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M A Y /JU N E 19 93


A review from the
Federal Reserve Bank
of Chicago

How lean manufacturing changes
the way we understand the
manufacturing sector
A listing of Bank Structure
Conference audio tapes
Economic development policy in
the 1990s—are state economic
development agencies ready?
Proceedings available:
Shaping the G reat Lakes Economy

Recent trends in corporate leverage


How lean manufacturing changes the way
we understand the manufacturing sector................................................. 2
Thom as H. K lier

The Midwest’s future economic prosperity may depend on its
ability to adopt lean manufacturing. The author describes this
new system and highlights some of its policy implications.

A listing of Bank Structure
Conference audio tapes.............................................................................. 10
Economic development policy in the 1990s—
are state economic development agencies ready?................................. 11
Richard H. M atto o n

Changing economic and political pressures are among the forces
affecting state economic development policies. The author
discusses new development strategies and their evaluation.

Proceedings available:
Shaping the G reat Lakes E c o n o m y ................................................................23

Recent trends in corporate leverage........................................................


Paula R. W o rthing to n

Neither a borrower nor a lender be? The author analyzes
recent patterns in corporate debt burdens and discusses
their implications.

Conference announcement:
Cost Effective Control of Urban Smog..................................................... 32

Karl A. Scheld, Senior Vice President and
Director of Research
Editorial direction
Carolyn McMullen, editor, David R. Allardice, regional
studies, Herbert Baer, financial structure and regulation,
Steven Strongin, monetary policy,
Anne Weaver, administration
Nancy Ahlstrom, typesetting coordinator,
Rita Molloy, Yvonne Peeples, typesetters,
Kathleen Solotroff, graphics coordinator
Roger Thryselius, Thomas O ’Connell,
Lynn Busby-Ward, John Dixon, graphics
Kathryn Moran, assistant editor

M ay/Ju ne 1993 Volum e XVII, Issue 3

the Research Department of the Federal Reserve
Bank of Chicago. The views expressed are the
authors’ and do not necessarily reflect the views
of the management of the Federal Reserve Bank.
Single-copy subscriptions are available free of
charge. Please send requests for single- and
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Articles may be reprinted provided source is
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provided with a copy of the published material.
ISSN 0164-0682

How lean manufacturing changes
the way we understand the
manufacturing sector

Thom as H. K lier

Manufacturing is currently
undergoing a transition from a
mass production system to a
lean production system which
emphasizes quality and speedy
response to market conditions using technologi­
cally advanced equipment and a flexible orga­
nization of the production process. This new
manufacturing system has achieved remarkable
productivity advances. The success or failure
of the Midwest’s manufacturing sector in
climbing on board this revolution will be cen­
tral to the region’s future prosperity due to the
historic role of manufacturing in shaping the
region’s economy. Successful adaptation to
lean manufacturing is likely to require signifi­
cant changes in both the management of facto­
ries and the structure of the economy, such as
changes in worker training, job performance,
public infrastructure, and perhaps the location
of factories and jobs.
These changes are the focus of this article.
First, I briefly summarize the main features of
lean manufacturing. The next section concen­
trates on the effects of the introduction of lean
manufacturing. I will discuss several aspects of
the new manufacturing system: managementlabor relationships, worker training, location
decisions, and product development. Finally,
I discuss policy implications of the change in
manufacturing systems. To illustrate, examples
from the auto industry will be used throughout
the article because it has greatly influenced the
way many other businesses organize their facto­
ries. However, it is important to note that spe­
cific applications of lean manufacturing vary
according to industry and firm. Thus, the pic­

ture described in this article is necessarily a
general one.
Featu res o f lean m a n u fa c tu rin g

Lean manufacturing features teamwork and
participatory management. Tasks are performed
by teams in which each member can do any of
the team's tasks, including maintenance, inspec­
tion, and machine setup. Lean manufacturing
encourages worker participation and discourages
managerial authoritarianism.
In designing the production process, lean
manufacturing gives top priority to quality con­
trol. This is different from the so called Fordist
approach to manufacturing originated by Henry
Ford (see Table 1). This approach introduced
interchangeable parts and the moving assembly
line to the manufacturing process and dominated
most of the world’s manufacturing from the mid1950s through 1980. Lean manufacturing re­
gards large inventory stocks as a source of costs
and problems rather than a solution. With lower
in process inventories, quality problems of a
particular assembly operation become apparent
faster. Continuous improvement of operations
also is central to the lean manufacturing philoso­
phy, with most of these improvements the result
of suggestions from the factory floor.
Lean manufacturing systems are designed to
turn out small batches of customized products on
relatively short notice and at low cost. That
makes it necessary to provide flexibility and
quick setup capability in a factory, for example,
Thomas H. Klier is a regional economist at the
Federal Reserve Bank of Chicago. The author
would like to thank W illiam Testa and Carolyn
McMullen for helpful comments.


by reducing the time needed to change dies. As
a result, lean manufacturing requires a different
process flow design and plant layout than tradi­
tional manufacturing, usually occupying much
less floor space. However, lean inventories
plus the need for flexibility place great strains
on the flow of materials. To address these
requirements, Toyota pioneered the use of the
“kanban” method for moving parts and materi­

hallmarks of Japanese auto companies as their
so called transplants have been remarkably
successful in North America and Europe. In
1982, Honda of America began to assemble
automobiles in Marysville, Ohio. By 1991,
seven Japanese transplants produced almost 1.4
million cars in the United States. Honda can
now produce cars in North America as effi­
ciently as those made in Japan; and Nissan’s
Sunderland plant in England is referred to as
one of the most efficient car plants in Europe.1
While changes in the production system
were pioneered and successfully transplanted
by Japanese producers, American auto manu­
facturers have been adopting the new manufac­
turing techniques in order to compete effective­
ly internationally.2 The Big Three have made
strong gains in manufacturing productivity
during the last few years. By one account, Ford
has improved its assembly productivity by 36
percent since 1980.3 Specifically, some Ford
plants have all but erased the labor cost advan­
tage enjoyed by the most efficient Japanese
auto producers; among these is Chicago’s Tau­
rus plant. Chrysler, in turn, has improved its
assembly productivity by 33 percent since
1980. GM has increased the productivity of its
assembly operations by 11 percent since 1980;
most notably in the launch of its Saturn line in
1991. Recent gains in market share experi­
enced by the Big Three may well be related to

als across the factory. Using this method, each

improvements in manufacturing efficiency.4


Fordist versus lean manufacturing

Lean m anufacturing

Job definition

narrowly defined,
repetitive steps

Teamwork; multiple

Quality control

Separate function

Built into production
process and each
job description

Production process

Continuous operation
of one process

Flexible adjustments






container transporting parts downstream in the
production process carries a card. As the parts
are depleted, the card is sent back to the previ­
ous production stage where it signals the need
to produce more of these parts. By maintaining
a continuous, tightly controlled, but decentral­
ized, flow of parts and materials, lean manufac­
turing allows flexible adaption of the produc­
tion line to changes in the demand for the final
Finally, lean manufacturing enables a short
design cycle by taking an integrated approach
to the various steps of manufacturing; market
assessment, product design, engineering, com­
ponent sourcing, and final assembly are inte­
grated into one decisionmaking unit rather than
dealt with sequentially.
Lean m a n u fa c tu rin g c o m e s to
N orth A m e ric a

Expanding the geographic boundaries of
lean manufacturing has become one of the



M a n a g e m e n t-la b o r re la tio n sh ip s

One of the characteristics of lean manufac­
turing is its emphasis on constant improvement
in operations. Most of the improvements are
actually suggested by the factory workers.
However, for an employee suggestion system to
be effective, it must be embedded in coopera­
tive management-labor relations since workers
would not have an incentive to increase produc­
tivity if the end result was only that some of
them lost their jobs. That requires a switch
from the decades old practice of dividing work
into simple, repetitive tasks carried out by
workers who were not greatly respected by
their bosses nor trusted to perform without
being prodded and closely supervised (see
Box 1). In a lean manufacturing environment,
management treats workers primarily as assets,
not as costs. The potential benefits of coopera­
tive management-labor relationships are well
known. For example, Luk Inc., a small


BOX 1

The case of NUM M I
New United Motor Manufacturing (NUMMI),
the GM-Toyota joint venture in Fremont, Califor­
nia, serves as an excellent case study for the adapta­
tion of lean manufacturing techniques to the United
States. GM opened this assembly plant in 1963. It
became known for its abysmal productivity and
quality records, as well as a very confrontational
relationship with the UAW local, and was subse­
quently closed in 1982. In 1984, the plant reopened
as a joint venture between Toyota and General
Motors. At its opening, 85 percent of NUMMI’s
hourly workers came from GM’s previous work
force. Within two years, its productivity was higher
than that at any other GM factory and more than
twice as high as it had been under GM management.
In fact, it was almost as high as Toyota’s Japanese
factories. The same was true of quality.
According to a recent study, the main factor in
turning NUMMI around was a new management
approach.' Under the old, Fordist style of manufac­
turing, Taylorist time and motion studies were
implemented by means of a hierarchical, authoritar­
ian style of management.* More than 80 industrial
engineers would measure in minute detail the activi­
ties of workers and then standardize and accelerate
their tasks. Supervisors would impose these stan­
dards on workers who were never consulted. Under
lean manufacturing at NUMMI, Taylor’s scientific
management techniques are combined with partici­
patory labor-management relations. The work force
was divided into 350 teams, consisting of five to

company that makes clutch plates for manual
shift cars in Wooster, Ohio, introduced such a
new work ethic. Its 340 employees are now
encouraged to constantly search for ways to
improve output and quality. As a result, Luk
improved productivity at its plant to the extent
that it could overtake the market leader which
had shifted its production to Brazil, in an attempt
to economize on labor costs. Luk’s constant
improvements to its efficiency rendered the
foreign operation of its competitor unsuccessful.5
In another example, Eaton Corp. instituted
teams on the factory floor and encouraged work­
ers to improve incrementally the products they
make and the processes used to make them. A
system of bonuses serves as an incentive to solic­
it suggestions. The company’s productivity rose
by 3 percent a year over the last decade; that
compares to an average increase of 1.9 percent


seven people and a team leader. Team members
were taught Taylor’s techniques for describing and
analyzing physical tasks. Team members now
design all the team’s jobs, time each other with
stopwatches, and explore ways to improve their
performance. The results are compared across
teams of different shifts. In addition, team mem­
bers are trained to do each other’s jobs and regular­
ly rotate tasks. The surprising turnaround at
NUMMI is ascribed to the fact that Toyota could
persuade workers that they are the key element to
the factory’s success. NUMMI management won
workers’ trust and commitment by instituting a no
lay off policy, as well as implementing extensive
training and maintaining constant consultation with
the workers.3
'Adler ( l 993).
2In his 1911 book, Frederick Taylor argued that the produc­
tivity of physical labor could be increased by measuring in
great detail the activities o f workers, and then standardizing
and accelerating their tasks.
3At the start o f NUMMI, it was agreed to not lay people off,
except in the most dire straits and then only after managers’
pay was cut along with other expenses. This agreement
became part o f the UAW contract with NUMMI. It was put
to test in the late 1980s when production at NUMMI fell
sharply. Capacity utilization fell to about 60 percent and
about 10 percent o f the work force were idle. The idle
workers were rotated into four week training programs, at
full pay, until production picked up around eight months
later. See Uchitelle (1993).

for all U.S. manufacturers. Some of that in­
crease in productivity was the result of conven­
tional belt tightening efforts; Eaton closed four
plants in 1991 and laid off 807 workers. How­
ever, due to improved management-labor
relationships and productivity gains at its Lin­
coln, Illinois, plant, Eaton relocated 70 jobs
from Mexico.6
W o rke r tra in in g

Under lean manufacturing, a worker also
maintains the equipment, cleans up the work
area upon completion of other duties, and per­
forms quality control functions. If the worker
spots a flaw in the production process, the
group leader is alerted. The manufacturing
error is then corrected instantly, either while the
car is still moving on the assembly line or after
the line has been stopped by the group leader.
Of course, shutting down the assembly line to


correct defects requires highly skilled line
workers who must be able to recognize and
correct defects in order to restart the assembly
line quickly. Whirlpool Corp. decided to teach
its workers how to improve quality and produc­
tivity at a tooling and plating shop in Benton
Harbor, Michigan. In addition to implementing
a system of financial incentives to reward pro­
ductivity gains, Whirlpool focused on improv­
ing the skills of its employees. It set up a new
training center at its plant that offers interactive
computer lessons on everything from general
math skills to learning how to handle gauges
and other tools. Workers from the Benton
Harbor shop went to see the assembly plant for
washing machines to learn how the parts they
produce are put into the final product. With
this understanding, they were able to make
adjustments that helped the line flow more
smoothly. As a result, the Benton Harbor
plant’s productivity has surged more than 19
percent since 1988.7
Higher demands on workers’ education and
skills raise the barriers of landing a manufactur­
ing job. For example, in order to apply at a
Carrier Corp. compressor plant in Arkadelphia,
Arkansas, one must be a high school graduate
or have a general education diploma. Appli­
cants take a standardized state test; only those
scoring in the top third advance. The appli­
cants who advance past the interviews take a

six week course prior to receiving a job offer.
Five nights a week for three hours, they learn
blueprint reading, math such as fractions and
metric calculations, statistical process control
methods, some computer skills, and how to
solve problems in dealing with fellow workers.
Successful completion of the training sessions
virtually guarantees a job at the plant.8
L o c a tio n d e c is io n s

