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Economic j Review FEDERAL R E S E R V E BANK O F A T L A N W ^ E R A L RLS, RVE BANK I OV PH1LAÜ LPHIA MAY 1 9 8 1 ÏX990 S.E. Demographic Outlook | G N P REVISIONS * IIA M I HOW Important? Foreign Deposit Profile 1 C H R Y S L E R Regional Repercussions A G R I C U L T U R E Forces of Change Economic m Review Wm FEDERAL RESERVE BANK OF ATLANTA President: William F. Ford Sr. Vice President and Director of Research: Donald L. Koch Vice President and Associate Director of Research: William N. Cox III Financial Structure: B. Frank King, Research Officer David D. Whitehead National Economics: Robert E. Keleher Regional and International Economics: Gene D. Sullivan, Research Officer Donald E. Baer, Research Officer Charlie Carter William J. Kahley Database Management: Delores W. Steinhauser Editing: Gary W. Tapp Graphics: Susan F. Taylor and Eddie W. Lee, Jr. Free subscription and additional copies available u p o n request to t h e I n f o r m a t i o n C e n t e r , Federal Reserve Bank of Atlanta, P.O. Box 1731, Atlanta, Georgia 30301. Material h e r e i n may be r e p r i n t e d or abstracted, p r o v i d e d this Review, the Bank, and the author are credited. Please provide this Bank's Research D e p a r t m e n t with a copy of any publication in w h i c h such material is reprinted. The purpose of the Economic Review is to inform the public about Federal Reserve policies and the economic environment and, in particular, to narrow the gap between specialists and concerned laymen. 2 M A Y 1 9 8 1 , E C O N O M I C REVIEW The Southeast in the 1980s 4 Now that the last of t h e b a b y b o o m has e n t e r e d the labor force, w h a t will h a p p e n to e c o n o m i c g r o w t h in the Southeast? H o w will the region's e m p l o y m e n t , income, a n d p o p u l a t i o n in 1990 c o m p a r e with the rest of the nation? W h a t is the d e m o g r a p h i c o u t l o o k for individual states in the region? Faulty Diagnosis: The GNP Revisions ..17 Southeastern Agriculture in the 80s . . . . 12 W h a t are the forces that will c h a n g e s o u t h e a s t e r n agriculture d u r i n g the next 10 years? H o w will c o m p e t i tive positions shift? A l o n g - t e r m look at the region's agricultural i n d u s t r y Regional Repercussions • of a Chrysler Failure 23 Recently, the C o m m e r c e D e p a r t m e n t , u s i n g u p d a t e d s a m p l i n g information, r e v i s e d its G N P figures from 1946 to 1980. T h e n e w figures s h o w a stronger e c o n o m y over t h e past four years. W h y d i d the figures c h a n g e for t h e better, h o w i m p o r t a n t are the revisions, a n d w h a t are the i m p l i c a t i o n s for e c o n o m i c policy? If Chrysler C o r p o r a t i o n s h o u l d eventually fail, how w o u l d it affect i n c o m e a n d e m p l o y m e n t in the Southeast? W h i c h southeastern locations w o u l d b e a f f e c t e d most? The U.S. Economic Outlook: No Instant Miracles International Deposits in Miami — A Profile 25 Robert F. Lanzillotti, D e a n of t h e G r a d u a t e S c h o o l of Business, University of Florida, recently s p o k e to the B o a r d of D i r e c t o r s of the A t l a n t a Federal Reserve Bank on the R e a g a n e c o n o m i c p l a n a n d the short-run outlook. E x c e r p t s f r o m his remarks. V O L U M E LXVI, N O . 3 28 A l m o s t $2.5 billion in international d e p o s i t s w a s held by Miami b a n k i n g entities as of J u n e 1980. B a s e d o n interviews with 14 Miami c o m m e r c i a l banks, E d g e Act corporations, a n d foreign b a n k a g e n c i e s , this article d e s c r i b e s these international d e p o s i t s a n d the reasons w h y international b a n k i n g activity is s u r g i n g in Miami. 3 The Southeast in the 1980s T h e Southeast will see continued above-average economic growth in the 1980s, but t h e level of regional income will remain below the national average for some time. With t h e maturity of the baby boom generation, population growth will slow in t h e region, b u t n o t as m u c h as nationwide. Migration will continue to fuel t h e region's rising share of the U.S. population. As the post-World War II baby boomers were growing up and entering the labor force in the 1960s and 1970s, states of the Sixth District were making great strides in attracting population and businesses to the Southeast. 1 Well e n d o w e d w i t h sun, water, and other natural resources, yet underpopulated, underurbanized, and underindustrialized relative to n o r t h e r n and midwestern states, the Southeast has benefited from large inflows of capital f o r investment in plant and equipment in new or expanding industries and from the in-migration of people from outside the region. The inflows of capital and people have simultaneously altered the 1 4 ln the remainder of this article, the terms, "Sixth District" and "Southeast," will be used synonymously and will encompass the six states which comprise the Sixth Federal Reserve District, including portions of these states located in other Reserve Districts, M A Y 1981, E C O N O M I C REVIEW Table 1. Establishment Employment Nation % of total District % of total Farm Manufacturing Durables Nondurables Mining Construction Trade Government Transportation, Communications and Public Utilities Services Finance, Insurance, and Real Estate Total N o n f a r m Total (in 000, 1960 1980 1990 1960 1980 1990 17.3 4.0 3.0 11.5 3.9 3.2 21.6 21.9 21.5 19.5 20.8 27.4 6.8 9.0 10.4 15.4 12.9 13.5 10.4 12.0 8.6 8.4 1.1 1.2 1.1 1.0 4.8 12.9 1.3 10.4 1.2 5.5 6.1 5.8 4.8 4.7 18.6 22.7 23.0 18.6 21.8 22.2 13.6 17.0 16.0 14.9 18.5 17.2 6.1 5.8 5.6 6.5 5.5 5.2 10.9 17.2 17.5 12.0 18.8 19.8 3.9 5.1 6.0 4.3 5.5 5.9 82.7 96.0 97.0 88.5 96.1 96.8 6,361 11,628 13,690 61,246 94,231 108,422 1972 bench marks) Sources: U.S. Bureau of Labor Statistics, U.S. Bureau of Economic Analysis, State Departments of Labor, and Federal Reserve Bank — Atlanta. region's industrial profile, causing it to more closely resemble that of the nation as a whole and enabled the region to grow more rapidly than the nation as a whole. Population movement has also caused the population profile to diverge f r o m that of the nation. Can w e continue to expect above-average economic growth in the region now that the last of the baby boomers have entered the labor force? To answer this question, we will first take a quick but careful look at how employment, income, and population have changed in the District while these boomers were growing up. We will then age them 10 years (along w i t h everyone else) and explore the major demographic and economic changes which will occur in the 1980s if recent and prospective economic and demographic relationships are extended to 1990. H o w , under these circumstances, will 1990 compare to 1980? Will the current decade's progress match gains of the 1960s and 1970s? What are the important relationships and issues which FEDERAL RESERVE B A N K O F A T L A N T A will emerge from economic-demographic interactions d u r i n g the decade? Changes in Employment, Income, and Population, 1 9 6 0 - 8 0 Dramatic changes have occurred in the Southeast's economy since 1960; it has become more diversified, w i t h an employment mix increasingly favorable to the growth of personal income. Since 1960, for example, farm payroll employment as a percentage of total payroll employment in the District is estimated to have fallen from 17 percent in 1960 t o 4 percent in 1980; during the same period, farm employment in the U.S. declined, but by less — from 111/2 percent of the total to 4 percent (Table 1). This reduction in farm jobs has occurred as farm operations have become mechanized and as farmers have switched f r o m crop production to less labor-intensive livestock production. 5 The share of employment in manufacturing also declined in this region and the nation in the period 1960-80, but the relative decline was sharper for the nation, which, in 1960, employed a greater share of workers in manufacturing than did the Southeast. Convergence of the region's employment and earnings mix to that of the nation has been aided by the region's availability of low wage and nonunionized labor. A generally favorable business climate, including low taxes, also helped attract capital to finance expansion of the share of employment in higher paying durable goods manufacture and a contraction in the share of employment in such nondurables as apparel, food, and textiles. In the same period, the share of employment in trade, services, and government expanded sharply, from 44 percent to about 58 percent of payroll employees, for both the region and the nation — due, largely, to general economic development. This growth has offset the falling share of farm and manufacturing employment. The changing employment shares partly explain why overall personal income per capita in the region increased relative to that in the nation. In 1960, per capita personal income totaled only 74 percent of the national average; by 1980, it rose to about $4,600 (1972 dollars) and represented 86 percent of the national average. This convergence in per capita personal income was also aided by the fact that the labor force in the District, excluding Florida, was growing more rapidly than population relative to the nation. And, in Florida, personal income per capita is increased by the influx of retirees w i t h above-average income and below-average household size. A marked increase in the region's economic activity has accompanied the dramatic structural changes in employment since 1960. Total employment in the nation expanded sharply to more than 94.2 million in 1980, up 54 percent from 1960; in that period, Southeast employment rose by 83 percent, reaching 11.6 million in 1980. The remarkable employment change in this region reflects, of course, the significant migration to the region. Briefly, in the 20 years after 1960, roughly the peak of the baby boom, the District's population has increased 6 by 9.2 million — to a total of 30.4 million in 1980; for the nation, the increase was 48 million — to 226.5 million in 1980. Thus, the region has accounted for almost one-fifth of the total growth of the nation, much of it f r o m foreign and domestic migration to the region. The share of the nation's population accounted for by the Southeast now stands at 13.4 percent, up from 11.9 percent in 1960. Migration has also significantly affected the region's population age structure compared to the nation. The Southeast has gone from having relatively more young in 1960 compared to the nation — 47 percent versus 45 percent in the age group 0-24 — to having the same relative number of young, 41 percent, in 1980. Meanwhile, the relative number of elderly has increased in the District compared to the nation. In 1960, 9 percent of both populations were age 65 and over, but in 1980, the District's percentage was 13 percent while the nation's was 11 percent (in 1980, 44 percent of the estimated 3.8 million elderly of the region resided in Florida). In both the region and the nation, the population age 25-64 as a share of the total has increased in this period due to the ending of the baby boom. National and Southeast Changes in Employment, Income, and Population, 1980-90 If recent history serves as a useful guide, the years of this decade will be marked by continued growth of employment, income, and population in the region at rates exceeding the national average. 2 Furthermore, all the region's states will benefit f r o m better-than-average growth, although not all states will benefit equally. Basically, the region has developed considerable growth m o m e n t u m over the past two decades, and, given the region's existing advantages, that m o m e n t u m is unlikely to be reversed in the near future. It may slow, however, as flows of P r o j e c t i o n s discussed in this article rely heavily on the projections developed by the Bureau of Economic Analysis's Division of Regional Economic Analysis. Those projections were modified to roughly take into account the results of the 1980 Census. Also, our employment projections refer to employment as measured by the establishment survey rather than the more inclusive measure of employment utilized by BEA. M A Y 1981, E C O N O M I C REVIEW capital and people cause wages and prices of other resources to rise, thus eroding the region's locational advantages. Further, despite the prospect of continued convergence of regional income toward the national n o r m , the level will remain below the national for some time. Economic and demographic changes on the horizon will also pose new or increased challenges which will require our continuing attention, analysis, and reaction. Total employment in the Southeast is projected to increase by 18 percent in this decade, a slowdown from the 1960-80 period when the baby boomers were swelling the labor force; the increase for the nation, meanwhile, is projected t o be 15 percent (Table 1). Major relative employment gains are likely for the manufacturing and finance, insurance, and real estate industries, while relative declines are expected in farm and construction employment. In 1990, trade, services, and government will employ 58 percent of payroll employees in both the Southeast and the nation, as in 1980. Manufacturing growth will be spurred by the expansion of durables manufacturing, especially the electronic equipment and nonelectric machinery industries. Meanwhile, due to slower demand growth and outside competition, the growth of production of apparel, textile, and f o o d products will slow; diversification in the region will thus continue. The relatively strong growth of financial employment reflects the growing strength of the Southeast economy and the developing importance of the largest metropolitan areas as financial centers. Farm employment in the region, which continues to decline absolutely and relative to the nation, will