journal, 2000, vol. 10,
no. 2, pp. 173-192.

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BOOKREVIEW
Markets in Everything?
WHEN ALTRUISM ISN’T ENOUGH:
THE CASE FOR COMPENSATING
KIDNEY DONORS
EDITED BY SALLY SATEL
WASHINGTON, D.C.: AMERICAN
ENTERPRISE INSTITUTE, 2008, 228 PAGES
REVIEWED BY AARON STEELMAN

n 2006, Sally Satel, a lecturer at the Yale University
School of Medicine and a resident scholar at the
American Enterprise Institute, a Washington, D.C.based think tank, received a kidney donation. She was one
of the lucky ones. “In the fall of 2008 in the United States,”
she reports, “over 100,000 Americans were candidates for
transplantable kidneys, livers, hearts, and lungs.”
The vast majority of transplant candidates — about 75
percent — need kidneys. But they face a mounting challenge.
“Twenty-five years ago, the average wait for a deceased-donor
kidney in the United States was about one year; currently,
the average wait is approaching five years, and, in many parts
of the country, it is nearing ten,” she writes. “Last year, over
four thousand wait-listed individuals died.”
Considering the huge human cost of the failure to meet
this demand, Satel and Richard Epstein, a law professor at
the University of Chicago, organized a conference in July
2007 to discuss alternatives to the current U.S. transplant
system. The event consisted of presentations by economists,
philosophers, physicians, and others interested in exploring
the possibility of a more efficient and humane way of
allocating kidney transplants. The papers presented at that
conference are collected in this volume.
To most economists, the idea of creating a “market” for
organs is neither new nor inherently objectionable. But
to many others, the idea seems ghastly, something out
of a dystopian science fiction novel. In this volume, the
economic arguments for compensating kidney donors are
addressed — as well as the ethical concerns that may, in
the end, prove to be the biggest obstacle to adopting such a
system.
In 1984, the National Organ Transplant Act was passed.
The Act banned offering “valuable consideration” to people
in exchange for donating organs. In short, donors could not
be compensated. This, according to David C. Cronin II,
director of liver transplantation at the Medical College of
Wisconsin, and Julio J. Elías, an economist at the State
University of New York at Buffalo, “has failed to procure the
requisite numbers of kidneys for transplant.” They outline
two alternative approaches, one that they call the “free
market system” and one they dub the “centralized system.”

I

Under the free market system, those in need of organs
could potentially make private arrangements with donors,
determining a price for the donation, making provisions for
post-operative medical care, and handling other details that
would be made contractually explicit. In a separate paper,
Elías and economist Gary Becker of the University of
Chicago have estimated that the compensation required to
eliminate the shortage of organs would be roughly $15,000.
Such a system “would encourage some patients to secure
transplant organs legally rather than turning to the black
market, particularly since the wait in the legitimate system
would be sharply reduced,” write Cronin and Elías. But they
argue that such a system is too controversial and “will garner
virtually no political support.”
The centralized system, on the other hand, would
be more likely to gain such support. Under that system,
donor compensation “would be fixed in advance by the
government (federal or state), which would serve as the
single payer and prospectively determine the type
and duration of payments,” Cronin and Elías write. “The
compensation could take any number of forms, including
fixed payment or in-kind rewards, such as long-term health
insurance, college tuition, or tax deductions, or a package
that included some combination of these or other, equally
valuable, alternatives.”
An obvious question raised by the centralized system
proposal is: Wouldn’t such government compensation to
donors increase the cost to the public? Possibly, but as
explored elsewhere in the book, current government provision of dialysis treatment and other care needed by patients
with severe kidney problems, through Medicare and
Medicaid, is expensive too. On balance, then, a system that
would use public funding to compensate people who otherwise might not donate organs likely would be less costly than
the present system. And it would almost surely reduce the
shortage of available organs, giving life to people who might
die waiting for purely benevolent donors.
The economic and ethical arguments for adopting
a more incentive-based system of organ transplantation —
one that does not rely solely on the altruism of donors,
as important and noble as these selfless acts certainly are —
will seem strong, indeed compelling, to many readers. But
they probably will not convince those people who open this
book instinctively believing that paying people for organs is
simply wrong. Ultimately, this debate involves more than
simple cost-benefit analyses. It requires serious thought
about difficult normative issues. But one has to wonder: Is it
really desirable to cling to a system that fails to save the lives
of thousands of people each year when an alternative
approach is within our reach?
RF

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DISTRICTDIGEST

Economic Trends Across the Region

Housing Markets, Financial Markets, and Recession:
What About the Fifth District?
BY S O N YA R AV I N D R A N AT H WA D D E L L A N D B E T T Y J OY C E N A S H