Recent evidence indicates that automobile
manufacturing is reviving in the Midwest (see
Table 2). Rubenstein (1992) refers to two
structural trends. First, increasing fragmenta­
tion of the market for passenger cars since 1960
reduced the need for branch plants; that is,
plants producing identical models at centers of
demand for regional distribution. Of the four
West Coast passenger car assembly plants in
operation 10 years ago, only NUMMI’s Fre­
mont, California, plant still operates. A fair
amount of geographical restructuring of the
automobile industry has also occurred within
the Midwest over that time period. GM alone
closed seven and opened four plants in the
Midwest during the last 10 years.9 Surprisingly,
the age of an existing assembly plant does not
seem to increase its likelihood of being shut
down. Ford Motor Company, for example, has
not opened a single new assembly plant for
passenger cars in the U.S. in the last decade, yet


U.S. car production by state
(percent of U.S. total)

M idwest w ithout






































































'M id w e s t is defined as Illinois, Indiana, M ichigan, O hio, and W isconsin,
tr a n s p la n ts refer to U .S. facilities o f foreign auto assem blers, including jo int ventures.
SOURCE: Ward's Automotive Yearbook, 1982-1992.




it currently ranks as the most pro­
ductive of the Big Three.1 The
results of a study by Rees, et al.
(1986) on the spread of automated
technology in the American ma­
chinery industry support the same
conclusion and suggest an explana­
tion. It reports that older plants are
more likely users of new produc­
tion technologies than newer
plants; evidence for a continuous
retooling process taking place in
the more established industrial
areas of the country."
Second, nearly all of the Japa­
nese transplants have located in the
Midwest, in proximity to the indig­
enous automobile industry’s sup­
plier industry (see Figure 1). In
fact, that development is responsi­
ble to a large extent for the revival
of automobile manufacturing in the
Midwest. In model year 1992, transplants
produced 23.5 percent of all the automobiles in
the Midwest, up from 3.4 percent in model
year 1983.
However, the sites chosen by the Japanese
were not traditionally associated with motor
vehicle assembly. Note in Table 2 the south­
ward shift of automobile assembly; losses in
Wisconsin’s share of automobile assembly were
compensated by gains in Illinois and Ohio. The
location of transplant assembly plants on most­
ly rural greenfield sites is generally seen as the
result of the perception that flexible work as­
signments may be difficult to implement in
urban locales where the influence of strong
labor unions may resist such changes.1 Japa­
nese plants desire low cost locations, which
avoid strong union centers yet have access to an
adequate labor pool (Rubenstein, 1992). Ac­
cordingly, a complex pattern of industrial
growth and decline emerged in the Midwest.1
In a lean manufacturing environment, the
location of suppliers seems to be influenced by
the need for a tightly controlled flow of parts
and materials, including a timely supply of
materials from outside suppliers.1 It is therefore
no surprise to find relationships between car
assemblers and suppliers to be characterized by
high levels of communication and mutual com­
mitment. These close relationships may help to
explain the fact that lean manufacturing assem­
blers have chosen to buy directly from only a



small number of “first tier” suppliers. Mair, et
al. (1988) analyze the effect of lean manufactur­
ing on the locational pattern of supplier opera­
tions for Japanese transplants in North America.
They find existing geographical patterns of trans­
plant locations to be a direct result of the desire
of Japanese automobile producers to transfer lean
manufacturing techniques to North America.
Rubenstein (1988) and Rubenstein and Reid
(1987) analyze the changing supplier distribution
of American motor vehicle parts suppliers. Their
sample consists of about 1,000 suppliers from
Ohio. They cannot establish a clear cut effect of
lean manufacturing on location, yet they do find
a change from the long term locational pattern of
auto supplier companies which prevailed until
the 1970s. With the introduction of a tiered
supplier structure, increased cooperation, and
longer term contracts between car assemblers
and suppliers, first tier suppliers are found to
locate new plants near their customers’ assembly
plants. However, there are also countervailing
pressures. The pressure to reduce production
costs leads to geographical dispersion, especially
for lower tier suppliers; that often means setting
up shop in a nonunionized rural area, or even a
low wage foreign country.
P ro d u c t d e v e lo p m e n t

Under lean manufacturing, the development
process is not the sum of the individual work of a
large number of narrowly focused specialists.


Instead, the development of an automobile is
guided by a team which includes members from
marketing, design, research, logistics, production
planning, engineering, and sales. The team stays
together for the life of the model and its leader
has a range of real decisionmaking powers with­
in the organization of the company. Chrysler’s
recent introduction of its LH-cars illustrates the
benefits of this approach.1 The LH-car was
developed in 39 months with a technical staff of
740, as compared with the development of the
K-car, which was introduced in the early 1980s
and took 54 months and a technical staff of
2,000.1 Development of the K-car followed the
sequential process of Fordist manufacturing.
The lean development process also relies on
contributions from parts suppliers. Chrysler
received almost 4,000 suggestions from its sup­
pliers in the development of the LH-car, saving
$156 million.1 Instead of being played against
each other in competitive bidding, supplier com­
panies now enter into long term contracts with
producers. As part of the new sourcing relations,
the supplier may need to develop a component,
or subsystem, with the assembler merely giving
final approval of the part. Therefore, rather than
produce parts according to predetermined speci­
fications, outside suppliers must increasingly
conduct product research and development both
on their own and in consultation with assem­
blers. Turning over complete component sys­
tems to suppliers enabled Chrysler to drastically
reduce the number of vendors with which it does
business. It now deals with 230 parts and mate­
rials suppliers in producing its new LH-platform
using the lean manufacturing system."4That
compares to 456 suppliers for the 1992 version
of the Chrysler New Yorker, a car introduced in
1988 and built according to the Fordist system.1
Im p licatio n s fo r e c o n o m ic
d e v e lo p m e n t p o lic y

This article has highlighted some dramatic
changes to the auto industry brought about by
the introduction of lean manufacturing tech­
niques. If other Midwest manufacturing indus­
tries are to compete globally, they must follow
the lead of the Midwest auto makers and parts
suppliers and adopt the more efficient lean man­
ufacturing standards. What are the implications
of these changes for the direction of regional
economic development policy? The main goal
has to be to ease the transition and sustain the
changeover to lean production in autos and



broadening it to other manufacturing sectors.
However, since there will be a multitude of
adjustments, which vary from industry to indus­
try, and even plant to plant, there is no single or
simple policy measure that can address all of the
necessary adjustments. Rather, in many instanc­
es policymakers will have to rely on a wellchosen array of customized policy measures.2
First, the creation and upgrading of labor
skills is a major requirement for lean manufac­
turing operations. Successful implementation of
lean manufacturing in factories rests on the
ability to enhance skills and responsibilities of
assembly line workers within a team oriented
management approach. This will require job
training programs that teach how to improve
quality and cooperative management in order to
successfully harness ideas for improving the
production process. Policy measures include
apprenticeship programs, vocational training
schemes, and part-time enrollment in local uni­
versities. Training on the job can be used to
improve the skills of the workforce during low
capacity utilization periods. For example, when
NUMMI experienced weak demand for its prod­
ucts during the late 1980s it put idle workers on
job training programs. The state government of
California subsidized some of the cost, justifying
the outlay with the argument that unemployment
would have been more expensive.2
Second, within individual states, efforts
have been made to support the adaptation of
lean manufacturing technologies. For example,
in 1989 Pennsylvania instituted a “Manufactur­
ing Innovation Networks” program that supports
the growth of lean manufacturing networks by
means of eight industrial resource centers.
These regional centers introduce smaller and
medium sized manufacturers to leading manu­
facturing process technology. The centers are
overseen by independent boards and the pro­
grams are customized to local identity and eco­
nomic conditions. Since 1988, industrial re­
source centers have worked with about 10 per­
cent of Pennsylvania’s manufacturers (Green­
berg, 1992). Other programs, like Michigan’s
Technology Centers or Ohio’s Edison Technolo­
gy Centers are more broadly targeted and serve
as an intermediary organization for technology
development in specific industries. The main
objective of these programs is to share both
information and knowledge on the application
of lean manufacturing techniques. A national
economic strategy in support of commercial


research and development and manufacturing
excellence has been proposed by the National
Center for Manufacturing Sciences. It launched
an initiative called the Manufacturing Applica­
tion and Education Center Network. It repre­
sents a collaboration among state governments,
academic institutions, economic development
organizations, and industry. Funding for the
centers is equally split among the federal and
state governments and private industry. Of the
planned 150 centers, three are currently in
operation. Each center will be tailored to ad­
dress regional industrial needs and will provide
manufacturers with access to new technologies
and equipment, better business practices and
new materials and products.2
Third, international competition and direct
foreign investment in the U.S. have been im­

portant elements supporting the introduction of
lean manufacturing techniques into North Ameri­
ca. The success of the Japanese transplants has
shown the ability to transfer manufacturing tech­
nology internationally. Fostering openness to
trade and investment are therefore crucial for the
Midwest’s and nation’s success in an environ­
ment where advances in manufacturing technolo­
gy are being made around the world.
Last, but not least, lean inventories render
frequent timely deliveries of parts and materials
crucially important for the successful application
of lean manufacturing. That places great empha­
sis on a well designed and maintained system of
public transportation infrastructure.

'The Economist Newspaper (1992), survey p. 6.
2In developing the lean manufacturing system, Japanese
companies, most notably Toyota, were influenced by their
own analysis o f the Fordist system as well as the quality
enhancing ideas o f American consultant W. Edwards
3White (1992).
4After reaching 30 percent in 1991 and 1992, the Japanese
share o f U.S. car sales fell to 27 percent in the first two
months o f 1993, while the Big Three’s market share rose
three percentage points to 68 percent (Miller and Mitchell
5Uchitelle (1993). No information is available on changes
in the overall employment level at Luk; however, employ­
ees who are not adjusting to the new job requirements end
up with a smaller degree of job security.

finding with the fact that most o f the new technologies are
discrete units that can be introduced into an existing plant in
an incremental fashion.
l2See Linge (1991) and Testa (1993).
l3Rubenstein (1991), p. 129.
l4According to newspaper reports, Saturn Corp. will charge
suppliers who disrupt the production process by sending
inferior or mislabeled parts $500 per minute for the delays
they cause. The policy went into effect November 1, 1992.
See Frame (1992).
l5Ford was the first o f the Big Three to successfully imple­
ment the team approach in developing the Taurus, launched
in 1985. As part of the recent major corporate reorganization
taking place at GM, all new development projects are being
carried out by teams as o f January 1993. Models created by
these teams are not scheduled to appear on the market until
at least 1996, however (Levin 1993).

60 ’Boyle (1992).
l6Stertz (1992).
7Wartzmann (1992).
17Stertz (1992).
8Norton (1993).
9In December 1991, GM announced that as part o f its
corporate restructuring it would close 21 factories, includ­
ing 6 final assembly plants. Since then it has only identified
2 o f the 6: the minivan plant in Tarrytown, New Jersey, and
its W illow Run plant near Ypsilanti, Michigan. See Treece

l8Platform refers to the structural underbody o f a car. For
example the Dodge Intrepid, Chrysler Concorde, and Eagle
Vision are separate models, yet are all LH-platform vehicles.
l9Ward’s (1992), p. 53.
2l)See Ettlinger (1992) and Scott (1992).

10White (1992).

2lUchitelle (1993).

"Rees, et al. (1986), p. 215. The authors explain this

“ National Center (1992).




Adler, Paul S., “Time-and-motion regained,”
Harvard Business Review, January/February
1993, pp. 97- 108.

Rubenstein, James M., The changing U.S. auto
industry: a geographical analysis, Routledge,
New York, 1992.

Economist Newspaper, NA, Incorporated,
The, “Survey: the car industry,” The Economist,
October 17, 1992.

____________ , “The impact of Japanese invest­
ment in the United States,” in C.M. Law, ed.,
Restructuring the Global Automobile Industry:
National and Regional Impacts, Routledge, Lon­
don, 1991, pp. 114-142.