account for a lesser share of employment than it does in the nation by 1990. Construction's employment share also falls significantly relative to the nation but continues to be large relative to the nation, the trends reflecting the slowdown of the region's population growth and the region's still rising share of the total population due to natural increase and migration. In part because of the continued convergence of regional employment patterns to the national profile, per capita personal FEDERAL RESERVE B A N K O F A T L A N T A Chart 1 Population a n d Age Structure Baby boom moves into 25-44 bracket. Nation District Age 1980 — " 7.3% •7.8 1990— 15.5 14.8 15.3 14.7 18.7 15-24 14.2 15.7 16.3 m 16.3 25-34 11.1 10.0 9.7 11.6 15.0 10.2 10.4 45-54 9.5 8.0 9.5 5.6 55-64 12.7 14.9 9 16.8 35-44 14.2 18 •1990 5 to 14 18.2 % -1980 7.2% Under 5 11.2 6 5 or over 0 0 9 18 % Sources: U.S. Bureau of the Census, U.S. Bureau of Economic Analysis and Federal Reserve Bank-Atlanta. income will also continue to converge to the national average. Per capita personal income is projected to increase from $4,600 currently to $6,600 in 1990 (in 1972 dollars); as a percentage of the national figure, the increase is from 86 percent to 90 percent. Demographically, continued convergence of regional fertility to the national norm will also contribute to continued per capita income convergence. Significant changes in the national and regional population age structures are in the o f f i n g in the 1980s (Chart 1). Regional and national growth is projected to fall from 2.4 percent per year and 1.1 percent per year, respectively, in the 1970s to 1.5 percent and .9 percent, respectively, in the 1980s. The relative slowdown in population growth in the 7 I Chart 2 1990 Age Dependency Mississippi rate will in have Ratios highest school age dependency District. (Persons 5-24 per 100 persons 25-64) 68.5 60.4 5? Ala. Florida 6T2 6Z6 Fla. will Ga. have La. extremely Ms. high Tn. District elderly Nation region is due to the region's growing population base and the relative decline in the national age pool of likely migrants w h o add so much to the region's growth. 3 The national trend toward a more stable, mature, and productive labor force as a consequence of the aging of baby boomers will be less pronounced in the Southeast relative to the nation. Past and expected migration and natural increase trends are likely to cause significant differences in southeastern growth rates by age f r o m the nation; except for the age group 45-64, growth rates by age are higher for the Southeast in the decade of the 1980s. As a consequence, the District will likely show an overall increase in the age dependency ratio, with a particularly sharp increase in the elderly dependency ratio (Charts 2 & 3).4 dependency Issues of Growing Importance in the 1980s rate. (Persons 65 a n d over per 100 persons 15-64) 72.0 Ala. Fla. Louisiana's elderly) Ga. La. overall will be Ms. dependency lowest in Tn. rate District (school Nation age plus International political and economic developments will impact importantly on the Southeast — on Florida, in particular. Market and migration changes — of capital and people — will significantly influence the population and business of District states. Will legal (and illegal) migration, on balance, add District. (Persons under 15 plus persons 65 a n d over per 100 persons 25-64) 50 — The broad strokes of economic and demographic changes outlined in the preceding section should, of course, be viewed with extreme caution. As baseline projections dependent upon historical tendencies, they are subject to change as the underlying assumptions regarding fertility, mortality, migration, labor force participation, marriage and divorce rates undergo transformation and as consumer and government preferences change and interact w i t h constantly changing technology — here and abroad. In fact, there are many developing transformations which could significantly affect the scenario presented in addition to the already inherent uncertainties of the projections. 46.6 25 3 Ala. Fla. Ga. La. Ms. Tn. District Nation Sources: U.S. Bureau of Census, U.S. Bureau of Economic Analysis and Federal Reserve Bank-Atlanta. The improved 1980 Census enumertion of Blacks and Hispanics who live disproportionately in the Southeast also has caused the 1970s growth rates to be somewhat overstated. 4 The age dependency ratio takes into account joint changes in the proportions of children, "workers," and elderly in the population. Age dependency ratios thus summarize the age structure of a population. MAY 1981, E C O N O M I C REVIEW Chart 3 1990 District A g e D e p e n d e n c y Ratio (District Relative to N a t i o n ) Southeast's exceed school age and elderly dependency rates will nation's. Age 5-24 Under 15 plus 65 and over 65 and over 128.2 105.3 per 100 aged 25-64 per 100 aged 25-64 per 100 aged 15-64 to or subtract f r o m the region's stock of human and financial capital? W i l l immigrants be welcomed as potential labor shortages arise due to expanding markets in Latin America and declining labor force growth at home, or will they add ethnic to already apparent racial tensions? Nationally, federal government tax, spending, and regulatory policy changes will have complex and conflicting effects on the region's well-being. Will deregulation of energy prices offset or diminish the region's current energy advantage by improving the comparative advantage of northern states which have suffered f r o m governmentimposed rigidities vis-a-vis the Southeast? What will be the effects of deregulation of transportation and financial markets? Will the end of subsidies to borrowers adversely affect housing and plant and equipment construction in the Southeast? How will FEDERAL RESERVE B A N K O F ATLANTA p e n d i n g reallocations of spending and transfers (more defense, less welfare and Social Security benefits) affect the region? Typically, there are positive and negative implications for the region for each of these questions. Interregional^, will the slowdown of national population growth and the maturing of the population cause savings and productivity to rise, leading to more investment and capital per worker, income, and sales, especially of luxury goods, or will stagnation in the North lead to internal beggar-thy-neighbor policies? What, if anything, will be the impact of a slowing and aging population on the structure of demand and flexibility in the flow of resources? What will be the impact of increased southeastern representation in the Congress? How quickly will low wage rate, land, tax, and unionization advantages in the Southeast erode? W i t h i n the region and individual states of the region, growing infrastructure needs are apparent. More schools and other investment in human capital are needed to prepare the young for w o r k in an increasingly sophisticated technological society, and an aging population requires increased health care facilities. Will continued growth provide the needed funds, or will continued growth induce resistance and a halt to further growth due to growing potential environmental threats, congestion, and pollution? Ultimately, of course, the answers to these and other questions depend upon the individual and collective choices made by baby boomers and their relatives. These choices, while not known with precision today, are perhaps sufficiently known to permit a cautious optimism regarding the future population and employment structure of the Southeast. The Southeast should continue to advance toward a rising national level of well-being — and at an above-average pace. — William J. Kahley 9 INDIVIDUAL STATE EMPLOYMENT, INCOME, AND POPULATION C H A N G E S , 1980-90 Additional insight into the changing economic and population structure in the Southeast in this decade can be gained by examining movements within individual states. In fact, the changes and structure vary widely by state. Furthermore, important changes are projected for each of the Sixth District states (Tables 2 and 3). A L A B A M A — T h e p o p u l a t i o n of A l a b a m a , t w e n t y - s e c o n d l a r g e s t in t h e n a t i o n , g r e w by only 1 3 p e r c e n t in t h e 1 9 7 0 s . In t h e 1 9 8 0 s , g r o w t h will s l o w to 6 . 9 p e r c e n t a s it b e c o m e s t h e o n l y state in t h e District to g r o w m o r e s l o w l y t h a n t h e nation. B y 1 9 9 0 , it will h a v e m o r e b u r d e n s o m e s c h o o l a g e , elderly, a n d o v e r a l l d e p e n d e n c y ratios t h a n the nation. Overall e m p l o y m e n t growth, projected at 1 9 . 3 p e r c e n t in t h e 1 9 8 0 s , e x c e e d s District a n d national growth rates." E m p l o y m e n t projections s h o w m a r g i n a l d e c l i n e s in t h e s h a r e s of f a r m i n g a n d g o v e r n m e n t , o f f s e t by i n c r e a s e s in m a n u f a c t u r i n g , l a r g e l y in t h e p r i m a r y a n d f a b r i c a t e d m e t a l s i n d u s t r i e s . P e r c a p i t a p e r s o n a l i n c o m e will i n c r e a s e f r o m 7 8 p e r c e n t of t h e n a t i o n a l a v e r a g e c u r r e n t l y to 8 6 p e r c e n t in 1 9 9 0 . G E O R G I A — Georgia, currently the thirteenth m o s t p o p u l o u s s t a t e , h a d a p o p u l a t i o n g a i n of 19 p e r c e n t in t h e 1 9 7 0 s . In t h e 1 9 8 0 s , g r o w t h will s l o w to 10.2 p e r c e n t . G e o r g i a h a s a y o u n g e r t h a n - a v e r a g e p o p u l a t i o n a n d in 1 9 9 0 will have, higher-than-average school age and overall d e p e n d e n c y r a t i o s but a l o w e r - t h a n - a v e r a g e e l d e r l y d e p e n d e n c y ratio. E m p l o y m e n t g r o w t h is p r o j e c t e d to b e t h e l o w e s t in t h e r e g i o n , a n d , at 1 1 . 7 p e r c e n t , it is t h e only r e g i o n a l s t a t e b e l o w t h e n a t i o n a l a v e r a g e g r o w t h f i g u r e . F i n a n c e , insura n c e , a n d real e s t a t e a n d c o n s t r u c t i o n e m p l o y m e n t will b e t h e f a s t e s t g r o w i n g e m p l o y m e n t i n d u s t r i e s d u e l a r g e l y to c o n t i n u e d g r o w t h of A t l a n t a as t h e m a j o r r e g i o n a l b u s i n e s s center. Per c a p i t a p e r s o n a l i n c o m e is p r o j e c t e d to rise f r o m 85 p e r c e n t of t h e n a t i o n a l l e v e l c u r r e n t l y to 8 9 perc e n t in 1 9 9 0 . 'Employment growth figures for the states in the 1980s are probably somewhat distorted by the fact that 1980 is a recession year. Thus, states such as Alabama, Mississippi, and Tennessee, which are perhaps more vulnerable to recession than Florida, Georgia, or Louisiana, start the decade from a temporarily low relative employment base. F L O R I D A — W i t h a 4 3 - p e r c e n t p o p u l a t i o n g a i n in t h e 1 9 7 0 s , F l o r i d a w a s t h e third f a s t e s t g r o w i n g s t a t e in t h e n a t i o n a n d n o w r a n k s s e v e n t h in size. D u e to t h e d i m i n i s h e d m i g r a t i o n pool, t h e g r o w t h rate will d e c l i n e , b u t r e m a i n h i g h , at 2 3 . 9 p e r c e n t . In 1 9 9 0 , it will h a v e a n a t i o n a l a v e r a g e s c h o o l a g e d e p e n d e n c y ratio b u t e x t r e m e l y h i g h elderly a n d overall d e p e n d e n c y ratios. The 16-percent e m p l o y m e n t g r o w t h will b e g r e a t e s t in f i n a n c e , i n s u r a n c e , a n d real e s t a t e , reflecting Miami's g r o w t h as a f i n a n c i a l center. T r a d e a n d s e r v i c e s will c o n t i n u e a s t h e l a r g e s t i n d u s t r i e s d u e to Florida's a t t r a c t i v e n e s s to r e t i r e e s a n d t o u r i s t s a n d to t r a d e w i t h Latin A m e r i c a . Per c a p i t a p e r s o n a l i n c o m e , c u r r e n t l y t h e h i g h e s t in t h e r e g i o n at 95 p e r c e n t of t h e n a t i o n a l a v e r a g e , will rise m a r g i n ally to 9 6 p e r c e n t of t h e nation's in 1 9 9 0 . L O U I S I A N A — Louisiana's population, ninet e e n t h largest in t h e n a t i o n , g r e w by 15 p e r c e n t in t h e 1 9 7 0 s ; in t h e 1 9 8 0 s , it will g r o w by 11.9 p e r c e n t . L o u i s i a n a , like G e o r g i a , h a s a y o u n g e r t h a n - a v e r a g e p o p u l a t i o n profile, w i t h a h i g h e r t h a n - a v e r a g e s c h o o l a g e d e p e n d e n c y ratio e x p e c t e d in 1 9 9 0 ; its o v e r a l l a n d elderly d e p e n d e n c y ratios a r e e x p e c t e d to b e l o w e r - t h a n a v e r a g e . Louisiana's o v e r a l l e m p l o y m e n t g r o w t h in t h e d e c a d e is p r o j e c t e d at 18 p e r c e n t , e q u a l to t h e District's a v e r a g e . T h e m a n u f a c t u r i n g , t r a d e , s e r v i c e s , a n d financial i n d u s t r i e s will e x p a n d their s h a r e of e m p l o y m e n t in this d e c a d e . Per c a p i t a p e r s o n a l i n c o m e will i n c r e a s e f r o m 8 8 p e r c e n t of t h e nation's c u r r e n t l y to 91 p e r c e n t in 1990. M I S S I S S I P P I — Mississippi, w h i c h r a n k s thirtyfirst in t h e n a t i o n in p o p u l a t i o n size, g r e w by 1 4 p e r c e n t in t h e 1 9 7 0 s ; in t h e 1 9 8 0 s , p o p u l a t i o n g r o w t h will b e 10.4 p e r c e n t . M i s s i s s i p p i is p r o j e c t e d to h a v e a significantly h i g h e r s c h o o l a g e d e p e n d e n c y ratio in 1 9 9 0 t h a n o t h e r s t a t e s in t h e District a n d c o m p a r e d to t h e nation. A n d , w h i l e its 1 9 9 0 e l d e r l y d e p e n d e n c y ratio is v e r y low, it will h a v e a relatively high overall d e p e n d e n c y ratio. E m p l o y m e n t g r o w t h in the d e c a d e is a relatively high 2 3 p e r c e n t . T h e bulk of t h e e m p l o y m e n t g r o w t h will b e in d u r a b l e s m a n u f a c t u r e . Per c a p i t a p e r s o n a l i n c o m e will rise f r o m 6 9 p e r c e n t of t h e n a t i o n c u r r e n t l y to 7 6 p e r c e n t in 1990. T E N N E S S E E — T e n n e s s e e is t h e nation's s e v e n t e e n t h m o s t p o p u l o u s state. Its i n c r e a s e in p o p u lation in t h e 1 9 7 0 s w a s 17 p e r c e n t ; in t h e 1 9 8 0 s , it is p r o j e c t e d to i n c r e a s e by 14.2 p e r c e n t . T e n n e s see's p o p u l a t i o n profile in 1 9 9 0 is e x p e c t e d to b e v e r y similar to t h e nation's, a l t h o u g h t h e s c h o o l a g e d e p e n d e n c y ratio is p r o j e c t e d to b e slightly h i g h e r t h a n t h e nation's. O v e r a l l e m p l o y m e n t is p r o j e c t e d to i n c r e a s e b y 2 4 p e r c e n t in this d e c a d e , with e m p l o y m e n t g a i n s c o n c e n t r a t e d in d u r a b l e s m a n u f a c t u r e . Per c a p i t a p e r s o n a l i n c o m e , n o w 8 2 p e r c e n t of t h e nation's, is p r o j e c t e d to i n c r e a s e to 8 8 p e r c e n t by 1 9 9 0 . 