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Economic ^
Review B
' ' FEDERAL RESERVE BANK OF ATLANTA
SURVEY
BANKS
IRA Competition Heats Up
Challenges of the 80s
TAX CUTS
Will They Make a Difference?
SUPPLY-SIDE
EXPORTS
Atlanta Conference
Southeast's Ports Booming
SOUTHEAST
MAY 1982
Impact of Business Tax Cuts
Economic
Review
FEDERAL RESERVE
BANK O F ATLANTA
President:
William F. Ford
Sr. Vice President a n d
Director of Research:
Donald L. Koch
Vice President and
Associate Director of Research:
William N. Cox
Financial Stucture:
B. Frank King, Research Officer
David D. Whitehead
National E c o n o m i c s :
Robert E. Keleher, Research Officer
Stephen O. Morrell
Regional E c o n o m i c s :
Gene D. Sullivan, Research Officer
Charlie Carter
William J. Kahley
Database M a n a g e m e n t :
Delores W. Steinhauser
Payments Research
Paul F. Metzker
Veronica M. Bennett
Visiting Scholars:
James R. Barth
George Washington University
George J. Benston
University of Rochester
Robert A Eisenbeis
University of North Carolina
Arnold A. Heggestad
University of Florida
John H e k m a n
University of North Carolina
Paul M. Horvitz
University of Houston
Peter Merrill
Peter Merrill Associates
C o m m u n i c a t i o n s Officer:
Donald E. Bedwell
Public Information Representative:
Duane Kline
Editing:
Gary W. Tapp
Graphics:
Susan F. Taylor
Eddie W. Lee, Jr.
The purpose of the E c o n o m i c Review is to inform the
public about Federal Reserve policies a n d the economic environment and, in particular, to narrow the gap
b e t w e e n specialists a n d c o n c e r n e d laymen.
Views expressed in the E c o n o m i c Review aren't necessarily t h o s e of this Bank or the
Federal Reserve System. Material herein may be reprinted or abstracted if the Review
and author are credited. Please provide the Bank's Research Department with a copy of
any publication containing reprinted material. Free subscriptions and additional copies
are available from t h e Information Center, Federal Reserve Bank of Atlanta, P.O. Box
1731, Atlanta, Ga. 3 0 3 0 1 (404/586-8788). Also contact the Information Center to
receive Southeastern E c o n o m i c Insight, a free newsletter on economic trends
published by the Atlanta Fed twice a month and mailed first class to subscribers. Insight
is designed to give readers fresh and timely data, analyses and forecasts on t h e
Southeast's
economy.
MAY 1982 ECONOMIC REVIEW
IRAs in the Southeast:
A Laboratory for Deregulation
4
The new Individual Retirement Account regulations
allow, for the first time, unlimited competition for
funds among depository institutions, insurance companies, and securities dealers. An Atlanta Fed
survey provides an early indication of how the
competition is taking shape and offers possible
clues to future competitive patterns under deregulation.
Supply-Side Economics and
the Vanishing Tax Cut
20
What will the federal tax rate cut mean to you? How
much will the reductions be affected by inflation
and by higher state, local and Social Security taxes?
A credible tax reduction is essential to the Reagan
approach, but some observers remain skeptical.
Southeast's Ships
Come In
35
The value of waterborne exports shipped from
southeastern ports jumped from $ five billion in
1970 to over $ 30 billion in 1980. What caused the
explosion, what kinds of products are sailing from
southeastern ports, and what changes in national
and regional exports can we expect in the 1980s?
Challenges for Retail Banking
in the 80s
For retail bankers, competition that was nonexistent
three years ago is now around every corner. What
can commercial banks learn from other recently
deregulated industries, and how painful is the deregulatory process likely to be?
Supply-Side Conference
in Atlanta
25
A two-day Atlanta conference on supply-side ecomics brought together leading economists, Reagan
administration policymakers, and key congressional
supply-side standard bearers. The result: lively—
sometimes impassioned—debate.
Industrial Impacts of the
1981 Business Tax Cuts
42
The 1981 Tax Act made major changes in the
taxation of business income. How do these changes fit
into the recent development of corporate tax policy,
and how will they affect key industries in the Southeast?
Statistical Supplement
V O L U M E LXVII, N O . 5
13
51
IRAs in the Southeast:
A Laboratory for Deregulation
The new, unregulated competition for individual retirement
accounts presents a virtual "laboratory" situation for studying the
possible effects of deregulation in the financial services industry.
Results from an Atlanta Fed survey show that early competition was
heated among depository institutions. Securities dealers and
insurance companies are also unquestionably "in the game."
W h e n individual retirement accounts with no
interest limits became available to most workers
in 1982, it presented a unique opportunity to
study unregulated competition for funds among
financial institutions. The new IRA regulations
allow virtually unlimited competition for funds
among depository institutions, insurance companies and securities dealers. How these competitors react in this unregulated market should
give us clues about how they may compete as
deregulation proceeds u n d e r t h e mandate of the
Monetary Control Act.
In order to get an early line on IRA competition,
the Federal Reserve Bank of Atlanta conducted a
telephone survey of 121 financial institutions in
the Sixth Federal Reserve District during the first
two weeks of January. These institutions included
commercial banks, savings and loan associations,
credit unions, insurance companies and securities
dealers.
Our results indicate that:
1 . M o s t larger institutions and many smaller
ones were offering rates competitive with
rates on alternative investments.
2. Larger institutions of all types were offering
higher rates and a broader selection of IRA
plans.
3. In general, savings and loan associations
were offering somewhat higher rates than
other institutions.
4. Rates on the same type of account varied
widely among offering institutions, even institutions of the same types.
5. Depository institutions, securities dealers
and insurance companies offered similar
rates.
6. Securities dealers generally offered greater
investment flexibility in their IRAs.
7. Insurance companies and securities dealers commonly had service charges for IRAs
while depository institutions generally did
not.
IRA's Aim: Stimulate Savings, Investment
The Economic Recovery Tax Act of 1981 —
with its liberalized provisions for individual retirement accounts—addressed the need to boost
savings t o help finance corporate investment,
provide a secure base of deposits for depository
institutions, and ease pressure on the Social
Security system by providing incentives for working people to save for retirement First authorized in
1974, the individual retirement account (I RA) is
a special savings plan that lets individuals defer
federal income taxes on the money invested and
the interest it earns until the money is withdrawn.
Money deposited in an IRA cannot be withdrawn
until the individual reaches age 591/2 except in
the event he or she becomes totally disabled. If
the money is withdrawn before then, a penalty
equal t o 10 percent of the amount withdrawn
must be paid to the Internal Revenue Service.
Additional penalties may be imposed by the
financial institution where the money was invested.
4
M A Y 1982, E C O N O M I C
REVIEW
'
,
*
An early withdrawal will be subject t o taxes at the
regular rate.
Until this year, only individuals not covered by
an employer's qualified plan or a government
plan were allowed t o establish I RAs. Beginning in
1982, anyone with earned income may establish
an IRA, even if also covered by an employer's
retirement plan. Banks, thrift institutions, credit
unions, brokerage houses, mutual funds, and
insurance companies may all offer IRA plans.
Another change in IRA laws provides additional
incentive t o individuals to save for their retirement by increasing the amount of deductible
contributions that can be made each year to an
IRA. Under the old law, contributions to an IRA
were limited t o the lesser of $1,500 or I S
percent of earned income for an individual,
$3,000 or 15 percent of earned income if both
husband and wife work, and $1,750 or 15 percent
of earned income for an individual with a nonworking spouse. Effective January 1,1982, these
limits were raised to the lesser of $2,000 or 100
percent of earned income for an individual,
$4,000 or 100 percent of earned income for a
husband and wife w h o both work, and $2,250 or
100 percent of earned income for an individual
with a non-working spouse.
So that depository and nondepository institutions may compete for IRA funds on a similar
basis, banks, thrifts and credit unions have been
authorized by the Depository Institutions Deregulation Committee to offer a certificate of
deposit aimed specifically at I RAs. The new IRA
certificate has a m i n i m u m maturity of 18 months
and no interest rate ceiling. The rate is set by the
individual institution and can be fixed or variable.
The market for this certificate differs from most
deposit markets in which commercial banks,
savings and loan associations and credit unions
compete because there are no regulations telling
the institutions what interest rates to pay or how
t o structure the specific accounts. In addition,
non-deposit financial institutions such as insurance
companies and brokerage houses may also compete for I RAs with similar instruments.
The changes in IRA laws substantially increased
the number of people eligible t o open an IRA.
The Treasury Department estimates 35 million
full time workers were eligible for I RAs in 1980
before the new tax law took effect. Under the
new law, an additional 40 t o 50 million workers
become eligible for I RAs. If each were to establish a
$2,000 IRA, between $80 billion and $100
FEDERAL RESERVE BANK O F A T L A N T A
billion would be available for I RAs each year.
According to the Internal Revenue Service, 2.6
million 1980 tax returns had I RAs. This represents a
participation rate of about 7.5 percent.
Studies show that financial savings increase as
income rises. According to an Urban Institute
study done in May 1981, participation in I RAs
rose substantially as income increased. Eligible
wage earners with income less than $15,000 a
year had a participation rate less than 8.0 percent
This rate rose t o 52.4 percent, however, for
eligible workers with yearly income more than
$50,000. According t o the Department of Labor,
in 1980 the median income for households
covered under pension plans was 45 percent
higher than the median income for all households.
Therefore, these newly eligible investors are
likely t o have higher incomes than previously
eligible IRA investors and t o make more use of
I RAs. If the participation rate is higher for the
newly eligible, as it is expected t o be, it would
mean a substantial market for institutions that
offer I RAs. At yearend 1980, investments and
savings in I RAs amounted to $ 18.4 billion. If only
10 percentt>f newly eligible investors open I RAs,
it would mean as much as $10 billion in new
savings per year. If IRA participation follows the
Canadian pattern of investment in a similar
program, 12.4 percent of eligible investors would
participate and new I RAs w o u l d equal about
$12.5 billion per year.1
In addition to providing savings incentives, the
expanded IRA program may serve to shift the
burden of retirement savings from social security
to individuals. Uncertainties about the future of
the Social Security Program may cause many
workers to look for alternatives. In fact, reductions
in social security benefits take effect this year for
people retiring at age 65. I RAs will provide a way
for working individuals to save for their own
retirement and may help them adjust to further
social security reforms.
An Experiment In Unregulated Competition
In addition to being an attempt to raise savings
(see Box) the new IRA has become an experiment
in unregulated interest competition. The large
new IRA market presents an attractive opportunity and a new challenge for the institutions
'Goldman Sachs Economic Research, December 1981.
5
Table 1 . Institutions Offering IRAs
SAVINGS INCENTIVES
Type
of
Institution
One important question that the new IRAs raise deals
with the effectiveness of IRA savings incentives. It is
important to know the overall impact of IRAs on the
rate of savings in the U.S. economy. At one extreme, all
new IRA funds might be new savings. If a $12.5 billion
per year IRA market comes into existence from new
savings, t h e savings rate w o u l d rise by a b o u t .6%,
adding 11 percent to savings out of disposable income.
At the other extreme, new IRA investment could come
entirely from other assets and represent no new
savings.
We have little evidence on the effect of IRA savings
incentives. Little time has passed since the new law
took effect. Nationwide savings data is not available,
and consumer surveys on such items as net new
savings from any one incentive change are notoriously
inaccurate. Further, IRA impacts on new savings may
vary over time. Transfers from other liquid assets may
occur early while new savings may be induced as
other liquid assets are exhausted. Assessment of
overall saving effects must await time series of well
designed consumer surveys and econometric analysis.
that may offer t h e m . H o w they compete in this
unregulated market should give us clues about
how they may compete as deregulation of deposit
markets proceeds.
Our early January survey of 121 institutions
sought information on IRA pricing and account
characteristics from large and small depository
institutions and from national and regional insurance companies and securities brokers. Firms
were asked if they offered I RAs, how many plans
they offered, and the features of each plan
including its compounded rate, maturity, minimum
balance and service charge.
For comparison purposes, we started by choosing
2 or 3 each of the five largest S&Ls and five largest
commercial banks in each state of the District, as
well as 2 or 3 each of the remaining commercial
banks and S&Ls in each state. W e chose t w o
credit unions from each state: the largest and
one at random. In all, w e surveyed 80 depository
institutions: 16 large commercial banks, 18 small
commercial banks, 16 large S&Ls, 18 small S&Ls,
6 large credit unions and 6 smaller credit unions.
W e also surveyed 41 nondepository institutions:
9 national insurance companies, 12 regional
6
Commercial bank
Large
Small
Savings and loan assn.
Large
Small
Credit Union
Large
Small
Insurance Co.
National
Regional
Stock brokers
National
Regional
Number
Surveyed
Number
Offering
IRAs
16
18
16
11
16
18
16
16
6
6
5
1
9
12
9
5
8
12
8
9
insurance companies, 8 national securities dealers
and 12 regional securities dealers.
Because rates paid on an account are not the
only factor for attracting a potential customer, w e
asked about other items which might also tend
to be persuading points: the maturity of the
deposit, whether the rate was variable or fixed
for the maturation of the certificate, how the rate
was determined, and what the minimum denomination for the account was to be.
The larger institutions began the year with IRA
programs. All of the large banks and savings and
loan associations—each among the three largest
in its state—and all but one of the large credit
unions offered at least one sort of IRA. Most
offered more than one plan; one bank offered six
plans. All of the national insurance and brokerage
firms also offered IRAs. Most offered several
plans.
Smaller depository institutions were somewhat
less aggressive. Fewer offered IRAs and those
that did offer I RAs had fewer plans. Most of these
institutions were in nonmetropolitan areas and
had fewer competitors than the larger institutions in
the District's metropolitan areas. Of the 18 small
commercial banks surveyed, only 11 had IRA
plans in service. Sixteen of eighteen small S&Ls
offered IRAs, but generally restricted their services
to only one plan. Only one smaller credit union
and five of the regional insurance companies
offered an IRA plan (Table 1).
M A Y 1982, E C O N O M I C REVIEW
T a b l e 2 . Interest Rates Paid o n IRAs
18-Month Maturity
Variable Rate
Small
Large
Small
Large
Commercial Banks
Commercial Banks
S&Ls
S&Ls
High
Low
Median
High
Low
Median
13.54
16.76
14.51
16.65
11.52
12.28
11.68
11.91
13.07
13.35
12.72
13.54
15.00
16.17
15.25
15.02
12.55
12.50
12.00
12.75
12.75
13.88
14.00
14.45
FEATURES OF THE PLANS
Banks and Savings and Loans
The most popular plan among all the institutions
was the 18-month variable rate IRA. At least 90
percent of all commercial banks and large S&Ls,
and a little over half the small S&Ls, offered such
a plan. In addition, about half the institutions
offered a fixed-rate 18-month certificate.
A wide variety of methods was used by all
institutions to determine their rates on variable
rate plans. The most common methods for setting
rates, though, were 1) paying the same rate paid
on either the 6-month money market certificate
or the 30-month small savers certificate, 2) paying a
rate determined by some derivation of Treasury
bill rates, 3) paying rates decided upon arbitrarily
by management based on other short-term market rates, and 4) paying a rate determined by
some derivation on the yield of certain money
market funds.
These rates varied as widely as the methods
used in determining them. Again, large institutions
appeared to be the front runners, paying consistently higher rates. These large institutions were
generally located in metropolitan areas where
competition was greatly increased, thereby forcing
rates higher in order to attract customers (Table 2).
Just as the larger institutions offered more
plans, they offered higher rates than the smaller
ones. The median rate paid by the large banks on
an 18 month flexible rate IRA was .28 percent
above that paid by the small banks. The large
banks' median rate on an 18 month fixed rate
IRA was 1.13 percent above the median paid by
small banks. A similar pattern was established for
savings and loan associations. Comparison of
FEDERAL RESERVE B A N K O F A T L A N T A
Fixed Rate
bank rates with those paid by savings and loans
indicated that generally savings and loans paid
more. This is consistent with the idea that the
market requires a differential payment from
savings and loans for deposits.
Another choice that institutions had to make in
offering a profitable, but competitive, IRA was
the frequency of changes in the rate. Frequent
changes mean more administrative costs for the
institutions, a greater risk of increasing costs of
funds during rising interest rates, and a quick
means of lowering the cost of funds during
declining interest rates. For competitive purposes,
customers would benefit from less frequent
changes on the downside of the interest rate
cycle and from more frequent changes on the
upside. Most institutions set the rates monthly.
Large commercial banks were more aggressive
and generally settled on a weekly change in their
variable rate IRA (Table 3).
Two other fixed-rate alternatives were commonly offered by the institutions to their IRA
customers. Since the six-month money market
certificate and the 30-month small savers certificate were already popular market-rate deposit
instruments, many institutions offered these certificates as IRAs for their customers. The large
banks particularly offered these types of plans
most often.
The IRA money market certificate operated
identically t o the regular money certificate traditionally offered by depository institutions. This
instrument was made available to pre-1982 IRA
participants w h o could transfer existing IRA
funds into the new certificate since by law the
minimum denomination is $10,000. All institutions
offering such a plan paid the highest rate allowed
by law at the time, 12.532 percent.
7
T a b l e 3 . F r e q u e n c y of R a t e C h a n g e s
for 1 8 - M o n t h Variable R a t e IRA Plans
Daily Wkly 2 Wks. Mthly Qrtiy.
Chart 1. Rates Paid on IRAs and
U.S. T r e a s u r y N o t e s w i t h 3 0 - M o n t h
Maturity
(effective annual yield)
SemiAnnually
Fixed Rate
Median
17
Large
Com. Banks
Small
Com. Banks
Large S&Ls
Small S&Ls
0
47%
0
27%
20%
7
0
7%
0
22%
29%
33%
0
7%
0
44%
50%
56%
33%
7%
11%
0
0
0
?
15 —
1 3 -
11 _
The 30-month IRA was another popular plan.
The rates paid on the 30-month plan were
closely tied t o the maximum legal limit set for
small savers certificates. However, some of the
commercial banks paid much lower rates than
others did on their 30-month plan (Chart 1).
Other plans which did not fall into these 3
categories were either multi-year maturities at a
fixed rate or open accounts with no maturity
which could be used to accumulate enough
funds to eventually invest in a time certificate.
The longest maturity offered was an 8-year IRA
paying 14.57 percent in early January.
Unlike the brokers and insurance companies,
depository institutions have shied away from
establishment and maintenance fees. These fees
showed up rarely in the survey, with one small
savings and loan charging $10 t o set up an
account and one large S&L charging $25. Maintenance fees ranged from $5-$50 per year, but
only 5 percent of all IRA plans had maintenance
fees.
Some institutions required a large m i n i m u m
initial deposit t o offset administrative costs in
setting up the IRA. But most kept the requirements fairly low t o attract small savers. The
variable rate deposit had a minimum denomination
of $100 in most cases. Small banks generally kept
theirs lower, at $50. The fixed rate 18-month
IRAs also had a $100 minimum at large institutions,
but the smaller instituions required a higher
m i n i m u m of $500. The 21/2 year fixed rate IRAs
generally held to a minimum of $500 across all
institutions. One bank required a $5000 minimum
on the 21/2 year IRA in early January, but quickly
dropped it to $1,000 as potential customers were
discouraged by the higher minimum (Table 4).
8
30 mo. constant maturity
• U.S. Treasury Note Rate
(week ended Jan. 1, 1982)
—
I
I Small Commercial Banks
•
Small Savings & Loans
I
I Large Commercial Banks
H
Large Savings & Loans
The large savings and loans were the only
group t o heavily engage in luring IRA customers
with premiums. Six out of sixteen associations
offered something of value, ranging from S&H
Green Stamps t o a free checking account.
Insurance companies and brokers were actively
seeking out employers w h o were considering a
payroll-deduction IRA plan for their workers. But
this is a new area for bank marketing strategists.
The large banks in our survey were the most
heavily involved in establishing payroll-deduction
plans. Eighty-eight percent of the large banks and
64 percent of small banks had either established
a plan for employers or planned to announce
one soon. Fifty percent of large S&Ls were doing
the same, while only 12.5 percent of small S&Ls
had shown interest. The most c o m m o n arrangement for the banks and S&Ls was to offer one or a
choice of their already established plans w i t h a
smaller m i n i m u m denomination.and minimum
deposit per person.
Credit Unions
Of the six large credit unions surveyed, five
were offering some sort of IRA plan: one offered
a variable rate plan only, t w o offered a fixed rate
plan only, and t w o offered both a fixed and
variable rate plan. The one large credit union not
offering an IRA plan stated that it was in the
process of establishing such a plan.
Of the plans offered, there were six fixed rate
plans. The average (mean) rate of return on these
MAY 1982, E C O N O M I C REVIEW
Table 4. Minimum Denomination
18-Month IRAs
Variable Rate
Small
Large
Small
Large
Commercial Banks
Commercial Banks
S&Ls
S&Ls
Fixed Rate
Low
Median
High
Low
Median
High
Low
Median
2000
250
500
500
0
0
25
10
50
100
100
100
1000
1000
1000
250
250
0
50
0
500
100
500
100
1000
1000
1000
500
100
100
100
500
500
500
500
Insurance Companies
The survey indicated that depository institutions
are going to get stiff competition from national
insurance and securities firms, at least. All of
these national firms surveyed offered IRAs. Insurance companies surveyed included 9 national
firms and 12 regional firms. Well before the
Economic Recovery Act of 1981, the large insurance companies had inherent in their system
established retirement plans and, as January 1,
1982 rolled around, already had the fundamental
structure t o set up a qualified IRA program. Of
the smaller insurance companies contacted, less
than half reported that they had an IRA program
in effect. Those that offered a program, had one
similar, if not identical, to the national firms. The
basic IRA program described by most companies,
an annuity type plan, differed very little from the
standard annuity plans that the companies have
been offering for a number of years.
Fixed Rate
High
was 11.95 percent (the median-13.02 percent).
These plans required an average minimum denomination of $506.66 (the median—$262.50). Three
variable rate plans were offered, with the average
rate of return being 13.83 percent (median—
14.03 percent) and the average m i n i m u m denomination being $500 (median—$500).
Of the six small credit unions called, only one
offered any IRA programs, three stated they
would offer in the near future and two had no
immediate plans for an IRA program. The one
that did offer a program offered three plans, all at
a fixed rate of interest. The rates of interest were
9.30, 10.38 and 11.99 percent with m i n i m u m
denominations of $0, $500 and $2000, respectively.
FEDERAL RESERVE BANK O F A T L A N T A
3 0 - M o n t h IRAs
5000
Two basic variations of the annuity plan were
described by the insurance companies, the flexible load annuity and the no-load annuity. As far
as the structure of the annuity was concerned,
both options were similar: the annuity, or annuitization, was defined t o be an insurance contract
that required payments over a period of time. As
the contract reaches maturity, the owner of the
annuity has the choice of how he wants t o
withdraw the money, either in a lump sum
(which would be subject to severe taxation) or in
any installment plan that he and the insurance
company agree upon.