Ettlinger, Nancy, “Modes of corporate organi­
zation and the geography of development,” Pa­
pers in Regional Science, Vol. 71, No. 2, 1992,
pp. 107-126.
Frame, Phil, “Saturn to fine suppliers $500/
minute for delays,” Automotive News, December
21, 1992, p. 1.
Greenberg, Andrew T., “Technology and entre­
preneurship,” Shaping the Great Lakes Econo­
my, conference proceedings, Federal Reserve
Bank of Chicago, 1993, pp. 28-30.
Levin, Doron P., “How G.M. is losing its hold
on the crucial family sedan,” New York Times,
March 7, 1993, Section 3, p. 5.
Linge, G.J.R., “Just-in-time: more or less flexi­
ble?,” Economic Geography, Vol. 67, No. 4,
1991, pp. 316-332.

____________ , “Changing distribution of Ameri­
can motor vehicle-parts suppliers,” Geographical
Review, Vol. 78, No. 3, 1988, pp. 288-298.
Rubenstein, James M., and Neil Reid, “Ohio’s
motor vehicle industry—industrial change and
geographical implication,” Miami University,
geographical research paper, No. 1, 1987.
Scott, Allen J., “The collective order of flexible
production agglomerations: lessons for local
economic development policy and strategic
choice,” Economic Geography, Vol. 68. No. 3,
1992, pp. 219-233.
Stertz, Bradley A., “Importing solutions,” Wall
Street Journal, October 1, 1992, p. Al.
Taylor, Frederick, The Principles o f Scientific
Management, Harper, New York, 1911.

Mair, Andrew, Richard Florida, and Martin
Kenney, “The new geography of automobile
production: Japanese transplants in North Ameri­
ca,” Economic Geography, Vol. 64, No. 4, 1988,
pp. 352-373.

Testa, William, “Trends and prospects for rural
manufacturing,” Economic Perspectives, Federal
Reserve Bank of Chicago, March/April 1993,
pp. 27-36.

Miller, Krystal, and Jacqueline Mitchell,
“Stalling out,” Wall Street Journal, March 4,
1993, p. Al.

Treece, James B., “The plants GM will probably
padlock,” Business Week, December 14, 1992,
pp. 34-35.

National Center for Manufacturing Sciences,
“NCMS teaching factory network offers states a
vital tool for economic development,” Focus,
December 1992, pp. 4-5.

Uchitelle, Louis, “Stanching the loss of good
jobs,” New York Times, January 31, 1993, Section
3, p. 1.

Norton, Erie, “Future factories,” Wall Street
Journal, January 13, 1993, p. Al.
O’Boyle, Thomas F., “Working together,” Wall
Street Journal, June 5, 1992. p. Al.
Rees, J., R. Briggs, and R. Oakey, “The adop­
tion of new technology in the American machin­
ery industry,” in John Rees, ed., Technology,
Regions, and Policy, Rowman & Littlefield,
Totowa, N.J., 1986, pp. 187-217.



Ward’s Communications, Ward’s Automotive
Yearbook, Detroit, 1982 through 1992.
Wartzmann, Rick, “Sharing gains,” Wall Street
Journal, May 4, 1992, p. Al.
White, Joseph B., “GM's labor cost disadvantage
to Ford is placed at $4 billion a year by study,”
Wall Street Journal, October 6, 1992, p. A2.


Cassette tapes are available for FDICIA: An Appraisal
The 29th Annual Conference on Bank Structure and Competition
May 6 & 7, 1993

T hursday Sessions

T rid a y Sessions

(May 6,1993)

(May 7, 1993)

Welcoming Remarks (Silas Keehn)
Keynote Address (Alan Greenspan)

Session A: Estimating BIF Losses
(Moderator: Wayne Passmore) Estimating BIF Losses:
Secrets to Accurate Forecasting (Bert Ely); BIF Loss Expo­
sure: a Simple Actuarial Approach (George E. French);
Estimating BIF Losses: a Discussion of Various Methods
(Philip F. Bartholomew)

FDICIA: Renaissance or Requiem?
(Moderator: Edward C. Ettin) Richard S. Carnell, Richard
L. Thomas, William M. Isaac, Harrison Young, and
George G. Kaufman
Luncheon Presentation (John G. Heimann)
Systemic Risk in Interbank Markets
(Moderator: Herbert L. Baer, Jr.) Merton H. Miller, Mark
C. Brickell, Wendy L. Gramm, and Patrick M. Parkinson
Banking after FDICIA (Moderator: Stuart I. Greenbaum)
Future Directions in Regulation (Karen D. Shaw); An
Empirical Analysis of the Costs of Regulatory Compliance
(Anjan V. Thakor and Jess C. Beltz); New Private Sector
Deposit Insurance (Warren G. Heller); The Costs of
Rejecting Universal Banking (Charles W. Calomiris)

To order tapes, at $12.00 each,
please contact:
FRB Cassettes
d o Teach’em
160 E. Illinois Street
Chicago, Illinois 60611
To order by phone:
Toll-free (outside Illinois): 800-225-3775
In Illinois: 312-467-0424

FRB 306
Session B: The Response of Banks to Capital Shocks
(Moderator: George G. Kaufman) Bank Capital and Bank
Growth (Herbert L. Baer, Jr., and John N. McElravey);
Bank Capital and Portfolio Composition (Diana Hancock
and James A. Wilcox); The Implications of Capital Re­
quirements for Bank Behavior and the Macroeconomy:
the Japanese Experience (Ryoichi Shinagawa)
Session C: A Closer Look at Bank Mergers
(Moderator: Douglas D. Evanoff) The Strategy of a Merger:
Fleet and Bank of New England (Dwight B. Crane and
Jane C. Linder); The Efficiency Effects of Bank Mergers:
a Case Study Approach (Stephen A. Rhoades)
Session D: Banking Crises—a Global Perspective
(Moderator: Elijah Brewer III) Japanese Banking:
the Current Situation, How We Got Here, What Can Be
Done? (Thomas F. Cargill); Financial Crisis and Financial
Reform in Argentina (Geoffrey P. Miller), The Banking
Crises in the Scandinavian Countries (Sigbjorn Atle Berg)
FRB 309
Luncheon Panel: The Outlook for Banking: Is the Crisis
Over? (Moderator: Silas Keehn) L. William Seidman,
George M. Salem, and Edward J. Kane
*2 cassettes per session.

Economic development policy in
the 1990s— are state economic
development agencies ready?

Richard H. M a tto o n

“State and local economic
development strategies typi­
cally evolve incrementally,
without an underlying eco­
nomic theory, except that
more jobs are good and less jobs are bad.”—
Beaumont and Hovey'
The rules for economic development are
changing in response to a new economic devel­
opment landscape characterized by global mar­
kets, the rapid pace of innovation, and increas­
ingly mobile capital. The new economy fea­
tures firms that compete through technology
and export growth. States are trying to find
new ways to capture economic growth and to
adapt to upheaval and restructuring. While
state and local economic development agencies
have been quick to establish new programs to
meet the changes in economic activity, they are
increasingly short on resources. Economic
development agencies have been among the
first to be slashed during budget crunches.2 In
part, agencies have been the target of budget
cuts because of the perception that the vast
number of existing development programs have
failed to produce significant results. In re­
sponse to recent budget cuts, development
agencies have, partly out of necessity, invested
time and effort to articulate new ideas for guid­
ing current and future programs and policies.
Changing directions in economic develop­
ment strategy is not new to the states. Histori­
cally, states have adopted diverse strategies in
rapid succession from industrial recruitment to
small business incubators and high tech indus­
try development to the current emphasis on key
industry clusters. The somewhat erratic record



of past development strategies places the
current strategic thinking under close and criti­
cal scrutiny.
This article will examine how state eco­
nomic development programs—especially
those in the Seventh District—are responding to
fiscal pressures and to the current wisdom con­
cerning economic development in the 1990s.
The article concludes with a critical look at
what may be missing from some of these new
strategies and how formal evaluation of devel­
opment programs may provide the key to un­
derstanding the value of current and future
development efforts.
E c o n o m ic d e v e lo p m e n t p o lic y
in th e 1990s

A variety of forces have led states to reex­
amine their economic development strategies.
Chief among these forces are the severe fiscal
pressures which have plagued the states since
the start of the 1990s. With Medicaid and
prison expenditures accounting for a larger slice
of the budgetary pie, discretionary programs
such as economic development have offered
ready targets for budget cuts. In fiscally
strapped states like Illinois and Michigan, the
state economic development agencies have
seen the state funded portions of their budgets
cut by more than 70 percent since FY90.
While budget cuts may have precipitated a
hard look at economic development programs,
the new strategies emerging from these reducRichard H. Mattoon is a regional economist at the
Federal Reserve Bank of Chicago. He wishes to
thank William A. Testa and David R. Allardice for
their comments and guidance on previous drafts.


nomic growth, they too stumbled when it came
to leveraging significant economic growth on a
large scale.
This has led to a third wave in develop­
ment policy which primarily examines the
institutions through which development policy
is carried out. As described by Scott Fosler of
the Committee for Economic Development:

tions also reflect new paradigms for successful
economic development. These new paradigms
tend to reject programs emphasizing industrial
recruitment and related tax abatement and
subsidy strategies and instead emphasize those
government programs that enhance private
industry productivity and innovation. In partic­
ular, they stress the state’s role in creating a
sound foundation for economic growth by sup­
porting broad based factors such as infrastruc­
ture and education rather than targeting assis­
tance to individual firms.
Many refashioned state development strat­
egies start by rejecting previous development
programs. Often this critique is borrowed from
so called third wave theories of the evolution of
development strategies which have been articu­
lated by the Corporation for Enterprise Devel­
opment (CfED).3 According to CfED, econom­
ic development policy can be conceptualized in
three waves. The first wave consisted of indus­
trial recruitment strategies and was particularly
prominent from the 1950s to the 1970s. The
first wave ended because global trends toward
more open markets and changing technology
made it possible for branch manufacturing
plants to locate in countries other than the U.S.
When even low cost U.S. states could be under­
cut by cheaper and sometimes more productive
foreign locales, the value of “smokestack chas­
ing” as an economic development strategy was
called into question.
This era was supplanted by second
wave policies characterized by emphasis on
home grown economic development activities.
The idea here was to improve the productive
inputs of the local economy. Economic advan­
tage could be established through a skilled
work force, available technology and capital,
and modem telecommunications. Economic
development success stories consisted of re­
gions where local advantages had been identi­
fied and home grown industries had sprung up.
In these cases, the basis for supporting high
growth industry was to push development poli­
cy down to the most grass roots level. The idea
was that economic development occurred only
when local actors such as businesses and non­
profit groups were empowered through policies
which placed resources and decisionmaking in
their hands.4 However, while the second
wave’s capacity building policies did a better
job at understanding the new dynamics of eco­

The third wave blames the uneven success
of second wave policies on a “deficient public
technology.” In second wave policy, when a
development problem was discovered, the
natural response was to create a program to fill
the gap. The problem was that the'new pro­
grams were often provider driven and not cus­
tomer driven. Fundamental to third wave prin­
ciples is to make certain that customer demand
drives program design and objectives. To en­
sure this, the customer must be willing to invest
time and resources in the program. Govern­
ment would then have feedback to measure the
effectiveness of existing programs and would
no longer create programs that fail to meet
customer needs. If there is no real demand for
the program it would be eliminated. This was
often not the case in the second wave. Other
improvements in the technology of government
suggested by third wave analysts include devis­
ing programs which encourage competition
among suppliers and ultimately leverage re­
sources from sources other than government.
As such, if the public technology for delivering
these services could be enhanced, better perfor­
mance could be achieved.
In order to improve on the delivery and
design of economic development programs the
structure of government itself would need to
change. All agencies of state and local govern­
ment would need to recognize that their pro­
grams can contribute to economic growth strat­
egies. Coordination between different levels of
government and between agencies would be
essential in structuring a better system for de­
livering development programs. Without better
coordination and cooperation between agencies
with as diverse missions as education, transpor­