10 M A Y 1 9 8 1 , E C O N O M I C R E V I E W Table 2. Establishment Employment by State Florida Alabama % of Total 1980 1990 Farm 5.0 3.8 Georgia % of Total 1980 1990 2.6 2.2 % of Total 1980 1990 3.7 Louisiana % of Total 1980 1990 Mississippi % of Total 1980 1990 Tennessee % of Total 1980 1990 2.9 3.3 2.2 7.6 5.5 5.4 3.8 15.8 24.7 28.8 27.5 28.2 Manufacturing 25.3 26.3 12.2 12.9 23.2 23.8 13.2 Durables 12.2 13.7 6.9 7.5 8.2 8.4 6.3 7.8 13.6 17.8 12.1 13.9 13.1 12.4 5.5 15.1 15.4 7.0 8.0 11.1 11.1 15.4 14.3 5.0 4.3 1.1 0.9 0.5 0.6 4.9 5.1 4.6 4.7 Nondurables Mining Construction Trade Government Transportation, Communication, and Public Utilities Services Finance, Insurance, and Real Estate Total Nonfarm Total (In '000, 1972 bench marks) 1.2 1.6 5.3 0.3 0.2 0.3 0.3 4.8 5.5 7.5 6.6 4.4 4.9 8.5 7.1 19.5 19.8 26.1 25.6 22.6 23.4 22.8 23.5 18.2 19.1 20.4 21.8 18.9 17.0 21.7 18.8 17.0 15.9 21.0 19.0 17.0 16.6 19.1 17.7 5.1 5.0 6.0 5.7 6.3 6.2 7.2 7.0 4.7 4.4 4.6 4.6 14.2 14.3 21.6 22.3 15.3 15.1 16.2 17.5 13.4 13.1 15.9 15.6 4.1 4.7 6.7 7.9 4.9 5.7 4.7 5.5 3.7 4.3 4.1 4.8 95.0 96.2 97.4 97.8 96.3 97.1 96.7 97.8 92.4 94.5 94.6 96.2 1,421 1,695 3,625 4,207 2,221 2,480 1,593 1,876 896 1,103 1,872 2,329 Sources: U.S. Bureau of Labor Statistics U.S. Bureau of Economic Analysis, State Departments of Labor, and Federal Reserve Bank — Atlanta. Table 3. Population and Age Structure of District States Florida Alabama % of Total 1980 1990 Louisiana Georgia % of Total 1980 1990 % of Total 1980 1990 % of Total 1980 1990 Mississippi % of Total 1980 1990 Tennessee % of Total 1980 1990 7.6 7.9 6.3 7.2 8.0 8.4 8.1 8.3 8.5 8.6 7.2 7.9 5 to 14 16.0 15.3 13.5 13.5 16.7 15.4 17.1 15.8 17.6 16.4 15.3 14.8 Under 5 years 15-24 18.4 14.6 16.9 12.6 19.0 15.0 19.7 15.5 19.1 15.7 18.0 14.4 25-34 16.1 16.5 14.2 15.2 17.1 16.5 16.3 17.5 15.2 16.6 16.3 16.9 35-44 11.3 14.6 10.4 13.4 12.0 14.9 11.0 14.8 10.5 13.6 12.0 15.0 45-54 10.1 10.1 10.4 8.9 9.7 10.4 9.6 9.8 9.2 9.2 10.4 10.4 55-64 65 or over 9.2 8.4 10.9 8.1 8.3 7.9 8.4 7.8 9.1 7.4 9.4 8.3 11.4 12.5 17.4 21.2 9.3 10.9 9.8 10.6 11.5 12.4 11.4 12.2 3,890 4,160 9,740 5,464 6,024 4,204 4,704 2,521 2,784 4,591 5,243 All Races Both Sexes '000) 12,068 (in Sources: U.S. Bureau of Census, U.S. Bureau of Economic Analysis and Federal Reserve Bank-Atlanta. FEDERAL RESERVE BANK OF ATLANTA 11 Southeastern Agriculture in the 80s Changes in factors affecting t h e supply of farm products will be the dominant forces in southeastern agriculture in the 80s. Since farmers in the region use more energy-related products than their national counterparts, cropping patterns in t h e Southeast may be changed by increasing energy costs. Farm credit volume will grow, b u t business will shift away from traditional lenders. The region is in good position to share in the growing agricultural export markets. Southeastern agriculture seems likely to change dramatically d u r i n g the decade of the 1980s. A number of economic forces have already set some of those changes in motion. Undoubtedly, other factors, as yet unrecognized, will also have important impacts. The changes that appear most prominent from this vantage point are developments that will influence the future supply of farm products. Energy At the t o p of the list is the rapidly rising cost of energy. Energy affects not only the fuels required to operate machinery but also the w h o l e complex of agricultural inputs of chemical origin, including fertilizers, insecticides, fungicides, and herbicides. In the spring of 1980 when farmers were probably negotiating f o r most of their inputs for the year's crops, diesel fuel prices were nearly double the level of a year earlier. Prices of fertilizers and agricultural chemicals were also up substantially (20 percent or more), but the rate of increase was lagging behind that for fuels. Agricultural chemical prices are likely to increase more rapidly as accumulated inventories are w o r k e d off and manufacturing capacities become more fully utilized. 12 This escalation in energy prices will have a proportionately greater impact on southeastern agriculture than in the country as a w h o l e because agricultural production in the Southeast is more energy-intensive than in most other parts of the country. Estimates of 1980 production costs show that in the Southeast 47 percent of variable production costs for cotton are made up of energy-sensitive items as opposed to an average of 28 percent for the U. S. The numbers for corn are 58 percent versus 53 percent and f o r soybeans, 45 percent versus 30 percent. Thus, the Southeast's disadvantage is substantial when energy costs are rising, largely because more fertilizer is required on relatively less fertile soils and more insecticides, fungicides, and herbicides are required for most crops because of the longer growing season. In addition, frequent rainfall (in normal years) requires repeated applications of chemicals t o control insects, diseases, and competing vegetation. The rapid rise in energy costs tends to make crop production more costly in southeastern states than in the rest of the U. S., affecting producers' comparative advantage. If energy costs should double from 1980 to 1982, comparative positions for producers of cotton, corn, soybeans, and rice w o u l d significantly deteriorate. Although crop production will not cease, producers w o u l d have an M A Y 1 9 8 1 , E C O N O M I C REVIEW incentive to shift t o crops that use relatively less energy and in which their comparative disadvantage is least. Rice, soybeans, and wheat appear to be crops that producers will expand in the coming decade, while acreage of feed grains and cotton w o u l d probably decline unless price relationships among these crops undergo major changes. Energy from Crops Considerable experimentation is now under way on the feasibility of producing ethanol from agricultural products as a partial substitute for oil-based fuels. Should vegetable sources of energy become economically competitive, the Southeast is in good position to produce large tonnages of vegetable products for alcohol production. The long growing season, with relatively abundant rainfall, gives this area massive potential for increased forage production. Should specialty crops, such as sweet potatoes and sweet sorghum, in fact become efficient crops for alcohol generation, commercial crop production w o u l d take on a new dimension in this area. A livestock system to utilize the byproducts from alcohol production could significantly alter traditional animal production patterns. W i t h increased irrigation will come new concerns involving water rights, allocations, and governmental jurisdictions. Actions to regulate and police water usage will result in additional costs that are also likely to influence crop choices. Pollution Related to water regulation is the broad area of environmental regulation. Agriculture will unquestionably experience greater future impacts from governmental regulations in this area. The direct effects on farmers themselves will involve cost-increasing practices that will be required to abate environmental pollution in all forms. The abundance of surface and subsurface water makes southeastern farmers more vulnerable to restrictive regulations on a broad spectrum of farm operations. For example, crops that require frequent applications of potent toxic materials are candidates for sharp alterations in cost structures as a result of additional restrictions nearly certain to be forthcoming. Livestock farmers are likely to be required to make substantial expenditures to adequately treat and dispose of animal waste products. Farm Structure Irrigation The drought in 1980 reminded southerners of the value of our relatively abundant water supply, both surface and subsurface. The potential for irrigation could make a significant difference in crops grown in this area. For example, w i t h adequate moisture, producers could have quickly started a crop of soybeans following 1980's winter wheat harvest. W i t h o u t water, much acreage either did not get planted or did not emerge to an even stand following planting. Irrigation could have made a difference between obtaining two substantial crops from the same acreage in 1980 or obtaining only one crop. As more irrigation systems are installed and utilized more intensively in the Southeast, double and triple cropping (in the case of some vegetables) may become the rule rather than the exception in the years ahead. The effect would be to substantially increase the revenue from an acre of land while spreading production costs over a much larger output volume. FEDERAL RESERVE B A N K O F ATLANTA The rapid growth in farm size has enabled producers to reduce average production costs by expanding their volume of o u t p u t . The trend is likely to continue, resulting in fewer farmers and farm workers, while at the same time spurring the use of larger machines and the adoption of output-increasing technology. Growth in farm size has resulted in a renewed expansion of tenancy as part-owner farm operators attempt to gain control of larger acreages w i t h o u t buying land outright. In most cases, land prices have escalated to the point where purchasers can no longer hope to generate sufficient cash flow from agricultural production to service indebtedness for farmland. The result? Landownership rests increasingly w i t h those looking t o farmland as an investment opportunity. They see farmland as protection against inflation because it appreciates more rapidly than the general price level. Since this environment increases tenant farm operators' uncertainty, they are likely to respond by reducing land improvements that pay off over the long 13 t e r m . Eventually, the p r o d u c t i v i t y of farmland is likely to decline as tenancy becomes m o r e p r o m i n e n t . Absentee owners also w i l l have d i f f e r e n t concerns f r o m farm operators, w h i c h may affect the unity of s u p p o r t for future farm legislation. A n o t h e r p r o d u c t of fewer farms and larger operations is t h e organization of producers into larger cooperatives or g r o w e r associations. This t r e n d is n o t h i n g new in itself. It has n o w spread f r o m poultry and vegetable p r o d u c t i o n to other enterprises, and some of its consequences are new or not yet fully recognized. These enlarged organizations of producers, w h e t h e r cooperatives, corporations, or just c o m m o d i t y associations, affect t h e c o m p e t i tive e n v i r o n m e n t . In most cases, they reduce c o m p e t i t i o n a m o n g m e m b e r s w h i l e enabling the m e m b e r s h i p to bargain m o r e effectively w i t h o p p o s i n g forces in t h e marketing syst e m . Large farmer cooperatives b e c o m e the marketplace for b o t h farmers' products and farm inputs. They p e r f o r m research and educational f u n c t i o n s for their m e m b e r s , and they substitute for many services traditionally p r o v i d e d by t h e Land Grant Colleges and the U. S. D e p a r t m e n t of Agriculture. Credit Large farm units have large credit d e m a n d s — d e m a n d s so large, in fact, they o f t e n surpass t h e l e n d i n g expertise, if not the l e n d i n g limits, of local credit institutions. Many lenders w h o have not specialized in agricultural finance f i n d themselves ille q u i p p e d to make and manage loans of t h e size and complexity required by large f a r m i n g operations. Farmers in the South have l o o k e d m o r e and m o r e to the specialized financial institutions for credit needs. In cases w h e r e farmers are l i n k e d to other businesses t h r o u g h integration, credit needs are often s u p p l i e d t h r o u g h large urban financial institutions. In the f u t u r e , loans will increasingly f l o w t h r o u g h corporate headquarters to t h e p r o d u c e r level and w i l l probably escape detection as agricultural credit altogether. New banking legislation enacted in 1980 seems likely to affect t h e cost and availability of agricultural credit. It requires u n i f o r m reserve requirements on all banks after an initial adjustment p e r i o d . Reserve requirements are, in an i m p o r t a n t sense, a cost of d o i n g 14 business for a bank. Banks that have n o t been m e m b e r s of the Federal Reserve System have had lower r e q u i r e m e n t s than m e m b e r banks. Thus, n o n m e m b e r banks w e r e able to place a higher p r o p o r t i o n of their deposits in earning assets and t o realize a higher return (or a lower cost) f r o m their business operations. A n o t h e r i m p o r t a n t legislative change is that all banks can n o w pay interest on d e m a n d deposits or c h e c k i n g accounts. If c o m p e t i t i o n forces most banks to pay interest at somew h e r e near 5 percent on most checking deposits, the cost of funds to banks w i l l rise sharply. Profits f r o m l e n d i n g those funds w i l l be squeezed, unless average l e n d i n g charges (interest on loans) m o v e up a comparable a m