T

District Prices
Housing markets in the District outperformed the nation in
the first part of the decade, as did house price growth. From
2000 to second quarter 2007, house prices in the Fifth
District grew 86.1 percent, an average annual rate of 9.1 percent, according to the Federal Housing Finance Agency
House Price Index (HPI). Nationally, house prices grew 69
percent, an average annual rate of 7.5 percent, over the same
period.
House prices rose dramatically in the Washington, D.C.,
metropolitan statistical area (MSA), which includes the
District of Columbia and parts of Maryland, Virginia, and
West Virginia. House prices in the MSA grew at an average
annual rate of 12.9 percent from 2000 to 2007. Meanwhile,
prices grew at an average annual rate of 12.3 percent in
Maryland, 10.7 percent in Virginia, and 14.6 percent in D.C.
Although the D.C. metro area influenced total apprecia-

Percentage of Subprime Mortgages
16
14

U.S.
Fifth District

PERCENT

12

6
U.S.
Fifth District

5
4
3
2
1
0
2000

01

02

03

04

05

06

07

08

NOTE: The serious delinquency rate is the percentage of homes in foreclosure
(out of the total number of mortgage originations) plus the percentage of
mortgages that are at least 90 days delinquent.
SOURCE: Mortgage Bankers Association

tion in Maryland and Virginia, prices in those states also
increased considerably outside the D.C. region. The
Lynchburg, Va., metro area saw the slowest annual average
growth of all metro areas in Virginia and it grew at nearly 6
percent from 2000 to 2007. Meanwhile, in five of seven
metro areas in North Carolina and three of four metro areas
in South Carolina, house prices appreciated at an average
annual rate of less than 5 percent between 2000 and 2007. In
fact, price growth was less steep in North Carolina and
South Carolina in general, where prices grew at an average
annual rate of 5.2 percent and 5.6 percent, respectively.
West Virginia University economist George Hammond
says most of West Virginia missed the housing boom except
the areas that lie in or near the D.C. metro area. Prices grew
sharply in the Winchester, Va.-W.Va., MSA early in the
decade, and then declined by 17 percent from fourth quarter
2007 through fourth quarter 2008.
But statewide, prices in West Virginia grew by an average
annual of 5.5 percent between 2000 and 2007. “West Virginia
missed the worst excesses of the boom, so it’s better positioned to miss the worst of the bust,” he says. House prices
declined by 0.5 percent over 2008.

10

Subprime Lending

8
6
4
2
0
2000

01

02

03

04

05

SOURCE: Mortgage Bankers Association

48

Serious Delinquency Rate (All Mortgages)

PERCENT

he Fifth District’s recession likely began in the
spring of 2008, later than the national recession,
which the National Bureau of Economic Research
(NBER) dates from December 2007.
Like the national recession, the District downturn was
ignited by a collapse in residential real estate markets. New
construction, home prices, and consumer spending have
been falling, while unemployment and mortgage delinquencies are rising. In addition, increased delinquencies of
subprime mortgages and the subsequent decline in value of
mortgage-backed assets have hurt financial institutions, further weakening the economy.
But through third quarter 2008, the District economy
performed better than the U.S. economy, even when
residential real estate is included in the mix.

R e g i o n F o c u s • Wi n t e r 2 0 0 9

06

07

08

The share of subprime lending in the Fifth District never
reached that of the nation. But it accounted for nearly
11.6 percent of the District mortgage market in second
quarter 2007 compared to almost 4 percent at the beginning
of 2000.
The expansion of subprime lending was much stronger in

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Page 49

DIFFUSION INDEX

Fifth District Retail and Manufacturing Data
40
30
20
10
0
-10
-20
-30
-40
-50
-60
-70

Shipments
New Orders
Retail Revenues

2005

2006

2007

2008

NOTE: The diffusion index equals the percentage of responding firms
reporting increase minus the percentage reporting decrease.
SOURCE: Federal Reserve Bank of Richmond