“The transition from the second to the
third wave ... involves important changes
in organization: policy continues to focus
on internal development, but new organi­
zational approaches are used to pursue
that objective.”5

tation, and economic development, to name just
a few, the various pieces of economic develop­
ment could not be put into place to really sup­
port private sector economic growth.
Third wave theory has been bolstered by the
ideas of a series of popular policy critics includ­
ing Michael Porter, Robert Reich, and Peter
Eisinger.6 These analysts have identified the
fundamental changes occurring in the economy
and accordingly set new directions for govern­
ment to cope with these changes. In their work,
themes such as the globalization of commerce,
the rapid pace of innovation, the need for human
capital and worker training, and the importance
of an entrepreneurial climate are stressed. For
most of these policy critics, economic growth is
part of a turbulent process in which constant
innovation and technological breakthroughs
create new markets for the best firms. Firms
that fail to innovate are doomed to fall by the
wayside as competitors throughout the world
overtake them. The overarching policy prescrip­
tion for government is to complement private
sector economic changes by broadly supporting
the building blocks of growth. Fundamental to
this view is the idea that government’s role
should establish a solid foundation for economic
growth through a sound physical and social
infrastructure. Less emphasis is placed on spe­
cific programs and more emphasis is placed on
the broader understanding of a region’s econo­
my and how it creates wealth and raises produc­
tivity. Broad concerns include establishing a
base for economic development through an
appropriate and well funded education and train­
ing system, stable regulatory policies, and a
solid infrastructure. The issue here is one of
scope; the new development strategy expands
far beyond the purview of a traditional economic
development department and instead cuts across
all services provided by all departments of
state government.7
Another thread running through this process
oriented approach is that economic development
is driven by decisions made by the private sec­
tor. State programs should accordingly reflect
the needs of private industry and should there­
fore get specific information from industry.
Accurate information about industry needs will
only be revealed when industry itself decides to
commit its own resources to a government spon­
sored program. For example, government mon­
ey can be used to encourage active participation
in industry trade associations or to create associ­



ations where none exists, but the direction of
the association must be charted by members of
the industry and not the government.
These new policy prescriptions are de­
signed to support an economy driven by tech­
nological change, innovation, and a constant
process of identifying and exploiting new mar­
kets. The identification of these forces as the
engines of the capitalist economy have their
intellectual roots in the works of Joseph Schum­
peter.8 Schumpeter was among the first to
stress that technological progress is the most
important driver of the capitalist economy.
Through innovation in products, production,
transportation, and entry to new markets, firms
drive economic growth. This innovation is not
costless; Schumpeter also coined the phrase
“creative destruction” to describe what happens
to those firms left behind in an innovation driv­
en economy. For Schumpeter, a critical ques­
tion in trying to determine the best organiza­
tional structure for innovation was whether
small or large firms were best suited to innova­
tion. Through his research, Schumpeter found
both large and small firms had certain advan­
tages which might position them to innovate
effectively, and this ambivalence over what
organizational form is best able to innovate
continues today. Such questions highlight
government’s key role in economic develop­
ment. In addition to supporting basic inputs
such as physical infrastructure and skilled
workers, government must set the market con­
ditions and rules which will best spur techno­
logical progress.
H ow are th e sta te s ch a n g in g th e ir
d e ve lo p m e n t stra te g ie s?

In many states, elements of these new
paradigms are finding their way into develop­
ment strategies. States appear to be willing to
embrace these models of economic growth
based on technology, innovation, and global
markets to define their economic development
programs. This section begins with a discus­
sion of the State of Oregon because it has
achieved perhaps the most profound changes in
direction in accord with the new development
ideas. Then, using Oregon for comparison, the
development strategies of the five states of the
Seventh Federal Reserve District—Illinois,
Indiana, Iowa, Michigan, and Wisconsin—are


O re g o n — relyin g on b e n ch m a rk s

Oregon’s approach is unique in that it devel­
oped a strategic plan for the state’s economy in
accord with comprehensive third wave thinking.
The state has chosen to implement its strategic
plan by establishing specific benchmarks for a
wide range of social and economic goals. Quan­
tifiable goals are to be achieved by specific dates
and are intended to provide Oregon with the
economic underpinnings to successfully compete
in the future. This process also corresponds with
much of the recent interest in adapting the total
quality management (TQM) standards developed
by the private sector to the public sector. Like
the private sector, government agencies must
have the proper incentives if they are expected to
meet quantitative goals. In Oregon, budgetary
incentives ensure that the operations of all state
agencies respond to these benchmarks.
The Oregon plan clearly contains two ele­
ments of the new economic development theory:
the state’s program is designed to strengthen the
foundation of the economy more than it is de­
signed to benefit specific companies; and the
plan recognizes that it is a function of all agen­
cies of government to contribute to economic
growth. In all, Oregon has set 155 quantifiable
benchmarks. Thirty of the goals are considered

critical and receive special attention. These
goals are very specific and set intermediate and
final benchmarks for the state’s economy and
overall quality of life (see Table 1).
To encourage agencies to support bench­
marks, agency heads are required to develop
concrete mission statements relating to the
benchmarks and to budget resources to achieve
specific benchmarks. This process is then fur­
ther reinforced by specifically linking the budget
planning structure to the benchmarks. This
occurs by first requiring all state agencies to
reduce 1992 spending by 20 percent. Second,
the agencies are able to recover the missing 20
percent only through two means. The first 10
percent can be recovered by proving that the
additional appropriation is related to an essential
service performed by the agency. The second 10
percent can be recovered only if the agency is
able to demonstrate that the spending will sup­
port one of the critical benchmarks. Restoring
this second 10 percent requires the approval of a
designated manager who is appointed by the
Governor to oversee one of the critical bench­
marks. Agencies can present joint proposals in
order to receive funding.9
The hope is that, through the benchmarks,
Oregon will establish an economic foundation


Benchmarks for the Oregon economy
Interm ediate




Percentage of lumber and
wood products employees in
value added manufacturing



National ranking in workers'
compensation costs



Per capita income
as a percentage of
U.S. average
All other areas

Industrial land that is suitable
for development







Manufacturing employees
in industries other than the
state's largest



Manufactured goods sold



Oregonians working outside
of Portland



Taxes as a percentage of



Spending for public facilities
as a percent of gross
state product





Adults proficient at written
and quantitative skills






Adults with good health


Babies born to drug free



International ranking of
12th graders' math ability

12th out
Of 15


Teen pregnancy rate per
1,000 females

High schoolers in technical



that will lead to future and sustainable econom­
ic growth by focusing government activities
on necessary and appropriate activities. As a
related strategy, the state has reoriented its
direct economic development strategy to serve
whole sectors of the economy rather than spe­
cific firms. By adopting a sectoral strategy,
Oregon hopes to overcome three weaknesses
that it found in traditional economic develop­
ment plans. First, sectoral strategies overcome
the lack of sufficient scale common in many
previous development efforts. Traditional
development programs are designed to help a
handful of specific firms, not entire industries.
Second, traditional state run programs tend not
to be responsive to the competitive needs of
firms because few programs represent true
collaborations with business. Finally, the sec­
toral approach attempts to provide services that
improve the performance of firms in global
markets. An example of this sectoral approach
is the establishment of the quasi-public Wood
Products Competitiveness Corporation. This
corporation is intended to bring together all
participants in the wood products industry,
from suppliers of raw materials to producers of
final products, to identify challenges and
opportunities for the industry. The corporation
is also expected to provide information to
the state on policy improvements which might
be needed. State funds have also been used
to establish associations for software and bio­
technology firms. State funds have been
channeled into research and development con­
sortia for computer related parallel processing
Seven th D is tric t sta te s

In contrast to Oregon, the five Seventh
District states have been more conservative in
embracing change. Massive budget cuts in the
state economic development departments in
Illinois and Michigan have left those states
groping for a new paradigm to redefine the role
and mission of their development efforts. In
Indiana, Iowa, and Wisconsin, a two track
approach is being used in which long range
development strategies are planned in harmony
with the internal capacity building suggested by
the new development paradigms, but short term
development efforts still utilize business re­
cruitment strategies.



Michigan—a program wholesaler

The Michigan Department of Commerce is
going through a process of redefining its mis­
sion.1 Following a two year reduction of more
than 70 percent of its $82 million state budget,
the department has adopted a strategy that
emphasizes working with broadly defined
groups of economic actors rather than specific
firms. The groups are seen as customers of
economic development and include community
development officials, industry and trade asso­
ciations, governmental units, and local econom­
ic developers. This strategy has three stated
missions. First is to safeguard the state’s quali­
ty of life. Second is to work with local commu­
nities and developers to retain or expand busi­
ness growth and investment by removing regu­
latory and other barriers to private investment.
Third is to promote an economic development
environment where all participants have access
to resources, information, and systems which
encourage profitable businesses. A final strate­
gy is to take advantage of existing, but underu­
tilized, public infrastructure by trying to chan­
nel new investments into communities around
the state with underutilized capacity.
Michigan, similar to other states, is making
the transition from what David Osborne1 has
termed being a program retailer to a program
wholesaler. The distinction is that “retail”
programs tend to be suited to the individual
firm while the “wholesale” approach tends to
address problems in a whole industry with a
particular eye toward leveraging the resources
of the industry to both stretch and channel the
impact of government dollars. In trying such
an approach there is a basic recognition that
state economic development dollars alone are
simply insufficient to create sweeping changes
in industries and the economy. However, if
state money can trigger private investment by
promoting efficient markets, significant eco­
nomic development can occur.
This new policy direction is also evident in
specific programs with a clear emphasis on
building up the roots of the economy. For
example, the state has launched “Build Michi­
gan,” a large infrastructure program focusing
on roads, bridges, ports, airports, and rail lines.
The program is designed to leverage nearly
$3.5 billion in federal transportation money
over a five year period.1 Similarly, the state is
launching a $25 million, employer driven adult


training program. This innovative program
matches potential employers who have guaran­
teed that they will hire program graduates with
individuals who successfully complete the
training. The providers of the training are paid
only half of each student’s total training cost
until the trainee has a new or upgraded job and
has worked twelve weeks.1 This assures that
both employer and employee are satisfied with
the training by building a feedback loop direct­
ly into the process. This type of enhancement
of human capital, driven by industry needs, is
characteristic of the new direction in economic
development policy.
Finally, Michigan is trying to leverage
resources and provide more information to
industry through joint departmental programs,
such as the Environmental Services Division.
The division is a joint service of the Depart­
ment of Commerce and the Department of
Natural Resources and is designed to provide
technical assistance to Michigan businesses in
the area of waste reduction, recyclable product
opportunities, site reclamation, and permit
processing. These programs are all designed
to help establish a strong foundation for eco­
nomic development by working with industry
to promote a sound economic base rather than
by targeting the particular needs of an individu­
al firm.
Illinois—a focus on clusters

The Illinois Department of Commerce and
Community Affairs has undergone an 80 per­
cent reduction in its general fund based budget
authority. The department has responded by
beginning a process which will redefine its role
and which will focus on new directions in eco­
nomic development for Illinois. As a first step
in this approach, a study was commissioned to
analyze both the state’s economy and economic
development policies and to assess Illinois’
capacity to compete. The report, conducted by
SRI International and DRI/McGraw-Hill, iden­
tifies government’s most effective role in de­
velopment as having shifted from targeting
specific industries and using tax and trade poli­
cies for creating advantage toward supporting
economic foundations and creating a level
playing field for tax and trade policy. Success
in the new economy will be measured by a
higher standard of living rather than job cre­
ation alone.


Part of this new approach evaluates gov­
ernment’s role in the state’s economy and, as a
related function, streamlines those existing
programs which slow the ability of companies
to respond to change. In the SRI report, these
broad programs are designed to support indus­
try clusters.1 Clusters are defined as concentra­
tions of competing, complementary, and inter­
dependent firms across several industries, in­
cluding suppliers, service providers, and final
product manufacturers. These are both large
and small firms which are strengthened by
being able to share a common economic foun­
dation. This can include specialized labor,
supply and support services, access to capital
and technology resources, economies of scale,
and ease of communications. Clusters are seen
as the source of global competitive advantage.
As such, economic development policies have
to support the vitality of all aspects of the clus­
ter rather than targeting support to just one
industry in the cluster. For Illinois, 12 key
industry clusters were identified (see Table 2).
Iowa—the state as a product

While Iowa is borrowing from the new
economic paradigms in looking to the future, it
is unwilling to completely abandon the use of
recruitment strategies from the past. In Iowa’s
recent planning document, Positioning Iowa for
the 21st Century: A 20 Year Economic Devel­
opment Vision (1991), the change in the method
and scope of economic development is evident.
By 1989, Iowa’s planning documents began to
take on a distinctly third wave flavor when the
emphasis for measuring success was shifted
from direct job creation to improving the stan­
dard of living and building the fundamental
capacity of the state to grow. The need to in­
crease productivity received particular atten­
tion. State strategies called for investing in
human and physical capital, creating an envi­
ronment which would encourage business in­
vestment, and keeping pace with technology.
To take advantage of the new theory on
economic development, the report suggests that
Iowa view itself as a product. This approach
focuses on discovering strategies which will
make Iowa a more appealing product than is
available in either national or international
markets. The emphasis is on the whole econo­
my rather than tax incentives for individual
firms. As the report puts it, “The job of state



Illinois’ key industry clusters

Em ployment

Em ploym ent



o f 1977$)

O utp ut

g row th
in o utput


Agriculture and food processing





Business and personal travel









Consumer appliances and electronics





Electrical equipment









Coal mining

Export services
Health services and biomedical products




Industrial machinery





Manufactured inputs





Telecommunications equipment





Transportation and distribution









Transportation equipment

government, in this instance, is one of making
policy that enhances our strengths, helps over­
come critical weaknesses, and finds and ex­
ploits our own special areas of competitive
advantage. In essence, the state must make
every effort to insure that Iowa will continue to
be—and be seen as—a good buy.”1
In implementing this competitive advan­
tage strategy, two parallel avenues are suggest­
ed. These avenues are termed supply side and
demand side approaches to economic develop­
ment and have meaning similar to that de­
scribed in the work of Eisinger (1988). The
supply side approaches are characterized as
traditional incentive based policies aimed at
lowering business operating costs to attract
business. By the 1980s, these supply side in­
centives had become quite intricate and usually
were finely targeted. However, their effective­
ness was increasingly questioned. Because
incentives were being offered in virtually all
states, their effect on business location deci­
sions was being diluted. Given this, supply side
policies are most effective for the first state to
offer them, according to the Iowa report; how­
ever, they cannot be abandoned as they are
expected by private firms as part of an expan­
sion or relocation deal.
A longer term but possibly more effective
approach is found in demand side policies.