The two options seemed to differ in only t w o
areas, rates of return and fees (or penalties). The
flexible load annuity t e n d e d ' t o offer a slightly
higher rate of return on the principle, but fees
and possible penalties were attached to the front
end of the payments. For example, one firm
offered a flexible load annuity in which there was
an annual fee of $25 throughout the life of the
annuity plus a charge of 8 per cent of each
payment into the annuity for the first four years
of the plan; there were no explicit penalties for
withdrawing from the annuity prematurely (other
than those prescribed by law). The no-load
annuity offered a slightly lower rate of return
than the flexible load annuity, but there were no
service charges or administrative fees. However,
there was a penalty for withdrawing from the
plan prematurely; the penalty was a gradually
downgrading percentage that faded out over a
period of time. For example, one firm offered a
no-load plan with no administrative costs t o pay,
but there were penalties for withdrawing: 10
percent of the principal for withdrawing in the
first year, 9 percent for withdrawing in the
second year, 8 percent in the third year, and so
9
"The survey indicated that depository institutions are going to get
stiff competition from national insurance and securities firms."
forth until there was no penalty for withdrawing
in the eleventh year.
It should be noted that a number of the
companies fell into a category somewhere in
between the t w o mentioned above, where there
was a slight administrative fee, but the downgraded
penalty system was not quite as lengthy (five
years downgraded instead of ten, for example).
Some firms required an initial establishment fee,
then followed the basic structure of the no-load
plan. Other firms claimed t o fall into one plan or
the other, but described as part of their plan
characteristics of both.
Smaller insurance companies were not so
quick t o get into the IRA business. Only 5 of 12 of
the regional firms we contacted offered IRAs;
each had one annuity plan. Three were flexible
load plans; t w o were no-load plans.
The rates that the large insurance companies
were offering on the annuities fell somewhere
between 13 and 15 percent, with the flexible
loads bringing in perhaps .5 to 1 percent higher
than the no-loads, on the average. The regional
companies tended to offer somewhere between
11 and 12 percent. The rates quoted were, for
the most part, variable rates, usually changing
once a year. Some firms stated that they were
required by state law (Florida law) to hold the
rate fixed for at least 6 months. Every firm
guaranteed a base rate of at least 3 to 4 percent
throughout the life of the annuity.
Most companies described a "disability rider"
that w o u l d be attached to each contract. Quoted
as being the "selling factor" by one firm, the
disability rider guarantees that, in case of disability
(and some firms included death), the average
payment of the annuity holder would be continued
by the insurance company until the holder, or his
benefactor, reaches the age of retirement.
Most of the insurance companies contacted
could handle payroll deduction IRAs, but only a
small number of those actually had a program in
action. Generally, the insurance company would
10
use the same program available t o any individual
for payroll deduction, although a couple of firms
stated that they would customize a plan for a
business. Under most plans, the employer would
be responsible for the bulk of the administrative
work such as collecting and sending the money,
as well as sending a breakdown sheet of individual
contributions t o the insurance company. The
insurance company would charge a flat fee for
maintenance of the annuities to the employer;
the employer could then decide whether or not
to pass on the cost t o the employee. Some firms
suggested that it would be beneficial, in terms of
employee relations, for the company to absorb
the cost itself.
Securities Firms
W e contacted eight national securities firms in
the survey and each one was ready to compete
for the funds that were expected to come to
market in January, 1982. From the eight firms
came three distinct types of programs for investing funds with respect to the new I RA regulations.
These programs were either a self-directed investment plan, a plan that invests the customer's
money in various types of mutual funds, or in a
plan that places funds in a money market fund.
Most firms, if they offered more than one of
these plans, provided the option of moving
funds freely between them, dividing funds between them or simply concentratingtheir money
on one.
Of the eight firms, six offered a self-directed
investment plan. The customer can direct his
funds into any type investment that the brokerage
house deals in and that is not prohibited by law.
Most of the establishment and maintenance fees
were fairly uniform throughout the six firms, with
establishment fees falling between $20 and $25
and maintenance fees falling between $20 and
$35 per year. Initial deposits t o the account
varied greatly, however, with three firms requiring
no minimum, one requiring only $100, and the
M A Y 1982, E C O N O M I C
REVIEW
"The large potential market for IRAs attracted most of the large financial
institutions in the region and a substantial proportion of the small ones."
other two requiring $1,500 and $2,000, respectively; none of the six set a minimum additional
deposit. W h e n it comes time to move funds from
one stock t o another, t w o firms require no
transaction fee, while the other four levy some
type of commission on the sum moved.
Five of the firms also offered custodial type
accounts. One of these offered t w o accounts
which had different minimum deposits and service charges. Establishment fees varied from a
maximum of $25 to no fee at all. Maintenance
fees varied as much, ranging from $2.50 per year
to $30 plus 1.3 percent peryear. M i n i m u m initial
deposits ranged the entire spectrum, from a
maximum of $2,000 to no set amount at all. Only
one firm required a set additional minimum
d e p o s i t , and that was set at $10. Two firms do
not levy any sort of explicit termination fee when
the investment is pulled, but the other three
penalize the cancellation in some way.
The mutual funds offered the customer several
directions in which a customer could invest his
money. Key areas were short term investments,
capital investments, and bond and securities
investments. The short term investments are
those that concentrate on maximum current
income in one or several money market instruments. The capital investments concentrate in
common stocks of companies seeking long-term
capital growth and appreciation; current income
in these is of secondary importance. Bond and
securities investments seek maximum current
income by concentrating on government and
corporate bonds and securities. These are three
very general groups; individual firms break down
and consolidate these as they deem marketable.
Most firms allow freedom of movement between
these groups as the customer desires.
Four of the firms offered their own money market
funds. These varied with the individual firm, with
only one charging an establishment fee ($5) and
the maintenance fee for all ranging around the
$2 mark. Two firms required a minimum deposit
of $250 and $300, respectively, to initiate the
FEDERAL RESERVE BANK O F A T L A N T A
account, while the other t w o left it open. Additional deposit requirements ranged from an
open amount up to $ 100. The money market funds
was the only group that guaranteed any sort of
return, and this was a variable rate, with the rates
ho ring around the 12 to 13 percent mark in
early January.
Of the eight firms, six replied that they would
participate in a payroll deduction IRA program if
given the chance. Five said they would use the
same plans already set up within their organizations, probably making available only the mutual
funds program. O n e firm, however, said that they
would work with the company to set up a
program suitable for all involved.
The small securities dealers were a special
group in that each of those surveyed tended to
be highly specialized. Because of the competitive
market they were in, as well as factors relating to
limitations of size, these local or regional brokers
dealt mainly in one type of investment. Such
investments included agricultural commodities,
local utilities, etc. It was very difficult, quantitatively
or qualitatively, to analyze any endeavors that
they were undertaking in the newly opened
market for IRA customers. Nine of the 12 smaller
firms were offering I RAs but, upon further questioning, we discovered that each plan offered
was not unique to the individual firm. Generally
speaking, these firms acted as an intermediary
between their customers and larger national
brokerage houses, or nationally marketed mutual
funds. They themselves were not responsible for
the management of the IRA funds. They simply
advised customers on an array of what was being
offered and then received a fee from the company actually handling the IRA funds.
A Summary of Survey Results
Our survey indicated that the large potential
market for IRAs attracted most of the large
financial institutions in the region and a substantial
11
proportion of the small ones. Generally, the
larger institutions offered market rates for the
IRA funds while the smaller ones offered somewhat lower rates. Rates paid, particularly by
larger institutions competing in metropolitan
areas, were competitive with similar rates being
offered in the market. There seemed to be little
or no discount for the tax exempt status of the
IRA similar t o the discount usually seen in the
tax-exempt securities markets. This finding may
be explained by the recent decline in the spread
between yields on tax-exempt securities and
Treasury securities. It may also result from issuing
institutions' desire to attract IRA customers w h o
establish a long-term relationship with the issuer
when they establish the IRA. Market rates should
offer savers a considerable incentive to use I RAs.
Our study indicates that savings and loan
associations paid higher interest rates than banks. In
large institutions the median differential between
thrifts and banks on 18-month flexible rate accounts was.19 percent—close t o the.25 percent
differential commonly found in deposit rate
regulation. However, on other accounts the differential was considerly higher.
W e found a large variation in rates within each
institutional type. Though the median rate was
an approximation of market rates, rates within
institutional types varied by as much as 3.67
percentage points between high and low rates
on 18 month fixed rate accounts at large commercial banks and 4.74 percentage points on 18
month variable rate accounts at large S&Ls. One
would expect such price variations to diminish
over time, particularly since we have found
region-wide offerings of I RAs at uniform rates by
competing insurance companies and securities
12
dealers. The early variation may well be a result
of inexperience in pricing of consumer accounts
by depository institutions. Rates offered by large
insurance companies were generally similar to
those on fixed maturity I RAs offered by banks
and savings and loan associations. Half of the
large insurance companies' plans and all but one
of the large securities dealers' plans carried
annual maintenance charges. Only a small proportion of the plans offered by banks and savings
and loans carried maintenance fees. The security
dealers' plans, on the other hand, generally
offered a choice among investment vehicles at
one institution.
Our survey indicates that, when rates are not
limited, depository institutions have offered an
approximation of market interest rates on time
deposits. Nondeposit institutions competing for
the same funds have also been close t o market
rates. Each institution structured its plan or plans
somewhat differently, and each type of institution
used its own powers t o differentiate its offering.
As interest rate ceilings are removed over the
next V h years, depository institutions will be
faced with more and more situations like this
one—unregulated interest rates and the opportunity to go head-to-head with previously unregulated competitors. Their behavior in the IRA
situations indicates that these newly deregulated
institutions will be strongly influenced by their
market.
—B. Frank King,
Delores Steinhauser,
Jody Fletcher,
and Michael Taylor
MAY 1982, E C O N O M I C REVIEW
Challenges for
Retail Banking
in the 80s
Deregulation may be a difficult process for some banks, but continuation
of the regulatory status quo might be even more difficult Bankers
can learn from trucking and airline deregulation that creativity and
ingenuity are the keys to survival.
Twenty years ago, the financial services industry
comprised several sectors, all neatly packaged
and all concentrating on their own specialized
functions.
Commercial banks dominated the commercial
and retail market in the traditional checking,
saving, and lending functions. Savings and loans
played the dominant role in making mortgages,
offering a premium for savings deposits. Insurance
companies were limited t o providing insurance
and taking in " t i m e deposits" in the form of
annuities. Retailers were the major providers of
credit cards, while securities dealers limited
themselves t o investments in stocks and bonds.
Today, by crossing over into non-traditional
financial fields, those non-bank industries have
come to offer a wide array of financial services;
some have become real financial supermarkets.
For example, Sears Roebuck was once known
exclusively as a department store retailer. By
acquiring various financial firms, it now has
diversified to offer checking, saving, time deposits,
installment loans, business loans, mortgage loans,
credit cards, insurance, stocks, bonds, mutual
funds and real estate. Even more threatening to
commercial banks is that many of Sears' operations
can handle business without regard for state
boundaries. Recently Sears' chairman vowed " t o
have a bank at every outlet."
Chart 1 shows how those institutions involved
in financial services have evolved over time.
Most institutions were very limited in their offerings 20 years ago. But today, a few firms in each
financial service sector offer a wide array of
"products." The depository institutions, i.e., banks,
mutual savings banks and S&Ls, are obviously
limited by regulations in what they can offer.
Creative managers, however, are dabbling in
these areas. For example, banks have teamed up
with money market funds to provide cash management for consumers in the form of deposit
sweeps.
The Lure of Banking
The profitability and stability of commercial
banks is the lure attracting other financial service
companies into the banking business. Commercial
banks' after-tax earnings rose an average 19
percent a year during each of the last five years
(Chart 2). And return on assets (ROA) is much
more stable than those of other financial service
competitors. The ROA of New York Stock Exchange member firms ranged from a negative
return in the mid-1970s recession t o V h percent
as the recovery from that recession began;
commercial banks' ROA hovered around 1 percent
for the entire decade. The S&Ls have been
burned by the high levels of interest they must
pay on deposits while carrying low-yielding mortgages in their portfolios. Their return on assets
dropped near zero in 1980, and many institutions
lost money in 1981. Life insurance companies
have seen their potential for earnings erode as
customers have terminated policies to invest in
higher yielding alternatives. The percentage of
policies voluntarily terminated rose from 5.8
percent t o 8.1 percent in the last 10 years.
13
FEDERAL RESERVE B A N K O F A T L A N T A
Chart 1 . Financial Services
/
•
1982
Checking
Saving
Time Deposits
Installment Loans
Business Loans
Mortgage Loans
Credit Cards
Insurance
Stocks, Bonds
Mutual Funds
Real Estate
Interstate Facilities
VQ
/ /
s?
<%
• •
• • •
• • •
• •
• •
• •
•
•
•
•
•
•
•
•
•
/
Chart 2. Commercial Bank Earnings
£
oe,
•
•
•
•
•
•
• •
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
V
• •
• •
•
•
16
•
•
•
•
Source: Federal Reserve Bank of Atlanta
12
—
"
N V
Average Annual
Percent Change
8
/
/
~
^
A
4
n
'61
Such problems have p r o m p t e d the various
financial service providers t o look for ways to raid
traditional banking markets by introducing new
services that meet customers' needs. Money
market funds have been the most visible and
aggressive suppliers of new consumer services.
Only four years ago, the funds were practically
non-existent; they could claim a mere one percent
of all interest-bearing deposits when compared
with commercial banks and thrift institutions.
The funds saw an opportunity in the retail market
as interest rates remained at high levels and
individuals increasingly put their money in Treasury securities. During the 1970s, individuals'
holdings of Treasury securities increased from 13
percent to 20 percent of all holdings. The money
market funds provided an easy access for all
investors to the higher yields of government
securities, large CDs, and other money market
instruments. Today, money market funds hold
10 percent of deposits. They have evolved basically at the expense of the thrifts, whose share of
deposits dropped from 50 percent to 41 p e r c e n t while commercial banks' share held steady at 49
percent (Chart 3).
Money market funds are only one example of
the success of non-traditional banking firms now
competing for banking business. Today, insurance
companies, retailers, and securities dealers all
are offering a full product line of financial services;
while commercial banks are in the same business
they were 20 years ago. Even that market is
slipping away to other suppliers of funds, competitors with a freedom to innovate.
After Tax Earnings (Bil. $)
i
l
'65
i
i
'70
'75
_J
'80
Competition that was nonexistent three years
ago is around every corner. An unlikely competitor
is Gulf and Western, a $5.9 billion conglomerate
best known for movies such as "Raiders of the Lost
Ark," "Reds," and "Ragtime." It acquired Fidelity
National Bank, a commercial bank in California,
after that bank had sold off its commercial loan
portfolio to meet legal requirements. That portfolio
sale moved Fidelity National beyond the legal
definition of a bank. Gulf and Western owns a
commercial loan company, several factoring companies and an insurance company. In essence,
the conglomerate looks like a bank, as the basic
deposittakingand lendingfunctionsare done by
separate subsidiaries of the company. Household
International, formerly known as Household Finance Company—H FC—used the same strategy
in purchasing Valley National Bank of California
and divesting its commercial loan portfolio. Even
RCA, a $7.9 billion entertainment giant, has
taken the plunge into financial- services by acquiring C.l.T. financial corporation.
The direct onslaught from such outsiders as
Merrill Lynch and Sears has brought the issue of
the financial services evolution to a head. Compare
the funds Merrill Lynch has under management
in the Ready Asset Trust and Cash Management
Account to commercial bank deposits. Merrill
Lynch ranks as the 5th largest bank in the United
States, with $41 billion under management.
Sears places 20th in financial assets, not including
its insurance business or its recent acquisition of
the real estate firm Coldwell Banker or the Dean
Witter Reynolds securities firm.
14
M A Y 1982, E C O N O M I C REVIEW
Chart 3 .
Interest-Bearing
Balances
Commercial
Banks
M o n e y Market
Funds
Thrifts
The Lessons of Deregulation
Bankers have f o u n d it difficult t o deal w i t h
the flood of new competitors because banking
regulations restrict the services that depository
institutions can offer and the prices they can
charge. It may well be that deregulation of the
industry is necessary if commercial banks are to
keep up with their competitors. Yet deregulation
will not be without pitfalls. The recent experience
of the trucking and airline industries operating in
a less restrictive regulatory environment has
been mixed. Some companies have fared better
under deregulation—but some have fared much
worse.
Generally, the firms that have succeeded under
deregulation are those that have been able to
seek out the market, trim operations, and offer
the right products. And those that could not
adapt have not done so well.
For example, t w o trucking giants—Roadway
and Yellow Freight—have been affected in opposite ways by deregulation. The deregulation of
truckers allowed small independent owner-operators to step into the market and offer full
truckload service at a lower price than the large
national carriers can afford to charge. The independents, however, cannot effectively compete
in the less-than-truckload (LTL) business since
they have no access to a network of terminals for
distribution. The larger carriers have been forced
to move into the LTL market as the independents
ran away w i t h their truckload business. Roadway
has always concentrated on the LTL market and
FEDERAL RESERVE B A N K O F A T L A N T A
was prepared for deregulation. Yellow Freight,
on the other hand, was hit hard by the loss of its
truckload business. Discounted prices have increased the ailing firm's share of the LTL market,
but not without a drastic reduction in earnings.
Roadway's revenues of $1.1 billion in 1981
produced a profit margin of 6.4 percent, which is
higher than in the previous t w o years. Yellow
Freight's revenues of $936 million resulted in a
margin of only 1.8 percent. The firm's return on
net worth, at 8 percent, was less than half of
Roadway's 18 percent.
In the airline industry, deregulation has placed
a premium on being a low-cost deliverer of a
service. Scheduled air transportation has basically
become a commodity as the traditional differences
between the full-service and no-frills approaches
are meaningless to the cost-conscious traveling
public. W h e n deregulation went into effect several years ago, the major airlines abandoned
many of their short-haul, money losing routes.
That service became a mainstay for many of the
regionals. USAir (formerly Allegheny), once a
regional airline in the Northeast, has taken its nofrills, low cost reputation and expanded into a
widespread national carrier. Expansion has been
carefully planned and controlled. The airline also
benefits from the commuter network it has
established which feeds passengers from lowdensity stops into the USAir system. The commuter lines have access t o USAir's reservation
service, through baggage-checking and discount
fares. The airline found a profitable niche in the
industry which was practically being ignored and
built a strong business on it.
On the other hand, Braniff set out t o meet
deregulation and competition head on, but its
strategy backfired. The airline stretched its route
system by 50 percent within 2 months after the
deregulation act was passed. While the firm had
a strong financial and operational foundation,
the pace of expansion was too fast in the midst of
a weakening economy and rising fuel costs. After
a massive failure of the expansion plan, Braniff is
cutting back and taking its losses. The airline took
in over $1 billion in revenues in 1981, but posted
an operating loss for the year. USAir, on the other
hand, took in over $1.1 billion and earned 4.6
percent on those revenues.
In both trucking and airline deregulation, the
firms that anticipated the profitable markets and
countered price competition with new operations
strategies excelled. Those that merely moved
into the new pricing structure without adjusting
15
Chart 4 .
C o m m e r c i a l Bank
Deposits
^ ^
Time & Savings
Demand
their product or their operations had difficulty
maintaining old profit margins.
Likewise, commercial banks seem likely to
suffer some grief under deregulation in the next
few years as interest margins narrow and competitors close in. In 1970, time and savings
deposits accounted for 48 percent of commercial bank deposits, while non-interest bearing
demand deposits made up a larger share—52
percent. Today, bankers must pay interest on 72
percent of their deposits, and these interest
bearing time and savings deposits are shifting
from lower paying passbook accounts into higher
yielding certificates (Chart 4).
Preparing for Rapid Change
While deregulation may be a painful process
for some banks which are not prepared for the
change, the regulatory status quo would be even
more painful for all banks. If deregulation does
not occur within legislative guidelines, it will
continue to occur through the market This
market deregulation of financial services, which
has been occurring during the past several years,
threatens the future survival of even the most
profitable banks. Unless banks are allowed to
compete for deposits at market rates of interest,
they will continue to have difficulty in attracting
funds. Once the new pricing demands are understood, they can adjust their operations t o profitably accommodate higher interest expense.
To keep tabs on the banking industry's health
in our region, the Federal Reserve Bankof Atlanta
developed a Southeast M o d e l Bank by averaging
the financial statements of seven of the region's
largest holding companies. Over the past three
years, the Southeast Model Bank's deposits shifted
from low-paying passbook accounts t o money
market certificates beginning in 1978 and from
checking accounts into N O W accounts in 1981.
Cost of funds rose sharply, narrowing the interest
spread from 3.09 percent in 1979 to 2.74 percent in
1981 (Chart 5).
As the spread narrowed, non-interest expense
grew rapidly. The investment in brick and mortar
branching in the late 1970s was a high price to
pay; net non-interest expense rose from 2.48
percent of assets to 2.68 percent. The increase in
net expense was less in 1981 than in previous
years as new fees imposed on services began to
offset the cost of facilities expansion (Chart 6).
Rising noninterest expense may well be a
symptom of long-term problems for banks. Other
financial service providers are much less committed to bricks and mortar than banks. The
money market funds, for example, are one office
operations. New communications technologies
and explicit pricing of services (rather than emphasis on personal contact) also threaten to
make branches obsolete.
At some point, commercial bankers must realize that expansion in bricks and mortar is not the
wave of the future. The industry's market areas
are already saturated with financial service locations. If we include commercial banks, mutual
savings banks, S&Ls, credit unions, and securities
dealers, we come up with 107,000 financial
offices throughout the U.S. But are these all of
the participants on the financial services playing
field?
In 1960, only commercial banks, mutual savings
banks, S&Ls and credit unions offered traditional
banking services. Theiroffices numbered 55,000
and any one location servecTan average of 3,300
people. Yet today, the outlets don't end with
those 107,000 offices mentioned earlier. For a
more accurate count, w e must add to that
25,000 automatic teller machines as well as
14,000 life insurance offices, which are competing for depositors' funds particularly in retirement
accounts. That gives us 151,000 outlets, or one
location for every 1,500 people.
This market saturation makes it difficult for
banks to operate in the traditional sense. While
battling the new competition, banks will also
face the challenges of new technology, more
sophisticated customer needs and desires, and,
16
M A Y 1982, E C O N O M I C REVIEW
of course, price deregulation. Banks are likely t o
respond in a variety of ways. W e have analyzed
four possible responses to these banking challenges—(1) Electronic banking (2) Boutique or
Specialty banking (3) Investment orientation
and (4) Financial supermarket—of which banks
may choose one or a combination.
Electronic Banking
Banks which see the declining profitability in
a d d i n g t o t h e i r b r i c k a n d m o r t a r b r a n c h networks
have already begun large campaigns t o install
automatic teller machines. Our earlier definition
of the 151,000 financial service locations included 25,000 ATMs.
The trend today is toward in-home banking. It
is not clear yet what method of delivery for inhome services will ultimately be accepted. Some
banks are offering services through two-way
cable television hookups.
There are already 55,000 interactive cable TV
hookups in the nation with the potential to
provide banking services. With the understanding
that cable television w o u l d provide only limited
access to'financial services, adding cable TV t o
the list of financial service locations brings the
number to 206,000—or one limited access location for only about 1,100 people.