D.C., Maryland, and Virginia than in the Carolinas. In
Maryland and Virginia, for example, the number of subprime mortgages expanded more than fivefold from 2003
through second quarter 2007. Over the same time frame, the
number of subprime loans in the Carolinas more than doubled. Even though house price growth, financial market
innovations, and policy decisions enabled more lending in
the District, the share of subprime lending did not grow as
sharply as it did nationally.
As the overall U.S. housing market began to show signs of
stress toward the end of 2006 and into 2007, reports indicated stronger conditions in the Fifth District than the
nation. Nationally, subprime “serious” delinquency rates had
begun to climb toward the end of 2006. Serious
delinquency rates represent the
percentage of homes in foreclosure plus the percentage of
mortgages at least 90 days delinSubprime loans are those
quent. In fourth quarter 2006,
extended to borrowers
the subprime serious delinquenwhose credit is impaired
cy rate was nearly 8 percent, but
or who have limited or no
by third quarter 2008, the rate
documentation on
had jumped to 19.6 percent.
income or assets, high
In the Fifth District, it was
loan-to-value ratios, or
mid-2007 before serious delinhigh payment-to-income
quency rates started rising. The
ratios.
subprime delinquency rate
jumped 8 percent from second
quarter 2007 to 15 percent by third quarter 2008.
As subprime delinquencies rose, the value of investment
assets backed by mortgage loans fell, setting off a string of
problems in the financial sector. With rising delinquencies
and a stalled housing market, house prices peaked in the second quarter of 2007 and began the first national decline in
history, falling 4.5 percent by third quarter 2008. In the Fifth
District, prices over the same period fell almost 3 percent.
As prices fell and homeowners continued to lose equity,
prime delinquencies also started to rise. Although delinquency and foreclosure rates have remained below national
levels, the measures have risen notably in every jurisdiction
of the Fifth District.

QUICK
FACT

The Economic Consequences
As the boom in housing ended, residential construction
activity declined. Permit levels and housing starts have fallen, workers in construction and manufacturing have been
laid off, and consumer spending has fallen. As house prices
have fallen, even those households not in danger of losing
their homes have felt less wealthy and have reduced consumption.
Failed banks and mortgage companies also have left
employees without work, and economic uncertainty has
contributed to significant fluctuation in the stock market,
which has eroded consumer confidence and further reduced
spending. Furthermore, the deleveraging of financial firms
and heightened concern over the quality of borrowers has
reduced lending, making it difficult for businesses and
individuals to secure loans.
Manufacturers, retailers, and
financial firms are all suffering,
payrolls have fallen, and unemployment has risen.
Alternative-A (Alt-A)
The NBER estimates that the
mortgage loans are those
United States went into recession
extended to borrowers
in December 2007. Using state
with strong credit histodata along with monthly manuries, but nontraditional
facturing and service sector data
characteristics, such as
from Richmond Fed surveys, we
reduced documentation,
can estimate the timing and
a low downpayment, or a
depth of the recession in the
house that is not ownerFifth District.
occupied.
Employment in the Fifth
District peaked in the spring of
2008. Payroll employment estimates indicate a peak in
February 2008, with the household survey indicating an
employment peak around the same time. It was also in the
spring of 2008 when the number of unemployed in the
District began to grow beyond fluctuations of recent years.
Personal income may have peaked in the second quarter
of 2008, although this conclusion could change as more data
become available. Peaks in the indexes for Fifth District
manufacturing and retail sales measured by the Richmond
Fed survey are also difficult to judge. Nonetheless, in March

QUICK
FACT

Fifth District Real Personal Income
960
950
940

DOLLARS IN BILLIONS

RF_WINTER_2009

930
920
910
900
890
880
870
2005

2006

2007

2008

SOURCE: Bureau of Labor Statistics, Seasonally Adjusted

Wi n t e r 2 0 0 9 • R e g i o n F o c u s

49

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Page 50

2008 the indexes for both shipments and new orders in
manufacturing began to fall to levels far below what the
measures have seen even in the difficult environment of the
past few years. In the retail sector, the index for revenues
peaked in June 2007, but the index started dipping to
extremely low levels in April 2008.
From these data, therefore, it appears that the Fifth
District is in a recession that began in the spring of 2008 —
a few months after the national recession began.

THOUSANDS

Fifth District Payroll Employment
14,100
14,000
13,900
13,800
13,700
13,600
13,500
13,400
13,300
2005