o u n t . The latter is a very likely o u t c o m e after an initial adjustment p e r i o d . Farmers b o r r o w i n g f r o m such banks w i l l likely f i n d that t h e interest they are asked to pay f o r credit w i l l be at a p e r m a n e n t l y higher rate in the f u t u r e . If o t h e r lenders, such as the Farm Credit System agencies, d o not experience a comparable rise in costs of funds acquired in national m o n e y markets, their competitive position vis-a-vis commercial banks w i l l be enhanced. To some extent, h o w e v e r , banks w i l l pass along these higher interest rates to m o n e y market rates and users of credit in general. Bankers are i m p o r t a n t participants in national m o n e y markets t h r o u g h their exchanges of bonds, bills, and certificates of deposit. Bankers w i l l not bid as eagerly for market instruments unless they offer returns high e n o u g h to offset the rising costs of deposits. The absence of bankers' participation in markets w h e n rates d r o p b e l o w acceptable levels w i l l probably cause users of funds to have to pay higher rates to attract investors back to t h e market. Thus, costs of funds to farm credit agencies w i l l probably rise also. The end result w i l l be to tie interest rates on agricultural loans m u c h m o r e closely to national money market rates than they have been in the past. The cost of credit seems likely to rise in most localities, and interest charges will display an increased volatility. W i t h the large and g r o w i n g use of credit in farm operations, f u t u r e success in farming may d e p e n d as m u c h on the judicious acquisition and use of b o r r o w e d capital as on technical agricultural expertise. M A Y 1 9 8 1 , E C O N O M I C REVIEW I Input Costs > , Inflation has not only occurred in land and energy prices but has been running rampant in practically all items farmers buy. As farmers further expand o u t p u t , the brisk demand for tractors, machinery, and other farm inputs will continue to support rising price levels of all major inputs. The rising general cost level will probably keep farm operating margins squeezed to the point that there will be little room for income declines (such as we experienced in 1980) w i t h o u t threatening the viability of many highly leveraged farming operations. Risks I »[ J -j Efforts to protect against these increased economic risks will increase demands for insurance in a variety of forms. Lenders are likely to play a major role in inducing farmers to install irrigations systems, purchase crop insurance, engage in some form of forward pricing of products, and campaign for strengthened government programs to provide price and income support to farmers. However, serious efforts to combat inflation at the national level will cause Congress to press hard for reducing federal expenditures. The dwindling rural population and the consequent reduced political strength of the agricultural sector will render agricultural programs increasingly vulnerable to fiscal budget-cutting efforts. Future farm sector demands for price and income supports that involve government-imposed restrictions on output seem certain to be countered by strong demands to expand rather than restrain supply. Pressures will grow to reduce subsidies for crops such as tobacco and peanuts that do not have strong nationwide support. Livestock Profits f ' , Many factors affecting crop production will also impact the Southeast's livestock sector. Cattle and calf production, the largest single income-earning enterprise across the Southeast, will continue to be pushed off land that can be used for crops. The beef cattle enterprise is simply unable to provide a competitive return under existing levels of prices and FEDERAL RESERVE B A N K O F ATLANTA technology. Although some practices may increase the productivity of grazing land, considerable escalation in cattle prices will be necessary to produce the future growth in beef o u t p u t that once seemed likely for the Southeast. It is clear that the increased returns to crop production in the Midwest have all but stamped out the use of land for livestock grazing in most of that region. The same trend has already been observed in the more productive soil areas in the Southeast. Feed Costs Elevated energy costs further penalize the importation of feed grains to the Southeast, and the growing comparative disadvantage of feed grain crops in this region will not allow increased indigenous production. Livestockfeeding industries that depend heavily on harvested grains are thus unlikely to experience much growth. The poultry industry, however, w h i c h makes heavier use of soybean meal than do cattle or hogs, will receive offsetting benefits from the increased local supplies of soybeans and soybean meal. In the Southeast, then, feed costs are not likely to rise as much for poultry producers as for cattle and hog producers. That, c o m b i n e d w i t h the lower winter requirements for a u x i liary heat, may give southeastern poultry producers a considerable cost advantage over colder regions. Exports O n the demand side, the biggest boost to the region, as well as to the country as a whole, has been the massive increase in export markets for agricultural commodities. The growing demand for feed grains and soybeans has been a particular b o o n for the Southeast because of the relatively large area of land in marginal uses that is adaptable to soybean production. The superior returns available from grain production in other regions have allowed a growing share of the soybean market to be filled by southern producers. Part of the increase in export demand has been attributable to a decline in the value of the dollar against other currencies. This has given U. S. agricultural products a price advantage in w o r l d markets. M o r e importantly, rapidly growing purchasing power in other 15 countries has fueled the demand for f o o d and feed products. Thus, even if the dollar holds its own or regains some ground in foreign exchange markets in the years ahead, growth in export demand should continue strong because purchasing power is now strengthening in countries like Mexico with its n e w f o u n d oil wealth. Another example is the People's Republic of China where virtually unlimited needs set the stage for prospective rapid growth in demand for most southeastern farm products. The potential to respond to increased foreign demand is large and growing. Agricultural producers have easy access to ports all along the southern and eastern boundaries of our region. Inland waterways t h r o u g h the Southeast provide a transportation advantage of growing consequence as fuel costs continue to rise. C r o w i n g demand and its impact on profitability will spur agronomic developments that could easily double yields of crops like soybeans. The Southeast has an abundance of land in marginal uses. Its producers have the capability to utilize technological innovations and expand production rapidly. The region is also developing facilities for handling large volumes of agricultural production. All these features place the Southeast in a strong position to respond to the massive growth in export demand that seems highly likely to occur in the 1980s. Domestic Consumption Although domestic population growth is likely to be limited during the upcoming decade, changing tastes and preferences stemming f r o m rising incomes will enhance demand for superior f o o d products. Consumers will demand more fruits, fresh vegetables, and exotic f o o d preparations. Producers of fruits and fresh vegetables, especially those adjacent to large and growing population centers, may encounter growing local demand that could offset rising shipping charges that tend to shrink more distant markets. Producers of bulky products like melons, for example, are finding that a doubling of fuel costs since 1978 has necessitated such high prices in distant markets that the quantity demanded has declined. O n ihe positive side, the maintenance of f o o d assistance programs will assure southeastern food crop producers of more stable demand than in the past. Specifically, during economic hardships, eligible consumers need not curtail their food purchases as long as the government's food stamp program continues to operate. Highlights Rapidly escalating farm input prices will markedly raise production costs of southeastern farmers. Enterprises using large proportions of energy-related inputs will be particularly hurt, and most southeastern crop producers use higher proportions of energy than do their national counterparts. Shifts in southeastern cropping patterns are likely to occur as energy costs rise. Credit use will expand dramatically, but b o r r o w i n g costs will move up to a permanently higher plane, and business will shift away from some traditional lenders. Demand for f o o d products will expand rapidly, with vigorous growth in effective demand in foreign markets. Southeastern producers have the advantage of a strategic location to share in the growing export markets for agricultural products. The growth in demand will raise prices sufficiently to offset cost increases for major enterprises, so that farmers will continue to bring marginal land into production and hold d o w n their expansion of grazing livestock enterprises. O n balance, total agricultural o u t p u t will expand but shifts in competitive positions will cause traditional enterprises to diminish in importance. The structure of southeastern agriculture will continue to change rapidly in the decade ahead. Commercial agriculture of the 1980s will differ remarkably from its predecessor of a short two decades ago. —Gene D. Sullivan 16 M A Y 1 9 8 1 , E C O N O M I C REVIEW Faulty Diagnosis: The GNP Revisions Revisions to t h e GNP figures announced in December depict a stronger economy, especially for t h e last four years. Investment, productivity, saving, and output were all higher t h a n previously reported. While some changes resulted from redefinitions of categories, many of the revisions were substantial enough to suggest that expansionist economic policies may have been overstimulative. A patient being treated f o r severe anemia has been t o l d that a new red cell counting procedure adopted in his physician's clinic has found him t o be only mildly anemic and was so all along. The patient is immediately t o r n between the emotions of joy at learning he isn't terribly ill and of being irate over the side effects he has developed f r o m his medication that wasn't necessary. All the w h i l e , the patient had been feeling better than he was supposed t o , considering his diagnosis. He couldn't convince the physician of what good shape he was in, even though he exercised and enjoyed life when he wasn't being told by the doctor how sick he was. Although recently the medication he was taking was making him nervous and somewhat hyperactive, the doctor had taken these developments as unfortunate b u t necessary consequences of trying to get the patient well. N o w that the mistake has been f o u n d , what will the correct course of action be? Unless the patient has become addicted to the medication, the obvious first step w o u l d be to stop or reduce sharply the medication. Maybe a valuable lesson was learned by the physician — trust your judgment about the patient's well-being if it runs counter to suspicious lab results. Of course, this episode of erroneous diagnosis closely parallels governmental policy and the economy. Official statistics 'regarding o u t p u t in the economy are the lab results; the government, as the doctor, prescribes economic remedies. For several years, especially since 1975, statistics portrayed an economy apparently suffering from anemic growth, poor productivity, a steeply declining saving rate, and inadequate investment spending — and therefore slowly growing potential. Because of this supposed weak growth, fiscal and monetary policies were kept strongly stimulative. Meanwhile, officials argued that o u t p u t was far below potential and stimulus was necessary to reduce unemployment and move closer t o potential o u t p u t . Further, they argued that all this could be achieved without making inflation worse. These arguments held sway despite evidence that noninflationary potential had been reached, probably in mid-1978. 1 ' S e e Haulk and Goudreau, "Potential GNP," Economic Review, Federal Reserve Bank of Atlanta, July/August 1979. 