Demand side policies focus on the local econo­
my and are designed to help generate economic
opportunities within the state. These policies
are designed to help existing companies grow,
often by easing access to capital and streamlin­
ing regulatory burdens. The measure of success
of these efforts is not job creation but rather
wealth creation. These policies assume that by
assisting wealth creating industries, jobs will
follow. Most of the recent thinking in econom­
ic development strategy has focused on the
demand side. Government can accomplish this
by making key, critical investments which can
improve productivity and unlock the economy’s
potential to meet new and expanding markets.
In devising a development plan for the
future, Iowa intends to use both strategies.
Supply side activities will continue because
other states (and, increasingly, other nations)
will continue to offer incentives as a method for
attracting investment. However, it is the de­
mand side strategies which will ultimately
differentiate Iowa’s economy and lead to the
more sustainable competitive advantage which
Porter and other economic development theo­
rists favor.
Wisconsin—building internal capacity

Wisconsin moved to restructure its ap­
proach to development earlier than many of its


counterparts. In 1984, the state conducted a
survey of state businesses to gauge their satis­
faction with the state’s business climate. Not
only were the results worse than had been ex­
pected, but 65 percent of the respondents actu­
ally indicated that they had “suffered” at the
hands of Wisconsin’s government.1 In re­
sponse to the perception that the state was cre­
ating such a negative business climate, the
Wisconsin Strategic Development Commission
was launched in 1985. From the beginning, the
commission was not structured to propose spe­
cific programs for economic development, but
rather to establish a strategic guide for develop­
ment policy in the state.
A critical aspect of the development com­
mission’s work was to establish three “strategic
objectives” for the state by which to measure
economic development progress. The three
benchmarks were:
■ to create 150,000 new jobs between
■ to achieve an unemployment rate of 5 per­
cent or two percentage points below the na­
tional average, whichever is less; and
■ to stimulate growth in per capita disposable
income of 3.5 percent annually.1
These measures have been recalibrated for
1990-1995. The job growth benchmark has
been fine tuned to focus on nonfarm wage and
salary growth (success over this period will
require a 5.1 percent growth in this broad job
category). The unemployment benchmark
remains at 5 percent or less and the goal for real
per capita income growth has been set at 6.8
percent over the five year period. While the
job growth benchmark for the 1985-1990 peri­
od was exceeded and the unemployment bench­
mark was essentially met, the income growth
figure fell below target.
In addition to benchmarking, the council
adopted a set of principles to guide the state’s
economic development efforts. These princi­
ples recognize the nature of global markets and
he inability of states to completely control
their economic futures. With this in mind the
three principles established are:
■ to recognize that, while the role of the state
government is limited, state actions can be
decisive in shaping the way a state economy
adjusts to the world economy;


■ for state government officials to recognize
the fundamental importance of a market
driven private sector and for the private sec­
tor to recognize the role of state government
in assisting and supporting development; and
■ for the state to conceive a strategy which
identifies priority actions, gives cohesion to
government actions, and avoids policies that
may be harmful to the economy.1
While the bulk of Wisconsin’s policies
appear to be focused on building internal capac­
ity, the state has still not abandoned recruitment
strategies. The state’s “Forward Wisconsin”
program plays an active role in recruiting out of
state businesses to Wisconsin and leaves the
impression that, much like Iowa, the state has
chosen to use both supply and demand econom­
ic development policies in pursuing economic
development in the 1990s. However, it is
worth noting that “Forward Wisconsin” frames
the state’s business advantages in terms of
the quality of the Wisconsin work force and
business environment. This strategy is based
on offering a sound foundation for business
location, not simply providing tax breaks and
cheap labor.
Indiana—bridging the old and new

Indiana’s approach to formulating develop­
ment strategy is similar to that of Wisconsin.
The state has not abandoned traditional recruit­
ment and retention strategies as illustrated by
the state’s recent bidding efforts which won the
state the United Airlines repair and mainte­
nance facility.2 However, Indiana’s recruit­
ment advertising also stresses the state’s home
grown, quality oriented advantages over offer­
ing the lowest cost operating environment.
Similar to Wisconsin, the state has estab­
lished an organization which is charged with
having a long range vision for state economic
development. In 1985, the Indiana Economic
Development Council was established as a
private, not-for-profit corporation charged with
helping to define economic development strate­
gy. The legislation establishing the council
defined three broad missions:
■ to update, revise, and manage the state’s
strategic planning process to adapt to changes
in society and in the economy;
■ to establish and coordinate the operation of
programs commonly available to all citizens
of Indiana; and


■ to evaluate and analyze the state’s economy
and economic development efforts to deter­
mine the direction of future public and pri­
vate actions, and report and make recommen­
dations to the governor with respect to the
state’s economy.
The council functions with a board com­
prised of 72 members, an executive committee
of 15 members, and a full-time staff of five.
The organization is driven by a broad based
consensus approach with both the executive
committee and the board being drawn from
diverse interests. Its structure is nonpartisan,
allowing long range development planning to
be accomplished in a less political atmo­
The contribution of this approach is to split
the state’s economic development activities
into short term supply side measures, such as
business attraction through abatements and tax
breaks, and longer term demand side programs
which will allow the state to adopt those strate­
gies in the areas of infrastructure and education
which are essential to future prosperity.
Events this year bear this out. By mid­
year, the Indiana Economic Development
Council will be releasing a major update to the
state’s long range development plan. This is
coupled with Governor Bayh’s renewed empha­
sis on economic development efforts which has
already produced a statewide development

summit held in December 1992 and created a
development cabinet comprised of senior poli­
cymakers. Other longer term programs include
increasing capital availability for small busi­
ness, export promotion, and increased work
force training. In the meantime, while these
more long term measures are pursued, short
term strategies still focus on incentives. The
“Indiana edge” program would allow Indiana to
match incentives offered by other states in
order to attract or keep firms creating new jobs
in Indiana.2
E v a lu atin g th e new d ire c tio n s in
e c o n o m ic d e v e lo p m e n t p o lic y

As these examples show, these six states
have moved at various speeds to revise their
economic development efforts to reflect the
new paradigms for economic development.
While these new paradigms appear to accurate­
ly describe the new economic geography of the
world, are their policy prescriptions well suited
to state governments? How can state policy­

Federal Reserve Bank of St. Louis


makers be certain that these new development
strategies are better than their predecessors?
Many believe that an evaluation mecha­
nism is needed to judge the success of these
new programs.2 What made it so easy to dis­
card previous development programs was the
perception that they did not work. Too often
there was simply too little follow up to know
whether a program had in fact had the intended
impact. As a report from the Urban Institute
points out, “... effective performance monitor­
ing systems have not been developed and used
by most economic development agencies.”2
The report notes that even when states have
tried to evaluate the effectiveness of economic
development efforts, it has been on a sporadic
basis with such ad hoc measures as future em­
ployment projections and occasional client
In order to know if the adoption of pro­
grams under this new paradigm are justified,
intermediate and final benchmarks need to be
formally established to judge programmatic
success or failure. As such, Oregon’s approach
is a step in this direction. By defining specific
goals, the state can determine whether a pro­
gram is contributing to these objectives. Other­
wise states can end up accepting the logic be­
hind the new paradigms without knowing
whether associated programs are reaching de­
sired outcomes.
The Urban Institute suggests a set of moni­
toring procedures to insure the proper evalua­
tion of programs. First, monitoring should rely
heavily on client based assessment of perfor­
mance. Second, the procedures should be in­
corporated into the normal operations of the
development agency so that regular reports can
be generated and problems can be identified
and corrected early. Third, intermediate and
final benchmarks are needed to insure that the
program is on the right course. The intermedi­
ate benchmarks are particularly critical since
they can identify intermediate steps which are
required along the way to reach final objec­
tives. For example, if a final benchmark identi­
fies the need to raise productivity, intermediate
benchmarks might include expanded worker
training and equipment investment. Since it
may take months or even years to achieve the
final goal of increased productivity, it is critical
to know whether firms are taking the necessary
intermediate steps which will lead to the final


In including evaluation as a critical compo­
nent of economic development strategy, the
focus will be on quality of public service. This
is a departure from previous evaluation efforts
which have emphasized activity levels (such as
the number of programs conducted or newslet­
ters sent) or budget targets (such as actual
expenses compared to budgeted expenses or
the amount of activity per employee). While
this knowledge can be informative, it is not
related to the success of a particular program
in meeting a specific benchmark. It also
does not provide managers with direction to
correct programs which may not be reaching
desired goals.
Other potential problems emerge when
trying to adapt the policy prescriptions of the
new development paradigms to existing state
government structure. To begin, the new para­
digms favor long range investment in the pro­
ductive factors of the state’s economy. Build­
ing up a state’s physical and human capital will
take years and even decades. Third wave crit­
ics have noted that long term economic devel­
opment strategies have been difficult to pursue
given the traditional structure of state and local
government. The election cycle of governors
and state legislators calls into question whether
the states can carry out long range investment,
particularly if the investment’s political payoff
occurs years after the elected official is out of
office. Continuity has not been one of the
hallmarks of economic development policy as
many governors have used economic develop­
ment offices to pursue specific short term ad­
vantages rather than to coordinate a long range
investment strategy for the state. The political
gain which can be accrued by luring a major
facility with thousands of jobs to a state still
outweighs a job training program which will
improve the state’s human capital availability
five or ten years down the road. To partially
overcome this, Indiana and Wisconsin have
established strategic planning bodies which are
able to identify where future development pro­
grams will be needed. While this will increase
planning continuity it does not invest these
planning bodies with the authority to develop
actual programs.
More fundamental is whether the structure
of state government can be adapted to support
broad based efforts which cut across agency
boundaries. While the new paradigms call for
economic development efforts which cut across


all government agency boundaries, developing
such a shared vision may take time to breach
existing interdepartmental barriers. Traditional­
ly, economic development departments were set
up to address the economic development needs
and/or business interests within the state. Other
departments were established to address other
state needs. With the growing recognition that
successful economic development requires the
participation of all agencies of government, a
growing challenge is whether other agencies of
government will be willing to take on explicitly
economic development goals as part of their
mission. For example, will state education
agencies be willing to support vocational educa­
tion programs needed to strengthen the econo­
my? Will environmental and tax departments
recognize their role in promoting the economy
as well as protecting the environment and
maximizing the revenue intake for the state?
Part of the third wave critique is that previous
development efforts have failed to achieve
sufficient scale in part because they have not
coordinated the resources of government with
those of the private sector. Whether government
structure can change to improve cooperation
will be a critical test.
While Oregon’s benchmarking program
specifically establishes a system of incentives
for departments to adjust their mission and be­
haviors, other states are leaving it up to the state
development agency to cajole other departments
to join the economic development parade.
With smaller budgets and fewer programs, state
development agencies will be at a relative disad­
vantage with larger agencies. Therefore, they
will need to act more as a facilitator of develop­
ment than as a direct participant. More time
will need to be spent convincing other depart­
ments to launch economic development efforts
than launching such efforts themselves. Other
alternatives which might overcome this obstacle
include establishing a development supraagency
with the power to compel other agencies to
adopt policies which encourage development
goals or simply allowing the governor to estab­
lish development as a clear goal of the state.
For example, in Indiana, an economic develop­
ment cabinet has been created to improve policy
planning and coordination.
Similarly, it is unclear whether states will be
able to abandon those past development strate­
gies which are widely considered to be ineffec­
tive and costly. While tax incentive and abate­