Looking Forward

2006

2007

2008

SOURCE: Bureau of Labor Statistics, Seasonally Adjusted

Although in the early part of this episode, housing markets
in the Fifth District fared better than the aggregate nation2008. While reports on existing home sales and new resial market, they have slowed enough to create problems
dential construction indicate some potential firming in the
elsewhere in the economy. In addition, the depth of the
northern part of the District and other parts of the country,
regional recession is likely to be affected by the stress on the
conditions in the Carolinas have deteriorated further. The
banking sector caused by the mortgage crisis.
sluggishness in residential real estate may persist in the
A primary reason for the relatively more stable housing
Carolinas after conditions start to turn
conditions in the Fifth District was the
around in the nation and the D.C. area. This
strength of the Carolinas. But house prices
could impede the quick recovery of the Fifth
in North Carolina and South Carolina postDistrict economy.
RF
ed their first declines in the third quarter of
In securitization, the cutoffs between tranches for
structured products are
usually chosen to ensure a
specific rating. The safest
offer investors a relatively
low interest rate, but are
the first to be paid out of
the cash flows from the
An expansion in lending to people who
replaced in recent years by an “originate
assets. Those tranches are
previously would not have had the opportuand distribute” model.
usually rated AAA. Tranches
nity to buy homes — so-called Alt-A and
Here is how that works: After making a
that will be paid only after
subprime mortgage lending — fueled the
loan, banks typically form portfolios of
other tranches are paid out
housing boom. According to Mortgage
mortgages, loans, corporate bonds, or other
typically have much lower
Bankers Association data, the number of
assets (called “structured products”) and
ratings.
prime mortgages serviced in the United
slice them into tranches, or groups, before

QUICK
FACT

Subprime Primer

States almost doubled from 2000 to 2007,
while the number of subprime mortgages
grew almost tenfold.
Fifth District mortgage growth was less skewed toward
subprime. Over the seven-year period, prime mortgage
lending more than doubled in the District while there were
about five times as many subprime loans made.
Although future research will shed more light on this
recent episode, there is some consensus that policy decisions, house price appreciation, and innovations in the
financial system all contributed to the escalation of subprime lending.

First, accommodative monetary policy and government programs targeted at homeownership encouraged
institutions to lend and people to buy homes. Second,
steep house price appreciation allowed borrowers to
take on more house than they ultimately could afford.
Borrowers used escalating home values to refinance and
extract equity. Finally, the traditional banking model of
originating and maintaining a mortgage or loan was
50

R e g i o n F o c u s • Wi n t e r 2 0 0 9

selling them in the market. The tranches
are then sold separately to, for example,
pension funds, hedge funds, or structured investment vehicles. This “securitization” was the main financing method
of the major subprime mortgage originators. It spread risk,
enabling lower interest rates.
Securitization also increased the available pool of money
for loan originators because it allowed investors to indirectly hold assets that they were previously prevented from
holding for regulatory reasons. For example, certain pension funds that could invest only in AAA-rated
fixed-income securities could invest in a AAA-rated senior
tranche of A-rated securities.
Toward the end of 2006, national subprime serious
delinquency rates began to climb. Those are the percentage
of homes in foreclosure plus the percentage of mortgages at
least 90 days delinquent. In the last quarter of 2006, the
subprime serious delinquency rate was 7.8 percent, but by
third quarter 2008, the rate was 19.6 percent.
—SONYA RAVINDRANATH WADDELL