The second means of delivering in-home banking services is through telephone access. Two
mill ion personal computers are already in home
use, and the number is increasing at a rate of
FEDERAL RESERVE BANK O F A T L A N T A
more than 500,000 a year. It is both simple and
inexpensive for a personal computer to connect
by m o d e m with a host computer through local
telephone numbers. If w e put our imaginations
t o work, w e can picture the industry in the year
2000, when most financial services will be electronic and accessible through a home computer
via telephone or some other means of telephone
transfer system. Then w e will have one limited
access financial service location—a telephone—
for every 11/2 people. It may seem futuristic, but it
is easy t o see where retail banking could be
heading. (Chart 7).
The deposit-taking and lending functions of an
electronics-oriented retail bank would remain
intact, but they would be done as a mass production
effort The high degree of personal contact through
the branch network would become less important
as customers utilize the "self-service" functions
of the bank.
H o w quickly will consumers accept electronic
banking? As with most trends, demographics will
play a large role in determining the speed and
ease of acceptance. Clearly, consumer surveys
have demonstrated that the acceptance of ATMs
is much higher among the younger population
than the older age groups. As today's youthful
population grows older, the demand for innovation
in financial services seems certain t o grow. Tomorrow's financial consumer will represent a
generation familiar with electronics, a consumer
w h o will demand both greater convenience and
efficient flows of money.
Our nation's aging population will create addi17
Chart 7
People Served Per Location
•»3,300
'60s
'90s
'80s
2000
N u m b e r of
Financial Service Outlets
1 5 1
55
Thous.
an investment company. Instead of accepting
deposits from consumers and lending t o an array
of customers, the bank could buy deposits and
package brokered assets. This strategy would be
similar to the route some savings and loan
associations have taken in restructuring their
operations to become more like mortgage bankers.
Essentially, all categories of the traditional
bank balance sheet could be replaced with
pooled assets and liabilities without involving
the very costly transaction of processing and
maintaining a small loan or deposit.
206
Thous.
Thous.
tional opportunities for retail bankers in this
brave new world of the future. Consider that the
average income of a full-time worker peaks
between age 45 and 54. Over the next 10 to 20
years, the bulk of our maturing population will be
moving up on the income curve, advancing into
what we might call the "sweet" part of the
earning years. They will be not only more prosperous, but they will be more sophisticated users of
financial services. They will have a better understanding of electronic technology. And they will
demand financial services that save time.
Boutique or Specialty Banking
As "self-service" banking becomes more prevalent, there will still be the need to personalize
services for many customers. Some banks will
choose to specialize in personalized consumer
services and others in commercial services. "Boutique" banks are likely to cater t o the higherincome retail customer and develop individual
packages which meet his needs.
While boutique banking caters to the retail
customer, specialty banking is aimed at serving a
defined market of business clients. There will
always be a demand for loan origination which
can be handled very ably by commercial banks.
Investment Orientation
Some banks may choose to transform their
institutional structure by performing more like
Traditional
Commercial Bank
Commercial Bank
Acting As
Investment Function
Assets
Cash
Securities
Commercial Loans
Consumer Loans
Real Estate Loans
Premises & Equipment
Cash
Securities
Commercial Loan Participations
Credit Cards, Indirect Loans
Pooled Mortgages-GNMA, FNMA
Premises & Equipment
Liabilities & Equity
Demand Deposits
NOW Accounts
Passbook Savings
Purchased Time Deposits
Money Market Certificates
(CDs greater than $100,000)
CDs less than $100,000
CDs greater than $100,000
Debt
Debt
Equity
Equity
By substituting purchased deposits and pooled
lending for the retail function, the commercial
bank can operate more efficiently. One reason
Merrill Lynch has been able to successfully
diversify its financial operation is its low cost of
doing business. Merrill Lynch is able t o manage
more funds with fewer employees than can a
typical commercial bank.
Merrill Lynch employees involved with money
market funds sales and operational and administrative support are responsible for an average
$4.14 million each. The commercial bank, as
reflected in our Southeast M o d e l Bank, is far
more labor intensive; the M o d e l Bank's deposits
total a comparatively modest $500,000 plus per
employee.
Financial Supermarket
Some banks will choose to segment the market
by concentrating entirely on in-home banking,
boutique or specialty banking, or investment
banking. Many institutions will find it profitable to
18
MAY 1982, E C O N O M I C REVIEW
merge with others and form large and diverse
"financial supermarkets."
This term, "financial supermarket," has been
tossed around loosely in the past year. The idea
is one-stop shopping for financial services.
W e can get some idea of the magnitude of
change when an industry consolidates around
the "supermarket" idea by looking at the evolution of the retail food store industry. Retail food
distribution is similar to retail banking in several
ways. Both services have traditionally been
labor intensive. Operations of both are highly
adaptable to computer technology. Both are
sensitive t o location and availability. Both offer
generically homogeneous products. Indeed,
the t w o industries differ in certain respects.
Food must be physically delivered, requiring
customers to go t o the food store. Banking
services can be delivered to the home electronically, lessening the need for physical location considerations. Food store products are
more numerous and more diverse than banking
services. However, the likenesses of the t w o
industries are strong enough to make some
comparisons of the evolution of food retailing,
an industry under little regulatory restraint t o the
future of banking.
In 1929, consumers bought their food products in a variety of stores. Grocery stores which
did not carry meats accounted for 26 percent
of the market, and grocery stores with meats
had 29 percent. General stores which also
carried groceries made up 19 percent of sales.
Consumers made stops at various other stores,
particularly meat markets, dairy stores, candy
stores, and bakeries.
The advent of the supermarket in 1930
started a consolidation of services which combined self-service, mass merchandising and
one-stop shopping. Today 94 percent of food
sales are at grocery stores and 74 percent of
those grocery store sales take place in supermarkets. The store design has evolved o v e r t i m e
in response to consumer bargain shopping,
and changing lifestyles, w i t h varying emphasis
on nutrition, fast foods, natural foods and
irregular shopping hours.
As financial services are deregulated, banks
will begin to offer customer convenience particularly through electronic banking and consolidation of services. The food retail industry
consolidated 586,000 stores in 1929 into 252,000
stores in 1977. The banking industry will ultiFEDERAL RESERVE B A N K O F A T L A N T A
mately reduce more than 95,000 depository
institutions to some smaller number of consolidated financial supermarkets.
Summary
How d o bankers survive in an era of deregulation, new competition and more demanding
consumers? The key seems to be in creativity and
ingenuity. Both have already been tested over
the past few years, but the future will pose
additional challenges.
Creativity and ingenuity are indeed generalities, but they pay off when translated into
specifics. For instance, they may translate into
trying t o improve productivity by rewarding employees on their performance—rather than relying on the old across-the-board pay hike for all
employees. W h y not reward exceptional performance with exceptional pay? Connecticut
Bank and Trust, for example, has an incentive
program for employees w h o attract new deposit
customers. In an increasingly competitive market
environment, exceptional performance could
make the difference between the winning and
losing operations.
Bankers should be creative in their pursuit of
new technologies, financial innovations, and
alliances with nonregulated businesses. They
should pay greater attention than ever before
to what customers want. That need is underscored by the fact that so many aggressive new
competitors are eyeing the financial services
markets. The Merrill Lynches have challenged
the industry to battle for those customers
banks traditionally could rely on as their own.
The competitive field where banks must battle
may not always be totally level. Deregulation will
have its pitfalls, but the process is necessary t o
allow banks to compete. W i t h o u t planned and
controlled deregulation by the regulators, the
market will continue t o deregulate. Banks are
clearly disadvantaged by market deregulation.
Banks face multiple challenges in the 1980s.
By relying on a wealth of cumulative experience
in offering financial services, and by applying
creative and innovative management strategies,
banks should be able to meet the challenges of
new technology, new customer demands and
deregulation.
Donald L. Koch
and Delores W. Steinhauser
19
Supply-Side Economics
and the Vanishing Tax Cut
Although federal tax rates are being reduced between 1981 and 1983, the
reduction is likely to be offset by inflation and increased Social Security, state and
local taxes. Any reasonable test of supply-side theory, the author contends,
requires a long-term commitment to lower taxes.
Supply-side economics hasn't worked for
the Reagan Administration for one simple reason:
it has never been tried.* Contrary to all the
congressional publicity raised over the Reagan
tax-cut package, personal income tax rates will
continue their upward trek.
Granted, federal tax rates for given income
tax brackets are being cut in successive annual
installments of 5, 10 and 10 percent between
1981 and 1983, a net rate cut of 23 percent, not
25 percent (because the annual cuts will be
made against a progressively lower tax rate
structure). However, inflation will continue t o
drive people into higher and higher tax brackets
at both the federal and state levels. Social
Security taxes also will continue their upward
climb, and w e can anticipate that, by 1984,
state and local governments will enact additional
tax increases to offset expected losses in revenue
from the federal government.
•This article is an expanded version of a c o l u m n originally published by the
author, "An Introduction to Personal Tax 'Cuts,'" Wall Street J o u r n a l
(January 8, 1982), ed. page.
The Meaning of the Tax Cut
What will the federal tax rate cut mean to
you? It all depends. But Table 1 tells much of
the tax story for three hypothetical families in
South Carolina: one w i t h a " l o w i n c o m e "
($15,000), one with a "median income" ($24,000),
and one with a "high income" ($45,000) in
1980. All three families have one income earner,
claim four exemptions, and take standard
deductions in computing their federal and
South Carolina income taxes.
The table is based on assumed annual inflation rates of 10, 9, 8, and 7 percent for 1981
through 1984. Before-tax income is assumed to
rise in line w i t h inflation. Such an assumption
spotlights the net effects of tax rate reductions
due to congressional action and "bracket creep"
due to inflation. If income were adjusted by
more or less than the rate of inflation, any
change in computed tax rates would, in a way,
be divided between the effects of bracket
creep and the effects of shifts in before-tax
purchasing power. Besides, the Reagan tax cut
is an outgrowth of supply-side economics, and
the efficacy of the supply-side concept depends
20
M A Y 1982, E C O N O M I C
REVIEW
T a b l e 1. Personal Income Taxes in 1 9 8 0 and 1 9 8 4 with the Reagan Tax Cuts
1980
C,ass m e
S1980
m 1980
¡¡¡22
T»,«
Taxes
SecuriW
Ta««
Taxes
1 9 8 4
Z2S o "T]**
Direct Purchasing
Taxes
Power
Incorni
Taxes
^
^
Tax
Rate*
F e d e r a l
Social
State
I n c o m e Security I n c o m e
Taxes Taxes Taxes
Total
Aftertax
Direct Purchasing
Taxes
Power
Average^
Tax
Rate
( 1 9 8 0 $s)
Low
i i1C5?, n
(! $
0 0n 0m)
$ 1 , 2 4 2
9 7 5
4 5 6
2 , 6 7 3
1 2 , 3 2 7
1 7 8 %
1
7 8 1
1
'
3 9 2
0 8 6
5
'
8 7 1
1 8 , 1 2 9
2 4
4 , 3 7 5
2
'
2 2 8
2 , 5 5 6
1 4
'
8 9 6
3 0 , 1 0 4
-
8 6 1
4
-°34
'
7 3 4
8
'
3 3 7
1 7
-
9 7 8
25.1%
'
7 7 1
2 1
'
5 7 4
2 9
-
4 2 0
34.6%
12,084
19.4%
Median
($24,000)
$ 3
2 2 5
1 , 5 6 0
$ 1 0 , 6 5 6
1 , 6 8 4
'
1
'
5 %
-
1
High
($45,000)
3 3
'
1 %
1 5 , 3 9 1
2 , 4 1 2
3
*The total of Social Security a n d Federal a n d S o u t h Carolina i n c o m e taxes divided by before-tax income.
critically on reductions in the tax rates at given
real income levels.
Further, Social Security taxes in the table are
based on scheduled increases in the rate of
taxation—from 6.5 percent in 1980 on a maximum income tax base of $27,000 t o 6.7
percent in 1984 on a maximum income tax
base of $36,000. South Carolina income taxes
are computed on the basis of 4 percent of the
first $10,000 in income and 7 percent thereafter.
The "Low Income" Family
After accounting for federal and South Carolina
income taxes and Social Security taxes, the low
income family paid 17.8 percent of its income in
taxes and retained $12,327 t o spend in 1980.
This family's federal tax burden alone was
$1,242. It also paid $975 in Social Security
taxes (not counting the employer's equal share,
which can also be construed as a tax on the
worker) and $456 in state taxes. Total tax bill:
$2,673, or, as noted, 17.8 percent of the family's
gross income.
After adjusting its before-tax income upward
in line with anticipated inflation (or by 38
percent, the compounded impact of the assumed
inflation rates) and accounting for the Reagan
tax rate cut, this low income family in 1984 will
pay a total of $4,034 in direct taxes. That's an
increase over 1980 of 51 percent: $1,781 in
federal income taxes, $861 in state income
taxes, and $1,392 in Social Security taxes.
FEDERAL RESERVE B A N K O F A T L A N T A
Those taxes will account for 19.4 percent of the
family's income, a 1.6 percentage point increase.
That means the family will have $243 (or
almost 2 percent) less in real (inflation adjusted)
after-tax spending power in 1984 than it had in
1980. In spite of the Reagan tax rate cut, the
family's average federal tax rate will rise from
8.3 percent t o 8.6 percent, all because of the
effects of inflation on taxable income.
The "Median Income" Family
The "median income" family, earning $24,000
in 1980, will see its total direct tax bill rise from
$5,871 in 1980 to $8,337 in 1984, an increase
of 42 percent. This family's average federal
income tax rate will fall slightly from 13.4 t o
13.2 (due to the fortuitous location of its
income in the 1980 and 1984 tax brackets). Yet
it will still see its overall average tax rate rise
from 24.5 t o 25.1 percent. This decline in
average federal tax rates is offset exactly by the
rise in the Social Security tax rate from 6.5 to
6.7 percent. The family's after-tax purchasing
power will fall in terms of 1980 dollars by $ 1 51,
almost 1 percent of its 1980 after-tax income.
The "High Income" Family
The "high income" family, receiving $45,000
in 1980, will find that its average tax rate
escalates from 33.0 percent in 1980 t o 34.6
percent in 1984. Its total taxes will rise from
21
Chart 1 . Average Tax Rate, 1 9 8 0
and Proposed 1984
%
40
-
Low
($15,000)
Medium
($24,000)
High
($45,000)
•The total of Social Security a n d Federal a n d South Carolina taxes
divided by before-tax income.
law; but they do not necessarily gain t o the
extent advertised by across-the-board rate
reductions. The rich will still have to pay progressively higher tax rates.
Still, the poor of today can benefit from
reductions in tax rates on the rich (or higher
income earners). Any category of poor people
is fluid, with many people either temporarily
impoverished by immediate family and employment circumstances or by choice. In some cases,
current income is deliberately being given up as
future income-earning skills are raised—as is
clearly the case with many graduate students.
Many poor people will remain trapped in lives of
poverty. But many will (or can) benefit substantially from across-the-board tax reductions.
Inflation and More Taxes
$14,896 t o $21,574, or by nearly 45 percent.
Federal income taxes alone will rise from $10,656,
or 23.7 percent of 1980's before-tax income, to
$15,391, or 24.7 percent of 1984's before-tax
income. The high income family's after-tax
purchasing power will fall during the period by
$684, or 2.2 percent. (Chart 1 summarizes
average tax rates for the three income groups).
Income Levels and Tax Cut Benefits
These figures should dispel commonly voiced
concern that the Reagan tax cut (to the extent a
cut is perceived) necessarily favors the "rich."
Tax pundits have reasoned that a 23 percent
cut in the rates of the " p o o r " in a 20 percent tax
bracket is less than a 23 percent cut in the rates
of the "rich" in a 50 percent bracket. True
enough; the raw cuts in tax rates for the " p o o r "
and the "rich" are 4.6 and 11.5 percentage
points, respectively. However, critics have failed
t o realize that inflation adds dollars which are
more devalued t o the higher dollar incomes of
the rich, which tends to drive them up through
the brackets and t o offset the larger average
rate reductions.
The "rich" may gain because of the regressiveness of the Social Security taxes, since a
smaller share of the rich's dollar income will be
covered by the maximum taxable income in
1984 than back in 1980. The wealthy may also
be in a better position to take advantage of taxexempt "All-Savers' Certificates" and Individual
Retirement Accounts, now written into the tax
Admittedly, our analysis may be the "worstcase scenario." What happens t o the actual tax
rates people pay depends critically upon inflation
rates, and the inflation rates employed above
are slightly higher than the inflation rates assumed
by the administration in its 1981 tax cut proposal.
Further, many families that itemize deductions
may find some, but not all, of their deductions
escalating with inflation. In these regards, the
inflation figures may overstate the actual tax
rate increase and real income decrease.
On the other hand, the inflation and income
assumptions are improvements on recent economic experience. The above calculations are
based on an average inflation rate of 8.5 percent,
whereas the average inflation rate for 1979 and
1980 was almost 11 percent. Stephen Meyer
and Robert Rossana, writing for the Federal
Reserve Bank of Philadelphia's Business Review,
found that using an average inflation rate of 8.4
percent for the 1981-1983 period (which approximates the Reagan administration's estimates), also led to tax rate increases.1
Unfortunately, we cannot be sure that inflation
may not get worse in the immediate future
despite its recent cooling. Nor can we be sure
that average tax rates may not rise by more than
indicated in the table. The spiraling inflation
rates of the 1960s and 1970s offer little comfort;
' S t e p h e n A. Meyer a n d Robert J. Rossana, " D i d the Tax Cut Really Cut
Taxes?" Business Review (Federal Reserve Bank of Philadelphia), Novemb e r / D e c e m b e r 1981, pp. 3-12.
22
M A Y 1982, E C O N O M I C REVIEW
T a b l e 2 . Taxes in 1 9 8 0 a n d 1 9 8 4
w i t h Future Tax C u t s R e s c i n d e d
Income Class
in 1980
Average
Tax Rate
1980*
Average
Tax Rate
1984
Low Income Family
($15,000)
17.8%
22.2%
Median Income Family
($24,000)
24.5%
29.7%
High Income Family
($45,000)
33.1%
40.0%
•Total of Social Security a n d federal a n d S o u t h Carolina income taxes
divided by before-tax income.
and although monetary policy may have been
generally "tight" over the last year with a
growth of 7.4 percent in M l , between December
2, 1981 and February 3, 1982 the money stock
increased at an annual rate of 17.6 percent. 2
Pressure will be brought to bear on interest
rates by this fiscal year's $100-billion federal
deficit and the shift of states from budget
surpluses t o deficits, which will add to pressure
for the Fed t o monetize the deficits.
President Reagan seems determined, at least
for now, t o hold the line on overt tax rate
increases even though the 1983 budget calls
for several measures that will raise tax collections. However, bipartisan coalitions are urging
the postponement and/or elimination of scheduled federal rate cuts, further hikes in Social
Security taxes, the elimination of additional
"loopholes," restrictions on some tax deductions,
and increases in a variety of excise taxes on
"luxury goods" and gasoline.
Table 2 paints a graphic picture of what would
happen t o average tax rates if the scheduled tax
rate cuts for 1982 were rescinded. The 1984
federal tax payments of the low income family
would be $586 greater than with the additional
cuts. The median income family would find it
must add $1,866 to its federal tax bill,-and the
high income family w o u l d have to fork over an
additional $3,368.
Overall, without the additional tax rate cuts,
the average tax rate of the low income family
would rise from 17.8 percent in 1980 to 22.2
' F e d e r a l Reserve Bank of St. Louis, U . S . Financial Data(February 10,1982),
FEDERAL RESERVE BANK O F A T L A N T A
percent in 1984. The median income family's
average tax rate would j u m p from 24.5 to 29.7
between 1980 and 1984, and the high income
family w o u l d see its average tax rate rise from
33.1 percent in 1980 t o 40.0 percent in 1984. Of
course, as a consequence, household purchasing
power would decrease while government purchasing power escalates.
Already, a number of state governments
have raised and can be expected to continue
raising their tax rates, partially to offset the loss
of federal revenues but partially to finance
their almost natural proclivity to expand. According to the Federation of Tax Administrators,
26 states in 1981 passed increases in their
gasoline taxes, five raised their sales tax rates,
and three raised their income taxes.3 Several
states raised some combination of sales, income,
tobacco, gasoline, and liquor taxes. Called by
any other name, a tax increase is still a tax
increase. Accordingly, there is reason for taxpayers t o doubt that between now and 1984
they will receive a tax break.
The Policy Dilemma: Economic Needs
and Political Realities
Supply-side economics is a long-term economic game plan based principally, as it must
be, on improved incentives for investment
through lower tax rates. It is a strategy to return
" p o w e r t o the people." It is not the quick-fix
policy that people have been led to believe it
is. Indeed, supply-side theory explicitly rejects
the proposition that government can "fine
tune" the economy. Time is needed t o turn
incentives into real plants and equipment and
improved human skills. However, to make the
needed investment, businesses and individuals
must be convinced that tax rates will actually
be cut—and will stay down for some time to
come.
Therein lies the "rub"—or, better, the Achilles'
heel—of "Reaganomics." There is, as yet, little
reason for taxpayers t o believe the immediate
future will be any different from the immediate
past. Many people view the recent tax rate
"cuts" as they have viewed the other so-called
tax cuts of the 1970s: as mid-course corrections
t o the anticipated upward movement of tax
3
As reported in "Regions" Wall Street Journal (January 19, 1982), p. 31.
23
rates. The "economic miracle" people are anticipating depends importantly on expectations
about the future course of tax rates. Many
people remain cautious about makingthe investment that must be at the foundation of any longterm growth, fearing that their earnings may go
up in the smoke of greater taxes.
James Buchanan and Dwight Lee have written
regarding the inconsistency between the needs
of political leaders, w h o necessarily have their
eyes on the near term and the next election,
and investors, w h o necessarily look to the longterm and the future after-tax return on their
current investment. 4 Politicians, w h o seek reelection and the funds to provide benefits to
constituencies, may be inclined to take advantage of people's inability t o shift out of taxable
income in the short-run. If so, they would tend
t o maximize short-run revenue, positioning
themselves on the peak of the short-run Laffer
curve. In the long-run that would spell a contraction of the nation's capital stock, income, and
government revenue below the maxirrhim that
could be achieved. That is to say, the short-run
proclivities of politicians may push taxpayers
to the upper side of the long-run Laffer curve.
The now familiar Laffer curve is represented
in Chart 2 by the orange line, our long-run
Laffer curve. That curve illustrates a basic proposition: over some range of tax rates, from zero
to R3 in the figure, the government can raise its
tax rates and collect more revenue. However,
beyond some rate, further increases are counterproductive: revenues go down. This is because
taxpayers learn how to escape through tax
avoidance and by taking their pleasures in nontaxable forms, like leisure.
In terms of Chart 2, Buchanan and Lee argue
that short-run pressures can push members of
Congress to the peak, identified by point A, of
the short-run Laffer curve (the gray curve),
which represents the only viable set of raterevenue combinations open to them. That
peak can be on the upper portion of the longrun Laffer curve, meaning that a rate cut could
bring a revenue increase after a period of
several years.