ment strategies have been condemned as ineffi­
cient, it is still likely that states will continue to
pour resources into questionable attraction and
retention strategies as a defensive response
(unless all other states agree to simultaneously
end these programs.) Iowa’s acceptance of
both supply and demand economic develop­
ment strategies grudgingly recognizes the need
to continue these questionable policies. The
problem is that as long as everyone else contin­
ues to provide such incentives, the political cost
of ending these incentives is very heavy. Fur­
thermore some development professionals
argue that incentives may still be the best poli­
cy for poorer regions lacking the physical and
human capital levels of other regions. These
analysts argue that the building block strategies
can be adopted once these region have secured
a certain threshold of economic activity.
There is also the question of the capacity of
government to absorb some of the functions
being thrust upon it. Many analysts are asking
government to absorb investment risk, particu­
larly in high technology industries which have
potentially large, but highly uncertain future
returns.2 Whether state government will have
the patience and the capacity to provide these
ventures with resources which are unavailable
in the private market remains an open question.
Furthermore, policymakers should be careful
that in establishing programs to address a fail­
ure in private markets, they do not end up inad­
vertently discouraging private sector solutions.
It is equally important that the root of the “mar­
ket failure” is understood and that a govern­
ment response is appropriate. In some cases,
the hesitance of the private market to invest
may be well founded and can be a signal for
government to avoid a similar mistake.
Government may need to be more farsight­
ed in adapting to economic change. As the
development gurus of the 1990s point out, the
new innovation driven economy will be less
stable. To succeed, government policies will
need to abandon efforts to protect significant

but declining industries and instead develop an
effective transition for redeploying these avail­
able resources. The ability of government to
anticipate industry changes and have an effec­
tive transition policy for declining industries
will be another test of government’s ability to
adapt to economic change. Programs which
stress retraining displaced workers will need
more attention. As a related issue, an increas­
ing body of research stresses the link between
economic development and wise use of envi­
ronmental resources. The concept of sustain­
able development is likely to become a more
common feature of long range development
strategies. As the link between environmental
policies and economic growth continues to
strengthen, development policies will be pres­
sured to include measures to promote the re­
sponsible stewardship of natural resources.
Finally, there is one wild card which the
states need to consider. With the Clinton Ad­
ministration’s arrival in Washington, it is possi­
ble that more funding and support for the types
of programs suggested by these new paradigms
will be forthcoming. Promoters of these new
paradigms such as Robert Reich have been
tapped as cabinet members in the new Adminis­
tration. Furthermore, during his tenure as Gov­
ernor of Arkansas, Clinton created an economic
development strategy for the state which relied
heavily on the ideas contained in these para­
digms. It is likely that national policy will be
supportive and complementary to those states
that are trying to recast their economic develop­
ment efforts along these lines.
State development agencies are entering a
new era. With smaller budgets and a new con­
ception of the engines of future economic
growth, these agencies are developing new
ways of doing business. As always, the success
or failure of these strategies remains to be seen,
but if the theory of growth presented in these
new paradigms is right, the states may be on the
right track.

'Eisinger (1988), p. 31.

(1990), pp. 3-10.

2National Council for Urban Economic Development
(1992), pp. 4-5.

♦Toft (1992), pp. 1-3.
5R oss and Friedman (1990), p. 7.

3For more on the third wave, see Ross and Friedman


6The major works by these three authors on economic



development policy are: Michael E. Porter, The Compara­
tive Advantage o f Nations, The Free Press, New York,
(1990); Robert B. Reich, The Work o f Nations, Knopf, New
York, (1991); and Peter K. Eisinger, The Rise o f the Entre­
preneurial State, The University of Wisconsin Press,
Madison, (1988).
7Zehner (1992), pp. 1-2.
*For a review o f Schumpeter’s writings in this area, see
Scherer (1992), pp. 1416-1433, and Schumpeter (1942).
’Proffer (1992), pp. 33-35.
l0Cortright (1991).

“ Iowa Department o f Economic Development (1991), p. 25.
“ Eisinger (1988), pp. 136-137.
“ Wisconsin Strategic Planning Council (1990), p. 2.
“ WSPC, p. 3.
20Crain Communications Inc. (1991), p. 8. In all, the city
offered SI 11.5 million in incentives to win a four city com­
petition for the UAL maintenance facility. Combined with
state incentives, the total package is expected to top $200
“ Indiana Economic Development Council, Inc. (1992),
pp. 1-3.

“ Michigan Department of Commerce (1991).
“ State Policy Research, Inc. (1993), p. 5.
“ Osborne (1988), pp. 259-260.
“ Byington (1993), p. 36.
“ Illinois Department o f Commerce and Community Af­
fairs, Economic Leadership in Illinois: New Approaches for
the 1990s, prepared by SRI International and DRI/
McGraw-Hill, (1992), pp. ES1-ES3.

“ A session at the “State and local economic development
strategy summit” sponsored by the University o f Minnesota’s
Humphrey Institute and the National Conference o f State
Legislatures specifically addressed this topic. The confer­
ence was held December 3-5, 1992 in Minneapolis.
“ Hatry, Fall, Singer, and Liner (1992), p. 1.
“ Greenberg (1993), pp. 28-30.

Byington, Marge, “Development activities in
Michigan,” Shaping the Great Lakes Economy,
Federal Reserve Bank of Chicago, 1993, pp.

Illinois Department of Commerce and Com­
munity Affairs, Economic Leadership in Illi­
nois: New Approaches for the 1990s, Springfield, 1992.

Cortright, Joseph, Third wave economic de­
velopment in Oregon, Oregon Joint Legislative
Committee on Trade and Economic Develop­
ment, December 1991.

Indiana Economic Development Council,
Inc., Corporate Profile, Indianapolis, January

Crain Communications Inc., “UAL taps Indi­
anapolis for maintenance hub,” Crain’s Chica­
go Business, October 28, 1991, p. 8.

Iowa Department of Economic Development,
Positioning Iowa fo r the 21st Century: A 20
Year Economic Development Vision, Des
Moines, 1991.

Eisinger, Peter K., The Rise o f the Entrepre­
neurial State, The University of Wisconsin
Press, Madison, 1988.

Michigan Department of Commerce, Eco­
nomic Development Mission Statement, Lan­
sing, 1991.

Greenberg, Andrew T., “Technology and
entrepreneurship,” Shaping the Great Lakes
Economy, Federal Reserve Bank of Chicago,
1993, pp. 28-30.

National Council for Urban Economic Devel­
opment, “Economic development budgets face
state axes,” Economic Developments, March
15, 1992. pp. 4-5.

Hatry, Harry, Mark Fall, Thomas Singer,
and E. Blaine Liner, Monitoring the Outcomes
o f Economic Development Programs: A Manu­
al, The Urban Institute Press, Washington,
D.C., 1992.

Osborne, David, Laboratories o f Democracy,
Harvard Business School Press, Boston, 1988.


Porter, Michael E., The Comparative Advan­
tage o f Nations, The Free Press, New York,


Proffer, Lanny, “Benchmarks to a better Ore­
gon,” State Legislatures, National Conference
of State Legislatures, July 1992, pp. 33-35
Reich, Robert B., The Work o f Nations, Knopf,
New York, 1991.
Ross, Doug, and Robert E. Friedman, “The
emerging third wave: new economic develop­
ment strategies in the 90s,” The Entrepreneur­
ial Economy Review, Corporation for Enter­
prise Development, Autumn 1990, Vol. 9, No.
1, pp. 3-10.
Scherer, F.M., “Schumpeter and plausible
capitalism,” Journal o f Economic Literature,
Vol. 30, September 1992, pp. 1416-1433.

Schumpeter, Joseph, Capitalism, Socialism,
and Democracy, Harper, New York, 1942.
State Policy Research, Inc., State Budget &
Tax News, Vol. 12, No. 5, March 2, 1993, p. 5.
Toft, Graham, “Making waves: a critique of
the third wave,” Indiana Economic Develop­
ment Council, Indianapolis, 1992, pp. 1-3.
Wisconsin Strategic Planning Council,
Report Number 2, Madison, February 1990.
Zehner, Andrew L., “What the gurus are say­
ing about economic competitiveness,” Indiana
Economic Development Council, Indianapolis,

Shaping the Great Lakes Economy

Published Proceedings Available

Held October 15,1992, in Indianapolis, Indiana, the conference focused on the state of the
region’s economy and on strategies to promote the region’s economic growth and develop­
ment. The conference was sponsored by the Federal Reserve Bank of Chicago, the Great Lakes
Commission, and The Institute for Development Strategies at Indiana University.
The published proceedings contains the remarks of those leaders who spoke at the conference.
Presentations covered topics which
■ The state of the region’s economy
■ Global trends and policies impacting on
the region
■ Emerging trends in the organization and
competitiveness of basic m anufacturing
■ The economic developm ent experience
and programs of Midwestern states and
of Canada

If you would like a complimentary copy
of the proceedings, please write or phone:
Public Affairs Department
Federal Reserve Bank o f Chicago
P.O. Box 834
Chicago, Illinois 60690-0834
Telephone: 312-322-5111

■ New directions in regional
developm ent strategies




Recent trends in
corporate leverage

Paula R. W o rthing to n

Many analysts have voiced
concerns about the indebted­
ness of U.S. corporations dur­
ing the last several years.
These analysts believed that the
debt buildup of the 1980s would leave firms in
precarious financial condition if and when the
next cyclical downturn arrived; higher debt bur­
dens would prove difficult to manage when
revenues and cash flows fell in a recession.
Some of these concerns have indeed been borne
out in the most recent cycle, as many firms found
their debt servicing needs remained high while
funds available to meet those needs tapered off.
Analysts have also argued that firms have recent­
ly taken great strides in reducing their debt bur­
dens and “restructuring their balance sheets.” In
this article, I examine some aggregate data for the
U.S. nonfinancial corporate sector and consider
several aspects of the changes in corporate debt
burdens in recent years. In particular, after pre­
senting some evidence of the debt buildup of the
1980s and its subsequent slowdown, I focus on
the balance sheet restructuring that began in 1990
and continues to the present.
The article’s findings are briefly stated. I
find that total debt growth has indeed slowed,
though its short and long term components have
moved in opposite directions in recent quarters.
Various debt to asset and debt to income ratios
have fallen noticeably in recent quarters, though
typically they have failed to retrace much of their
buildup during the 1980s. Flow measures of
indebtedness, such as interest expense to cash
flow ratios, have shown much larger decreases,
and I find that the principal factor explaining
these decreases is the drop in interest rates expe­

2 4

rienced in both the short and long term ends of
the rate structure. Cash flow growth and debt
level reduction, by comparison, have contributed
only a modest amount to the observed decrease
in these ratios. This suggests that firms have
indeed experienced a decrease in their debt bur­
dens, but that this is due more to the effects of
monetary policy than to explicit restructuring
efforts on the part of firms themselves. Further­
more, this analysis suggests that debt burdens
remain historically high, so that future interest
rate increases may return many firms to situa­
tions in which cash flow may be inadequate to
service outstanding debt. The consequences of
the 1980s debt buildup will remain an economic
force well into the decade of the 1990s.
The rest of this article is organized as fol­
lows. In the following section, I define and
describe the measures of leverage used in this
article; Box 1 describes in more detail the data
sources used. The article’s third section docu­
ments the debt buildup of the 1980s and its re­
cent slowdown using simple figures and growth
rates; I also briefly discuss the notion of “optimal
capital structure” in that section. The fourth
section looks at the balance sheet restructuring
process in some detail and presents the main
results of the article. The fifth section concludes.
M e a su re s o f in d e b te d n e ss

Numerous financial ratios may be construct­
ed to develop a sense of the extent of indebted­
ness in the U.S. nonfinancial corporate sector.
Paula R. Worthington is a senior economist at the
Federal Reserve Bank of Chicago. The author grate­
fully acknowledges helpful comments from Carolyn
McMullen, Kathryn Moran, and Steven Strongin.