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Page 51

Outside the Urban Range:
House Prices in the Rural Fifth District

PERCENT

House price appreciation has stalled in nonmetro areas
Regional Nonmetro House Prices
of the District. Prices for land, with its variety of uses, are
(Year-over-Year Percent Change)
more difficult to gauge and appear to vary from state
to state.
30
About 17 percent of people in the United States live in
25
MD
NC
SC
VA
WV
places outside the commuting range of urban or metro areas
20
of more than 50,000 people. The classification is used to
15
define “rural” for research and policymaking.
10
Rural areas didn’t grow as much as metro areas over 2000
5
to 2005, according to the Economic Research Service of the
0
United States Department of Agriculture. Nonmetro area
-5
populations increased only slightly, about 2.2 percent, com-10
99
00
07
03
08
01
98
02
05
06
04
pared to a 5.3 percent increase in urban areas over the first
SOURCE
:
Federal
Housing
Finance
Agency
half of this decade.
In 2008, the Federal Housing Finance Agency released
tighter in the private sector. That’s part of it.”
indexes for nonmetro house prices. Those measure the rates
Lori Lynch, an agricultural economist at the University of
at which prices changed from quarter to quarter, year to year.
Maryland, has studied land prices for her research into the
The indexes show that in all Fifth District states, prices
viability of Maryland’s land preservation program. “We’re
reflected metro prices: They began to rise in the early part of
half agriculture, half forest. The study we did looked at
the decade.
whether or not we could save a million acres.”
Year-over-year house price appreciation in nonmetro
Rural land prices are influenced by the potential for resiareas started to slip by fourth quarter 2005. Growth peaked
dential housing development. In Maryland, she says, land
at 9.2 percent in North Carolina at the end of 2005, but
prices throughout the state, even in the most remote
slowed to 4.6 percent by fourth quarter 2007, and further to
corners, seemed to have appreciated because of that possi1.7 percent by the end of 2008.
bility. “Garrett and Allegany [counties] would be least
In South Carolina, the year-over-year change slipped to
urban influenced, but they also were getting second home
-0.8 percent by the end of 2008, after having reached a
purchases,” she says.
growth rate of 10 percent as late as mid-2006. In Virginia,
“Between 2002 and 2005, agricultural land prices went up
house price growth peaked in 2005 at 17.7 percent over the
more than 100 percent, while the agricultural value of
previous year but by 2008 had fallen to -1.4 percent.
the land went up 12 percent to 14 percent,” she says. That’s
While those price indexes apply to home prices in nonwhat the land would be worth for agricultural uses, not
metro areas, land prices are trickier to evaluate because of
development.
the wide variety of ways land is used: agriculture, pasture,
“They seem to think that any time they want, they could
and residential development.
just find a developer and sell their land, move to Florida, and
Land prices don’t appear to be on the decline in North
live happily ever after. Whether that’s factual is really, really
Carolina, according to Mike Huskey. He heads the farm
hard. There’s a lot of land in Maryland,”
loan programs for the United States
she says.
Department of Agriculture in Raleigh,
But now the market has dried up.
N.C. “Traditionally up until this year, land
“The bottom line — the market has just
prices were on the increase, 10 percent to
stopped. It started slowing down in 2005.
12 percent, but even that would vary,” he
Nonmetro
There’s not a lot of action because we
says. “I think people are still investing in
House Price Appreciation
don’t have that many transactions.”
land — they see it as a better investment
2007
2008
As for foreclosures, she hasn’t heard of
than the stock market. There are probably
even one in Maryland. “That doesn’t seem
fewer transactions now with the economy
MD
1.3
-5.8
to have hit the farm community the same
being the way it is, but people are still
NC
4.6
1.7
way,” she says. “I haven’t even heard people
investing in land.”
SC
5.0
-0.8
talking that much about credit problems.”
His agency lends to farms, and loans
VA
2.4
-1.4
Farmers seem more concerned about
have increased. “I don’t know what to
WV
4.6
2.7
input prices.
attribute it to,” he says. “But credit is
—BETTY JOYCE NASH
SOURCE: Federal Housing Finance Agency

QUICK
FACT

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State Data, Q3:08
DC

MD

NC

SC

VA

WV

709.7
0.8
2.4

2,597.9
-0.4
-0.5

4,132.0
-0.3
-0.6

1,924.6
-0.9
-1.2

3,767.3
0.0
0.1

763.2
0.4
0.6

1.6
-4.0
-4.0

128.0
-0.9
-2.9

512.3
-1.6
-4.6

241.9
-1.4
-3.0

264.2
-1.1
-4.5

56.1
- 1.3
-4.8

Professional/Business Services Employment (000’s) 153.2
Q/Q Percent Change
0.0
Y/Y Percent Change
0.7

399.0
0.6
0.3

504.2
-0.6
0.3

219.3
-2.6
-3.5

659.1
0.3
1.7

60.6
-0.5
-0.5

Government Employment (000’s)
Q/Q Percent Change
Y/Y Percent Change

236.5
1.0
2.3

488.9
0.5
2.0

708.7
0.7
2.7

343.2
-1.2
2.2

697.3
0.9
1.9

147.2
0.7
1.4

Civilian Labor Force (000’s)
Q/Q Percent Change
Y/Y Percent Change

333.9
0.5
2.4

2,999.2
0.1
0.3

4,552.2
0.6
1.0

2,160.3
0.9
1.7

4,129.4
0.4
1.3

804.6
-0.3
-1.2

7.2
6.6
5.5

4.5
4.1
3.5

6.6
5.9
4.8

7.2
6.3
5.6

4.1
3.8
3.0

4.2
4.3
4.5

31,431.8
-0.6
-0.1

221,375.0
-0.8
-0.4

259,648.4
-1.3
0.0

116,637.5
-1.6
-0.2

272,180.8
-0.9
-0.8

45,845.7
-0.6
1.2

152
-19.6
-71.2

3,819
-2.3
-18.4

14,572
-6.3
-26.7

6,706
-16.9
-20.5

6,308
-14.1
-24.5

873
4.1
-10.8

622.2
-1.5
-5.7

500.7
-2.9
-6.3

345.8
-0.5
2.2

325.6
-0.6
2.3

452.8
-1.7
-3.8

229.5
-2.1
0.2

7.2
0.0
-21.7

65.6
1.9
-18.0

153.6
-9.0
-24.3

80.4
-6.9
-22.4

126.4
11.7
12.9

25.2
-3.1
-7.4

Nonfarm Employment (000’s)
Q/Q Percent Change
Y/Y Percent Change
Manufacturing Employment (000’s)
Q/Q Percent Change
Y/Y Percent Change