17 FEDERAL RESERVE B A N K O F A T L A N T A CHART 1 Real o u t p u t r e v i s e d u p w a r d . . . Bil. 1 9 7 2 $ a n d r e v i s i o n s increased s i n c e 1977. Bil. 1 9 7 2 $ foreign subsidiaries of U.S. companies were previously not counted as corporate earnings; henceforth, they will be. In addition, errors were found in the way nonmerchandise international transactions were handled. Foreign income on corporate tax returns had previously been subtracted. Royalty payments are now included in corporate profits. The corrected procedure results in higher earnings for U.S. firms. More recent tax return data indicate profits were actually higher than earlier data predicted. Finally, the timing of depreciation of utility plants was changed to coincide with plant start-up rather than construction completion. All these changes raised corporate profits (after inventory valuation and capital consumption allowance adjustments) by nearly 10 percent above levels previously reported (see table). After adjusting for inflation, profits were 25 to 30 percent higher. Interest Income Recalculated; Saving Rate U p 1 1976 1 1977 1 1978 1 1979 o 1980 Recently, the Commerce Department concluded what many suspected all along. Revisions to the GNP figures announced in December paint a much brighter picture than did previously reported numbers, especially for the last three or four years. For example, f r o m first quarter 1978 to third quarter 1980, real o u t p u t measured in 1972 dollars rose by $69 billion as opposed to the earlier reported $44 billion, a difference of over 50 percent. There were other important differences as well, including a higher saving rate, stronger investment, and higher profits. What were the changes that have so altered the nation's economic vital statistics? The 10-percent gain in net interest income (a component of personal income) was also the result of finding a sizable error in the way interest paid to businesses was calculated: businesses were being credited w i t h more than they actually receive. In addition to the interest income revisions, the last couple of years saw a combination of changes in the rental, proprietor, and employee compensation components, totaling $10 billion. CHART 2 Interest i n c o m e r e v i s e d up $ 1 0 billion for last t w o years. Bil. $ Net Interest C h a n g e - R e v i s e d M i n u s O l d 25 Corporate Profits Redefined The Commerce Department's upward revision in corporate profits was largely due to a definitional change. Reinvested earnings of 18 M A Y 1981, E C O N O M I C REVIEW MAJOR REVISIONS IN GNP ACCOUNTS (Differences and Percent Changes) GNP Billions of Dollars Saving Rate Real GNP Percent Increase Billions of 1972 Dollars Percent Increase Percent Increase Corporate Profits After-Tax and IVA and CCA adj. Billions of Dollars Percent Increase Net Interest Fixed Nonresidential Investment Percent Increase Billions of 1972 Dollars Percent Increase 3.4 1970:1 7.8 0.8 7.8 0.7 13.1 2.7 7.9 11.3 3.8 1970:2 9.8 1.0 8.9 0.8 10.7 4.9 14.3 10.6 3.3 2.9 1970:3 11.0 1.1 11.3 1.0 9.0 3.8 11.2 10.0 3.9 3.5 1970:4 12.7 1.3 13.3 1.2 3.8 3.8 12.2 9.7 4.3 4.0 1971:1 15.3 1.5 16.2 1.5 5.0 6.6 17.9 8.9 3.0 2.8 1971:2 12.7 1.2 13.6 1.2 6.2 4.2 10.7 8.7 5.0 4.7 1971:3 14.2 1.3 14.7 1.3 6.6 6.6 16.6 8.8 4.8 4.5 1971:4 14.6 1.3 14.9 1.3 1.4 7.3 17.3 8.2 4.0 3.6 1972:1 15.4 1.4 16.0 1.4 1.5 5.7 12.0 7.6 5.8 5.1 1972:2 15.0 1.3 15.5 1.3 5.4 3.4 6.8 8.0 4.5 3.9 1972:3 14.7 1.2 15.1 1.3 5.1 4.4 8.6 9.4 3.9 3.3 1972:4 14.1 1.2 12.6 1.0 6.1 4.3 8.0 10.7 4.3 3.5 1973:1 18.2 1.4 17.3 1.4 11.8 9.9 19.0 13.5 4.3 3.3 1973:2 19.2 1.5 17.9 1.5 10.3 8.8 18.2 15.6 7.6 5.8 1973:3 20.2 1.5 20.5 1.7 11.4 7.9 15.7 16.2 8.0 6.0 1973:4 21.6 1.6 24.4 2.0 9.2 9.0 17.8 14.5 8.3 6.3 1974:1 18.7 1.4 24.5 2.0 15.6 11.5 28.2 12.8 6.3 4.7 1974:2 23.7 1.7 31.8 2.6 17.8 13.4 39.6 11.6 4.4 3.3 1974:3 21.5 1.5 31.7 2.6 19.4 12.1 52.8 8.7 4.6 3.5 1974:4 21.4 1.5 32.7 2.7 14.7 11.6 42.6 8.5 5.0 4.0 1975:1 25.1 1.7 34.7 3.0 12.5 12.3 36.6 8.4 3.0 2.5 1975:2 18.1 1.2 31.1 2.6 10.3 12.5 29.0 8.0 4.9 4.3 1975:3 14.5 0.9 28.4 2.3 10.7 11.4 21.0 7.0 7.2 6.4 1975:4 23.8 1.5 31.8 2.6 14.1 18.9 35.4 6.5 7.8 7.0 1976:1 18.3 1.1 27.7 2.2 20.3 11.4 17.2 6.5 6.7 5.8 1976:2 15.5 0.9 28.4 • 2.2 19.7 11.8 19.3 4.6 6.5 5.5 1976:3 13.2 0.8 26.2 2.1 23.2 10.6 16.8 2.3 6.7 5.6 1976:4 16.4 0.9 27.3 2.1 13.5 11.2 18.2 0.7 6.4 5.2 1977:1 18.9 1.0 30.2 2.3 16.7 14.1 20.8 6.5 8.2 6.5 1977:2 17.9 0.9 32.2 2.4 11.8 14.5 19.0 7.1 11.5 9.0 1977:3 19.9 1.0 31.9 2.4 14.8 15.4 17.7 8.1 10.8 8.3 1977:4 17.3 0.9 30.2 2.2 13.7 15.5 19.9 7.5 14.6 11.1 1978:1 21.1 1.0 34.5 2.5 15.1 22.0 31.3 5.7 12.6 9.5 1978:2 25.4 1.2 37.6 2.7 2.0 17.2 20.3 5.1 13.2 9.4 1978:3 31.3 1.4 39.4 2.8 0 17.7 20.2 5.3 13.4 9.5 1978:4 36.7 1.6 39.2 2.7 12.8 20.7 23.1 6.9 13.9 9.6 1979:1 48.5 2.1 49.3 3.4 6.0 25.7 29.3 8.8 14.2 9.6 1979:2 44.8 1.9 51.1 3.6 3.7 22.3 25.4 9.0 14.4 9.8 1979:3 47.6 2.0 54.9 3.8 25.6 24.3 28.0 11.6 15.7 10.4 1979:4 39.4 1.6 50.3 3.5 34.3 21.9 27.3 12.4 13.6 9.0 1980:1 50.9 2.0 57.2 4.0 32.4 33.4 46.0 11.7 13.8 9.1 1980:2 43.5 1.7 54.7 3.9 26.5 22.6 30.0 11.8 10.8 7.4 1980:3 50.8 2.0 60.2 4.3 29.8 26.4 36.1 12.1 12.0 8.4 FEDERAL RESERVE BANK OF ATLANTA 19 Virtually all of the increase in disposable personal income resulting f r o m these net interest revisions was allocated to savings. For example, in third quarter 1980, there was a $30-billion revision in disposable income, and savings were raised by $25 billion in that quarter; the revisions in consumption spending were insignificantly small. What this has done is to raise the personal saving rate. CHART 3 S a v i n g rate h e a l t h i e r t h a n originally r e p o r t e d . Percent _ Saving Rate 3 0 The table shows the saving rate changes over the period 1970 to 1980. The largest upward revisions in the saving rate were for the five quarters 1979:3 through 1980:3, although fairly large revisions were in evidence from 1973 through 1978:2 when they suddenly diminished, probably due to the lower interest rate effect on net interest income. During the last one and a half years or so, the saving rate was about 25 to 30 percent higher than originally reported. The long-term trend still declined during the seventies, but for the last two years when w e heard so much about our deplorably low saving rate, it was actually just under its post-World War II average. Changes in G N P O n the expenditure side, there were two major changes. First, net exports were raised by including net reinvested foreign earnings. Second, rebenchmarking (revisions of 20 sampling using more recent information) discovered that producers' durable equipment was being underestimated. W i t h a newer model in place, gross business investment outlays were calculated to be about 8 percent greater in real terms than previously reported. Fixed Investment Figures Revised U p w a r d Since the revisions were concentrated in the producer durables c o m p o n e n t , fixed nonresidential investment was raised substantially both nominally and in constant dollars. Producer durables accounted for 60 to 70 percent of the revisions in nonresidential investment in the early 1970s and 100 percent by 1979. The size of the revisions in both absolute and percentage terms jumped in late 1973, fell back in 1974, and grew again in late 1975. Then in 1977, the revisions really swelled, going t o 11 percent higher than the originally reported figure. After reaching as high as 14 percent, they appear to have leveled off. In addition to nonresidential investment revisions, residential investment was boosted by 2 billion 1972 dollars. The share of nonresidential fixed investment in total GNP was raised by 8 to 10 percent for the past three years, less for earlier years. The share of GNP going to domestic investment has been higher in recent years than in any time in the post-WW II period. Furthermore, the fact that part of the increase in revised GNP was due to inclusion of unrepatriated earnings means that the share of gross domestic product going to investment was much higher than the post-WW II average. To the extent that producer durables have a shorter life than structures, the increase of producer durables relative to structures could slow the total growth of capital, since net investment w o u l d be lower. This may or may not be a p r o b l e m , depending on whether the shift is a true reflection of rates of return on the different capital stock components. The Commerce Department's Bureau of Economic Analysis says that the revisions raised net g r o w t h of capital f r o m 3.5 t o 3.9 percent per year for 1969-79.2 That is an 11 percent faster 2 Survey of Current Business, December 1980, p. 23. MAY 1981, E C O N O M I C REVIEW CHART 4 Nonresidential F i x e d I n v e s t m e n t over ten percent higher since 1977 . . . Bil. 1 9 7 2 $ Nonresidential Fixed Investment — — — 25 — 20 Revised M i n u s Old 1976 1977 1978 1979 1980 and at p o s t w a r high a s a s h a r e of GNP. Percent Revised ~~ 12 -' in constant dollars, consumption was found to be about one percent higher than earlier reports indicated. Almost all the revision was accounted for by outlays on nondurable goods. Service outlays in nominal terms were lowered while constant dollar expenditures remained level, meaning that the deflator for services was revised downward. For durables, there was no significant change in nominal or real outlays. Federal government spending was revised upward both nominally and in real terms. The largest revisions in real federal spending were for 1979 and 1980. For the third quarter 1980, the new figure is $3 billion, or 3 percent above the originally reported number. Nineteen-eighty state and local government spending, while 4 percent higher in real terms after revisions (lower in nominal terms), reflected a downward change in the government spending deflator. Finally, alterations in the deflation procedure for nonmerchandise exports and imports plus a lowered estimate for the cost of items purchased by the federal government significantly reduced the growth rate of the GNP deflator, particularly for the last two years. H o w Important Are the Revisions? rate. As a matter of interest, the annual net growth rate of capital was 3.4 percent from 1949 to 1959 and 3.8 percent f r o m 1959 to 1969. Given the big changes for 1977-79, we probably had a record rate of capital accumulation. These results indicate that much of the concern over the supposed weakness of investment in the U.S. has been unduly alarmist. It is important to remember that these revisions to producer durables are based in part on data already several years old. Additional upward revisions may come when later data are available. O t h e r Changes Total consumption spending was negligibly affected by the revisions. However, measured FEDERAL RESERVE B A N K O F A T L A N T A Even t h o u g h the inflation rate for the past few years has been revised downward, it is still uncomfortably high. It is still a serious problem because, as it persists, the economy tries to cope by developing inflationprotection schemes w h i c h make it more difficult t o control inflation. The GNP revisions did not reduce the growing tax burden felt by the middle-class, w h o must struggle against both inflation and the decreasing share of their gross income left in their pay envelopes. Revisions in productivity figures indicate that productivity grew about 16 percent faster over the period 1972-79 than was earlier thought. That still leaves a very slow rate of increase of 0.92 percent per year. The productivity slowdown is a complex phenomenon and could be overstated for reasons discussed in the final section of this article. The revisions are particularly disturbing because so much has been written to try to 21 explain the growing American capital shortage and poor productivity performance of recent years. The revisions are very generous to the producer durables component of investment. That makes sense in view of the upward revisions in profits and personal savings. It also makes sense in light of the very low, even negative, real after-tax interest rates prevailing for much of the period since the late 1960s, even taking into account problems created by the effect of historical cost depreciation on cash flow. Some leading economists, including Otto Eckstein, have made light of the revisions, arguing that they are not of great importance. For example, the changes in definition to include unrepatriated earnings are of no consequence except to recognize the claims on foreigners that these profits represent. Likewise, the changing of depreciation for utilities was not overly significant. However, recalculating the GNP deflator, discovery that corporate profits were higher than estimated and finding substantial errors in investment estimates, personal income, and the saving rates cannot be waved off lightly as unimportant. The discovery that investment as a share of GNP has been at a post-WW II high for the last three years is very important. Finding that the saving rate, while having fallen, is not inordinately low relative to post-WW II levels is quite a piece of news — especially in view of all that has been written and said about our lack of savings and investment. M o r e importantly, these revisions, many of them based on data several years old, should caution against over dependence or reliance on statistics based on extrapolations from sample data w h e n the structure of the economy is rapidly changing. The changes in the economy over the last ten years (massive increases in government transfer payments, increasing tax burden, financial market developments, inflation, changes in industrial output mix, oil price hikes, and invasion of 22 the U.S. markets by imports) should cause those w h o use national statistics derived from samples and historical relationships to view those statistics w i t h a jaundiced eye. Beyond the measurable changes, at least those which are in principle measurable, there has been rapid growth in the " u n d e r g r o u n d economy" which causes the officially reported numbers to understate true output. Thus, GNP figures do not accurately portray the state of the economy, and inflation rates are of necessity not totally reliable since it is not always possible to know the actual price at which a transaction takes place (as opposed to the list price). Further, the unemployment rate released each month is not truly indicative of economic suffering. The opportunities to supplement unemployment compensation with other transfer payments and unreported income undermine the government's attempts to conduct anti-inflation policies. The revisions in the accounts, and the strong possibility of further upward revisions, along with what we know from attempts to measure unreported income, must cast serious doubt on the inflationary, expansionist policies of the past few years. There are obviously some things policy-makers can do to alleviate real problems afflicting the economy. Lowering tax rates, which are so high that they reduce production incentives and encourage tax-avoiding behavior, w o u l d be a first step. Reducing the growth of government spending to eliminate perpetual deficits and their effects on interest rates and money creation w o u l d be a welcome move. The policymaker, like the wise physician, must act to produce overall good health rather than try to eradicate every ache and discomfort in the patient whether real or imaginary. Too much treatment could lead to a weakening of the patient's ability to cope w i t h truly serious ailments. 