Once at A politicians are caught in a bind.
They see that a tax reduction can increase
government revenues in the long run. They
also see that a reduction will cut into current
"James M. Buchanan and Dwight R. Lee, " S o m e Simple Analytics of the Laffer
Curve,'' Journal of Political E c o n o m y (forthcoming).
Chart
2
Tax Revenue (TR)
revenues, contract social programs, and increase
budget deficits. The politicians voting for such
cuts will suffer the political consequences.
Members of Congress who voted for the Reagan
tax cut package are, indeed, being chided for
fiscal irresponsibility and insensitivity to the
needs of the poor. Any benefits from real
reductions in current tax rates will be reaped
by future politicians w h o will see government
revenues rise with greater national income.
However, those politicians of the future will
also be tempted to raise tax rates, taking
advantage of future taxpayers' inability to reduce
their real and human capital stock.
Concluding Comments
Any reasonable test of supply-side theory
requires a long-term commitment
to lower
taxes. Such a commitment could be established
through quasi-constitutional devices such as
tax indexing (not in 1985 as under present law,
but right now), rules for governing the growth
in the money stock, and restrictions on the
growth in government expenditures and deficits.
Otherwise, some fundamentally sound economic principles will have been discredited
before they have been tried.
— Richard B. McKenzie*
' S e n i o r F e l l o w at t h e H e r i t a g e F o u n d a t i o n ,
o n l e a v e f r o m t h e e c o n o m i c s f a c u l t y at C l e m s o n U n i v e r s i t y .
24
M A Y 1982, E C O N O M I C REVIEW
;
Supply-Side Economics Conference
in Atlanta
The Atlanta Conference on Supply-Side Economics in the 1980s attracted a large
group to hear Milton Friedman, Martin Feldstein, Lawrence Klein, Murray
Weidenbaum, and many others debate the theoretical and practical validity of
the supply-side approach. This article provides excerpts from
six of the featured speakers.
A major conference on supply-side economics—
a concept as old as 18th Century English economist Adam Smith yet as immediate as the morning
newspaper—drew the attention of students of
economic policy to Atlanta in March.
The two-day conference, staged by Emory
University's Law and Economics Center and the
Federal Reserve Bank of Atlanta, drew 323 business people, regulators and academicians, including not only supply-siders but monetarists
and those subscribing to a multitude of other
economic persuasions.
They flew in from around the country for
"Supply-Side Economics in the 1980s," the spirited
gathering that filled the Atlanta Hilton's Grand
Ballroom March 17-18. Registrants heard speakers
including t w o Nobel-Prizewinning economists,
two undersecretaries of the Treasury, the chairman of President Reagan's Council of Economic
Advisers, three congressmen, and other panelists,
including an English banker w h o flew in to talk
about the Thatcher government's economic policies.
Considering the ideological spectrum of the
participants, it wasn't surprising that they sometimes expressed conflicting views on subjects
ranging from the importance of federal budget
deficits t o the success of "Reaganomics" in
general. Some even disagreed on a definition of
supply-side economics, with one p a r t i c i p a n t Nobel laureate Milton Friedman—even declaring
at one point, "There is no such thing as supplyside economics; there's only good or bad economics."
William A. Fickling Jr., chairman of the Atlanta
Fed's Board of Directors, noted in opening reFEDERAL RESERVE B A N K O F A T L A N T A
marks that the conference's subject would attract a
crowd even in a stable economic era. "But in
these times when w e are trying a new kind of
economics and in the midst of a serious recession,"
he said, " I think it's particularly interesting and
exciting to be able to present this kind of
program."
Atlanta Fed President William F. Ford traced
the conference's evolution, noting that " t h e
interest in supply-side economics has grown out
of the frustration that U.S. policy makers and
business leaders have felt about the inability of
demand-driven economic policies t o produce
non-inflationary economic growth in our country."
" O u t of the frustration that so many Americans
have felt about these trends in our economic
performance came the search for a new concept
to guide us in managing our economic policies,"
he said. " A n d that, of course, is what supply-side
economics is all about."
Uniike concepts of the past, he noted, supplyside theories were legislated into fact without
years of academic discussion. W i t h that omission
in mind, the conference opened with a review of
supply-side thinking and its theoretical foundations, moderated by Henry G. Manne, director
of Emory's Law and Economics Center. That
discussion served as an affirmative exposition of
supply-side philosophy. It was followed by a
session on alternative perspectives, which included
a rebuttal by critics of the administration's approach. That session was moderated by Donald
L. Koch, the Atlanta Fed's senior vice president
and director of research, w h o would later moderate a panel of leading journalists offering their
views on supply-side policies.
25
An early morning session on the second day
served up a sampling of academic research into
the subject, with academicians presenting a
series of special papers. That session was moderated by Robert E. Keleher, Atlanta Fed research
officer and authority on supply-side subjects.
Making sure that all the bases were covered,
Atlanta Fed President Ford moderated a concluding session covering political views of supplyside economics. That session featured two of the
three congressmen on the program—W. Philip
Cramm, a Democrat from Texas, and Newt
Gingrich, a Georgia Republican.
The opening discussion of theoretical foundations included the third—Jack Kemp, a New
York Republican—along with Paul Craig Roberts,
who holds the W. E. Simon Chair of Political
Economy at Georgetown University's Center for
Strategic and International Studies; Michael Boskin,
professor of economics at Stanford University,
and David Meiselman, director of the graduate
economics program at Virginia Polytechnic Institute.
Session 11, the alternate perspectives panel that
included Nobel laureate Lawrence Klein and
Harvard's Martin Feldstein, also featured Frank
Morris, president of the Federal Reserve Bank of
Boston; Alan Lerner, senior vice president and
money market economist at Bankers Trust Compay in New York, Alan Reynolds, vice president
and chief economist for Polyconomics, Inc. of
Morristown, N.J.; Thomas Sargent, Professor of
Economics at the University of Minnesota; David
Lomax, group economist for England's National
Westminster Bank Ltd. and Rudolph Penner,
director of Tax Policy Studies at the American
Enterprise Institute in Washington.
Both days of the conference, though, featured
speakers with impressive credentials in government as well as business and academia.
At the early session on the second day,
special academic papers were presented by
Gerald P. Dwyer Jr., associate professor of economics at Emory; Dwight R. Lee, research fellow,
Center for Study of Public Choice, and associate
professor at VPI; and James Gwartney, Florida
State economics professor, w h o delivered a
paper for himself and Richard Stroup, director of
the Department of the Interior's Office of Policy
Analysis.
The afternoon press panel brought together
Malcolm S. Forbes, Jr., senior editor of Forbes
magazine; Leonard Silk, economics columnist for
The New York Times; A. F. Ehrbar, a member of
Fortune's board of editors, and George R. Melloan,
deputy editor, editorial page, The Wall Street
Journal.
The first day's highlight was a lively, if not faceto-face, debate between the t w o Nobel Prize
winners, Milton Friedman and Lawrence Klein.
Welcoming Remarks
William A. Fickling
Chairman, Board of Directors
Federal Reserve Bank of Atlanta
Conference Purpose
and Overview
William F. Ford
President
Federal Reserve Bank of Atlanta
S e s s i o n I: T h e o r e t i c a l F o u n d a t i o n s
An affirmative
exposition
of supply-side
economic
policies
Moderator:
Henry G. Manne
Director, L a w a n d
Economics Center
E m o r y University
Supply-Side Economics:
T h e Administrative
Perspective
Murray
Weidenbaum
Chairman, President's Council
of Economic Advisers
T h e o r e t i c a l F o u n d a t i o n s of
Supply-Side Economics
Paul Craig
Roberts
W. E. S i m o n Chair
Center for Strategic and
International Studies
Georgetown University
An E m p i r i c a l E v a l u a t i o n
of S u p p l y - S i d e E c o n o m i c s
Michael
Boskin
Professor of Economics
Stanford University
Friedman: Reaganomics has Good Chance
Predicting that Congress would not vote for
higher taxes and higher government spending,
Friedman expressed optimism that inflation " w i l l
be d o w n under 5 percent in three or four years."
Friedman, long-time distinguished professor at
the University of Chicago and currently a research
fellow at the Hoover Institution, cautioned that
" m y crystal ball is not that good," and noted that
"the major sources of my optimism at the moment
is really political and n o t f r o m the point of view of
economics."
Two political developments, in particular, are
encouraging to him. O n e is a constitutional
amendment to limit federal spending and balance
the budget.
Limiting federal spending, in Friedman's view,
is crucial.
" I would rather have a federal government
expenditure of $400 billion with a $100 billion
deficit than a federal government expenditure of
$700 billion completely balanced" he declared.
26
M A Y 1982, E C O N O M I C R E V I E W
The amendment to limit spending has 60 sponsors
in the Senate.
The second encouraging development in the
political sphere is that "President Reagan is of a
different breed of ducks." Friedman said that
every president in his lifetime has sought to "get
in front of the other ducks...to find out where
public opinion was going in the short run, and get
in front of it." Reagan, on the other hand, "has
been flying all by himself up there in the sky for
20 years, and the ducks finally got in back of
him." As a result, Friedman said, Reagan will stick
to principle and be "stubborn and obstinate."
Friedman declined the opportunity to launch a
detailed scholarly defense of supply-side economics. In fact, he said "there is no such thing as
supply-side economics," maintaining that the
S e s s i o n I: T h e o r e t i c a l F o u n d a t i o n s
Supply-Side Economics:
An American Renaissance?
The Honorable Jack Kemp
(R-NY)
U.S. House of Representatives
Is T h e r e a C o n f l i c t B e t w e e n
Monetarism and
Supply-Side Economics?
David
Meiselman
Director, Graduate
Economics Program
Virginia Polytechnic Institute
(continued)
Supply-Side Policies:
W h e r e Do W e G o From Here?
Milton
Friedman
Nobel Prize Winner
Senior Research Fellow,
The Hoover Institution
Stanford University
Distinguished Service Professor,
University of Chicago
only things new about the concept are "its
catchy label" and " t h e extent to which some
people operating under that label have overpromised what it can deliver."
The essence of supply-side economics, Friedman argued, is the idea that people will move in
the direction of higher rewards and will leave
activities where rewards are lower. Thus, proposals to slow the personal tax reduction or raise
federal excise taxes are "bad economics," because
they encourage higher federal spending.
Federal spending plays a key role in Friedman's
view of our current economic dilemma. It has
diverted resources from productive uses into
other areas. Inflation combined with high marginal taxes has induced people t o put their
savings in nonproductive forms like housing.
FEDERAL RESERVE BANK O F ATLANTA
" W e have been paying people not to work,"
Friedman said. " W e have been taxing them if
they worked. W e have been inducing them to
put their assets in nonproductive forms."
Such discouragement of work makes it very
difficult t o increase productivity. In fact, Friedman said, " t h e only reason w e have done as well
as w e have is because of the ingenuity which
people have displayed in avoiding federal taxes
and regulations."
Turning to the role of monetary policy, Friedman drew chuckles by noting that some of his
best friends work for the Federal Reserve. Federal
Reserve performance, on average, has been
" p r e t t y good," he said. He linked the economy's
ups and downs since 1979 to the erratic behavior of
the money supply over that period. Nevertheless,
he said, given reduced government spending, "if
the Federal Reserve can stick to its average
policies," the market will adjust t o short term
changes.
Besides slow and steady money growth, renewed
economic strength depends critically on a reduction in the size of government. In Friedman's
view, "our present problems date more to the
explosive growth of government than t o any
other single thing." Citing President Reagan's
four part economic program of lower government
spending, lower marginal tax rates, less regulation,
and moderate, steady money growth, Friedman
declared " n o t h i n g else will do it. All other proposals are smoke screens."
Friedman is dismayed that total government
spending in fiscal 1983 is scheduled t o be higher
as a percentage of national income than it was in
fiscal 1982. The only way to cut government
spending; he argued, is to cut government revenues. Referring to the Laffer curve theory that
lower taxes may increase revenues, Friedman
said, "if the Lafferites were correct in the most
extreme form and a particular cut in tax rates
increased revenue, then my conclusion would
be we hadn't cut tax rates enough—what I want to
cut is government revenue because that's what
feeds government spending."
Friedman chided Democats w h o say Congress
should raise taxes to help balance the budget.
Asking "where do these born-again budget balancers come from?", Friedman answered that
" t h e y are not born-again budget balancers; they
are what they have always been—big spenders.
They don't want to balance the budget. What
they want is to increase taxes so they will have
27
more money t o spend and w o n ' t have t o cut
spending."
The triumph of President Reagan's policy so
far, according to Friedman, is that " h e has made
them talk on his terms." If the President were to
give in now and repeal the tax increase and
eliminate indexing, Friedman predicted that "inflation three years from now would be 25 percent a year... That," he said, " w o u l d be a clear
sign that we are going back to our bad old ways of
ever-increasing government spending and the
roller coaster we have been on of up and down
inflation."
But if the President sticks by his guns in
reducing government spending, and the Fed can
maintain its average monetary targets, " t h e n I
predict that three or four years from now the
inflation rate will be down t o 3 t o 5 percent."
The precise ending of the current recession is
not the crucial question, Friedman said. "The
question is whether that expansion will once
again be cut short by a Federal Reserve policy of
excessive reduction in the quantity of money...."
If it is not, we have a good chance of continued
reduction in inflation and a gradual decline in
interest rates. Friedman's optimism, he concluded,
is based on rising popular and political pressure
to limit federal spending and on a strong president
w h o finally "has the ducks flying behind him."
Klein: Poor Forecasting, Untested Theories
Behind Huge Deficit
Following Friedman on the program, but not
following him on economics, was Nobel laureate Lawrence Klein. Klein immediately took
SUPPLY-SIDE
ECONOMICS:
A S a m p l i n g of
Descriptions
O n e fact b e c a m e a b u n d a n t l y clear as t h e
conference proceeded:
"supply-side economics"
m e a n s m a n y t h i n g s to m a n y
p e o p l e . Like Proteus, t h e
Greek sea g o d w h o c o u l d
c h a n g e his a p p e a r a n c e at
will, s u p p l y - s i d e e c o n o m i c s
appears in s o m e descriptions
as a s o l i d b o d y of e c o n o m i c
t h o u g h t a n d in others as a
p h a n t a s m d e s t i n e d to
slip b e n e a t h t h e waves.
To h e l p sort out just how
many sides supply-side
t h e o r y has, w e p r e s e n t a
s a m p l i n g of d e s c r i p t i o n s
g l e a n e d from the conference's
31 s p e a k e r s .
William F. Ford
President
Federal Reserve Bank
of Atlanta
Murray Weidenbaum
Chairman
President's Council of
Economic Advisers
Hon. Jack Kemp
U.S. House of
Representatives
"Supply-side economics
has g r o w n out of the
frustration that U.S. p o l i c y
makers and business
leaders h a v e felt a b o u t the
inability of d e m a n d - d r i v e
e c o n o m i c p o l i c i e s to
produce non-inflationary
e c o n o m i c g r o w t h in o u r
country."
" T h e f u n d a m e n t a l effort to
shift resources a n d decisionm a k i n g from the government
to the private sector is as
n e e d e d a n d m e r i t o r i o u s as
ever.
R e d u c i n g t h e b u r d e n of
taxation a n d r e g u l a t i o n a n d
s l o w i n g the g r o w t h of
government spending and
c r e d i t are essential s t e p s to
achieving a stronger
e c o n o m i c performance."
" . . . T h e r e is a p o i n t at
w h i c h taxes b e c o m e counterp r o d u c t i v e . That's all (Adam)
Smith w a s s a y i n g , that's all
Keynes was saying and thafs
all Laffer w a s s a y i n g a n d
that's all w e ' r e trying to say
or e v e n J o h n F. K e n n e d y
w a s s a y i n g in 1 9 6 2 w h e n
h e s a i d t h e p u r p o s e of cutt i n g tax rates is not to create
a d e f i c i t b u t to i n c r e a s e
investment, employment a n d
the prospects for a b a l a n c e d
budget."
" A s y o u m a y have n o t e d . I
have a v o i d e d p r e s e n t i n g a
g r a n d vision, either n e w or
o l d of h o w the e c o n o m i c
w o r l d w o r k s . In this regard, I
recall o n e of the lesser
k n o w n s t a t e m e n t s of
G e r t r u d e Stein to the effect
that t h e t r o u b l e with
Americans is that they always
simplify w h e n they s h o u l d
try to understand complexity.
A part of that c o m p l e x i t y
surely involves the difficulties
inherent in quickly c h a n g i n g
basic aspects of the structure
of o u r e c o n o m y . "
M A Y 1982, E C O N O M I C REVIEW
the offensive by characterizing some previous
speakers as " a lot of sob sisters blaming the
Federal Reserve for their troubles."
The Reagan administration's economic advisers, according t o Klein, are guilty of poor
economic forecasting and of introducing untested economic policies. Klein, who is the
Benjamin Franklin Professor of Economics at the
University of Pennsylvania's Wharton School,
told the conference that " t h e events of 1981
provide us w i t h an extraordinary outcome in
which certain popular renditions of supply side
economics are shown to be false."
Klein said the Reagan policies and the policies
of Prime Minister Thatcher in Great Britain are
really "noncontrolled experiments on a grand
scale," which he blamed for serious recessions in
both countries.
Asserting that "there is no visible evidence of
the (supply side) effects having occurred," Klein
hammered away at t w o lessons he said should
be learned from this episode:
(1) forecast
accuracy is of great importance in the making of
economic policy, and (2) professional peer review
is essential before sophisticated arguments should
be accepted as the basis for making economic
policy."
Administration economists, Klein said, originally
brushed aside criticism of their forecasts of
"cycle-free expansion accompanied by declining
deficits, decelerating inflation, and falling unemployment." They argued that forecasts as such
were not important, Klein said.
"But their forecast was so w i d e o f t h e mark that
they could not see the dangerous territory into
which they were leading the economy."
In his defense of the need for rigorous peer
review, Klein criticized administration supplyside proponents w h o claimed that the incentive
effects (to work harder and save more) would be
large enough and quick enough to justify the
declining deficit projections of March and July
1981. The fact was, Klein said, that " b y July
everybody knew" that those estimates were
overly optimistic.
Differing again from previous speakers, Klein
stated that research showed supply-side effects
to be minimal at best.
" W e could find some effects of tax rates on
labor supply or on savings," he said, " b u t they
were so small, so slow, and sometimes not
statistically significant, that they were no basis at
all on which to form a grandiose public policy
proposition."
SUPPLY-SIDE
THE 1980s
arch 17-18, 1982
Atlanta, Georgia
S e s s i o n II: A l t e r n a t i v e
Perspectives
On Supply-Side Economics
A close inspection
of
neo-Keynesian,
rational expectations,
and Wall Street points ot view.
Moderator:
Donald L Koch
Senior Vice President
and Director of Research
Federal Reserve Bank of Atlanta
A l t e r n a t i v e P o l i c i e s for
Stable Non-Inflationary
Growth
Lawrence ft Klein
Nobel Prize Winner
Benjamin Franklin Professor
of Economics and Finance
University of Pennsylvania
Do t h e Monetary Aggregates
H a v e A F u t u r e as T a r g e t s
for F e d e r a l R e s e r v e Policy?
Frank
Morris
President
Federal Reserve Bank of Boston
A Wall Street Perspective
Alan
Lerner
Sr. Vice President and
Money Market Economist
Bankers Trust Company
T h e Gold Standard:
A Supply-Side Element?
Alan
Reynolds
Vice President
and Chief Economist
Polyconomics, Inc.
Non-Gradualist Approaches
to Eliminating Inflation
Thomas
Sargent
Professor of Economics
University of Minnesota
T h e T h a t c h e r Policies:
A Supply-Side Experience?
David
Lomax
Group Economist
National Westminster Bank, Ltd.
T h e Conceptual Foundations
of S u p p l y - S i d e E c o n o m i c s
Martin
Feldstein
Professor of Economics
Harvard University
President, National Bureau of
Economic Research
Balanced Budgets:
T h e Relationship to
Supply-Side Policies
Rudolph
Penner
Director of Tax Policy Studies
American Enterprise Institute
Turningto his own prescription forthe present
slowdown, Klein advocated " p r u d e n t demand
management" policies together with associated
structural policies.
Structural policies are best described as industrial policies to enhance productivity and improve
competitiveness, Klein said. In fact, "in a true
sense, these are supply-side economic issues,
much more in the spirit of supply-side than the
single-minded preoccupation with tax cutting."
Along this line, Klein approved of the administration's more generous tax guidelines for depreciation, but said they do not go far enough.
Klein suggested increases in investment tax
credits, special support for R&D, and increased
support for basic scientific research. Instead,
Klein said the administration is reducing federal
support of R&D and basic, non-military research.
To stimulate productivity growth, Klein argued,
we need to invest not only in fixed capital but in
human capital. This calls for training programs,
29
FEDERAL RESERVE BANK O F ATLANTA
especially for the young unemployed. Rather
than a publicly-supported CETA type program,
he would like to see a cooperative scheme
between the public and private sectors.
Agreeing w i t h supply-siders w h o want to promote saving, Klein suggested a scheme to make
workers' pension funds more portable in the
private sector, "something like the TIAA system
for academic retirement accounts."
As another facet of stimulating supply, Klein
said we should be prepared for a majoroil supply
interruption duringthe 1980s. The current world
oversupply of oil makes this a good time to fill the
strategic oil reserve and to stockpile various
other basic raw materials.
The most essential issue in reducing inflation,
Klein said, is not the money supply—it is the rate
of productivity growth. To encourage such growth,
he advocated an incomes policy which would
either penalize firms that grant excessive wage
increases or reward firms that restrain prices. He
cited Austria as an example of successful application of such an incomes policy.
"Alternatives exist," Klein concluded, " a n d
they go far beyond macro demand management.
From my perspective, they involve many aspects
of the supply side..., but not simply large scale tax
cuts."
Feldstein: Conceptual Foundation
Martin Feldstein, professor of economics at Harvard University and president of the National
Bureau of Economic Research, supplied a counterpoint to Klein in his address on "The Conceptual Foundation of Supply-Side Economics."
Feldstein described supply-side philosophy as
"a retreat from the Keynesian ideas that have
dominated economic policy for the past 35
years." The supply-side "revolution," as Feldstein
called it, rejects the Keynesian emphasis on
expanding demand to raise income and also
rejects the Keynesian fear of saving.
Identifying himself with the supply-side movement, Feldstein said " w e recognize that more
saving is a prerequisite for the increased capital
formation that can raise productivity and the
standard of living."
Feldstein joined Friedman, Rep. Kemp, and
several other speakers in refuting the notion that
supply-side theory is a new, untested fad. He
traced its origins back t w o centuries t o Adam
Smith's view that a nation's wealth and prosperity depend ultimately on its capacity to produce.
Smith also believed that the free market—without
government interference—will in general see
that capital resources and labor are allocated to
their most productive uses.
This view dominated economic thinking until
the depression of the 1930s "diverted attention
from the long-run problem of creating productive
capacity to the short-run problem of maintaining
demand."