Unemployment Rate (%)
Q2:08
Q3:07
Real Personal Income ($Mil)
Q/Q Percent Change
Y/Y Percent Change
Building Permits
Q/Q Percent Change
Y/Y Percent Change
House Price Index (1980=100)
Q/Q Percent Change
Y/Y Percent Change
Sales of Existing Housing Units (000’s)
Q/Q Percent Change
Y/Y Percent Change

NOTES:
Nonfarm Payroll Employment, thousands of jobs, seasonally adjusted (SA) except in MSAs; Bureau of Labor Statistics (BLS)/Haver Analytics, Manufacturing Employment, thousands of jobs, SA in all but DC and SC; BLS/Haver Analytics, Professional/Business
Services Employment, thousands of jobs, SA in all but SC; BLS/Haver Analytics, Government Employment, thousands of jobs, SA; BLS/Haver Analytics, Civilian Labor Force, thousands of persons, SA; BLS/Haver Analytics, Unemployment Rate, percent, SA
except in MSA’s; BLS/Haver Analytics, Building Permits, number of permits, NSA; U.S. Census Bureau/Haver Analytics, Sales of Existing Housing Units, thousands of units, SA; National Association of Realtors®

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Nonfarm Employment

Unemployment Rate

Real Personal Income

Change From Prior Year

First Quarter 1998 - Third Quarter 2008

Change From Prior Year

First Quarter 1998 - Third Quarter 2008

First Quarter 1998 - Third Quarter 2008

4%

8%
7%
6%
5%
4%
3%
2%
1%
0%
-1%
-2%

7%

3%
6%
2%
5%

1%
0%

4%
-1%
3%

-2%
98 99 00 01

02

03 04 05 06 07

98 99 00 01

08

02

03 04 05 06 07

Fifth District

08

98 99 00 01

02

03 04 05 06 07

United States

Nonfarm Employment
Metropolitan Areas

Unemployment Rate
Metropolitan Areas

Building Permits

Change From Prior Year

Change From Prior Year

First Quarter 1998 - Third Quarter 2008

First Quarter 1998 - Third Quarter 2008

First Quarter 1998 - Third Quarter 2008

Change From Prior Year

30%

7%

7%
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%

08

20%

6%

10%
5%
0%
4%
-10%
3%

-20%

2%

-30%
-40%

1%
98 99 00 01

02

Charlotte

03 04 05 06 07
Baltimore

08

98 99 00 01

Washington

02

Charlotte

03 04 05 06 07
Baltimore

98 99 00 01

08

Washington

02

03 04 05 06 07

Fifth District

United States

FRB—Richmond
Services Revenues Index

FRB—Richmond
Manufacturing Composite Index

House Prices

First Quarter 1998 - Third Quarter 2008

First Quarter 1998 - Third Quarter 2008

First Quarter 1998 - Third Quarter 2008

Change From Prior Year

15%
13%
11%
9%
7%
5%
3%
1%
-1%
-3%
-5%

30
40
20
30
10

20
10

0

0
-10

-10
-20
-30

-20
-30
98 99 00 01

02

03 04 05 06 07

08

08

98 99 00 01

02

03 04 05 06 07

08

98 99 00 01

02

Fifth District

03 04 05 06 07

08

United States

NOTES:

SOURCES:

1) FRB-Richmond survey indexes are diffusion indexes representing the percentage of responding firms
reporting increase minus the percentage reporting decrease.
The manufacturing composite index is a weighted average of the shipments, new orders, and
employment indexes.
2) Metropolitan area data, building permits, and house prices are not seasonally adjusted (nsa); all other
series are seasonally adjusted.

Real Personal Income: Bureau of Economic Analysis/Haver Analytics.
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.
Building permits: U.S. Census Bureau, http://www.census.gov.
House prices: Federal Housing Finance Agency, http://www.ofheo.gov.