0R] —Charles ]. Haulk M A Y 1 9 8 1 , E C O N O M I C REVIEW Regional Repercussions of a Chrysler Failure If Chrysler Corporation should eventually fail, t h e effects on t h e region's economy would be small. In specific locations, however, the effects could be significant. Chrysler's m a n u f a c t u r i n g facilities, dealers, and parts suppliers employ (directly or indirectly) over 14,400 workers in the Southeast. The Chrysler Loan Guarantee Board recently approved an additional $400 million in federal loan guarantees t o the Chrysler Corporation. The approval was conditional u p o n : employees agreeing to forego wage and benefit concessions (for UAW workers this amounted t o $622 million over the life of the current contract, w h i c h expires in September 1982); banks and other institutional lenders agreeing to convert some debt to equity, and to forgive other debt altogether in exchange for FEDERAL RESERVE B A N K O F ATLANTA partial cash p a y m e n t s ; a n d suppliers agreeing t o p r i c e freezes and rollbacks, and to more generous credit terms. Despite t h e approval, Chrysler's future remains uncertain W h e r e are t h e C h r y s l e r facilities and their secondary suppliers located in the Sixth District? What w o u l d be the likely repercussions on income and employment in the Sixth District if Chrysler were to fail? The direct influence on income and employment in the Sixth District w o u l d be small. H o w ever, the indirect effects, w h i c h take into account the effects on area dealers and parts suppliers in addition to Chrysler plants, w o u l d be considerable. This preliminary study is designed only to provide a rough estimate, not an in-depth analysis. Currently, the Chrysler Corp o r a t i o n has t h r e e p r i m a r y facilities located in the Southeast, w i t h a total w o r k force of about 1,700. The facilities are located at Cape Canaveral, Florida (a wire products plant); 23 Facility Location Employment* Huntsville Electrical Division Huntsville, Alabama Cape Canaveral, Florida 1 , 4 6 0 — J a n u a r y 1981 Chrysler Corporation W i r e Products Plant Chrysler M i c h o u d Defense-Space ( E n g i n e e r i n g Facility) Dealership E m p l o y m e n t : Slidell, Louisiana Alabama Florida Georgia Louisiana Mississippi Tennessee of July 1,1980, there w e r e 4,006 Chrysler dealerships througho u t the U. S. By January 1,1981, that n u m b e r had d e c l i n e d to 3,823. There are at least 11,930 w o r k e r s at C h r y s l e r dealerships, parts depots, and regional headquarters in the District. W h e n the direct and indirect e m p l o y m e n t effects of Chrysler's manufacturing facilities are c o m b i n e d w i t h the i n f l u e n c e on dealerships, the total comes to at least 14,468 workers. 3 A l t h o u g h this estimate is small relative to the overall level of e m p l o y m e n t (11.2 million), it w o u l d have significant effects in some communities. 33, but will b e O b y July 1981 or s o o n e r About 200 1,250 3,130 2,230 1,510 1,340 2,120 11,580 Regional H e a d q u a r t e r s a n d Parts Depots Total Direct E m p l o y m e n t Atlanta, Georgia, a n d Orlando, Florida 350 13,623 "Estimates of workers are from officials at the area facilities; estimates of dealership workers are from Chrysler officials at the Detroit headquarters. in H u n t s v i l l e , A l a b a m a (an e l e c t r i c a l d i v i s i o n ) ; a n d in Slidell, Louisiana (a defense and space facility). T h e r e f o r e , direct e m p l o y m e n t loss w o u l d be about 1,700— mainly in Huntsville. 1 The Economic Stabilization S u b c o m m i t t e e of t h e House B a n k i n g C o m m i t t e e uses a m u l t i p l i e r of 1.7 to d e t e r m i n e direct and indirect e m p l o y m e n t effects. For each 100 Chrysler manufacturing w o r k e r s laid o f f , another 70 w o r k e r s w o u l d be 1 Assuming that none of the plants would be purchased and run by another company. laid off at secondary suppliers. T h e s e 70 e x c l u d e those employees affected by dealership closings. If w e assume that all secondary suppliers to the Cape Canaveral and Huntsville facilities are localized, t h e multiplier effect suggests that about 2,500 2 District manufacturing w o r k e r s w o u l d lose their jobs or be laid off in t h e event of a Chrysler failure. Income Loss The i n c o m e loss w o u l d be even less than the e m p l o y m e n t loss. Since these facilities c o u l d argue that they have been adversely affected by i m p o r t s , they m i g h t qualify for trade assistance-up to 70 percent of gross weekly wages. 4 M o r e o v e r , w h e n taxes are taken into consideration, net disposable i n c o m e losses w o u l d be negligible. I ® There are o b v i o u s l y many Chrysler dealerships that w o u l d also be affected by a failure. As E s t i m a t e s exclude the Chrysler workers at Slidell, Louisiana's defense-space facility. These workers would likely continue in the event of a Chrysler failure. —Charlie 3 4 Carter Assuming that none of these workers would be hired by other dealers, repair shops, etc. President Reagan has proposed the elimination of the trade assistance program. Congressional approval is uncertain at this time. I 24 M A Y 1 9 8 1 , E C O N O M I C R E V I E W The U.S. Economic Outlook: No Instant Miracles by Robert F. Lanzillotti Robert F. Lanzillotti, Professor of Economics and Dean, Graduate School of Business, University of Florida, recently addressed the Board of Directors of the Federal Reserve Bank of Atlanta on the current economic outlook. Dr. Lanzillotti is optimistic about the Reagan policies and is convinced the American public will accept t h e necessary austerity accompanying this transition period. For some weeks f o l l o w i n g the November elections many commentators viewed Stockman and Company's proposals for drastic budget cuts and major tax reductions as more postelection bravado than serious economic argument. The President's February 5 general economic message removed all doubt about his economic program: He intends to bring the country to terms w i t h the problems of chronic high inflation, l o w productivity growth, slack production, and vulnerability to supply disruptions and OPEC price shocks. What kind of costs are likely to result from the bold approach President Reagan is advocating? Put differently, how large are the costs our country is willing to bear to guarantee the benefits of lower inflation? Are there alternative policies w h i c h can both lower these costs and also reduce inflation as quickly? Sources of Inflation Since the mid-1960s, the U.S. has experienced a series of major economic shocks, w h i c h have i n c r e a s e d t h e u n d e r l y i n g ( " e m b e d d e d " ) inflation rate by almost tenfold (from about 1 percent per year in the first half of the 1960s to 9-10 percent currently). The most traumatic shocks were triggered by the OPEC oil prices hikes, especially in 1973-74 and 1979. The 1973-74 hikes added about $18 FEDERAL RESERVE B A N K O F A T L A N T A billion to o u r i m p o r t e d oil bill (about 1.5 percent of GNP,) but the 1979 hike (from $15 to $35 per barrel) added another $50 billion to the cost of i m p o r t e d oil (roughly 2 percent of GNP). The U.S. economy, indeed the w o r l d economy, was ill-prepared to meet these developments. What is truly remarkable is that the various economies, including the U.S., withstood these shocks so well, which is a kind of tribute to the resiliency of our economy. But not all of the inflation shocks of the 1960s and 1970s were exogenous in nature. Many of o u r r e c e n t e c o n o m i c w o u n d s w e r e selfinflicted. The military adventure in Vietnam and the m o u n t i n g of the Great Society programs were financed for several years w i t h o u t a tax increase, leading to a very large federal deficit and a classic demand-pull j u m p in the underlying inflation rate by 4 or 5 percent. This was f o l l o w e d by the economic adventure in price and wage controls in 1971-73, producing various economic distortions and inequities. At the same time, the 1970s gave birth to new adventures in regulation (worker and product safety, air and water standards, and other "mandated costs" to business). These new regulations were enacted in the face of extensive economic analysis urging the wisdom of deregulation. It is now clear that these federal regul a t i o n s have f a i l e d t o r e f l e c t a sensible 25 b a l a n c i n g o f n a t i o n a l p r i o r i t i e s , and have largely disregarded the costs, benefits and least-cost solutions to p r o p o s e d regulations. I am convinced w e will c o n t i n u e to give gove r n m e n t regulations a "fresh l o o k " to determine w h e t h e r they should be m o d i f i e d or discarded altogether in the light of new economic and technical k n o w l e d g e or new conditions. I expect this process to extend beyond railroads, trucking, airlines, energy, telecommunications, and banking to the new regulat o r y agencies (EPA, NHTSA, CEQ, OSHA, CPSC, etc.), as well as other g o v e r n m e n t interventions, i n c l u d i n g unwarranted subsidies to business. In short, w h i l e it is clear that business wants to get the federal g o v e r n m e n t o f f its back, in the course of events I suspect it will b e c o m e clear that some businessmen mean "just the g o v e r n m e n t , not its subsidies." The United States faces the same e c o n o m i c d i l e m m a in the 1980s as in the 1970s: that is, are w e w i l l i n g to manage o u r e c o n o m i c affairs to correct the devastating inflation that fosters a kind of economic warfare a m o n g our citizens? In forging a policy to correct the inflation, it is essential to understand inflation's sources and w h y it has increasingly developed a "ratchetl i k e " character. In addition to supply shocks, the 1960s and 1970s suffered f r o m excess aggregate demand, d e c l i n i n g productivity g r o w t h , and a refusal of wages and prices to decline in response to slack in the economy. This d o w n w a r d insensitivity of both wages and prices has some rather deepseated structural origins, i n c l u d i n g multiyear wage contracts w i t h c o s t - o f - l i v i n g clauses, noncompetitive influences in the operations of various markets, and g o v e r n m e n t interventions in individual markets to fix wages, prices, quality, and p r o d u c t i o n conditions. Moreover, unions, business, and the public have w e l c o m e d the periodic validation by the Congress that e c o n o m i c policy will c o n t i n u e to be expansionary, and that Congress w i l l continue to provide " s p e c i a l " relief and assistance w h e n high prices and wages generate competitive difficulties. Most of all, I believe the inflation of the past 15 years has been a monetary and financial p h e n o m e n o n , created by excess liquidity, excessive credit expansion, and ultimately, excessive money-supply expansion. There is ample empirical evidence that budget deficits have c o n t r i b u t e d to recent surges in 26 inflation both by c o n t r i b u t i n g to higher aggregate demand and by justifying expectations about levels of future aggregate d e m a n d . As w e all k n o w only too w e l l , fiscal policy o r i e n t e d toward stimulating aggregate demand to drive d o w n unemployment requires monetary authorities to monetize the public debt. The real challenge for e c o n o m i c policy is w h e t h e r w e can arrest and reverse the inflation w i t h o u t inflicting equally devastating side effects on o u t p u t and e m p l o y m e n t . A corollary to this is w h e t h e r our e c o n o m i c t h e o r y and econometric models are adequate to provide guidance and support to the supply-side strategy as the centerpiece of the new e c o n o m i c policy. The Way O u t : Tax Cuts, Monetary Restraint M a n y things fall under t h e rubric of "supplyside e c o n o m i c s . " Essentially, it deals w i t h the e c o n o m i c s of p r o d u c t i o n (as contrasted w i t h t h e e c o n o m i c s of c o n s u m p t i o n and aggregate d e m a n d ) . It includes anything that influences cost, efficiency, productivity, and the level and c o m p o s i t i o n of GNP. Principal a t t e n t i o n is focused on incentives, and w h e t h e r sharp tax cuts w i l l "generate m o r e supply than d e m a n d , " by creating incentives to w o r k , save, invest, and p r o d u c e . In this c o n n e c t i o n , it is argued that tax cuts can pay for themselves in 1982 and 1983. The answer d e p e n d s , of course, on the type of tax cuts a d o p t e d . Personal tax cuts w i l l tend to increase aggregate d e m a n d by m o r e than the tax cut, by virtue of t h e m u l t i p l i e r process. Hence, to the extent the supply response to such actions is less than t h e additional aggregate d e m a n d created, any such tax r e d u c t i o n s are likely to add to inflationary pressures f r o m the d e m a n d side, at least in t h e s h o r t run. Recent studies demonstrate conclusively that o n e of t h e principal causes of the decline in p r o d u c t i v i t y g r o w t h d u r i n g the 1970s was the decline in t h e g r o w t h of capital stock relative to t h e labor force. In o r d e r to restore the g r o w t h of o u r capital stock per w o r k e r to the g r o w t h rate of t h e 1960s, real business fixed investment as a percentage of real GNP must rise by at least o n e - t o - t w o percentage points (above the recent average of a r o u n d 10 percent). Hence, tax cuts in the f o r m of accelerated depreciation allowances, larger investment tax M A Y 1 9 8 1 , E C O N O M I C REVIEW credit, o r lower corporate i n c o m e tax rates are likely to generate the r e q u i r e d increases in business fixed investment, a significant increase in o u r capital stock and a significant increase in t h e level of productivity. It