BOX 1

Data sources and definitions
Most of the data used in this article are taken
from the F lo w o f F u n d s ( F lo w s ) data collected by
the Federal Reserve Board (Board); exceptions are
noted in the text. F lo w s data have been published
by the Board on a regular basis since 1947. The
data are intended to describe the financial activities
of the aggregate U.S. economy and its constituent
sectors and to permit matching to income and prod­
uct data summarizing real resource flows in the
economy. The Board’s publication, I n tr o d u c tio n to
F lo w o f F u n d s , contains good background informa­
tion on this data source.
This article uses data pertaining only to the
nonfinancial, nonfarm corporate sector, and all data
are in nominal dollars. I use data from 1959:Ql
through 1992:Q3, the last quarter for which com­
plete data are available. I refer to 1992:Q3 as the
current quarter throughout the article. Two of the
series used in the article, trade debt and trade credit,
experienced changes in reporting methods and
variable definitions over the studied time period, so
in the following paragraphs I describe the changes
and how I adjusted the series to ensure comparabili­
ty over time.
T ra d e d ebt

In the fourth quarter of 1974, the F lo w s series
labelled “trade debt” displays a huge (32.8 percent)
drop from its 1974:Q3 level. This decline reflects a
change in the source data used by the Board to
construct the trade debt series. To get a consistent
series, then, I must adjust the data for 1974:Q3 and
earlier quarters to match the later period definitions
and sources.
Through 1974:Q3, the Board relied on the
Securities and Exchange Commission’s (SEC) data
on working capital of nonfinancial corporations for
the “notes and accounts payable” component of
trade debt.1 From 1974:Q4 forward, the Board has
used an alternative series, called “payables,” devel­
oped by the Federal Trade Commission (FTC) and
the Board. The payables series, both old and new,
is not part of the F lo w s data and instead is available
(through 1986 only) in the Board’s A n n u a l S ta t i s t i ­
c a l D ig e s t. These two alternative payables series
can be easily spliced at 1974:Q4, because both are
available for that quarter only (Board of Governors,
July 1978). The series are quite different in levels:
the old series reports a value of $402.3 billion,
while the new one reports one of $272.3 billion.
However, since I lack data for the other components
of the trade debt series, I cannot simply splice the
payables series and then adjust the trade debt series
in turn. Instead, I assume that between 1974:Q3
and 1974:Q4 the percentage change in trade debt



equals the percentage change in payables, where I
use the adjusted payables data. This gives me an
adjusted level of trade debt for 1974:Q3. For
1972:Q2 and earlier quarters, I assume that the
percentage change in the unadjusted trade debt
series equals the percentage change in the adjusted
trade debt series. These two assumptions permit me
to compute an adjusted trade debt series for the
quarters before 1974:Q4.
T ra d e cre d it

The F lo w s series labeled “trade credit” exhibits
similar behavior to that of trade debt: a break in the
series occurs in 1974:Q4 as the Board switches from
one data source to another. Prior to 1974:Q4, the
“accounts receivable” component of trade credit
was derived from the SEC data mentioned above.
From 1974:Q4 onwards, that component was de­
rived from series prepared by the Board and the
FTC. Like the payables series discussed above, the
receivables series can be easily spliced at 1974:Q4,
the quarter for which both series are available; in
addition, the receivables series is not part of the
F lo w s data but is published (through 1986) in the
A n n u a l S t a tis tic a l D ig e s t. To compute an adjusted
trade credit series, I need additional data on con­
sumer credit because trade credit is defined as the
difference between receivables and consumer credit
(see Footnote 1 of this Box). Thus, to obtain an
adjusted series for 1984:Q3 and earlier, I proceed as
follows. First, I use the published (unadjusted)
F lo w s data to compute an unadjusted receivables
series as the sum of trade credit and consumer
credit. Next, I adjust the receivables series by
assuming that the percentage change in receivables
between any two quarters is the same for both the
adjusted and the unadjusted data. Finally, I compute
an adjusted trade credit series for 1974:Q3 and
earlier by setting adjusted trade credit equal to the
difference between the adjusted receivables series
and the original (unadjusted) consumer credit series.
An alternative method more comparable to the one
used for trade debt yields very similar results.2
'For a discussion of the components o f all Flows series, see
Board of Governors (1971).
2Under the alternative method, I compute adjusted receiv­
ables for 1974:Q3 only by assuming that the percentage
changes in adjusted and unadjusted receivables between
1974:Q3 and 1974:Q4 are equal. I then compute adjusted
trade credit for 1974:Q3 as unadjusted trade credit plus
adjusted receivables less unadjusted receivables. For
1974:Q2 and earlier, I assume that the percentage changes
in the adjusted and unadjusted trade credit services are


I consider three types of ratios in this article.
First, I examine a short term assets to liabilities
ratio. Next, I consider a debt to income ratio, and
finally I look at ratios of interest payments to
cash flow. The remainder of this subsection
defines and describes each ratio in turn (Box 1
contains additional information on data sources
and definitions).
Ratios of assets to liabilities measure the
solvency and/or liquidity of a firm or sector. I
use the ratio of short term liabilities to short term
assets, which is just the reciprocal of the current
ratio.1 This ratio is a good measure of liquidity
since short term assets are those that could be
quickly used to meet the short term liabilities
faced by the sector.
The second ratio I examine is the ratio of
total debt outstanding to the flow of gross domes­
tic product for the nonfinancial sector (NFGDP);
similar ratios are commonly used in discussions
of government and household sector indebted­
ness [Friedman (1982) and Eugeni (1993)].
Shoven and Waldfogel (1990) refer to such mea­
sures as “hybrid” financial ratios, because they
compare stocks to flows. Such ratios offer a rule
of thumb measure of indebtedness by comparing
a sector’s flow of total income to its total debt; the
ratio essentially measures how quickly the sec­
tor’s underlying assets would generate the in­
come needed to repay the debt.
Finally, I examine the ratio of interest pay­
ments to cash flow, a liquidity measure which
compares the current flow of debt servicing obli­
gations with the current flow of cash available to
meet those obligations. The denominator of the
ratio, cash flow, is defined as the sum of before
tax profits, depreciation, and interest payments,
while the numerator is simply interest payments.2
Appropriate interest payments measures are not
directly available, so I construct proxies as fol­
lows. Short term interest payments are computed
as the product of the six month commercial paper
rate and short term debt outstanding; long term
interest payments are computed as the product of
the corporate AAA bond rate and long term debt
outstanding; and total interest payments are com­
puted as the sum of short and long term pay­
ments. These proxies assume that firms can and
do “roll over” their debt, both short and long
term, each time period (quarter or year). This
implies that when rates are rising, these proxies
may overstate the increase in the debt servicing
burden, since firms will not choose to refinance
existing debt at the newly higher rates. On the


other hand, when rates are falling, these proxies
may overstate the decrease in the burden, since
firms cannot refinance all of their debt immedi­
ately following a rate decline. These proxies also
ignore the fact that not all nonfinancial corpora­
tions have the same credit rating, so that the rates
paid for a given maturity issue will differ across
firms. Despite these shortcomings, these mea­
sures can provide an idea of both the level and
change in debt burdens.3
T h e d e b t b u ild u p o f th e 1980s and its
re ce n t slo w d o w n

Many studies have documented the leverag­
ing boom of the 1980s and have analyzed its
sources and consequences.4 At year end 1980,
U.S. nonfinancial corporations had a total of
$875.0 billion in total debt outstanding, while by
year end 1990, they had $2,273.4 billion, an
increase of nearly 160 percent. During that same
time period, the sector experienced growth of
only 96 percent in nominal NFGDP. Table 1
presents the annualized growth rates for NFGDP,
total debt, long term debt, and short term debt
over several time periods. The Table clearly
shows that total debt growth exceeded income
growth over the 1980s and that both short and
long derm debt grew vigorously over the decade.
Financial analysts disagree on whether this
increase in debt relative to NFGDP (and other
measures) was “good” or “bad.” Evaluating the
welfare consequences of particular capital struc­
tures requires a theory of optimal capital struc­
ture, and many theories and arguments have been
proposed. Analysts tend to agree on the factors
that determine the optimal capital structure but
rarely agree on their relative importance. For
example, corporate tax rates, expected bankrupt­
cy costs, liquidity of asset markets, and the extent
and nature of information based problems, such
as adverse selection and moral hazard, will all


Annualized growth rates







.1 0 0





.1 0 0




.1 1 2


.1 1 2

SOURCE: Flow o f Funds, Federal Reserve S ystem ,
various years.


influence firms’ choices of debt and
equity. A comprehensive treatment
Ratio of short term liabilities to short term assets
of these factors and consideration of
their behavior over the 1980s is
beyond the scope of this article;
hence, in what follows, I remain
agnostic as to the welfare conse­
quences of increases and decreases
in corporate leverage. Instead, I
simply document recent trends and
attempt to identify which factors
have been most important in recent
quarters in corporate balance sheet
To properly evaluate whether
the increased debt levels really repre­
SOURCE: Federal Reserve Board.
sented increases in indebtedness, one
needs to consider the ratios defined
end of 1990 than it had been at the end of 1980,
in the previous section. Figures 1 through 3
though the 1990 ratios were below the decade
depict the patterns in three sets of ratios since
peaks of 1982. Furthermore, the most recent data
1959, and together they tell a story of substantial
indicate a continued, pronounced decline in these
increases in leverage over the 1980s. For exam­
interest burden measures from their local peaks in
ple, the ratio of short term liabilities to short term
late 1990 and early 1991, with the short term
assets (STL/STA), which is shown in Figure 1,
interest burden falling much more than the long
rose from .593 at the beginning of the 1980s to a
term burden. To interpret these patterns properly,
peak of .760 in 1990:Q1. Since then, the ratio
recall that the sources of the high interest burdens
has fallen to .687, corresponding to a current
were quite different between the early 1980s and
ratio of 1.46 and bringing the ratio back to 1984
early 1990s. In the early 1980s, the source was
levels. The ratio’s decline reflects actual reduc­
high interest rates; in the early 1990s, the source
tions in current liabilities and somewhat modest
was high debt levels. For example, consider the
growth in current assets.
short term measure, which equalled .085 in 1980,
The ratio of debt outstanding to NFGDP,
with short term debt outstanding of $332.3 billion
depicted in Figure 2, displays a pattern similar to
and an average six month commercial paper rate
that of the STL/STA ratio. The total debt to
of 14.5 percent. By 1990, the ratio had risen to
NFGDP ratio rose throughout the 1980s, peaking
.107, because outstanding short term debt had
in 1991:Q1 at .751; the ratio has since fallen to
.718. Much of this ratio’s recent
decline reflects decreases in short
term debt outstanding; if only long
Ratios of debt to gross domestic product
term debt is used in the ratio’s nu­
merator, the ratio has not declined
but has only leveled off, reflecting
recent moves by corporations out of
short term into long term debt.
Figure 3 presents the interest
payments to cash flow ratios, and all
three ratios tell similar stories: bur­
dens grew in the late 1970s and early
1980s, as interest rates reached his­
torically high levels. During the
1980s, these measures remained high
by historical standards, though they
varied quite a bit from year to year.
Each of the ratios was higher by the

Federal Reserve Bank of St. Louis



quarters from now (1994:Q3) if
they decrease at the same rate as
Ratios of interest payments to cash flow
they have since 1990:Q3.5 For
example, consider the column
labeled STL/STA. This ratio
equaled .755 in 1990:Q3 and has
declined to .687 in the most recent
quarter. If that rate of decrease
were to continue, in two years the
ratio would reach .619, just above
its 198LQ3 value. Thus, in two
more years, firms would have
retraced much of the 1980s in­
crease in this ratio. On the other
hand, eight more quarters of debt
load reduction at rates already
experienced would bring the debt
to NFGDP ratio only to 1987:Q4
levels. The difference between the two measures
increased to $959.7 billion although the six
reflects the fact that firms have been exchanging
month commercial paper rate was significantly
short term for long term debt in recent quarters;
lower, at 7.7 percent.
consequently, short term leverage measures have
B a la n ce sh ee t re stru ctu rin g
decreased substantially, while long term and total
The ratios presented in the previous section
measures have decreased only moderately if at
suggest that firms have begun to reverse their
debt positions, with particularly noticeable de­
What factors have contributed to the
creases in debt servicing burdens and short term
decreased debt burden?
debt levels and ratios. A natural question, then, is
Figure 3 clearly indicates that debt servicing
when the restructuring process will be over.
burdens have decreased since 1990; what are
However, answering this question requires fore­
the sources of these decreases? This section
casting and understanding corporate preferences
attempts to disentangle the contributions of the
regarding optimal capital structure, both of
three key factors that determine these burdens,
which are beyond the scope of this article. Rath­
namely the amount of debt outstanding, the level
er, in this section, I ask three distinct but related
of interest rates, and the level of cash flow. In
questions. Each question emphasizes a different
recent quarters, short term debt levels have fallen,
perspective on the leverage issue and, as a conse­
while long term debt has risen, just slightly pull­
quence, analyzes different leverage measures.
ing up the total; interest rates have fallen, short
term more than long term; and the noninterest
How valuable are two more years o f


If the restructuring process continues for
another two years as it has for recent quarters,
what will corporate balance sheets look like?
That is, exactly how much will the corporate
sector have lightened its debt burden? Since
different leverage measures peak in different
quarters and exhibit somewhat different patterns
around their peaks, I will use the recent business
cycle peak date, 1990:Q3, as a common refer­
ence point.
Consider the entries in Table 2 below. For
two of the ratios discussed in the previous sec­
tion, STL to STA and debt to NFGDP, I compare
their 1990:Q3 value to their current value, and
then calculate what their value would be eight