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Metropolitan Area Data, Q3:08
Washington, DC
Nonfarm Employment (000’s)
Q/Q Percent Change
Y/Y Percent Change

Baltimore, MD

2,440.7
-0.1
1.1

1,316.7
-0.7
-0.3

101.1
-0.9
-1.6

4.0
3.5
3.1

4.8
4.0
3.8

5.1
5.3
4.3

3,458
-6.7
-23.7

1,621
29.5
-6.9

281
-11.9
-40.8

Asheville, NC

Charleston, SC

Durham, NC

175.4
-1.3
-1.1

854.6
-1.4
-0.3

292.2
-0.1
1.5

5.4
4.6
3.5

7.0
5.8
4.8

5.4
4.7
3.9

483
-11.2
-39.9

2,642
-32.2
-45.3

542
-15.4
-27.2

Greensboro-High Point, NC

Raleigh, NC

Wilmington, NC

Nonfarm Employment (000)
Q/Q Percent Change
Y/Y Percent Change

365.0
-1.2
-1.4

520.7
-0.3
0.6

146.7
-1.5
-1.3

Unemployment Rate (%)
Q2:08
Q3:07
Building Permits
Q/Q Percent Change
Y/Y Percent Change

7.1
5.9
4.9
679
-26.4
-40.1

5.4
4.5
3.6
4,007
26.4
-11.8

6.1
5.1
3.9
967
-12.8
-24.9

Unemployment Rate (%)
Q2:08
Q3:07
Building Permits
Q/Q Percent Change
Y/Y Percent Change

Nonfarm Employment (000’s)
Q/Q Percent Change
Y/Y Percent Change
Unemployment Rate (%)
Q1:08
Q2:07
Building Permits
Q/Q Percent Change
Y/Y Percent Change

For more information, contact Sonya Ravindranath Waddell at (804) 697-2694 or e-mail sonya.waddell@rich.frb.org

54

Hagerstown-Martinsburg, MD-WV

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Metropolitan Area Data, Q3:08
Winston-Salem, NC

Charleston, SC

Columbia, SC

216.2
-1.5
-0.3

301.5
-1.2
0.6

365.2
-1.0
-0.3

6.5
5.4
4.5

6.1
4.8
4.8

6.5
5.3
5.4

353
-16.0
-50.9

1,090
-16.7
-31.9

1,375
9.8
0.2

Greenville, SC

Richmond, VA

318.6
-1.4
0.9

628.5
-1.0
-0.8

161.8
-0.9
-0.8

6.3
5.1
5.4

4.7
4.0
3.2

4.3
3.7
3.1

596
-46.3
-42.7

1,129
-4.7
-27.6

141
-25.4
-36.2

Virginia Beach-Norfolk, VA

Charleston, WV

Nonfarm Employment (000)
Q/Q Percent Change
Y/Y Percent Change

775.6
0.2
-1.1

153.1
0.7
1.1

118.8
-0.4
-0.8

Unemployment Rate (%)
Q2:08
Q3:07
Building Permits
Q/Q Percent Change
Y/Y Percent Change

4.6
3.9
3.3
1,301
-24.9
-4.1

3.3
4.5
4.0
4,007
169.6
101.3

5.1
5.3
4.8
8
-33.3
-75.8

Nonfarm Employment (000’s)
Q/Q Percent Change
Y/Y Percent Change
Unemployment Rate (%)
Q2:08
Q3:07
Building Permits
Q/Q Percent Change
Y/Y Percent Change

Nonfarm Employment (000’s)
Q/Q Percent Change
Y/Y Percent Change
Unemployment Rate (%)
Q1:08
Q2:07
Building Permits
Q/Q Percent Change
Y/Y Percent Change

Roanoke, VA

Huntington, WV

For more information, contact Sonya Ravindranath Waddell at (804) 697-2694 or e-mail sonya.waddell@rich.frb.org

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OPINION
No Time for Protectionist Impulses
BY J O H N A . W E I N B E RG