goes w i t h o u t saying that demand-side and supply-side e c o n o m i c policies must be harm o n i z e d in a f r a m e w o r k of fiscal restraint if w e are to realize additional saving, investment, faster p r o d u c t i v i t y g r o w t h , and r e d u c t i o n in the inflation rate. M y analysis of t h e p r o b a b l e macro-economic effects of alternative tax reductions leads me to the c o n c l u s i o n that investment-and p r o d u c t i v i t y - o r i e n t e d tax cuts for business are likely to increase saving, investment, and productivity by m u c h m o r e than cuts in personal income taxes. M o r e o v e r , since t h e supply response requires t i m e to p r o d u c e the intended effects, any personal tax cuts should be t i m e d to be consistent w i t h t h e degree of d e m a n d restraint needed to reduce inflation. Tax reductions accompanied by reductions in federal s p e n d i n g of roughly t h e same magnitude w i l l not change aggregate demand. But a very large tax cut not linked to s p e n d i n g cuts probably w o u l d lead to b o t h an increase in inflation and a sharp rise in interest rates. M o r e over, s o m e of t h e s t i m u l u s to investment spending f r o m t h e targeted tax cuts thus might be w e a k e n e d by higher interest rates, generating new uncertainties. In my o p i n i o n , t h e desired policy-mix is one emphasizing tax cuts f o r business, c o u p l e d w i t h m o n e t a r y restraint. If personal tax cuts are also i n c l u d e d , it w o u l d be p r u d e n t to delay the effective date to July 1, or preferably O c t o b e r 1, 1981. This strategy offers t h e best prospect for significant r e d u c t i o n in the inflation rate w i t h i n a span of t w o - t o - t h r e e years. I am o p t i m i s t i c about t h e e c o n o m i c policies of t h e Reagan administration because it is clear they w i l l be t i l t e d in t h e direction of measures oriented t o w a r d l o n g - t e r m policy goals, rather than s h o r t - r u n e c o n o m i c crises. Accepting the Costs This will mean accepting slower e c o n o m i c growth in order to stimulate investment in plant and e q u i p m e n t , new technology, and higher productivity, even if it means in the short run there will c o n t i n u e to be some relatively high levels of u n e m p l o y m e n t , lower profits and slower rates of g r o w t h in total personal i n c o m e . FEDERAL RESERVE B A N K O F ATLANTA I am convinced that the American public as well as the American business c o m m u n i t y is prepared to accept the necessary austerity that must accompany this period of transition f r o m " a n e c o n o m y in distress" to an e c o n o m y capable of maintaining viable g r o w t h and stability. The prospects f o r the U.S. e c o n o m y f o r 1981 and beyond thus d e p e n d principally u p o n o u r success in b r i n g i n g d o w n the rate of inflation. At this juncture, even t h o u g h I am strongly supportive of the approach President Reagan is planning, I am not optimistic that the inflation rate will fall much in 1981. This j u d g m e n t is based on my earlier c o m m e n t s about the pervasive institutionalizing of the inflation t h r o u g h wage escalators, indexed transfer and pension payments, and other contractual arrangements w h i c h are not likely to be altered in the short run. Accordingly, wage costs w i l l accelerate in 1981 for both "catch u p " and " k e e p u p " reasons in the face of rather d i m prospects f o r productivity gains. W h i l e there still are no clear indicators of t h e widely predicted recession for early 1981, the o u t l o o k is not strong for much real g r o w t h in GNP. The w i d e swings w e witnessed in 1980 are not likely to recur this year. It is i m p o r t a n t also to ensure that t h e high volatility of interest rates in 1980 is not repeated. I look for some reduction in t h e g r o w t h of monetary aggregates and shall be b o t h surprised and disappointed if the Fed's recently a n n o u n c e d reductions in target g r o w t h rates for 1981 are not i m p l e m e n t e d . W h a t does all this signify w i t h respect to t h e e c o n o m i c o u t l o o k f o r the U.S.? The President's program is bold, and the p r o p o s e d changes in e c o n o m i c policy should p r o d u c e a q u a n t u m i m p r o v e m e n t in the long-run e c o n o m i c outl o o k . The character of the p r o g r a m und o u b t e d l y already has f a v o r a b l y a f f e c t e d producer and consumer expectations. The real test, however, must be measured in terms of the actual effects on e c o n o m i c performance, particularly the rate of inflation, national i n c o m e , o u t p u t , and p r o d u c t i v i t y . Economic processes are complex and o f t e n slow; hence, several years w i l l be required to correct cumulative errors in e c o n o m i c policy and to u n w i n d the tangles and imbalances generated. In short, even assuming the program, w i t h all of its strengths, is adoped intact by the Congress, history and p r u d e n c e caution us that in the economic w o r l d there are " n o instant miracles." BE] 27 International Deposits In Miami A Profile T h e surge in international banking activity in Miami is led by deposits from Latin American individuals and nonfinancial firms. Interviews with Miami commercial banks, Edge Act corporations and foreign bank agencies suggest that foreign depositors come to Miami primarily for portfolio diversification, political stability, and personal, bilingual service. International banking transacted by Miami commercial banks, Edge Act corporations, and foreign bank agencies is surging. Four years ago, Miami had no foreign bank agencies and only 10 Edge Act corporations. As of late March, 1981, 27 foreign bank agencies or representative offices and 36 Edge Act corporations have Miami banking offices open or pending. These include 25 of the world's largest 100 banks. 1 Additionally, Miami has over 20 commercial banks w i t h active international departments — that's over 75 banking entities in Miami w i t h an active international orientation. 2 A significant f l o w of international deposits is placed in these Miami international banking institutions. As of June 1980, aggregated international liabilities of Miami banking 'American Banker, July 25, 1980. 2 For a detailed list of the international banking participants in Miami, see "Behind Miami's Surge in International Banking" in the Economic Review, April 1981. 28 entities (commercial banks, Edges, and foreign agencies), excluding liabilities to the banks' o w n foreign offices, approached $2.5 billion. By far, the bulk of these international deposits (90 percent) was placed in Miami by individuals and nonfinancial firms. A large part of these accounts are in time deposits; most (over 90 percent) are from Latin America. O n top of those deposits directly placed on Miami books is a significant Miami-generated deposit base (perhaps another third) placed directly on a bank's Eurocurrency branch in the Bahamas, Cayman Islands, and London. In order to provide a profile of the character of international deposits placed in Miami, this author carried on a series of interviews during February 1981 w i t h 14 Miami commercial banks, Edge Act corporations, and foreign bank agencies, w h i c h account for four-fifths of Miami's foreign liability base. The interviews concentrated on those factors affecting individual and nonfinancial international deposits in Miami. M A Y 1981, E C O N O M I C REVIEW Table 1. Miami Banking Entities' International Deposits* ( J u n e 1 9 8 0 ) To Foreign official institutions Unaffiliated foreign b a n k s All o t h e r f o r e i g n e r s Total Percent of Total 2.8 6.7 Percent in Time Deposits Percent Latin American 13.3 99.0 0.5 88.6 90.5 80.4 93.5 100.0 73.2 93.3 "Excludes foreign liabilities to own branches and affiliates. Source: U.S. Treasury. The average international deposit account is large compared to its domestic counterpart. Some Edge Act corporations and foreign bank agencies have a strictly wholesale orientation and are hesitant to accept retail international deposit accounts. An average time account in these entities surpasses $100,000, and the » I W H Y ARE INTERNATIONAL DEPOSITS PLACED I N M I A M I ? Are Interest Rates a Major Factor? — Yes, but. : j I b Question 1. How responsive are foreigners' Miami bank deposits to interest rate differentials between the U.S. and the foreigners' home country? Responses a. very responsive b. moderately responsive c. not very responsive 3 7 4 Question 2. How significant is interest rate competition on CDs in the Miami banking market? Responses a. significantly competitive b. moderately competitive c. very limited competition 9 3 2 Nearly three-quarters of the interviewed bankers perceive Miami international deposits as somewhat to very responsive to rate differentials between U.S. and Eurodollar rates and what a large depositor could earn in his home country. But none of the bankers perceived interest rate differentials as the FEDERAL RESERVE BANK OF ATLANTA number of international deposit accounts may be 500 or less. Other edges and foreign bank agencies, as well as the Miami-based commercial banks, accept smaller accounts — still, an average time account ranges from $50,000-$100,000 or more. Time deposits are the principal deposit instrument, although most international depositors (and the banks themselves) prefer that the depositor also open a demand deposit account; this facilitates the banking relationship. The Miami banking entities are principally interested in these full banking relationships. Most request bank references and prefer depositors referred to them rather than relying on walk-in business. Some Miami banking entities travel abroad selling their personal deposit services; others d o not travel at all and only passively accept international deposits w h i c h may be generated by the bank's Miami or w o r l d reputation. Few of the Edges and agencies advertise locally for international deposits. prime explanation for Miami's international deposit growth. They view international depositors as increasingly sophisticated and aware of the differences between home country and international deposit interest rates. In response, an increasing number of Latin American economies are allowing their domestic time deposit rates to fluctuate w i t h international rates — sometimes with a marginally favorable difference in favor of the home country. Mexico has been particularly alert to maintaining its deposit rates marginally above comparable U.S. and Eurodollar rates. Costa Rica and Venezuela also have permitted their rates to vary w i t h international rates, although sometimes w i t h a lag. In contrast, Guatemalan maximum deposit rates, for instance, remained constant throughout the extremely volatile 1980 international interest rate scenario and likely induced a deposit outflow. Several bankers mentioned the fact that though some deposits do enter the Miami and Eurodollar international deposit place due to favorable interest rates, once placed abroad, a significant proportion of these deposits stay, even if the favorable rate differential disappears. Therefore, it is likely that international deposits are placed in Miami also for portfolio diversification and political stability purposes. 29 Table 2. Typical Interest Rates on Large Time Deposits (percent) 1980 Rica1 Guatemala2 Mexico3 Venezuela4 United States5 Eurodollar Deposits6 January 15.0 9.0 17.35 15.00 13.39 14.33 18.15 15.00 14.30 15.33 20.71 17.00 17.57 18.72 22.03 17.00 16.14 17.81 21.11 13.00 9.79 11.20 19.13 12.00 8.49 9.41 18.20 12.00 8.65 9.33 9.91 10.82 February March April May June July 17.5 16.1 10.8 10.9 11.8 12.2 9.0 9.0 9.0 9.0 9.0 9.0 August 13.3 9.0 18.98 12.00 September 13.7 9.0 20.74 12.00 11.29 12.07 21.74 12.00 12.94 13.55 23.25 16.00 15.36 16.46 October November 15.4 17.9 9.0 9.0 'Six-month foreign currency deposit. 2 M a x i m u m interest rate permissible on deposit liabilities. 3 Large three-month certificates of deposit. "Large six-month certificates of deposit. 5 Three-month certificates of deposit, secondary markets (average of five dealers). 