Peak, current, and extrapolated
values of selected financial ratios1


Peak value








Comparison date



Comparison value



Extrapolated value

'P eak value is for 1990:Q3, and current value is for


payments components of cash flow
(pretax profits and depreciation)
Interest payments to cash flow ratios
have risen. This section presents
Short term
Long term
some numbers to quantify the contri­
bution of these factors.
Table 3 presents values for three
interest payments to cash flow ratios
Actual value in 1990:Q3
under various assumptions about
Actual value in 1992:Q3
outstanding debt, cash flow, and
Change from 1990:Q3 ratio1
interest rates. The top portion of the
Debt levels at 1992:Q3
table simply reports the actual values
values, interest rates and
of the three ratios in 1990:Q3 and
cash flow at 1990:Q3 values .088
1992:Q3 and the change over that
Change from 1990:Q3 ratio1
.0 1 0
time period.6 For example, the short
Debt levels and cash flow
term measure fell from .098 to .040,
at 1992:Q3 values, interest
for a change of .058, over this time
rates at 1990:Q3 values
period. Similarly, the long term
Change from 1990:Q3 ratio1
measure fell from . 158 to .150, and
'C hange is com puted as the 1990:Q3 ratio m inus the 1992:Q3 ratio.
the total measure from .255 to . 190.
Now consider the importance of
debt level reduction in reducing these debt servic­
spectively. Again, the importance of rate reduc­
ing ratios. The Table’s first column reports that if
tion is clear. Further, these numbers suggest why
debt levels are held at their current 1992:Q3 val­
the previous section’s exercise would be of limit­
ues while cash flow and interest rates are held
ed interest for these debt servicing ratios. Mea­
fixed at their 1990:Q3 values, the short term debt
suring the effects of eight more quarters of reduc­
servicing burden would have equalled .088 in
tion in debt burdens is not that interesting in this
1992:Q3, instead of its actual .040. Thus, debt
case, since most of the action has come from
level changes alone explain only .010 ( = .098 extensive rate reduction, especially short term,
.088) of the improvement in the ratio. The second
which is not likely to continue through 1994.
column reports that, under the same assumptions
Table 3 suggests that corporations have not
of unchanged cash flow and interest rates but
restructured much by actually reducing their debt
current debt levels, the long term debt burden
levels. Instead, their debt burdens have become
would have equalled .172, compared to its actual
lighter because of extensive rate reductions and
.150 value in 1992:Q3. In this case, debt level
modest cash flow growth in the last eight quar­
changes have actually increased the debt servicing
ters. Given that future sizeable rate reductions
burden, contributing -.014 ( = .158 - .172) to the
are unlikely in the present economic environment
ratio’s decrease. The third level reports a similar
and that firms have shown little interest in out­
calculation for the total interest payments servic­
right debt level reduction, this puts the burden on
ing cash flow ratio.
cash flow growth to be the driving force behind
Now turn to the joint roles of debt level re­
future debt servicing burden reduction.
duction and cash flow growth.7 The Table reports
that the short term ratio would have equalled .084
What impact will growth have on
in 1992:Q3 if debt levels and cash flow were at
the debt burden?
their actual 1992:Q3 levels while interest rates
The last part of this section presents some
remained at their 1990:Q3 values. Thus, debt
estimates of the quantitative impact of prospec­
level changes and cash flow growth accounted
tive cash flow and output growth on two mea­
for only .014 of the change in the short term ratio,
sures of the debt burden. I consider the debt to
out of a total change of .058. It is clear that rate
NFGDP ratio and the previous section’s interest
reduction has been responsible for most of the
payments to cash flow ratio based on total inter­
improvement in this short term service ratio. Sim­
est payments. Tables 4A and 4B present esti­
ilarly, debt level changes and cash flow growth
mates of the impact of three alternative growth
together accounted for -.006 of the decrease in
rates on these two debt burden measures, under
the long term ratio and .007 of that in the total
alternative assumptions about the future growth
ratio, out of total changes of .008 and .065, re­
of debt outstanding. All of the calculations as-






co .
b "l

sume that short term debt growth is
zero and that the only debt growth,
Impact of future output growth on debt to NFGDP1
if any, is long term.
Output growth rate
Table 4A shows that if NFGDP
grows at an annual rate of 3 percent
Current value
over the next four quarters and if
total debt outstanding does not
Value in 1993:Q3
change at all, then the ratio of debt
to NFGDP will fall from .718 to
.697 over the next year, bringing the
economy nearly back to the
one-half of
1987:Q4 value of that ratio. If
output growth
NFGDP grows at 3 percent but long
'Dates in brackets denote m ost recent qu arter w ith ratio at or
term debt outstanding also rises, for
near that level.
example by 1.5 percent, then the
debt to NFGDP ratio will fall only
C o n c lu s io n s
to .707, near the 1988:Q2 value. Faster output
growth means more progress in decreasing the
This article has presented some evidence on
debt to NFGDP ratio, while adding more debt
the extent of financial restructuring undertaken
retards such progress. The third column, in which
by U.S. nonfinancial corporations in the last two
NFGDP is assumed to grow by 7 percent and debt
to three years. Measures of the debt burden that
is unchanged, brings the ratio back only to
focus on stocks of debt outstanding have de­
1986:Q3 levels. Thus, healthy output growth will
clined in recent quarters, especially those that
act to decrease this ratio, but even the most robust
focus on short term assets and liabilities. How­
case considered will bring the ratio back to 1986
ever, “flow” measures of the debt burden have
levels, which were still high by historical stan­
decreased much more significantly, primarily
dards (recall Figure 2).
because of a benign interest rate climate. Thus,
Table 4B shows similar calculations to assess
the recent decreases in corporate sector leverage
the impact of cash flow growth on the interest
should not be attributed so much to the explicit
payments to cash flow ratio. I assume that rates
shedding of corporate debt but rather to the re­
are unchanged from their 1992:Q3 levels and that
cent easing of monetary policy. Further, any
any growth in total debt outstanding is in long
substantial future interest rate increases may
term debt, leaving short term debt unchanged.
leave many firms nearly as vulnerable as they
The Table shows that cash flow growth lowers the
were before the recent recession. The burden of
ratio and that faster cash flow growth (less debt
future balance sheet restructuring will likely be
accumulation) translates into faster debt burden
borne by simple economic growth: as growth
reduction. However, the magnitude
of the reductions is quite modest in
all six cases considered; all would
leave the interest payments to cash
Impact of future cash flow growth on total interest
payments to cash flow1
flow ratio close to its 1979 level.
(Recall from Figure 3 that by 1979,
Cash flow growth rate
debt servicing burdens were high by
historical standards but would rise
even further as interest rates contin­
ued to climb.) Thus, future cash
Value 1993:Q3
flow growth is likely to have only
moderate effects on debt servicing
burdens. This is consistent with
Long term debt
Table 3’s numbers, which suggested
of cash flow growth
that recent cash flow growth has
contributed only modestly to recent
'Dates in brackets denote m ost recent qu arter w ith ratio at or
near that level.
decreases in debt servicing burdens.


picks up, firms will expand output and revenues
faster than debt, thus decreasing their debt loads
in a relative sense. The consequences of the

1980s debt buildup will stay with the economy
well into the decade of the 1990s.

'Short term assets are the sum of cash and equivalents, trade
credit, and inventories; short term liabilities are the sum of
short term debt, trade debt, and profits taxes payable.
2This cash flow measure has been used by other authors
studying leverage issues; for example, see Bemanke and
Campbell (1988), Bemanke, Campbell, and Whited (1990),
Warshawsky (1990), Blair and Litan (1990), and Lee (1990).
Alternative cash flow measures, such as after tax measures
that may exclude dividends, are appropriate for studying
other issues, for example, the sensitivity of fixed investment
spending to movements in internal funds; see Fazzari, Hub­
bard, and Petersen (1988) and Morck, Shleifer, and Vishny
(1990) for examples.

4For example, see the articles in Shoven and Waldfogel
(1990); Bemanke and Campbell (1988); and Bemanke,
Campbell, and Whited (1990); for the view that the debt
buildup was not large by historical standards, see McKen­
zie and Klein (1992).
5For reasons that will become clear in the following section,
I do not examine the interest payments to cash flow ratios
^ h e change is reported as the 1990:Q3 value minus the
1992:Q3 value.
7In this section, cash flow growth denotes growth in the
sum of pretax profits and depreciation.

3If the net interest payments measure from National Income
and Product Accounts is used instead o f these proxies, very
similar patterns emerge.

Bernanke, Ben S., and John Y. Campbell, “Is
there a corporate debt crisis?,” Brookings Papers
on Economic Activity, 1988:1, pp. 83-125.
Bernanke, Ben S., John Y. Campbell, and Toni
M. Whited, “U.S. corporate leverage: develop­
ments in 1987 and 1988,” Brookings Papers on
Economic Activity, 1990:1, pp. 255-278.
Blair, Margaret M., and Robert E. Litan, “Cor­
porate leverage and leveraged buyouts in the
eighties,” in John B. Shoven and Joel Waldfogel,
eds., Debt, taxes, and corporate restructuring,
Washington, D.C., Brookings, 1990.
Board of Governors of the Federal Reserve
System, Introduction to flow of funds, June 1980.
____________, “Working capital of nonfinancial
corporations,” Federal Reserve Bulletin, July
____________, “Flow of funds accounts: data
sources and derivations,” preliminary draft, 1971.
Eugeni, Francesca, “Consumer debt and home
equity borrowing,” Economic Perspectives,
March/April 1993, pp. 2-14.
Fazzari, Steven M., R. Glenn Hubbard, and
Bruce C. Petersen, “Financing constraints and



corporate investment,” Brookings Papers on
Economic Activity, 1988:1, pp. 141-195.
Friedman, Benjamin M., “Debt and economic
activity in the United States,” in Benjamin M.
Friedman, ed., The changing roles o f debt and
equity in financing U.S. capital formation, Univer­
sity of Chicago Press, 1982.
Lee, William, “Corporate leverage and the conse­
quences of macroeconomic instability,” Federal
Reserve Bank of New York, research paper, No.
9012, May 1990.
McKenzie, Richard B., and Christina Klein,
“The 1980s: a decade of debt?,” Center for the
Study of American Business, policy study, No.
114, October 1992.
Morck, Randall, Andrei Shleifer, and Robert
Vishny, “The stock market and investment: is the
market a sideshow?,” Brookings Papers on Eco­
nomic Activity, 1990:2, pp. 157-202.
Shoven, John B., and Joel Waldfogel, “Introduc­
tion and summary,” in John B. Shoven and Joel
Waldfogel, eds., Debt, taxes, and corporate re­
structuring, Washington, D.C., Brookings, 1990.
Warshawsky, Mark, “Is there a corporate debt
crisis? another look,” Federal Reserve Board of
Governors, working paper, January 1990.


Cost Effective Control of

U rb an Sm og

June 7 and 8, 1993

In conjunction with the Workshop on Market-Based Approaches to Environmental Policy and
the Chicago Council on Foreign Relations, the Federal Reserve Bank o f Chicago will hold a
two day conference on June 7 and June 8, 1993. Meetings will take place at the Federal
Reserve Bank. The conference will promote the exchange o f ideas and information among
the region's business community and policymakers so that the Midwest region can comply
with clean air mandates (especially regarding urban ozone) with a minimum o f regulatory
burden and growth retardation.
Highlights o f the p ro g ram
I Keynote sessions addressing the challenges
facing the Chicago area and other regions will
be delivered by Samuel Skinner, president of
Commonwealth Edison Co., and M ary Gade,
director of the Illinois EPA.
I George E. Tolley, professor of economics
at the University of Chicago, will report on the
status of current research regarding urban ozone
I Sessions will report on both ongoing planning
and experience to date with emissions trading
systems. Speakers will include James D. Boyd,
executive officer at the California A ir Resources
Board, Praveen K. Amar, senior program man­
ager for the Northeast States for Coordinated
A ir Use Management, and Kelly Robinson of
Rutgers University.
I A report addressing "Cost effectiveness of
remote sensing and enhanced inspection and
maintenance" will be presented by Winston
Harrington of Resources for the Future and
Virginia D. McConnell of the University of
Maryland. Discussants of the report will include
W ynn Van Bussmann, corporate economist for
Chrysler, and Andrew Plummer, deputy director
for improvement programming at the Chicago
Area Transportation Study.

I Daniel Dudek, senior economist at the
Environmental Defense Fund, will present
a paper on "Incentive systems and the car."
Discussants will include Thomas F. W alton,
director of economic policy analysis at General
Motors Corporation, along with Elmer Johnson
of the firm of Kirkland and Ellis.
I A panel of industry leaders from the Midwest
will respond to the challenges of complying
with Clean A ir Act regulations and will also
react to proposals for market based systems
of compliance.
I John Spengler of the Harvard School of
Public Health will address the "Health impacts
of urban ozone emissions."
If you would like to receive an invitation to the
conference, please write or phone:
Sandy Blazina
Public Affairs Department
Federal Reserve Bank of Chicago
P.O. Box 834
Chicago, Illinois 6 0 6 9 0 -0 8 3 4
Telephone: 312-322-5114
FAX: 312-322-5515

Public Information Center
Federal Reserve Bank of Chicago
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