Another example of this trend is a provision in the appromagine you plan to build a deck on your house. You
priations bill signed by the president in March. Within that
might purchase all the goods from a local store, but
bill was the discontinuation of a pilot program that allowed
originally the lumber might have come from Canada,
Mexican trucks to haul cargo over long distances on
the nails from China, and the varnish from England. Now,
American roads, probably reducing transportation costs —
imagine what that process might entail if the government
and ultimately the costs of the products being imported. As
decided that you couldn’t purchase those imported goods.
a result, Mexico has already retaliated by imposing duties on
Instead, they had to be produced domestically. Your deck
$2.4 billion worth of U.S. goods that they import, ranging
would almost certainly be more expensive — and it may
from pencils to toilet paper.
be of lower quality. That’s because there would be less comThere are some glimmers of light on the trade horizon in
petition among firms to provide the necessary supplies.
the wake of these questionable policies. President Obama,
That’s roughly analogous to the situation created by the
although he signed the bill that restricted trucking access,
recent economic stimulus package passed by Congress and
has publicly stated he wants to find a way to re-open these
signed into law by the president in February. It includes a
trade routes to Mexican trucks. And the final language of the
rule — commonly called a “Buy American” provision — that
stimulus bill does require implebinds all contractors working on
mentation of the “Buy American”
infrastructure projects to use iron,
It may be tempting to label some
rules to fall within the boundaries
steel, and other manufactured goods
of international trade agreements,
produced only in the United States.
products off limits simply
like the General Agreement
Realizing this might cause some
because they were produced by
on Tariffs and Trade and the North
problems, Congress did insert lanAmerican Free Trade Agreement.
guage into the final version of the
people in faraway lands. But it’s
If a certain stimulus-related transbill that would allow a waiver of
ultimately myopic.
action violates any of these, a
these provisions in cases where
waiver may be granted.
1) federal agency heads deem that it
The intent, however, of these protectionist provisions is
is “inconsistent with the public interest” 2) a particular prodobvious. It indicates an interest among some policymakers
uct is not made in the United States or is not made in
to further restrict access that U.S. consumers and producers
sufficient quantities domestically or 3) these rules would
have to foreign goods. It would be hardly surprising
increase the overall cost of a project by more than 25 percent.
if other countries retaliated the way Mexico did. Countries
The last point suggests that policymakers are concerned
like China, Brazil, and Russia, for instance — countries
that “buying American” could, in fact, wind up costing
that are either not included in government
Americans considerable sums of money on public projects.
procurement accords or do not have free-standing trade
But it’s not clear why that particular figure was chosen. Why
pacts with the United States — may be shut out of the
not 20 percent or 30 percent? In any of these cases, there
chance to supply materials for any stimulus-funded infrastill would be a significant subsidy to domestic producers —
structure projects. According to Census Bureau data, 39
some of whom may be less efficient producers of these
percent of all U.S. nonagricultural imports hail from coungoods and may already be shielded from competition by
tries affected by the “Buy American” provision.
existing tariffs and other trade barriers.
Policies like these beg the question of whether the
In fact, it’s hard to see how any cost overrun is not
government should be involved at all in deciding from whom
“inconsistent with the public interest.” It is incumbent upon
we can buy any legal product. It may be tempting — and
policymakers to make sure that taxpayer money is spent as
publicly popular, despite the costs — to label some products
efficiently as possible.
off limits simply because they were produced by people
The “Buy American” provision is an example of what
in faraway lands. But it’s ultimately myopic. It’s a road
seems to be a creeping return to a form of economic
that unfortunately we’ve been down before. Trade protecnationalism. It might remind economists and historians of
tions are the last thing we need during this economic
the early 1930s, when the United States turned its back on
downturn.
RF
the world economy with ill-guided laws like the SmootHawley Tariff Act. Dozens of other countries retaliated
and world trade fell about two-thirds within five years,
John A. Weinberg is senior vice president and director of
deepening the economic crisis.
research at the Federal Reserve Bank of Richmond.

I

56

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NEXTISSUE
Bond Rating Agencies

Jargon Alert

Amid the credit market turmoil, many have criticized the bond
rating agencies that awarded top-notch grades to securities
which are now called “toxic,” as well as the financial institutions
that held them. How do these agencies operate? And what
do economists have to say about the role they play in a healthy
capital market? Before policymakers decide how to regulate
the agencies, they might first pause to consider the purpose
they serve and determine what may have gone wrong with
current regulations.

Most people are familiar with what is
termed the unemployment rate. We’ll
explain a lesser known phenomenon:
underemployment.

Silver Screen Subsidies

Interview

Legislatures and governors across the nation have started
competing to attract movie and television productions to their
states. Enticements like tax credits and tax refunds abound.
Do these subsidies actually influence a film studio's choice of
where to film — and are they worth the cost?

We talk with economist Allan Meltzer of
Carnegie Mellon University, author of a
two-volume history of the Federal Reserve
and a co-founder of the Shadow Open
Market Committee.

Policy Update
Everyone seems to have an opinion about
whether CEOs are overpaid. But maybe
there’s a rational explanation for relatively
high executive compensation.

Beeconomics
The decline in the honeybee population caused by “colony
collapse disorder” has brought attention to the vital importance of bees to crop pollination. Some honeybee farmers have
begun subscriber-funded services to help maintain a sufficient
level of pollination. Are markets capable of providing what is
seen by some as a classic “public good?”

Airline Crunch
The airline industry has undergone significant changes during
the past decade. Recently, airlines have had to deal with a
spike in fuel costs and then a decline in demand for air travel.
Can the industry survive in its current form?

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