In the ensuing years, "what began as a policy of
government spending intended only to stimulate
the private sector back t o the full use of the
economy's capacity soon became the basis for
widespread intervention in all aspects of the
private economy." More recently, Feldstein said,
"careful empirical studies have confirmed that
governmental policy has not only often failed to
eliminate the problems it was designed to solve
but has frequently exacerbated those very problems or created new and unanticipated problems."
SUPPLY-SIDE ECONOMICS IN
Atlanta, Georgia
March 17-18, 1982
- - » • M i ^ H i i B B r
Special Papers
Some current academic
research
on supply-side
economics
Moderator:
Robert £
Keleher
Research Officer
Federal Reserve Bank of Atlanta
Inflation and G o v e r n m e n t
D e f i c i t s : W h a t is
the Connection?
Gerald P. Dwyer Jr.
Associate Professor of Economics
Emory University
W h e r e Are W e On the
Laffer Curve?
S o m e Political Considerations
Dwight R. Lee
Research Fellow,
Center for Study of Public Choice
Associate Professor,
Virginia Polytechnic Institute
Marginal Tax Rates,
Tax Avoidance,
and the Reagan Tax Cut
James
Gwartney
Professor of Economics
Florida State University
and
Richard
Stroup
Director, Office of Policy Analysis
Department of the Interior
The new policies adopted in 1981 were based
not only on classical economic principles, Feldstein reminded his audience, but also on continuing academic and political discussion from the
mid-1970s through 1981.
Unfortunately, he said, some administration
spokesmen "actually believed the extreme supplyside theory and predicted that the new policy
would cause an immediate surge in economic
growth and productivity and a rapid decline in
the inflation rate."
While he acknowledged that " t h e economy's
performance is not living up to these naive and
30
M A Y 1982, E C O N O M I C R E V I E W
euphoric forecasts," Feldstein stressed that it is
vital to judge the program by its long-term
consequences and " n o t by its failure to live up to
the naive short-term forecasts."
Feldstein traced the high inflation, low capital
formation, and declining productivity growth of
the '70s to "a whole range of government policies,"
including:
•
•
tax rules that p e n a l i z e d saving a n d d i s c o u r a g e d
business investment
a
Social
virtually
Security
program
unnecessary
for
that
the
made
majority
saving
of
the
population
•
c r e d i t rules that e n c o u r a g e d large mortgages a n d
extensive consumer credit
•
perennial g o v e r n m e n t deficits that a b s o r b e d
private saving a n d shrank the resources available
for investment.
The 1981 tax policy, in Feldstein's view, attacks
this government-inspired discouragement of saving through several substantial changes in the
personal tax rules aimed at encouraging saving.
He cited NBER studies indicating that the IRA
accounts alone will begin producing substantial
new savings after about t w o years.
The tax act also provides a dramatic reduction
in business tax rates on new investments and
should produce much higher net rates of return.
Feldstein's belief that the administration's basic
approach represents sound policy rests largely
on what he sees as "a complete reversal of the
roles assigned to monetary and fiscal policy."
Macroeconomic policy of the '60s sought to
combine easy money to stimulate investment
with a tight fiscal policy t o prevent inflation.
"That strategy clearly failed," Feldstein said.
SUPPLY-SIDE
ECONOMICS:
A S a m p l i n g of
Descriptions
Milton Friedman
Senior Research Fellow
Hoover Institution
Stanford University
"I d o n ' t think there is a n y
s u c h t h i n g as s u p p l y - s i d e
e c o n o m i c s . I t h i n k there is
simply g o o d economics
and bad economics."
T h e e s s e n c e of s u p p l y side e c o n o m i c s is . . . simply
the e l e m e n t a r y p r o p o s i t i o n
that p e o p l e will m o v e in t h e
d i r e c t i o n in w h i c h r e w a r d s
are h i g h e r a n d will leave
activities in w h i c h rewards
are lower, that d e m a n d
curves s l o p e negatively a n d
supply curves slope
positively. That's supply^side
economics and almost
n o t h i n g more."
Lawrence R. Klein
Benjamin Franklin Professor
of Economics and Finance
University of Pennsylvania
Martin Feldstein
Professor of Economics
Harvard University
Beryl Sprinkel
Under Secretary
of the Treasury
for Monetary Affairs
" A g g r e g a t i v e p o l i c i e s of
d e m a n d m a n a g e m e n t are
. . . in a t r u e sense, m u c h
m o r e in t h e spirit of s u p p l y
s i d e than t h e s i n g l e - m i n d e d
p r e o c c u p a t i o n with tax
cutting."
"A central feature of this
revolution in e c o n o m i c
t h i n k i n g is t h e rejection of
t h e K e y n e s i a n view that t h e
w a y to raise i n c o m e a n d
r e d u c e u n e m p l o y m e n t is
s i m p l y to e x p a n d d e m a n d .
I n s t e a d of K e y n e s i a n
d e m a n d management, the
n e w view f o c u s e s o n
capacity creation through
capital formation and
research."
"Monetary a n d supply-side
e c o n o m i c s are b a s e d o n
the p r o p o s i t i o n that private
initiative is t h e s o u r c e of
w e a l t h a n d t h e s o u r c e of
h i g h e r s t a n d a r d s of living."
" W h a t has b e e n
c h a r a c t e r i z e d as t h e s u p p l y
s i d e of our e c o n o m i c p o l i c y
d e a l s with t h e effect
government spending and
financing has on the
w i l l i n g n e s s a n d ability of
i n d i v i d u a l s to t a k e a c h a n c e
o n p r o d u c t i v e ventures."
"The current e c o n o m i c
p o l i c i e s are not the
e m b o d i m e n t of a radical new
w i s h f u l t h i n k i n g t h e o r y of
s u p p l y - s i d e e c o n o m i c s that
the administration brought
to W a s h i n g t o n . Instead, t h e
b a s i c p r o g r a m is a s o u n d
o n e that g r a d u a l l y e v o l v e d
in C o n g r e s s d u r i n g several
years of c a r e f u l study."
31
FEDERAL RESERVE B A N K O F A T L A N T A
Monetary authorities will now disregard the
goal of increasing investment and will focus
exclusively on achieving a low inflation rate.
Fiscal policy, in turn, will focus on stimulating
saving and investment by targeted tax incentives.
Feldstein believes the result will be " n o t a
permanent conflict between monetary and fiscal
policies..., but a coordinated mix designed to
twist spending away from housing and consumption
and toward business investment."
The reductions in personal tax rates will not be
inflationary, according to Feldstein, but not because the tax cuts will unleash a powerful supplyside response, as called for in the "extreme form
of Lafferite wishful thinking that candidate Reagan
discussed early in his campaign." In reality,
"there will be virtually no reduction in the share
of personal income taken by taxes" because the
reduction will be mostly offset by bracket creep.
"Because the administration never explained
that there are essentially no personal rate cuts,"
Feldstein said, "its critics have charged that its
fiscal policy is irresponsibly inflationary."
Feldstein believes that continued spending
reductions can gradually lower the deficit and
make more money available for investment. To
do this, however, the administration must " l o o k
beyond the list of budget categories that it dealt
with in its most recent budget."
Returning
nondefense spending to the same share of CNP
that it had in 1970, Feldstein pointed out, w o u l d
reduce federal outlays by 5 percent of GNP and
achieve a balanced budget.
NotingthatCongress"probably did not recognize how long and arduous the transition period
would be," Feldstein declared that " t h e administration's economic program is on the right
track and the current recession is an inevitable
part of the process of reducing inflation."
Administration Spokesmen
The Reagan administration was well represented
at the gathering to advocate its point of view and
to respond to its critics. Administration representatives included Murray Weidenbaum, chairman
of the President's Council of Economic Advisers,
and the t w o undersecretaries of the Treasury:
Beryl Sprinkel, undersecretary for monetary affairs,
and Norman Ture, undersecretary for tax and
economic affairs.
Weidenbaum, while defending the administration's achievements t o date ("The fundamental effort to shift resources and decisionmaking
-18, 1982
S e s s i o n III: T h e I m p l e m e n t a t i o n
Supply-Side
Problems and
Moderator:
William F. Ford
President
Federal Reserve Bank of Atlanta
of
Policies
Practicalities
I m p l e m e n t a t i o n of
Supply-Side Tax Policies
Norman
Ture
Under Secretary of the Treasury
tor Tax and Economic Affairs
Reaganomics:
The Monetary Component
Beryl
Sprinkel
Under Secretary of the Treasury
for Monetary Affairs
from the government t o the private sector is as
needed and meritorious as ever"') was candid in
discussing its dilemmas as well.
" W e have tried t o avoid repeatingthe mistakes
of the past, although no d o u b t we will produce a
full quota of new mistakes," W e i d e n b a u m conceded.
He forecast that the resulting educational
process will make for both a stronger economy
and an improved understanding of the workings
of economic policy. Yet, he added, " i t is far too
early for anyone to make a definitive evaluation
of Reaganomics."
The first year of the Reagan administration, he
said, has produced such gains as lower tax
burdens and dramatically reduced inflation. And,
he added, the public can look for further benefits
in economic growth and rising employment as
the economy pulls out of its current recession.
Like other administration spokesmen, though,
he indicated that the recovery's timing depends
on a number of variables.
"The precise timing, speed, strength and duration
of that recovery," he said, " w i l l be affected by
how quickly interest rates decline from the
current high levels." At the same time, he said,
those interest rate shifts during 1982 are certain
to be influenced by the degree of progress in
paring the federal budget deficits.
Weidenbaum noted that the fiscal year 1982
budget deficit will be in the neighborhood of
$100 billion, substantially above the 1981 figure
of $58 billion. Yet he pointed to the irony that,
despite the swelling deficit projections, the closely
watched Consumer Price Index inflation barometer has declined from the 12 to 13 percent
32
M A Y 1982, E C O N O M I C R E V I E W
range of late 1980 to a 4-6 percent range in
recent months.
" I am not so partisan as to contend the deficits
of one political party are inherently less inflationary
than those of another," Weidenbaum said with a
smile. "But I w o u l d defend the germ of truth that
is embedded in that proposition—namely, that
deficits associated with tax reductions are less of
a problem for the economy than those arising
from a spending increase."
Weidenbaum characterized the projected deficits as "a matter of considerable concern but not
national hysteria.
"The inflationary consequences so often attributed t o past deficits have actually been the
result of inappropriate monetary policy, which
SUPPLY-SIDE ECONOMICS IN THE 1980s
Atlanta, Georgia
March 17-18, 1982
Session IV: Press Perspective
Moderator:
Donald L Koch
Senior Vice President
and Director ot Research
Federal Reserve Bank of Atlanta
George R. Melloan
Deputy Editor, Editorial Page
The Wall Street Journal
A.F. Ehrbar
Member, Board of Editors
Fortune
Malcolm
Leonard
Silk
Economics Columnist
The New York T i m e s
S. Forbes, Jr.
Senior Editor
Forbes
monetized those deficits," he said. " W e have
contended that a policy of monetary restraint—a
substantial reduction in the growth of the money
supply from the rapid pace that characterized
much of 1979 and 1980—would contain the
inflationary potential of deficit spending."
He praised the Federal Reserve and its monetary policy for reining in the nation's runaway
inflation, and reiterated the administration's support for those efforts. But he said of the Fed's
monetary targets: "I wish their aim would i m p r o v e but then again, they d o too."
Undersecretary Sprinkel too referred to the
Fed's monetary policy in a presentation he called
"Reaganomics: The Monetary Component."
"The monetary component of Reaganomics is
critical to the overall program," said Sprinkel, a
former Harris Bank of Chicago economist.
"The supply-side promise of real growth and
prosperity is sound; the incentive effects will
work in America in the 1980s just as they have
worked hundreds of times before in our own
country and in other countries.
" But they will not work unless there is a fertile,
stable monetary environment," he said. "You can
have the best seeds in the world, but they w o n ' t
grow without the proper soil."
Sprinkel argued that the Federal Reserve is
capable of controllingthe nation's money supply
and, therefore, what he called the economy's
"monetary environment."
Explaining, he said the data show that inflation,
nominal GNP and interest rates all follow the
growth of M l — t h e Fed's basic measure of money,
including cash and checkable deposits in financial
institutions. He said M l growth, in turn, follows
the growth of the monetary base—which he
defined as "simply the sum of certain items on
the Federal Reserve's balance sheet." Since the
Fed can control the largest asset, its portfolio of
government securities, Sprinkel said, the Fed
"could, if it chose, control the base to the penny."
According to Sprinkel, the administration inherited "a pretty tough situation" when it took
office early in 1981.
" I n the last 12 months w e have had t o spend a
great deal of time repairing the wreckage from
the last administration," he said. "But we are now
on a sure, steady course toward low inflation, low
interest rates and real economic rates and real
economic growth in America."
"For us fully to realize our potential," he
concluded, "we must have less volatility in monetary growth."
Sprinkel disputed claims—repeated by some
conference speakers—that the administration's
supply-side policies are fighting with its monetarist policies: that the Reagan fiscal policy and
the tight money policy of the Fed are running
headlong into each other.
" I n spite of the frequency of their appearance
in the media, both of these statements are
untrue," according to Sprinkel. " N o t only are
supply-side and monetarist policies compatible,
it is essential that they go together."
The supply-side of economic policy, he explained, deals with the impact of government
spending and financing on the willingness and
ability of individuals to take a chance on productive
ventures. The monetarist component, he said,
deals w i t h money in the belief that high and
variable monetary growth and inflation discourage
work, savings and investment and that inflation is
33
FEDERAL RESERVE BANK O F ATLANTA
primarily a monetary phenomenon.
"The goal of the supply-side and monetary
elements of our policy is the same: to increase
the productive potential of the economy," he
declared. "The only difference is that they focus
on different aspects of government behavior,
one on the demand side and the other on the
supply."
And Reaganomics? He defined that as a combination approach "carefully designed to rid us
of stagflation by limiting money growth and
SUPPLY-SIDE ECONOMICS IN THE 1980s
Atlanta, Georgia
March 17-18, 1982
S e s s i o n V : P o l i t i c a l V i e w s of S u p p l y - S i d e E c o n o m i c s
Moderator:
William F. Ford
President
Federal Reserve Bank of Atlanta
Supply-Side Aspects
of Government Spending
The Honorable
W. Philip Gramm (D-Tx)
U.S. House of Representatives
The Politics of
Supply-Side Policies
The Honorable
Newt Gingrich (Ft-Ga)
U.S. House of Representatives
inflation, while increasing incentives to produce
real goods and services."
Norman Ture, under secretary of the Treasury
for tax and economic affairs, joined Sprinkel in a
spirited defense of the president's economic
program.
The Reagan program, he cautioned, should not
be construed as blind faith in the perfection of
markets. Instead it holds that " t h e responsibility
properly assigned to government is to seek to
identify the sources of market failure and to seek
t o facilitate more efficient market operation." In
turn, government must reject what Ture called
the "elitist notion that public policy makers
know better than private market participants
what is good for them—the private market participants."
The administration program also rejects shortrun fine tuning of the economy, Ture said, and
focuses instead on long run policy objectives.
To help the private market perform more
efficiently, Ture said, " t h e policy thrust toward an
ever-mounting edifice of complex regulations
must be reversed." In particular, the "antique
regulations of financial institutions" should be
eliminated.
Replying to some previous speakers w h o questioned how closely the Reagan program represented a supply-side approach, Ture said, " I do
not mean t o suggest that the President or his
principal policy advisers toiled through the supplyside exegesis in order to formulate the programs."
But had they done so, he maintained, " t h e
overall program would have differed little, if at
all, from that which the President presented in
1981."
Citing the supply-side rejection of a positive
relationship between levels of government spending and total output, for example, Ture argued
that the Reagan program sees reduced federal
spending as a key to expanded output and
employment.
The tax policy portion of the administration's
program also reflects sound suppl^side principles,
in Ture's view. By reducing marginal tax rates, the
1981 tax act is intended to reduce the relative
cost of working, saving, and investing. Ture took
special notice of the"dramatic revision in ourtax
provisions pertaining to capital recovery," which
he said will reduce the bias against saving and
capital formation.
Turning t o the more controversial question of
budget deficits, Ture argued that supply-side
theory rejects the view that budget deficits per
se are inflationary. That erroneous view, he said,
rests on the observation that those deficits tend
to be monetized. Consequently, the administration
program calls for the "institutional link between
monetary expansion and government deficits"
to be broken.
"Monetary policy," Ture said, "should pursue
a firm policy of slow and steady growth in the
stock of money, substantially oblivious t o budget
prospects or outcomes."
Ture joined Sprinkel, Weidenbaum, and Friedman in defending the intellectual and empirical
basis for the administration program. Far from
being "novel, exotic ... or abstract," the program
rests on "an extremely rigorous and hard-headed
analytical system...with an extensive empirical
record."
Finally, Ture said, the program should be judged
not by any short-term gains in housing, construction or other sectors, but by " t h e progress
toward greater economic freedom, toward investing the individual with greater opportunity
and responsibility for determining his or her
economic status."
34
MAY 1982, E C O N O M I C REVIEW
i
Conclusion
Not every participant at the Atlanta conference
agreed with the administration spokesman's viewpoint, of course, any more than everyone concurred with the criticisms voiced by supplyside's detractors. The conference's structure provided a cross-section of opinion expressed by
panelists from points as distant as Wall Street
and London's Threadneedle Street—panelists
who, in some cases, proved as far apart ideologically as they did geographically. By virtue of its
balanced nature, the gathering was designed to
stimulate an exchange of conflicting views rather
than a rubber-stamp unanimity.
"Supply-Side Economics in the 1980s" helped
focus attention on the effects of tax rate policy
on savings, investment and work effort. Participants may have differed on the importance of
tax incentive policies on the national economy,
but there seemed to be general agreement that it
was a crucial subject too often overlooked in the
past.
Sponsors had organized the program, in part,
to encourage eminent opinion-shapers to discuss
two fundamental questions regarding supplyside economics. First, does the supply-side approach hold the answers t o the nation's troubling
economic maladies? And, if not, what are the
alternatives?
Obviously, the conference didn't provide neatly
packaged answers to all the questions its sponsors
had raised, nor was it likely to have done so. Yet it
provided an open and far-ranging forum for
some of the nation's most respected thinkers to
offer their perspectives on the supply-side concept. So, if the Atlanta meeting raised a multitude
of perplexing questions, surely it defined a framework for producing the answers as well.
—Donald E. Bedwell
and Gary W. Tapp
PROCEEDINGS FORTHCOMING
Complete proceedings
of the entire conference
will
be available later in the year. See future issues of the
Review for details.
35
FEDERAL RESERVE B A N K O F A T L A N T A
Southeast's Ships Come In:
Bright Outlook for Exports
Over one-fourth of U.S. waterborne exports are now shipped from southeastern
ports, with a heavy concentration in food products and crude materials. The
region could continue to expand its exports in the '80s, especially if world demand
for coal heats up.
During the 1970s U. S. exports virtually
doubled as a percentage of GNP, reaching
more than 8 percent by 1980. 1
Nowhere is that export growth more visible
today than at the seaports of the Southeast,
which serve as busy jumping-off points for an
impressive share of American products that
foreign customers are buying. High on that list
of exports is food, with ever more wheat and
soybeans flowing from such ports as New
Orleans and M o b i l e to feed a burgeoning
global population.
Ports in the Sixth Federal Reserve District
also have emerged as major embarkation centers
for exports of coal, the Southeast's answer to
M i d d l e Eastern oil. Coal exports promise to
continue growing, with the planned completion
of the Tennessee-Tombigbee Waterway and
the hoped-for dredging of key Gulf ports to
accommodate huge freighters to handle the
projected future tonnage.
Along w i t h the Southeast's exporting boom
arise questions that this article will seek to
answer: How has the region's share of the
'In this article, "U.S. exports" refers to merchandise trade, or the dollar value
of tangible g o o d s only. A broader measure of trade includes exports a n d
imports of such services (or "invisibles") as international travel and transportation, insurance, a n d investment income. In general, the U. S. balance of
t r a d e in g o o d s and services (exports minus imports) is more favorable than
for trade in goods alone. This is because of t h e U. S.'s important role as
exporter of capital a n d source of technology a n d expertise.
36
value of U. S. waterborne exports changed over
the past decade? What changes have occurred
in the kinds of commodities exported? What
are the likely trends in U. S. exports in the
1980s? Answers t o these questions will provide
clues to the future of a growing portion of the
region's economy.
The Southeast's Share of U. S. Exports
In 1970, the value of U. S. waterborne exports
flowing through District ports was almost $5
billion, or one-fifth of the U. S. total (see Table
1). By 1980, these District exports had grown
t o more than $30 billion, over one-fourth of
U.S. waterborne exports. The value of southeastern exports increased at a 20 percent
compound rate during the decade, far faster
than the 16 percent for the rest of the nation.
New Orleans dominates exports through southeastern seaports, although its share is declining
(from 70 percent in 1970 t o 63 percent by 1980).
Even so, the New Orleans customs district still
accounted for one dollar in every six of U.S. exports
in 1980.
The other four southeastern customs districtsSavannah, Tampa, Miami and Mobile—ranked
in the upper half of U. S. customs districts in
waterborne exports in 1980 (see Table 2).
Every southeastern customs district except
MAY 1982, E C O N O M I C
REVIEW
Table 1.
Southeastern Exports
(Value of Domestic and Foreign Waterborne Exports)
1970
U.S. Customs
Districts
1980
1970-80
Value
Percent
Value
Percent
Compound
(Mil. $)
of U.S.
(Mil. $)
of U.S.
Annual Growth
Savannah
320
1.3
2,154
1.8
21.0
Tampa
281
1.2
2,782
2.3
25.9
Miami
395
1.6
3,912
3.3
25.8
Mobile
466
1.9
2,588
2.2
18.7
New Orleans
3,448
14.1
19,336
16.3
18.8
Sixth District
4,910
20.1
30,772
25.9
20.1
Non-Sixth District
19,475
79.8
88,063
74.1
16.3
U.S.
24,394
100.0
118,835
100.0
17.1
Source: U.S. Department of Commerce, Bureau of the Census, Waterborne Exports and General Imports, 1970 and 1980.
Mobile improved its ranking during the 1970s.
New Orleans j u m p e d into the number one slot
in the country, surpassing New York, and Florida
ports showed particularly sharp increases.2
The growth of southeastern port activity is
even more impressive when measured by tonnage. The weight of southeastern waterborne
exports increased even more rapidly, compared
to the nation, than has the value. In 1980, the
Southeast accounted for almost one-third of U. S.
tonnage.
But the Southeast's fast-growing share of U. S.
exports is best measured by its value. The
dollar volume of exports tells us how much
total income—wages and salaries, rent, interest
and profit—has been generated directly in the
U. S. economy by production of the commodity
which is being exported.
The Composition of Exports from the
Southeast
Mainly because of the huge volume of bulk
commodities f l o w i n g d o w n the Mississippi
through N e w Orleans, the Southeast has a high
?
The importance of U. S. airborne trade t h r o u g h Miami should also be noted.