6 Three-month rate. Most of the bankers interviewed regarded Miami as a moderate to significantly competitive banking market for large international deposits — significantly more competitive than it was even a few years ago due to the influx of the new internationally oriented banks. Still, Miami rates are typically below New York levels because of demand factors — the bankers simply do not have New York's loan demand. But competitive factors in Miami's banking market are closing the gap between Miami and New York rates. The sensitivity of large CD deposits to a particular bank's rates has been heightened by the 1980 volatile rate scene. Large depositors earned over 17 percent on three-month certificates of deposit in March 1980, but the renewal rate in June 1980 was at half that level. This induced a greater number of depositors to " s h o p a r o u n d " for rates. It also may have induced greater deposit placements in Eurodollar markets, since banks can quote marginally higher Eurocurrency rates to such interest-sensitive large depositors. Some Miami banking entities resisted paying the peak March/April 1980 CD rates, assuming that the cost of funds w o u l d soon fall and that the bulk of their depositors w o u l d stay due to longstanding banking relationships and personal attention given to their clientele. Some banks, then, differentiate their product 30 (deposit services) t h r o u g h such personal service. Large depositors are dealt w i t h personally by the bilingual senior official staff of Miami's banking entities — this is often in contrast to treatment afforded the same depositor in the same bank's head office in money centers. The smaller scale operations out of Miami make such treatment possible. These accounts also get significant attention because the personal international accounts are the bulk of Miami's international deposit base. It is this service and personal attention — so important to Latin American clients — that permit Miami banking entities to compete against New York and Eurodollar rates. The competition is in nonprice (noninterest rate) factors. Is Economic and Political Stability a Factor? — Yes! Question 3. How responsive are foreign deposits in Miami to fears of home country devaluation or exchange control establishment? a. very responsive b. moderately responsive c. unresponsive 8 6 0 M A Y 1981, E C O N O M I C REVIEW Question 4. How important a role does the political stability of the U.S. play in attracting foreign deposits in Miami? *\ a. very important b. moderately important c. relatively unimportant 13 1 0 > Question 5. H o w responsive are foreign deposits in Miami to political instability in the foreign depositor's home country? a. very responsive b. moderately responsive c. unresponsive 13 1 political factors alone. The U.S. has commercial and cultural ties w i t h Latin America. A large part of Latin American trade is conducted with the U.S.; many Latin Americans travel to the U.S. for business purposes. Further, a significiant number of Latin Americans study in U.S. colleges, spend their vacations in the U.S., and purchase retail goods here. All of these factors have induced the placement of dollar deposits in the U.S. Miami is in an especially good position for housing such deposits — it is the U.S. arrival and departure point for a third of international air passengers destined to or arriving f r o m Latin America. For many, Miami is increasingly the final U.S. destination point also, since business, banking, and tourism can be combined there. 0 Political and economic stability is important to the placement of international deposits in the U.S. Miami international bankers see this factor, along with portfolio diversification, as the basic rationale behind international deposit placement by individuals and nonfinancial firms. International depositors react to real and perceived factors. In countries which habitually have large current account deficits combined with high inflation and stable exchange rates, large depositors react to rumors of devaluation and exchange control implementation or tightening of existing controls. This occurred, for instance, in Mexico prior to the dramatic 1976 peso devaluation which caused a Mexican deposit overflow into dollar-denominated accounts in Mexico and abroad. In those countries w h i c h periodically adjust exchange rates, the deposit outflow due to anticipated changes is lessened. Where exchange controls are already in effect, the deposit outflow is likely reduced but not by any means eliminated. Not surprisingly, bankers also agreed that political instability in the depositor's home country (or in a neighboring country) also caused deposit inflows into Miami. This factor, combined with the political and economic stability of the U.S., has been a prime element in attracting deposits. Still, as one banker noted, other economies offer political stability. The reasons w h y deposits are placed in the U.S. go beyond Are Euromarkets and International Banking Facilities Important in Miami's International Deposit Base? — Yes. Question 6. What proportion of your bank's Miami international deposit base is actually booked on your Eurocurrency branch? a. less than 10 percent b. 10 to 35 percent c. over 35 percent Question 7. How will the proposed IBFs affect Miami's international banking activities (assuming a $500,000 m i n i m u m transaction)? a. very significant, positive effect b. moderate, positive effect c. no effect d. detrimental effect Banks are able to offer Eurocurrency deposit rates t h r o u g h placing international deposits on Eurocurrency branch books. The Edge Act corporations and foreign banks in Miami have Eurocurrency branches, as do several Miami commercial banks. Generally, bankers are not anxious to offer Eurocurrency rates on small transactions due to the paper w o r k involved in matching maturities of the deposit liability 31 FEDERAL RESERVE B A N K O F ATLANTA w i t h a similarly maturing income earning asset. Still, competition in Miami is reducing the m i n i m u m in w h i c h bankers will quote Eurocurrency rates. Some Miami banking entities apparently quote Eurocurrency rates on deposits as low as $25,000, although most require a $100,000 or higher deposit minimum. The Eurocurrency markets typically offer higher deposit interest rates than comparable U.S. rates. For instance, for the week ending January 2,1981, U.S. three-month certificates of deposit yielded, on average, 16.99 percent 3 while comparable Eurodollar deposits yielded 17.79 percent. Such Eurocurrency deposits operate w i t h o u t reserve requirements, so long as the funds are not transferred back to the U.S. — this enables the yield differential compared to U.S. booked deposits. Still, many international depositors prefer to have their deposits placed on U.S. rather than Eurocurrency books, since the "safekeeping" aspect of placing deposits in the U.S. is foremost in mind. The p r o p o r t i o n of international deposits generated by banking entities in Miami but actually placed on Eurocurency branch books is difficult to estimate. The p r o p o r t i o n , however, has been growing because more Miami-based commercial banks have Eurocurrency branches and because the 1980 interest rate volatility caused international depositors to be more rate conscious. Five of the 14 interviewed banks responded that less than 10 percent of their international deposit base is placed in Eurocurrency markets — partly because some of these banks d o not have direct Eurocurrency facilities. O n the other hand, another five of the interviewed banks estimated that over 35 percent of their Miami deposits were actually placed on Eurocurrency branches. A rough estimate is that approximately one-third of deposits generated by Miami banking entities are actually booked in Euromarkets. A recent Board of Governors' proposal w o u l d permit banks operating in the U.S. to offer International Banking Facilities (IBFs). This proposal w o u l d eliminate reserve requirements and interest rate ceilings on 3 Five-day average of rate quotes by five dealers for three-month certificates of deposit in secondary markets. Source of interest rate quotes: Board of Governors of the Federal Reserve System, Federal Fieserve Bulletin, Washington, D.C., January 1981. 32 international deposits placed in such IBFs by non-U.S. residents. In 1978 New York state passed legislation that w o u l d exempt IBFs, if approved by the Board of Governors, from state and local taxes. Other states are now considering accompanying legislation to exempt IBFs f r o m state and local taxes. Florida has already largely exempted foreign source income f r o m state and local taxes, although some relatively minor alterations to fully exempt IBFs are being presented to the Florida legislature this spring. The Board of Governors' proposal permits IBF establishment by all U.S. depository institutions, by Edge Act corporations, and by branches and agencies of foreign banks in this country. Only non-U.S. residents, other IBFs, and the parent institutions of IBFs w o u l d be eligible to place funds with IBFs. IBF deposits of foreign nonbank customers w o u l d be subject to a two-day minimum maturity to minimize use of such deposits for transaction purposes. To maintain a wholesale orientation, the Board proposed a $500,000 m i n i m u m transaction but at the same time requested comment on an alternative proposal that would require a $500,000 daily average balance for the reserve computation period, with a minimum amount of $100,000 for deposit or withdrawal transactions. The proposal w o u l d , therefore, permit banks to offer Eurocurrency-type large time deposits through an IBF instead of resorting to booking the deposit on a Eurocurrency branch. This issue is important to Miami's international banking development. It offers a Eurocurrency dimension to Miami commercial banks without offshore branches. It may induce formation of Miami Edge Act corporations by regional banks anxious to offer IBFs but operating in states which have not exempted such IBFs from state and local taxation. At the same time, however, it may induce placement of some funds into IBFs which otherwise would have been placed on a Miami banking entity's o w n books and made available for local lending. Generally, IBF funds would be destined abroad or to other IBFs, since the only domestic lending permitted is to U.S. offices of the IBF's parent depository institution — and these latter transactions are to be subjected to the Eurocurrency reserve requirement (3 percent). Twelve of the 14 interviewed Miami international banking entities perceived the M A Y 1 9 8 1 , E C O N O M I C REVIEW IBF proposal as having positive effects on Miami's international banking, although only three perceived the facilities, as proposed, as having very significant effects. Many felt that the $500,000 m i n i m u m transaction (or ^ m i n i m u m $500,000 daily average balance f o r the reserve c o m p u t a t i o n period) was too i high; average certificate of deposit accounts, although large, were well below these I minimums. Still, all banks had some accounts t which w o u l d be eligible for IBF placement. Several of t h e bankers perceived the need for Florida to offer fully tax-exempted IBFs for defensive purposes, since N e w York — Miami's principal U.S. c o m p e t i t o r for international deposits — has already exempted IBFs f r o m state and local taxation. ? » International Deposits in M i a m i — A Perspective Miami's international deposit base is primarily generated f r o m nonfinancial firms and individuals. O n l y a limited a m o u n t of official and unaffiliated bank-to-bank foreign liability activity is c o n d u c t e d f r o m M i a m i . The J * potential for expansion of these latter foreign liability f u n c t i o n s pends d e v e l o p m e n t in M i a m i of an efficient bank clearings system w h i c h can rival o t h e r c o m p e t i n g banking centers. International deposits — principally time deposit accounts — are in M i a m i to take advantage of asset diversification, e c o n o m i c and political stability, and favorable deposit returns d u e to interest rate differentials b e t w e e n the U.S. and Euromarkets and the depositor's h o m e c o u n t r y - c o n t r o l l e d rates. A significant p r o p o r t i o n of M i a m i international deposits are actually b o o k e d in Euromarkets d u e to t h e marginally higher deposit interest rates available there. The p r o p o s e d IBFs, even w i t h $500,000 m i n i m u m balances, w i l l b r i n g Eurocurrency deposits o n t o M i a m i books. IBFs w i l l also induce additional Edge Act corporations into M i a m i to take advantage of Florida's anticipated full e x e m p t i o n of IBF activity f r o m state and local taxation. At the same t i m e , however, IBFs may affect t h e a m o u n t of international deposits available for local and U.S. lending. —Donald E. Baer 33 t I I 1 V •JM i -I ) * i> • • FEDERAL RESERVE B A N K O F A T L A N T A ALSO AVAILABLE WORKING PAPER SERIES: Estimating Sixth District Consumer Spending by Brian D. Dittenhafer Changes in Seller Concentration in Banking Markets by B. Frank King Regional Impacts of Monetary and Fiscal Policies In the Postwar Period: Some Initial Tests by William D. Toal A Framework for Examining the Small, Open Regional Economy: An Application of the Macroeconomics of Open Systems by Robert E. Keleher V Southern Banks and the Confederate Monetary Expansion by John M. Godfrey An Empirical Test of the Linked Oligopoly Theory: An Analysis of Florida Holding Companies by David D. Whitehead Regional Credit Market Integration: A Survey and Empirical Examination by Robert E. Keleher Entry, Exit, and Market Structure Change in Banking by B. Frank King Future Holding Company Lead Banks: Federal Reserve Standards and Record by B. Frank King Money-Income Causality at the State-Regional Level by Robert E. Keleher and Charles J. Haulk ' *;' j i The Influence of Selected Factors on the Slowdown in Southeastern Manufacturing Productivity! by Charlie Carter 1919-1939 Reassessed: Unemployment and Nominal Wage Rigidity in the U.K. by Barbara Henneberry, Robert E. Keleher, and James G. Witte Home Office Pricing: The Evidence from Florida by David D. Whitehead ' Supply-Side Effects of Fiscal Policy: Some Historical Perspectives by Robert E. Keleher and William R Orzechowski I - " *« I 34 v M A Y 1 9 8 1 , E C O N O M I C REVIEW Copies of these publications are available upon request from: Research Department, Federal Reserve Bank of Atlanta, P.O. Box 1731, Atlanta, Georgia 30301. Please include a complete mailing address with ZIP Code to ensure delivery. Interested parties may also have their names placed on a subscription list for future studies. RESEARCH PAPER SERIES: No. 1 Impact of Holding Company Affiliation on Bank Performance: A Case Study of Two Florida Multibank Holding Companies by Stuart G. Hoffman No. 2 No. 3 Convenience and Needs: Holding Company Claims and Actions by Joseph E. Rossman and B. Frank King Small Banks and Monetary Control: Is Fed Membership Important? by William N. Cox, III No. 4 Component Ratio Estimation of the Money Multiplier by Stuart G. Hoffman No. 5 Holding Company Power and Market Performance: A New Index of Market Concentration by David D. Whitehead No. 6 Fundamental Determinants of Credit Volume: A Survey and Regional Application by Robert E. Keleher No. 7 State Usury Laws: A Survey and Application to the Tennessee Experience by Robert E. Keleher No. 9 Supply—Side Effects of Fiscal Policy: Some Preliminary Hypotheses by Robert E. Keleher No. 10 An Empirical Analysis of Sectoral Money Demand in the Southeast by Stuart G. 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