In 1 9 8 0 , 6 percent of U. S. airborne exports was out of Miami International
Airport (MIA). New York's J o h n F. K e n n e d y International Airport, w h i c h
accounted for half of U. S. airborne exports, was the only airport to rank
ahead of MIA.
share of such commodities and a lower share of
manufactures. Nationally, 40 cents out of each
dollar of exports are manufactured goods, compared t o only 25 cents for goods exported
through the region's ports (see Table 3). 3 O n the
other hand, food products exports account for
over one-third of Southeast exports, compared
to one-fourth for the nation. This contrast is even
greater when one considers that crude (nonfood)
materials exports account for another 2 3 percent
of District exports but only 17 percent for the
nation. Over half of the District's crude materials
exports are soybeans.
Sharp differences also appear within the
region. Over 70 percent of waterborne exports
from New Orleans and Mobile are food products
or crude materials; in contrast, three-fourths of
exports from Miami are manufactures. Savannah's
composition lies between these extremes—
3
U. S. exports can be classified, most simply, as either agricultural or
nonagricultural products. At t h e other extreme, c o m m o d i t y information can
be presented in terms of a seven-digit product classification s c h e m e based
upon the Standard International Trade Classification (SITC). In this article,
detailed c o m m o d i t y information is a g g r e g a t e d a n d presented in five
c o m m o d i t y groupings. The 10 single-digit SITC groupings are c o m b i n e d as
follows:Food a n d live animals, beverages a n d tobacco, a n d oils a n d fats
(animal a n d vegetable) are g r o u p e d t o g e t h e r as "farm products;" three
other groupings c o r r e s p o n d to t h e SITC classifications "inedible crude
materials," "mineral fuels," a n d "chemicals;" the remaining four single-digit
SITC groupings are c o m b i n e d as "manufactures." It is emphasized that
these classifications are made for analytical convenience and are somewhat
arbitrary. Nevertheless, presentation of the data in this form d o e s a l l o w u s t o
examine important structural features of waterborne U. S. exports t h r o u g h
southeastern ports.
37
FEDERAL RESERVE BANK O F A T L A N T A
The Southeast's Share of U. S.
Commodity Exports
Table 2.
U.S. Exports
(Value of Domestic arid Foreign Waterborne
Exports)
1980
Rankinq
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
1970
Customs District
New Orleans, Louisiana
New York City, N e w York
Houston, Texas
Baltimore, Maryland
Norfolk, Virginia
Los Angeles, California
S a n Francisco, California
Seattle, Washington
Miami, Florida
Portland, O r e g o n
Galveston, Texas
Charleston, South Carolina
Philadelphia, Pennsylvania
Tampa, Florida
Mobile, Alabama
Savannah, Georgia
Port Arthur, Texas
Cleveland, Ohio
Duluth, Minnesota
Wilmington, North Carolina
Rankinq
2
1
4
6
3
7
5
9
15
8
10
22
11
18
12
17
13
14
19
20
Source: U.S. Department of Commerce, Bureau of the Census, Waterborne Exports and General Imports, 1970 and 1980.
almost half of its exports are manufactures but
crude materials account for another 30 percent.
Chemicals exports are dominant in the Tampa
customs district.
Behind the Pattern
The pattern of southeastern exports is related
to resource endowments. The Southeast has
abundant natural resources and labor relative
to other parts of the nation. Thus, the Southeast
exports more primary goods while the nation
as a whole exports more manufactured goods.
Central Florida's huge phosphate deposits, coupled with a growing world need for fertilizers,
explains the dominant role of chemicals exports
from the Tampa district. As the U.S. supplies
more of the world's food, the Mississippi River
becomes a vital conduit for corn, wheat, and
soybeans from the Midwest, expanding the
importance of food products and crude materials exports through New Orleans. Southeastern
soybeans, ores and pulpwood flow through
Mobile, while soybeans, forest products, and
textiles are dominant exports from Savannah.
Miami provides the primary U. S. link with Latin
American markets for manufactured goods.
38
By commodity, the Southeast's share of U. S.
exports parallels the same patterns. Thus, the
Southeast accounts for over one-third of U. S.
food products and crude materials exports, but
only 17 percent of the nation's manufactured
exports (see Table 4). The Southeast specializes
in exports of these commodities, but not in manufactured goods. Similarly, the Southeast has a light
specialization in chemicals exports but none at
all in mineral fuels exports.
Clearly, the dominant feature of 1980 trade
in the Southeast is the massive flow of corn,
grain, and soybeans out of New Orleans: food
products and crude materials exports from this
customs district represent nine percent of total
U. S. waterborne exports. Despite this emphasis,
flows of mineral fuels, chemicals or manufactures
through New Orleans account for sizable shares
of U. S. exports. Among southeastern customs
districts, only Miami rivals New Orleans as an
exporter of manufactures and only Tampa
approaches New Orleans in chemical exports
(see Table 5).
Recent Changes in Southeastern
Commodity Flows
W h e n we examine the 1970-80 growth rates
for five kinds of commodities, we notice several
important changes. 4 First, compared to the
nation, both manufactured exports and crude
materials from the Miami region have grown
much more rapidly, while such exports from
the New Orleans region have grown less rapidly.
Chemicals and manufactures grew particularly
fast in the Miami region, while food was the
fastest-growing export from the N e w Orleans
region.
In general, changing supply and demand
factors—in the Southeast, elsewhere in the
nation, and abroad—have shaped the changing
pattern of exports through southeastern ports.
Thus, exports from the Southeast have grown
more rapidly than for the nation because of the
region's above-average rate of general economic
"Strictly speaking, the growth rates f o r t h e Miami Customs region reflectthe
influence of c h a n g e s in the growth and composition of c o m m o d i t y flows out
of s o m e customs districts a n d ports not located in the Sixth Federal
Reserve District. However, w e believe that the important trends revealed by
these data reflect m a j o r c h a n g e s in the District portion of the Miami Customs
region.
Table 3.
Southeast Commodity Profile 1980
(Percent Value of Domestic Waterborne Exports)
Savannah
Tampa
Miami
Mobile
New
Orleans
Sixth
District
U.S.
Food Products
7.9
12.7
12.5
34.0
45.6
34.8
24.6
Crude Materials
29.6
19.5
2.6
38.9
24.5
22.9
17.3
0.1
0.1
0.3
5.5
3.0
2.4
5.7
Chemicals
16.3
51.5
7.5
8.4
10.7
14.2
13.1
Manufactures
46.1
16.2
77.1
13.2
16.2
25.7
39.3
Total Percent
100.0
100.0
100.0
100.0
100.0
100.0
100.0
Mineral Fuels
Sources: U.S. Department of Commerce, Bureau of the Census, U.S. Exports: World Area by Commodity Groupings, FT 455/Annual 1980; Dialoq Information Retrieval
Service: U.S. Exports, File 126.
Table 4.
Shares of Southeastern Customs Districts in U.S. Commodity Exports, 1980
(Percent Value of Domestic Waterborne Exports)
Miami
Food Products
Tampa
Savannah
New
Orleans
Mobile
1.7
1.2
.6
Crude Materials
.5
2.6
Mineral Fuels
.1
—
Sixth
District
U.S.
3.0
30.2
36.7
3.1
4.9
23.1
34.2
100.0
—
2.1
8.5
10.7
100.0
100.0
Chemicals
1.9
9.3
2.3
1.4
13.3
28.2
100.0
Manufactures
6.4
1.0
2.1
.7
6.8
17.0
100.0
Total
3.3
2.3
1.8
2.2
16.3
25.9
100.0
Sources: U.S. Department of Commerce, Bureau of the Census, U.S. Exports: World Area by Commodity Groupings, FT 455/Annual 1980; Dialog Information Retrieval
Service: U.S. Exports, File 126.
growth and the proximity of regional ports to
growing world markets.
Factors related to the region's domestic growth,
such as the migration of people and jobs to the
Southeast in the 1970s, also influenced trade.
Specifically, the M i a m i region's manufactured
exports grew more rapidly than the nation, in
part, because of the increase in manufacturing
in Florida—especially in central Florida, where
the production of goods such as high-technology
computers has soared. The fact that ports in
this region serve as the primary link to growing
Latin America also helps explain rapid growth
in manufactured exports from southeastern
ports.5
But changes at the national level also help
account for the differences in growth rates. Food
5
A "technical" factor is also involved in the rapid growth of manufactured
exports from the Miami Customs region. The Port of Miami specifically
prohibits all "dirty a n d dusty" cargo, such as petroleum, bulk minerals,
grains, a n d scrap metal b e c a u s e of the tourism orientation of the city.
products was the fastest-growing category of
U.S. exports in the 1970s; it was also the fastestgrowing export from the N e w Orleans customs
region. Because of the important role the Mississippi
River plays in draining corn, grain, and soybeans
from farms in the Midwest, ports in the New
Orleans region have an advantage in exporting
U. S. farm products.
Such changes in the pattern of southeastern
exports are consistent with the changes in the
overall pattern of U.S. trade in the 1970s. Net
agricultural exports moved from near balance t o
substantial surplus; chemicals, capital goods, and
airplanes were strong export performers. 6
6
l n addition to the analysis of trade patterns discussed here, the reader is
referred to the following papers, w h i c h discuss important aspects of recent
U. S. trade flows: William H. Branson, "Trends in U. S. Trade and
Comparative Advantage: Analysis a n d Prospects," unpublished paper
prepared for the U. S. National Science Foundation (September 1980);
Thomas O. Bayard, Trends in U. S. Trade, 1 9 6 0 - 7 9 , Economic Discussion
Paper # 7 , U. S. Department of Labor, July 1980; Harry Bowen a n d J o s e p h
Pelzman, A Constant Market Share Analysis of U. S. Export Growth,
Economic Discussion Paper # 10, U. S. Department of Labor, October 1980.
39
Miami
0 Food and live animals
1 Beverages and tobacco
2 Inedible crude materials
except fuels
3 Mineral fuels, lubricants
and related materials
4 Animal and vegetable
oils and fats
5 Chemicals and
related products
6 Basic manufacturers
7 Machinery and
transportation equipment
8 Miscellaneous
manufactured g o o d s
9 Goods not classified
by kind, except military
TOTALS
Tampa
($000)
(%)
($ 000)
(%)
($000)
874,963
2,887
33.8
.1
417,155
116,437
6.4
1.8
339,770
5,967
12.2
.2
1,007,210
38.9
128,221
2.0
541,522
19.4
141,469
5.5
10,634
.2
214
—
32,773
.5
9,534
.3
375
<%)
—
218,466
241,132
8.5
9.3
452,689
916,056
6.9
14.0
1,430,707
191,267
51.3
6.8
84,058
3.3
3,445,051
52.8
196,257
7.0
15,694
.6
966,407
14.8
74,731
2.7
40,289
.6
1,463
.1
423
9,586,677
—
6,524,721
2,791,432
Source: Dialog Information Retrieval Service: U . S . Exports, File 126.
The New Orleans customs region in 1980
exported large quantities of wheat, corn, soybeans, and animal feed to the communist
countries of eastern Europe, the U.S.S.R. (before
the embargo), and China. Eleven percent of
the New Orleans exports were to these nations
in 1980, up from 2.5 percent in 1970. Of total
U. S. exports to communist countries, N e w
Orleans accounted for almost half in 1980, up
from three-eighths in 1970. Agricultural exports
to non-communist countries expanded significantly in the 1970s to provide markets for U. S.
food products.
The Future of Southeastern Exports
Extrapolation is warranted. The growth of
southeastern exports in the 1980s will depend
generally on the same factors which have
boosted growth in the past: the growth of
markets abroad and the region's price advantages. The location advantage of District ports
and growth of the regional market at an aboveaverage rate invite expansion of southeastern
port trade and export-oriented production in
the District in the 1980s.
More specifically, U. S. food products and
crude materials exports are likely to continue *
to expand briskly. The world's population continues to grow and the U. S. can be expected to
continue t o fill the food gap. Given the advantages of ports in the New Orleans customs
region in this trade, it is likely that such exports
as wheat, feed grains, and soybeans, particularly (
from these ports, will continue to grow rapidly.
Lumber, w o o d pulp, paper and paperboard ,
exports are important throughout the Southeast
The outlook for such exports from the region
during the 1980s is also good. Pulp (and paper)
mills are becoming more concentrated in the
Southeast, owing partly to the timber base of >
the region. These new plants are the most
efficient in the world and thus enhance the 1
comparative advantage of U. S. exports.
Chemicals exports from the region should
also continue t o show strength—especially
agricultural chemicals. Pesticide, insecticide,
and fertilizer export expansion will be fueled
by both demographic and economic growth k
factors. Feeding the one-half increase in the
world's population expected in the last quarter
of this century will require crop yield increases
40
M A Y 1982, E C O N O M I C
REVIEW
New Orleans
Savannah
District Total
($ 000)
(%)
($ 000)
(%)
($ 000)
(%)
7,768,310
42,753
40.0
.2
166,091
4,357
7.0
.2
9,565,289
172,401
28.4
.5
4,725,506
24.4
643,127
27.2
7,045,586
20.9
571,935
3.0
1,577
.1
725,829
2.2
990,339
5.1
453
1,033,484
3.1
2,062,968
1,226,213
10.6
6.3
364,230
605,214
15.4
25.5
4,529,060
3,179,891
13.4
9.4
1,797,165
9.3
493,464
20.9
6,015,995
17.9
214,585
1.1
80,034
3.4
1,351,451
4.0
7,457
.3
55,582
.2
5,950
19,405,724
-
-
2,366,014
33,674,568
channels to a minimum depth of 55 feet (from
45 feet) t o allow large coal (and grain) vessels
to call at their ports. The Tennessee-Tombigee
Waterway should spur coal exports through
the M o b i l e area. Even without these major
improvements, new coal terminals and other
port developments are likely to lead to continued
rapid expansion of coal exports from the region.
One factor in the growth of manufactured
goods from the region will be whether Florida
becomes more of a manufacturing-based state.
Because of the Southeast's "Latin connection,"
another important factor which will help spur
the growth of manufactured exports will be the
pace of development in Latin America. Perhaps
the key to the growth of manufactured exports,
h o w e v e r , lies w i t h the efforts that small t o
medium-sized companies make in selling abroad.
The U. S. Department of Commerce is currently
working hard to create a greater export awareness among U. S. producers. The outlook for
future manufactured goods exports from the
Southeast appears, on balance, t o be less
certain than that for the other major commodities.
Summing Up
which will, in turn, depend upon increased use
of agricultural chemicals. Also, as countries
develop, they will increase their per capita
consumption of grain-intensive meat; this will
require higher grain production and thus more
fertilizer. Agricultural chemicals production is
heavily dependent on oil and gas; in the Southeast
the energy industry is centered in the N e w
Orleans area. Also, phosphate rock, the base
for producing phosphate fertilizers, abounds in
central Florida.
There is a mounting worldwide demand for
coal in response t o the increase in world oil
prices. Some ports in the region—New Orleans,
Mobile, Savannah—hope to expand dramatically their exports of coal to Asia and Europe.
Coal exports from the New Orleans customs
region are already large and growing rapidly. In
1970, coal exports were $21 million (2 percent
of the U. S. total); by 1980 they were $353
million (7.4 percent of the U. S. total).
According t o the U. S. D e p a r t m e n t of
Commerce, the immediate barrier to expanding
U. S. coal trade is a limited capacity to store and
load coal at the ports. The Ports of New Orleans
and M o b i l e plan to dredge their shipping
An increasing share of rapidly growing U. S.
exports is flowing through southeastern ports,
dominated by a massive flow of farm products
out of the N e w Orleans customs region. Food
product exports are the fastest-growing category of U. S. exports, and the New Orleans
region has a comparative advantage in exporting
these products. Compared to the nation, the
Southeast exports fewer manufactured goods.
Only the Miami customs district, with its proximity t o growing markets in Latin America, specializes in the export of manufactured goods.
Looking ahead, the growth of southeastern
exports in the 1970s should continue through
the mid-1980s, dominated by food products
with less emphasis on manufactured goods.
The major exception is that, as worldwide
demand for coal soars, coal exports may be the
"trade event" of the 1980s.
—William j. Kahley
41
FEDERAL RESERVE B A N K O F A T L A N T A
Industrial Impacts of
the 1981 Business Tax Cuts
The Accelerated Cost Recovery System (ACRS) included in the 1981 Tax Act
provides more rapid write-offs of depreciable assets for businesses. Manufacturing
industries important to the Southeast, however, may benefit somewhat less from
ACRS than U.S. manufacturing as a whole.
Introduction
In addition to substantially reducing the statutory
tax rates on personal income, the Economic Recovery Tax Act of 1981 (ERTA) made major
changes in the taxation of business income. The
most significant change is the adoption of the
Accelerated Cost Recovery System (ACRS) which
speeds up the rate at which business capital can
be depreciated for tax purposes. Indeed, it is
estimated that ACRS accounts for some 96
percent of the total tax savings generated by
business.
As a result of these tax savings due to ACRS,
federal corporate tax receipts should grow at a
rate well below the average annual growth rates
of the last three decades. One consequence of
this lower growth rate is that the share of corporate
taxes in total federal taxes should decline substantially. 1
How does ACRS fit into the development of
post-World War II corporate tax policy? What is
the economic rationale for ACRS? Finally, how
'For a more detailed overview of the Reagan tax spending program, see
J a m e s R. Barth, "The Reagan Program for Economic Recovery: An Historical
Perspective," this Review, October 1981.
will ACRS affect specific industries, particularly
those industries important to the economic base
of the Southeast?
Corporate Tax Policy
Before ACRS
The Accelerated Cost Recovery System continues a post-war trend toward progressively
more rapid write-offs of the costs incurred in
using depreciable assets in production. Prior to
1954, firms received no tax credits for new
investment and were essentially required for tax
purposes to use a straight-line depreciation formula based on legally prescribed asset lives. For
e x a m p l e , if t h e useful life of a particular
d e p r e c i a b l e asset w a s " n " years, 1 / n t h o f t h e
initial cost of t h e asset c o u l d be t a k e n as a
depreciation deduction in computing taxable
i n c o m e . In 1 9 5 4 , taxpayers w e r e for t h e first
t i m e allowed t o use accelerated depreciation
formulas. T h o u g h t h e p r e - 1 9 5 4 d e f i n i t i o n s
of useful asset life w e r e r e t a i n e d , t h e accelerated f o r m u l a s p e r m i t t e d taxpayers t o w r i t e
off m o r e t h a n 1 / n t h of t h e asset cost in t h e
" e a r l y " years of its useful life a n d less t h a n
1 / n t h of asset cost in later years. This effectively allowed taxes on the income generated
42
M A Y 1982, E C O N O M I C
REVIEW
by depreciable assets to be deferred, thereby
lowering the effective tax rate on business income.
Between 1954 and 1962, the useful lifetimes
for determining depreciation allowances were
gradually reduced. In 1962 the lifetimes were
thoroughly revised, and generally shortened,
resulting in a further acceleration of capital
recovery. In addition, Congress adopted an investment tax credit for purchases of equipment in
1962. This credit was subsequently made somewhat more generous in 1964, and then suspended
and restored twice between 1966 and 1971. In
1971, the investment credit was reinstated and
the Asset Depreciation Range (ADR) system was
adopted.
The enactment of ADR further liberalized tax
depreciation rules. Under ADR, taxpayers could
shorten or lengthen the period over which they
took depreciation by as much as 20 percent
relative to the 1962 guidelines. In 1975 the rate
of the investment tax credit was increased.
Finally, the investment tax credit was made
permanent in 1978.
Thus, the system for recovering business capital costs prior t o ACRS was the product of
successive tax policies which provided enhanced
incentives for capital spending. Many observers
considered such policies necessary to offset the
impact of increasingly higher inflation on the real
value of depreciation deductions.
Under traditional accounting techniques, depreciation allowances are calculated on the basis
of the historical rather than the replacement cost
of assets. During periods of inflation this practice
can result in an overstatement of " t r u e " profits.
The reason is that, while business receipts are
likely to rise with inflation, one important cost of
generating those receipts—namely depreciation or
the wearing out of existing capital—is measured
as a constant, when in fact the cost of replacing
depreciating capital is actually rising. Failure t o
measure depreciation on a replacement cost
basis therefore results in an overstatement of
taxable profits during periods of inflation. This in
turn increases the effective, if not statutory, tax
rate on business income.
One means of reducing the adverse impact of
inflation is to permit taxpayers to use depreciation allowances more rapidly, as was done in
the 1950s, '60s, and the early 70s. However,
beginning in the mid '70s, the existing capital
cost recovery system, which was a modified
version of the ADR system adopted in 1971,
FEDERAL RESERVE BANK O F A T L A N T A
increasingly was criticized as inadequate in an
environment of persistently high inflation rates.2
In particular, critics argued that unless depreciation rules were further liberalized, inflation
would generate significant, though unlegislated,
increases in the effective tax rate on capital
income; and that this in turn would discourage
capital spending by U. S. industry. In response t o
these concerns, the Reagan administration proposed and Congress adopted in August of 1981
the Accelerated Cost Recovery System as a
replacement for the ADR system.
Provisions of ACRS
The ADR system attempted to match the
stream of nominal depreciation deductions for
the cost of an asset with the stream of income
earned by the asset. In practice, this meant that
the Treasury, on the basis of actual industry
experience, specified a midpoint life for industrial equipment. Taxpayers could then elect lives
20 percent longer or shorter than the midpoint
life. ADR midpoint lives ranged from 2.5 years for
certain special manufacturing tools to 50 years
for certain public utility equipment. For assets
not eligible for ADR and for taxpayers w h o did
not elect ADR, useful lives were determined
according to the facts and circumstances pertaining to each asset or by agreement between the
taxpayer and the IRS.
By comparison, ACRS places all depreciable
assets in one of four classes based on their
previous ADR midpoint life. These classes determine the length of time over which capital costs
may be written off for tax purposes. In general,
the recovery periods for different types of assets—3
years, 5 years, 10 years, and 15 years—are
shorter than the corresponding recovery periods
under the A D R system. The rate of investment tax
credit allowed for certain short-lived assets is also
somewhat more generous under ACRS than
under ADR. Table 1 shows comparisons of both
the recovery periods and the investment tax
credits allowed for different types of assets
under ACRS and the ADR system. Clearly, ACRS
reduces the recovery period substantially for
some assets and modestly for others. Note also
2
See, for example, Joseph J. Cordes, "Tax Policies for Encouraging Innovation: A
Survey" a n d Dale W. Jorgenson, "Taxation a n d Technical Change," in Ralph
Landau a n d N. Bruce Hannay, eds., Taxation, T e c h n o l o g y a n d t h e U.S.
E c o n o m y , f J e w York: Pergamon Press, 1981.
43
Table 1 . Capital Cost Recovery Periods and Investment Tax Credits
Under ACRS and ADR
Investment Tax
Credit
Asset
Old Law
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
0.100
0.100
0.100
0.067
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.067
0.033
0.100
0.100
0.100
0.100
0.100
0.0
0.0
0.0
0.0
0.0
0.0
0.100
0.100
0.100
0.100
0.100
0.0
0.0
0.0
0.0
0.0
0.0
Furniture and Fixtures
Fabricated Metal Products
Engines and Turbines
Tractors
Agricultural Machinery
Construction Machinery
Mining and Oil Machinery
Metalworking Machinery
Special Industry Machinery
General Industrial Equipment
Office and Computing Machinery
Service Industry Machinery
Electrical Machinery
Trucks, Buses, and Trailers
Autos
Aircraft
Ships and Boats
Railroad Equipment
Instruments
Other Equipment
Industrial Buildings
Commercial Buildings
Religious Buildings
Educational Buildings
Hospital Buildings
Other Nonfarm Buildings
Railroads
Telephone and Telegraph
Electric Light and Power
Gas
Other Public Utilities
Farm.
Mining, Shafts and Wells
Other Nonbuilding Facilities
Residential
Inventories
Land
ACRS
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.067
0.100
0.100
0.100
0.100
0.100
0.0
0.0
0.0
0.0
0.0
0.0
0.100
0.100
0.100
0.100
0.100
0.0
0.0
0.0
0.0
0.0
0.0
Cost Recovery Periods
(Useful Lifetimes)
Old Law
8.00
10.00
12.48
5.00
8.00
7.92
7.68
10.16
10.16
9.84
8.00
8.24
9.92
5.00
3.00
7.00
14.40
12.00
8.48
8.16
28.80
47.60
48.00
48.00
48.00
30.90
24.00
21.60
21.60
19.20
17.60
25.00
6.80
28.20
40.00
0.0
0.0
ACRS
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
3.00
5.00
5.00
5.00
5.00
5.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
10.00
10.00
15.00
5.00
15.00
15.00
0.0
0.0
Source: Don Fullerton a n d Yolanda K. Henderson, " L o n g Run Effects of the Accelerated Cost Recovery System," Discussion Pages No. 120,
W o o d r o w Wilson School, Princeton University, Princeton, N. J., December 1981, a d a p t e d from Table 1.
that the substitution of ACRS for ADR does not
affect the tax treatment of inventories and land.
The intent of ACRS is to provide businesses
with more generous allowances for the costs of
capital recovery. However, these more liberal
allowances are of actual value t o firms only if
they are able to use them. The ability of any
given firm to fully utilize its depreciation allowances in any given year is largely determined by
its taxable income. A firm with sufficient taxable
income will be able to use all of its depreciation
allowances as deductions against its gross income
and all of its investment tax credits as offsets
against the remaining tax liability.
For firms with insufficient taxable income,
however, the value of depreciation deductions
along with other business expenses may exceed
gross income, resulting in net operating losses
44
M A Y 1982, E C O N O M I C REVIEW
(NOLs). In such situations, firms would also be
unable to utilize any investment tax credits.
Still other firms might be able t o utilize fully all
depreciation deductions, but yet might have
sufficiently low taxable income once such
deductions were taken t o preclude the full use
of tax credits. Net operating losses and/or
unused credits w o u l d either have t o be carried
backward for a period of up to 3 years—that is,
applied t o prior years' tax liabilities—or carried
forward against future tax liabilities for a period
of up to 7 years under ADR and 15 years under
ACRS.
Firms with sufficient taxable income in earlier
years would, in effect, still be able t o fully
utilize available credits and deductions through
the use of carrybacks. However, firms w i t h
insufficient ability to carryback would have t o
defer using at least some credits and deductions
earned in the current year. The firms likely t o
be in this position are firms which have been
unprofitable for several years, and new firms
which are often unprofitable in their start-up
years and w i t h no ability to carryback.
Firms that are constrained in their ability t o
utilize depreciation deductions and the investment tax credit are placed at a disadvantage
relative to other firms because they are less
able to take advantage of investment incentives
in the tax code. There is considerable evidence
that many firms were encountering difficulties
in fully utilizing available depreciation deductions and tax credits under the ADR system,
which provided less generous capital recovery
allowances than does ACRS.3
Thus, without some mechanism t o facilitate
the use of the additional deductions created
by ACRS, a larger number of corporations than
before are likely t o encounter problems in fully
using capital cost recovery allowances. This
situation would have several consequences.
First, if a significant number of firms were
compelled to carry unused deductions and
credits forward, the objective of ACRS, which
was to permit firms to take deductions more
rapidly, would not be completely achieved.
Second, as noted above, firms which could not
fully utilize deductions and credits would receive
3
For a detailed discussion of this issue, see Joseph J. Cordes, and Steven M.
Sheffrin: "Taxation and the Sectoral Allocation of Capital in the U.S.,
National Tax Journal, December 1981 ; and "The Tax Advantage of Debt
Finance," 1981 Proceedings of the National Tax Association, forthcoming.
S I G N I F I C A N T C H A N G E S IN
POST-WAR C O R P O R A T E TAX POLICY
Change in Corporate Tax Policy
1954
Accelerated
depreciation
straight-li ne formulas
1962
Asset lifetimes revised
for new investment
formulas
permitted.
in place
and shortened;
enacted.
tax
credit
1964
Investment
tax credit liberalized,
corporate
rate reduced
from 52 to 48
percent.
tax
1966-71
Investment
tax credit suspended
twice during this
period.
1971
Asset
Depreciation
1975
Rate
of investment
1978
Investment
tax credit
made permanent
and
allowed
to offset a higher maximum
fraction
of
corporate
tax liability, corporate
tax rate
reduced
from 48 to 46
percent.
1981
ACRS
Range
and
System
tax credit
of
restored
enacted.
increased.
enacted.
a less than proportionate share of the tax
savings resulting from ACRS. Moreover, such
firms would become prime targets for takeover attempts by other firms interested in part
in acquiring unused tax credits and deductions.
Two mechanisms to facilitate the use of the
investment incentives created by ACRS were
included in the administration tax package: (1)
an extension of the carryforward period for net
operating losses from 7 to 15 years, and (2)
liberalization of rules governing leasing arrangements between firms. These provisions are
intended t o help firms with insufficient taxable
incomes t o use at least some benefits from
otherwise unused deductions and credits.
Increasing the carryforward period from 7 to
15 years would be of some immediate benefit
to corporations about t o exceed the prior 7
year limit. However, the long run impact of
extending carryforwards is likely t o be modest
since the present value of credits or deductions
carried forward that far would be worth a
fraction of their initial value.
Liberalization of equipment leasing rules to
allow a wide variety of transactions to be
characterized as leases for tax purposes should,
however, have a discernible impact. The new
rules permit sufficient flexibility in arranging
lease terms so that firms that otherwise would
be unable to fully utilize increased depreciation
deductions and tax credits conceivably could
45
FEDERAL RESERVE BANK O F ATLANTA
capture all the tax benefits from ACRS through
appropriately structured leasing arrangements.
As the leasing market develops, firms w i t h
insufficient taxable income will lease an increasing
fraction of their new investment to profitable
lessors. This means that potential loss of credits
and deductions on new investment will be of
less concern. That's because the new leasing
rules effectively permit deductions and credits
to be transferred from firms with insufficient
taxable income to firms less likely t o experience
utilization problems.
The Industrial Impacts of ACRS
To assess the relative impact of ACRS among
different industries, we first must consider how
the economic impact of investment tax incentives is to be measured. One procedure frequently
used is to translate the amount of allowable
investment credit and depreciation deductions
into an "equivalent first-year deduction." Another
is to estimate the impact of different depreciation
rules and tax credit schemes on the effective
tax rate levied on the capital income flowing
from different investments.
While the equivalent first-year deduction
measure is easily calculated and interpreted, it
has important limitations. Most notably, this
measure is not a price variable since it does not
directly measure the impact of different tax
regimes on either the price of capital services
or the return to capital investment. This latter
information is essential if one wishes t o assess
the impact of tax policy on the allocation of
capital to different investment activities and
ultimately t o different industries.
One approach which has been widely used
to obtain this information is based on user cost
of capital formulas of the sort initially developed
by Hall and Jorgenson. 4 These formulas are
used to estimate the real pre-tax return, R, that
a hypothetical project of $1 invested in a
particular asset in a particular industry would
have t o earn in order to provide investors with
some pre-determined after-tax real rate of
return, r, given some assumed values of the
inflation rate and relevant tax parameters. The
size of the effective tax wedge between the
" R o b e r t E. Hall a n d D a l e W. J o r g e n s o n , " A p p l i c a t i o n of t h e T h e o r y of O p t i m a l
C a p i t a l A c c u m u l a t i o n , " in Gary Fromm, ed., T a x I n c e n t i v e s a n d C a p i t a l
S p e n d i n g , W a s h i n g t o n , D C., B r o o k i n g s Institution, 1 9 7 1 .
T a b l e 2 . R e a l Pre-Tax R a t e of R e t u r n R e q u i r e d
to Provide a 4 Percent Real After-Tax Return
After-tax real
return=4%
Inflation
rate=8%
ACRS Class and Asset Detail
After tax real
return=4%
Inflation
rate=6%
(1)
(2)
(3)
(1)
(2)
ADR
1982
1986
ADR
1986
ACRS A C R S
ACRS
3-Year
Automobiles
Light Trucks
Small Tools
4.9
4.8
4.9
5.0
3.5
3.5
3.5
3.5
2.8
2.8
2.8
2.6
4.3
4.4
4.1
4.4
2.3
2.4
2.4
2.1
5-Year
Machinery & Equipment
Heavy Trucks
Computers
Vessels
Aircraft
Bus-Vehicle
Steam
Furn & Fixtures
Small Tools
5.2
5.1
4.7
4.5
6.1
5.5
4.5
5.5
4.6
4.7
3.8
3.8
3.6
3.6
3.9
3.7
3.6
3.9
3.8
3.5
3.1
3.2
2.5
2.4
3.4
2.9
2.5
3.6
3.2
N.A
4.6
4.6
4.1
3.7
5.7
4.8
3.7
5.2
4.2
3.6
2.7
3.0
N.A
N.A
3.2
2.4
N.A
3.5
3.0
N.A
10-Year
Machinery & Equipment
Pollution
7.1
7.0
6.5
5.7
5.7
5.2
4.9
4.9
4.6
6.5
6.5
6.1
4.4
4.4
4.3
15-Year Equip.
Machinery & Equip
9.4
9.4
7.8
7.8
6.7
6.7
8.9
8.9
6.2
6.2
15-Year Bid.
Buildings
8.1
8.1
6.6
6.6
6.6
6.6
7.8
7.8
6.3
6.3
TOTAL
7.5
5.7
5.1
6.9
4.6
Source: Calculated by the authors from U.S. Treasury D ipartment data
pre- and the after-tax rate of return on each
investment may then be calculated as (R-r),
while the effective tax rate on each investment
can be estimated from the ratio (R-r)/R.
This approach has the attractive feature of
being prospective: it measures the expected
tax consequences if a particular investment is
undertaken given certain assumptions that the
investor makes about the future course of tax
policy and of inflation. However, as Bradford
and Fullerton have recently noted, estimates of
the effective tax rate calculated from the general
formula R-r/R may be highly sensitive t o empir-
46
M A Y 1982, E C O N O M I C
REVIEW
ical assumptions used to estimate the required
pre-tax return. 5
Moreover, calculated values of the effective
tax rate are undefined when R is zero and make
little economic sense for values of R close to
zero. Hence, rather than use estimated effective
tax rates, w e have chosen t o compare the
impact of ADR and ACRS in terms of the
required pre-tax real return—R—that different
assets would have to earn to provide an investor
with a 4 percent real return after corporate
taxes.
The first three columns of Table 2 compare
the required pre-tax return needed for a 4
percent real after-tax return when the inflation
rate is assumed to be 8 percent. Clearly, the
required pre-tax return differs among various
assets under both ADR and ACRS. Indeed,
under both systems the required pre-tax return
increases with the life of the asset.6 Thus, if the
required pre-tax return is viewed as a "hurdle
rate" which the return to a prospective investment must meet or exceed in order t o be
worthwhile, both ADR and ACRS favor investment in shorter-lived assets.
Moreover, though ACRS reduces the required
pre-tax return for all assets, it reduces it relatively
more for shorter-lived than for longer-lived
assets. For example, assuming the inflation rate
is 8 percent, the fully phased in 1986 version of
ACRS may be expected to reduce the required
pre-tax return of 3-year assets by 42 percent, of
5-year assets by 40 percent, of 10-year assets
by 31 percent, of 15-year equipment by 29
percent, and of buildings by 18 percent. If the
inflation rate is assumed to be 6 percent, the
reduction in the required return due to adoption
of ACRS would be 47 percent in the case of 3year assets, 41 percent for 5-year assets, 32
percent for 10-year assets, 30 percent for 15year equipment, and 19 percent for buildings.
5
David F. Bradford and Don Fullerton, "Pitfalls in the Construction and Use of
Effective Tax Rates," Working Paper No. 688, National Bureau of Economic
Research, June 1981.
6
For an analysis of the potential reductions in economic efficiency resulting
from this differential treatment of assets, see Jane G. Gravelle, "The Social
Cost of Non-neutral Taxation: Estimates for Non-residential Capital," in
Charles R. Holten, ed., Depreciation, Inflation, and the Taxation of
Income from Capital, Washington, DC.: The Urban Institute, 1981.
T a b l e 3 : Real Pre-Tax R e t u r n R e q u i r e d t o Provide
a 4 Percent Real After-Tax R e t u r n
Alter tax required
return=4%
Inflation
rate=8%
(1)
ADR
(2)
1986
ACRS
(3)
% Reduction
in Required
Return Due
t o ACRS
Agriculture
6.5
4.8
26
Mining
6.2
3.7
40
Logging
6.5
4.3
34
W o o d Products & Furn
7.6
5.3
30
Glass, C e m e n t , & Clay
7.2
4.6
36
Primary Metals
6.5
4.2
35
Fabricated Metals
8.3
5.4
35
Machinery & Instruments
7.0
4.9
30
Electrical M a c h i n e r y
6.4
4.6
28
Motor Vehicles
6.0
3.4
43
Transportation
Equipment
7.0
4.8
31
Food
7.7
5.1
34
Tobacco
7.0
4.4
37
Textiles
6.3
4.3
32
Apparel
7.2
5.2
28
Pulp & Paper
6.1
3.9
36
Printing & Publishing
6.8
4.5
34
Chemicals
6.1
4.3
30
Petroleum Refining
6.7
3.9
42
Rubber
6.6
4.3
35
Leather
8.2
5.6
32
Transportation Service
6.4
3.7
42
Utilities
7.5
5.4
28
Communications
7.2
4.3
40
Services and Trade
9.1
6.6
27
TOTAL
7.5
5.1
32
Source: Computations made by the authors based on U.S. Treasury
Department data.
How Will ACRS Affect Specific
Industries in the Southeast?
The estimates in Table 2 indicate that ACRS
will not provide equal incentives t o all types of
capital investment. Since different industries
are likely to rely on different mixes of capital,
this implies that the adoption of ACRS, though
benefitting all industries, will benefit some
industries more than others. In particular, ACRS
will favor industries for which short-lived equipment represents a large share of total capital.
Table 3 presents estimates of the pre-tax
return required under both ADR and fullyphased-in ACRS to earn a 4 percent real after47
FEDERAL RESERVE BANK O F ATLANTA
Chart 1. Industrial Impacts of ACRS
Industry
Percent Reduction
in t h e Required
Pre-Tax Return
Attributable to ACRS
Southeast vs. U.S. :
Share of
Manufacturing Employment
(Percent)
0
2
4
6
8
10
12
14
I
I
I
I
I
I
I
"| 1 . 5 %
M o t o r Vehicle
43%
Petroleum Refining
42%
Tobacco
37%
Glass, Cement, & Clay
36%
Paper & Pulp
36%
Primary M e t a l s
35%
Fabricated M e t a l s
35%
¡4.5
Southeast
•
10.3
J 0.3
U.S.
• 3.3
J 3.1
IJ4.7
3.2
~| 4 . 0
| 5.6
I 6.0
]7.9
2.6
Rubber
35%
Printing & Publishing
34%
Food
34%
Logging
34%
Textiles
32%
Leather
32%
Transportation E q u i p m e n t
31%
W o o d Products & Furniture
30%
Machinery & Instruments
30%
3.7
4.3
9.5
7.8
10.7
0.4
]
9.6
11.3
T 1 -2
6.7
j r r
8.0
5.5
5.9
I
•
Chemicals
30%
Apparel
28%
Electrical M a c h i n e r y
28%
13.5
6.7
| 4.5
13.5
I
I 6.8
6.7
tax return in various industries. Column 3 of
Table 3 shows the percent reduction in the
required pre-tax return attributable to ACRS.
These ACRS reductions will have varying
impacts on manufacturing industries in the
Southeast and in the U. S. The first column of
8.8
Chart 1 contains manufacturing industries ranked
by the benefits received from ACRS. The second
column shows each industry's share of manufacturing employment in the Southeast and the
U.S.
Chart 1 suggests that, relative t o U. S. manu-
48
M A Y 1982, E C O N O M I C
REVIEW
'FL
District States'
Share of
Manufacturing Employment
(Percent)
GA
LA
MS
TN
industries which rank first in terms of their
share in Southeast manufacturing employment,
chemicals and apparel, rank at the bottom of
manufacturing industries in terms of the estimated investment stimulus provided by ACRS.
Differences in the impact of ACRS are likely
to be still more striking at the state level. Chart
1 also presents some information on the industrial impacts of ACRS in the southeastern states.
Chart 1 suggests that the industrial impacts
of ACRS are likely to vary among states in the
Southeast. In particular, manufacturing industries important t o the economies of Alabama
and Louisiana will benefit relatively more than
manufacturing industries important t o other
states in the region, while manufacturing industries important t o the economies of Georgia
and Mississippi should benefit relatively less.
Conclusion
As this article shows, the Accelerated Cost
Recovery System included in the 1981 Tax Act
provides more rapid write-offs of depreciable
assets for businesses. Manufacturing industries
important to the Southeast, however, may benefit
somewhat less from ACRS than U.S. manufacturing as a whole.
facturing as a whole, manufacturing industries
important to the industrial base of the Southeast
may benefit somewhat less from the investment
incentives provided by ACRS. The comparisons
^re, of course, more striking in the case of some
ndustries than others. For example, the t w o
FEDERAL RESERVE B A N K O F A T L A N T A
—James R. Barth
and Joseph J. Cordes*
•Department of Economics
George Washington University
49
i t i v e s
P e r s P f S s
So
u t n
e
on the
Econ
'
e o o ^ e ^
t
a
r l \ c \ e
s
' -
ftfrrffL
O1
af
f r e e
s U
a M ^
e a « *
50
e
p,t\a
nta
,
6
US «>
FINANCE
WÊÊÊmmÊÊÊÊmuÊÊÊÊmma
MAR
1982
UNITED STATES
C o m m e r c i a l Bank Deposits
Demand
NOW
Savings
Time
C r e d i t Union D e p o s i t s
Share Drafts
Savings & T i m e
FEB
1982
1,107,074 1,099,303
286,543
289,113
53,777
54,550
148,047
148,282
634,123
647,213
43,030
41,552
2,769
2,685
36,283
37,602
MAR
1981
ANN.
%
CHG.
998,599
298,370
34,819
157,545
540,915
35,578
1,835
31,955
+
11
4
+ 57
6
+ 20
+ 21
+ 51
+ 18
S a v i n g s <5c L o a n s
Total Deposits
NOW
Savings
Time
+
Savings & Loans
Total Deposits
NOW
Savings
Time
C o m m e r c i a l Bank Deposits
Demand
NOW
Savings
Time
C r e d i t Union D e p o s i t s
Share Drafts
S a v i n g s Sc T i m e
ALABAMA
C o m m e r c i a l Bank Deposits
Demand
NOW
Savings
Time
C r e d i t Union D e p o s i t s
Share Drafts
S a v i n g s <5c T i m e
FLORIDA
Commercial Bank Deposits
Demand
NOW
Savings
Time
C r e d i t Union D e p o s i t s
Share Drafts
Savings & T i m e
r.FORniA
119,830
34,317
7,169
14,711
67,075
4,225
293
3,621
118,492
34,161
7,030
14,714
65,409
4,088
278
3,487
107,556
34,941
4,329
15,616
56,192
3,253
211
2,827
13,511
3,420
622
1,523
8,389
734
56
625
13,409
3,504
612
1,530
8,190
717
55
617
12,196
3,477
397
1,642
7,058
526
46
478
+
11
2
+ 57
7
+ 19
+ 40
+ 22
+ 31
S a v i n g s <fc L o a n s
Total Deposits
NOW
Savings
Time
39,636
12,362
3,164
6,352
18,681
1,925
163
1,523
1
39,219
12,174
3,107
6,374
18,152
1,845
156
1,431
36,312
13,067
1,892
6,886
15,361
1,502
118
1,176
+
9
5
+ 67
8
+ 22
+ 28
+ 38
+ 30
S a v i n g s ic L o a n s
Total Deposits
NOW
Savings
Time
Commercial Bank Deposits
Demand
NOW
Savings
Time
C r e d i t Union D e p o s i t s
Share Drafts
Savings & T i m e
16,352
5,837
1,010
1,578
8,893
778
25
720
16,151
5,877
997
1,573
8,634
755
23
703
14,030
5,865
621
1,589
7,070
551
14
524
+
+
+
+
+
+
17
0
63
1
26
41
79
37
Savings & Loans
Total Deposits
NOW
Savings
Time
C o m m e r c i a l Bank Deposits
Demand
NOW
Savings
Time
C r e d i t Union D e p o s i t s
Share Drafts
Savings & Time
MISSISSIPPI
C o m m e r c i a l Bank Deposits
Demand
NOW
Savings
Time
C r e d i t Union D e p o s i t s
Share Drafts
S a v i n g s <5c T i m e
21,605
6,194
977
2,394
12,716
115
12
107
21,511
6,227
941
2,380
12,493
114
8
106
19,062
5,934
572
2,428
10,718
83
4
77
+ 13
+
4
+ 71
Savings & Loans
Total Deposits
NOW
Savings
Time
10,002
2,362
536
734
6,637
N.A.
N.A.
N.A.
9,799
2,336
521
731
6,449
N.A.
N.A.
N.A.
8,910
2,419
326
780
5,678
N.A.
N.A.
N.A.
Commercial Bank Deposits
Demand
NOW
Savings
Time
C r e d i t Union D e p o s i t s
Share Drafts
Savings & T i m e
18,724
4,143
860
2,130
11,758
673
37
646
18,402
4,044
852
2,125
11,491
657
36
630
17,046
4,179
521
2,291
10,307
591
29
572
Notes:
-
11
2
Mortgages Outstanding
Mortgage Commitments
+ 66
-
6.
+ 19
+ 30
+ 39
+ 28
1
+ 19
+ 39
+200
+ 39
+
-
12
2
+ 64
-
6
+ 17
Mortgages Outstanding
Mortgage Commitments
Mortgages Outstanding
Mortgage Commitments
Mortgages Outstanding
Mortgage Commitments
Mortgages Outstanding
Mortgage Commitments
Mortgages Outstanding
Mortgage Commitments
Savings & Loans
Total Deposits
NOW
Savings
Time
Mortgages Outstanding
Mortgage Commitments
+
+
+
+
+
+
10
1
65
7
14
14
28
13
Savings & Loans
Total Deposits
NOW
Savings
Time
Mortgages Outstanding
Mortgage Commitments
ANN.
%
CHG.
MAR
1982
FEB
1982
MAR
1981
524,297
8,667
91,811
424,412
JAN
508,240
15,547
521,441
8,377
92,743
420,811
DEC
509,133
15,163
510,074
4,093
100,227
405,142
JAN
495,415
15,893
77,150
1,425
11,708
64,037
JAN
74,418
3,364
76,566
1,372
11,766
63,471
DEC
74,633
3,488
74,240
624
12,824
60,592
JAN
71,593
3,382
+ 4
+128
9
+ 6
4,412
74
571
3,791
JAN
3,979
49
4,404
71
579
3,782
DEC
4,003
51
4,369
32
654
3,692
JAN
3,969
138
+ 1
+ 131
- 13
+ 3
46,917
998
7,868
37,958
JAN
45,536
2,913
46,371
962
7,893
37,444
DEC
45,702
3,059
45,151
461
8,676
35,792
JAN
43,188
2,721
+ 4
+116
9
+ 6
9,657
146
1,166
8,380
JAN
9,324
113
9,720
143
1,183
8,430
DEC
9,349
111
9,431
53
1,329
8,050
JAN
9,336
175
7,577
88
1,208
6,298
JAN
7,151
235
7,519
83
1,216
6,238
DEC
7,140
208
6,972
31
1,210
5,742
JAN
6,810
225
+ 9
+184
0
+ 10
2,382
40
221
2,136
JAN
2,200
15
2,378
37
222
2,131
DEC
2,205
17
2,354
14
242
2,100
JAN
2,188
61
+ 1
+186
9
+ 2
6,205
78
5,474
673
JAN
6,228
39
6,173
75
5,445
657
DEC
6,234
42
5,963
33
5,216
591
JAN
6,102
62
+ 4
+ 136
+ 5
+ 14
+ 3
+ 112
8
+ 5
+
-
+
-
3
2
4
1
+ 0
- 64
+
+
5
7
+ 2
+ 175
-
12
+
4
- 0
-
+
+
35
5
4
+ 1
- 75
+ 2
- 37
All d e p o s i t d a t a a r e e x t r a c t e d f r o m t h e F e d e r a l R e s e r v e R e p o r t of T r a n s a c t i o n A c c o u n t s , o t h e r D e p o s i t s and V a u l t C a s h ( F R 2 9 0 0 ) ,
a n d a r e r e p o r t e d f o r t h e a v e r a g e of t h e w e e k e n d i n g t h e 1st W e d n e s d a y of t h e m o n t h . T h i s d a t a , r e p o r t e d b y i n s t i t u t i o n s w i t h
o v e r $15 m i l l i o n in d e p o s i t s a s of D e c e m b e r 3 1 , 1 9 7 9 , r e p r e s e n t s 9 5 % of d e p o s i t s in t h e six s t a t e a r e a . S a v i n g s a n d l o a n m o r t g a g e
d a t a a r e f r o m t h e F e d e r a l H o m e L o a n B a n k B o a r d S e l e c t e d B a l a n c e S h e e t D a t a . T h e S o u t h e a s t d a t a r e p r e s e n t t h e t o t a l of t h e six s t a t e s .
S u b c a t e g o r i e s w e r e c h o s e n on a s e l e c t i v e b a s i s a n d d o n o t a d d t o t o t a l .
N.A. = fewer than four institutions reporting.
http://fraser.stlouisfed.org/
FEDERAL RESERVE BANK O F
Federal Reserve Bank of St. Louis
ATLANTA
51
EMPLOYMENT
••••••••
UNITED STATES
Civilian Labor F o r c e - thous.
Total Employed - thous.
Total Unemployed - thous.
U n e m p l o y m e n t R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. R a t e - %
M f g . A v g . Wkly. H o u r s
M f g . A v g . Wkly. E a r n . - $
SOUTHEAST
Civilian Labor F o r c e - thous.
Total Employed - thous.
Total Unemployed - thous.
U n e m p l o y m e n t R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. R a t e - %
M f g . A v g . Wkly. H o u r s
M f g . A v g . Wkly. E a r n . - $
ALABAMA
Civilian Labor F o r c e - thous.
Total Employed - thous.
Total Unemployed - thous.
U n e m p l o y m e n t R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. R a t e - %
M f g . A v g . Wkly. H o u r s
M f g . A v g . Wkly. E a r n . - $
Civilian Labor F o r c e - thous.
Total Employed - thous.
Total Unemployed - thous.
U n e m p l o y m e n t R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. R a t e - %
M f g . A v g . Wkly. H o u r s
M f g . A v g . Wkly. E a r n . - $
GEORGIA
Civilian Labor F o r c e - thous.
Total Employed - thous.
Total Unemployed - thous.
U n e m p l o y m e n t R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. R a t e - %
M f g . A v g . Wkly. H o u r s
M f g . A v g . Wkly. E a r n . - $
LOUISIANA
Civilian Labor F o r c e - thous.
Total Employed - thous.
Total Unemployed - thous.
U n e m p l o y m e n t R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. R a t e - %
M f g . A v g . Wkly. H o u r s
M f g . A v g . Wkly. E a r n . - $
MISSISSIPPI
Civilian Labor Force - thous.
Total Employed - thous.
Total Unemployed - thous.
U n e m p l o y m e n t R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. R a t e - %
M f g . A v g . Wkly. H o u r s
Mf
g - A v g - Wkly. E a r n . - $
TENNESSEE
Civilian Labor F o r c e - thous.
Total Employed - thous.
Total Unemployed - thous.
U n e m p l o y m e n t R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. R a t e - %
M f g . A v g . Wkly. H o u r s
M f g . A v g . Wkly. E a r n . - $
Notes:
ANN.
%
CHG.
FEB
1982
JAN
1982
FEB
1981
108,324
97,946
10,378
8.8
N.A.
N.A.
38.9
325
108,014
97,831
10,183
8.5
N.A.
N.A.
37.1
312
107,015
98,401
8,614
7.4
N.A.
N.A.
39.5
306
+ 1
- 0
+20
13,824
12,519
1,306
9.2
N.A.
N.A.
39.5
289
13,804
12,433
1,371
9.4
N.A.
N.A.
32.7
244
12,801
11,848
954
7.5
N.A.
N.A.
40.0
267
+ 8
+ 6
+37
1,668
1,437
232
13.3
N.A.
N.A.
39.7
288
1,673
1,426
248
14.0
N.A.
N.A.
29.3
228
1,639
1,484
155
9.1
N.A.
N.A.
39.6
271
+ 2
- 3
+50
4,558
4,236
322
7.3
N.A.
N.A.
39.5
270
4,511
4,165
346
7.4
N.A.
N.A.
38.9
267
4,015
3,763
252
6.7
N.A.
N.A.
41.2
258
+14
+13
+28
2,607
2,397
210
8.1
N.A.
N.A.
39.3
274
2,607
2,387
220
8.2
N.A.
N.A.
29.9
208
2,396
2,239
157
6.4
N.A.
N.A.
40.1
245
+ 9
+ 7
+34
1,836
1,661
176
9.2
N.A.
N.A.
40.5
375
1,849
1,659
189
10.1
N.A.
N.A.
34.9
328
1,761
1,634
127
6.9
N.A.
N.A.
40.8
341
+ 4
+ 2
+39
1,062
953
108
9.5
N.A.
- N.A.
38.6
246
1,051
939
112
10.0
N.A.
N.A.
28.7
181
1,010
922
89
8.2
N.A.
N.A.
39.1
230
+ 5
+ 3
+21
2,093
1,835
258
11.4
N.A.
N.A.
39.4
278
2,113
1,857
256
10.9
N.A.
N.A.
34.4
251
1,980
1,806
174
7.8
N.A.
N.A.
39.4
?55
+ 6
+ 2
+48
- 2
+ 6
- 1
+ 8
+ 0
+ 6
- 4
+ 5
- 2
+12
- 1
+10
- 1
+ 7
0
+ 9
FEB
1982
JAN
1982
FEB
1981
ANN.
%
CHG.
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & R e a l E s t .
Trans. C o m . & Pub. Util.
89,863
19,385
3,686
20,510
16,084
18,675
5,324
5,058
89,760
19,440
3,706
20,676
15,890
18,510
5,329
5,059
90,l3r
20,065
3,901
20,196
16,458
18,126
5,245
5,076
- 0
-3
- 6
+ 2
- 2
+ 3
+ 2
- 0
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & R e a l E s t .
Trans. Com. & Pub. Util.
11,447
2,232
679
2,676
2,153
2,215
637
696
11,424
2,234
678
2,695
2,133
2,195
637
695
11,320
2,275
673
2,619
2,194
2,095
623
691
+
+
+
+
+
+
+
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & R e a l E s t .
Trans. Com. & Pub. Util.
1,338
352
63
271
293
212
59
71
1,333
348
62
273
292
212
59
71
1,342
359
63
265
300
207
59
71
- Ó
- 2
0
+ 2
- 2
+ 2
0
0
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
F i n . , I n s . , 3c R e a l E s t .
Trans. Com. & Pub. Util.
3,813
468
268
1,019
621
919
280
227
3,805
469
274
1,027
614
901
280
228
3,704
465
274
976
631
853
266
226
+
+
+
+
+
+
3
1
2
4
2
8
5
0
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & R e a l E s t .
T r a n s . C o m . <5c P u b . U t i l .
2,160
505
99
493
439
361
114
142
2,156
504
97
496
436
359
114
142
2,163
513
100
496
441
351
113
143
+
+
-
0
2
1
1
0
3
1
1
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
F i n . , Ins., & R e a l E s t .
Trans. Com. & Pub. Util.
1,628
209
136
370
311
294
76
132
1,622
210
133
372
308
293
76
131
1,592
216
133
357
307
281
76
130
+
+
+
+
+
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
F i n . , Ins., & R e a l E s t .
Trans. C o m . & Pub. Util.
809
212
40
161
188
121
33
40
807
213
40
161
185
121
33
40
814
219
39
158
194
120
32
40
+
+
+
+
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & R e a l E s t .
Trans. Com. & Pub. Util.
1,699
486
73
362
301
308
75
84
1,701
490
72
366
298
309
75
83
1,705
503
64
367
321
283
77
81
1
2
1
2
2
6
2
1
2
3
2
4
1
5
0
+ 2
1
3
3
2
3
1
3
0
- 0
- 3
+14
- 1
- 6
+ 9
- 3
+ 4
All l a b o r f o r c e d a t a a r e f r o m B u r e a u of L a b o r S t a t i s t i c s r e p o r t s s u p p l i e d b y s t a t e a g e n c i e s .
Only t h e u n e m p l o y m e n t r a t e d a t a a r e seasonally a d j u s t e d .
T h e S o u t h e a s t d a t a r e p r e s e n t t h e t o t a l of t h e six s t a t e s .
T h e a n n u a l p e r c e n t c h a n g e c a l c u l a t i o n is b a s e d o n t h e m o s t r e c e n t d a t a o v e r p r i o r y e a r .
http://fraser.stlouisfed.org/
52
Federal Reserve Bank of St. Louis
M A Y 1982, E C O N O M I C REVIEW
CONSTRUCTION
WÊÊÊÊÊÊÊÊÊËÊ
WÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊm
JAN
1982
FEB
1981
12-Month Cumulative Rate
UNrfED STATES
N o n r e s i d e n t i a l B u i l d i n g P e r m i t s - $ Mil.
Total Nonresidential
50,958
Industrial Bldgs.
7,001
Offices
14,718
Stores
6,070
Hospitals
1,640
Schools
790
50,999
7,181
14,809
6,195
1,441
776
46,299
7,961
10,497
6,235
1,375
750
SOUTHEAST
N o n r e s i d e n t i a l B u i l d i n g P e r m i t s - $ Mil.
Total Nonresidential
6,593
Industrial Bldgs.
790
Offices
1,380
Stores
1,059
Hospitals
267
Schools
83
6,556
783
1,398
1,097
254
78
FEB
1982
t*.
mam
ANN
%
CHG
FEB
1982
+10
-12
+40
- 3
+19
+ 5
Residential Building P e r m i t s
V a l u e - $ Mil.
Residential P e r m i t s - Thous.
Number single-family
Number multi-family
T o t a l Building P e r m i t s
V a l u e - $ Mil.
6,698
860
1,181 '
922
202
123
- 2
- 8
+17
+ 15
+32
-33
Residential Building P e r m i t s
V a l u e - $ Mil.
Residential Permits - Thous.
Number single-family
Number multi-family
T o t a l Building P e r m i t s
V a l u e - $ Mil.
ALABAMA
Nonresidential Building
Total Nonresidential
Industrial Bldgs.
Offices
Stores
Hospitals
Schools
P e r m i t s - $ Mil.
432
70
56
55
31
8
431
55
57
58
25
6
506
87
61
73
54
15
-15
-20
- 8
-25
-43
-47
R e s i d e n t i a l Building P e r m i t s
V a l u e - $ Mil.
Residential P e r m i t s - Thous.
Number single-family
Number multi-family
T o t a l Building P e r m i t s
V a l u e - $ Mil.
FLORIDA
Nonresidential Building
Total Nonresidential
Industrial Bldgs.
Offices
Stores
Hospitals
Schools
P e r m i t s - $ Mil.
3,400
385
629
623
150
20
3,463
405
680
648
139
19
3,584
370
509
486
53
22
- 5
+ 4
+24
+28
+183
- 9
R e s i d e n t i a l Building P e r m i t s
Value - $ Mil.
Residential P e r m i t s - Thous.
Number single-family
Number multi-family
T o t a l Building P e r m i t s
V a l u e - $ Mil.
GEORGIA
Nonresidential Building
Total Nonresidential
I n d u s t r i a l Bldgs.
Offices
Stores
Hospitals
Schools
P e r m i t s - $ MU.
1,053
177
250
112
30
28
1,044
184
220
118
30
26
1,114
178
309
108
19
46
- 5
- 1
-19
+ 4
+58
-39
Residential Building P e r m i t s
V a l u e - $ Mil.
Residential Permits - Thous.
Number single-family
Number multi-family
T o t a l Building P e r m i t s
V a l u e - $ Mil.
LOUISIANA
Nonresidential Building
Total Nonresidential
Industrial Bldgs.
Offices
Stores
Hospitals
Schools
P e r m i t s - $ Mil.
841
87
277
123
29
19
812
69
270
124
33
19
720
115
198
87
38
23
+17
-24
+40
+41
-24
-17
Residential Building P e r m i t s
V a l u e - $ Mil.
Residential Permits - Thous.
Number single-family
Number multi-family
T o t a l Building P e r m i t s
V a l u e - $ Mil.
MISSISSIPPI
Nonresidential Building
Total Nonresidential
Industrial Bldgs.
Offices
Stores
Hospitals
Schools
P e r m i t s - $ Mil.
174
18
45
32
8
1
173
17
46
31
9
1
200
28
38
57
5
1
-13
-36
+18
-44
+60
0
R e s i d e n t i a l Building P e r m i t s
V a l u e - $ Mil.
Residential Permits - Thous.
Number single-family
Number multi-family
T o t a l Building P e r m i t s
V a l u e - $ Mil.
TENNESSEE
Nonresidential Building
Total Nonresidential
Industrial Bldgs.
Offices
Stores
Hospitals
Schools
P e r m i t s - $ Mil.
693
53
123
114
19
7
633
53
125
118
18
7
574
82
66
111
33
16
+21
-35
+86
+ 3
-42
-56
Residential Building P e r m i t s
V a l u e - $ Mil.
Residential Permits - Thous.
Number single-family
Number multi-family
T o t a l Building P e r m i t s
V a l u e - $ Mil.
NOTES:
ANN
%
CHG
FEB
1981
JAN
1982
38,554
39,366
45,509
-15
528.5
395.8
543.2
403.3
693.9
468.9
-24
-16
89,512
90,365
91,808
7,700
7,954
9,655
-20
109.6
94.2
113.6
98.4
152.1
127.2
-28
-26
14,293
14,510
16,353
-13
273
291
410
-33
4.9
5.1
5.2
5.5
8.8
8.0
-44
-36
705
722
916
-23
5,293
5,496
6,520
-19
64.7
66.9
67.5
70.0
88.3
88.9
-27
-25
8,693
8,959
10,104
-14
1,025
1,029
1,180
-13
20.2
8.5
20.5
8.8
26.1
9.4
-23
-10
2,078
2,073
2,294
- 9
582
601
634
- 8
9.7
7.5
9.7
8.3
11.3
8.0
-14
- 6
1,423
1,413
1,354
+ 5
146
152
274
-47
3.1
1.7
3.4
1.6
5.2
5.1
-40
-67
320
325
474
-32
381
385
637
-40
7.1
4.5
7.3
4.2
12.4
7.7
-43
-42
1,074
1,018
1,211
-11
-
3
D a t a s u p p l i e d b y t h e U . S . B u r e a u of t h e C e n s u s , H o u s i n g U n i t s A u t h o r i z e d By B u i l d i n g P e r m i t s a n d P u b l i c C o n t r a c t s , C - 4 0 .
N o n r e s i d e n t i a l d a t a e x c l u d e s t h e c o s t of c o n s t r u c t i o n f o r p u b l i c l y o w n e d b u i l d i n g s . T h e s o u t h e a s t d a t a r e p r e s e n t t h e t o t a l of
t h e six s t a t e s . T h e a n n u a l p e r c e n t c h a n g e c a l c u l a t i o n is b a s e d o n t h e m o s t r e c e n t m o n t h o v e r p r i o r y e a r . P u b l i c a t i o n of
F . W. D o d g e c o n s t r u c t i o n c o n t r a c t s h a s b e e n d i s c o n t i n u e d .
http://fraser.stlouisfed.org/
FEDERAL RESERVE BANK
Federal Reserve Bank of St. Louis
O F ATLANTA
53
GENERAL
FEB
1982
ANN.
%
CHG.
JAN
1982
FEB
1981
2,340.5
87,574
N.A.
8,695.1
2,155.8
86,128
N.A.
8,506.2
+ 2
282.5
168.7
263.2
162.2
+ 8
- 0
272.8
N.A,
4,239.7
1,405.7
249.2
N.A.
4,185.6
1,437.1
+13
N.A.
27.6
N.A.
25.5
31.4
N.A.
105.2
58.0
29.1
N.A.
106.8
57.5
N.A.
3.9
N.A.
3.8
98.3
67.2
2,109.3
89.0
NOV
153.6
7.8
88.8
59.7
2,193.2
123.7
JAN
137.3
7.0
+15
+13
- 9
-32
47.6
N.A.
1,599.1
N.A.
DEC
282.2
43.7
N.A.
1,455.5
N.A.
FEB
263.0
+11
39.1
N.A.
255.2
1,164.3
35.3
N.A.
268.3
1,155.4
N.A.
4.8
N.A.
4.0
.
i
Personal Ineome-$ bil. SAAR
(Dates: IQ, 4Q, IQ)
2,412.9
R e t a i l S a l e s - $ m i l . - SA ( M A R )
87,164
P l a n e Pass. Arrivals (thous.) (JAN)
N.A.
P e t r o l e u m P r o d , ( t h o u s . bis.)
8,684.4
C o n s u m e r P r i c e Index
1967=100
283.4
K i l o w a t t H o u r s - Mils. (NOV)
162.1
P e r s o n a l I n c o m e - $ bil. SAAR
(Dates:
I Q , 4 Q , 1Q)
282.1
Taxable Sales - $ mil.
N.A.
Plane Pass. Arrivals (thous.) (JAN) 3,941.9
P e t r o l e u m P r o d , ( t h o u s . bis.)
1,397.4
C o n s u m e r P r i c e Index
1967=100
N.A.
K i l o w a t t H o u r s - Mils. (NOV)
25.0
ALABAMA
Personal Income-S bil. SAAR
(Dates:
1Q, 4 Q , 1Q)
32.4
T a x a b l e Sales - $ mil.
N.A.
P l a n e P a s s . A r r i v a l s ( t h o u s . ) ( J A N ) 139.6
P e t r o l e u m P r o d , ( t h o u s . bis.)
56.4
C o n s u m e r P r i c e Index
1967=100
N.A.
K i l o w a t t H o u r s - Mils. (NOV)
3.5
P e r s o n a l I n c o m e - $ b i l . 5ÄÄR(Dates:
1Q, 4 Q , 1Q)
102.4
T a x a b l e Sales - $ mil. (MAR)
67.3
P l a n e Pass. Arrivals (thous.) (JAN) 1,999.3
P e t r o l e u m P r o d , ( t h o u s . bis.)
84.0
C o n s u m e r P r i c e Index - Miami
JAN
N o v . 1977 = 100
155.2
K i l o w a t t H o u r s - Mils. (NOV)
7.0
GEORGIA
Personal Ineome-$ bil. SAAR
( D a t e s : 1Q, 4 Q , 1Q)
48.7
T a x a b l e Sales - $ mil.
N.A.
P l a n e Pass. Arrivals (thous.) (JAN) 1,401.6
P e t r o l e u m P r o d , ( t h o u s . bis.)
N.A.
C o n s u m e r P r i c e Index - A t l a n t a
FEB
1967 = 100
279.8
K i l o w a t t H o u r s - Mils. (NOV)
3.7
P e r s o n a l I n c o m e - $ bil. SAAI
( D a t e s : 1Q, 4 Q , 1Q)
40.4
T a x a b l e Sales - $ mil.
N.A.
P l a n e P a s s . A r r i v a l s ( t h o u s . ) ( J A N ) 248.5
P e t r o l e u m P r o d , ( t h o u s . bis.)
1,163.0
Consumer P r i c e Index
1967 = 100
N.A.
K i l o w a t t H o u r s - Mils. (NOV)
4.1
P e r s o n a l I n c o m e - $ bil.
( D a t e s : 1Q, 4 Q , 1Q)
Taxable Sales - $ mil.
Plane Pass. Arrivals (thous.) (JAN)
P e t r o l e u m P r o d , ( t h o u s . bis.)
C o n s u m e r P r i c e Index
1967 = 100
K i l o w a t t H o u r s - Mils. (NOV)
P e r s o n a l I n c o m e - $ bil. SAAR
(Dates: 1Q, 4Q, 1 0 )
Taxable Sales - $ mil.
P l a n e Pass. Arrivals (thous.) (JAN)
P e t r o l e u m P r o d , ( t h o u s . bis.)
C o n s u m e r P r i c e Index
1967 = 100
K i l o w a t t H o u r s - Mils. (NOV)
MAR
1982
18.3
N.A.
27.9
94.0
17.7
N.A.
30.8
94.4
16.5
N.A.
36.8
100.5
N.A.
1.6
N.A.
1.9
N.A.
1.6
39.8
N.A.
124.9
N.A.
38.8
N.A.
140.1
N.A.
35.8
N.A.
130.8
N.A.
N.A.
5.1
N.A.
5.1
N.A.
5.4
+12
+ 1
-
6
-
3
-
2
+11
+31
- 2
- 8
+13
0
- 4
+ 6
+ 14
- 7
+ 1
+ 3
+11
-24
- 6
0
+11
- 5
-
6
i
i
' '
.I i
FEB R
1982
i
MAR R
1981
ANN.
%
CHG.
i
Agriculture
P r i c e s R e c ' d by F a r m e r s
I n d e x (1977=100)
132
Broiler P l a c e m e n t s (thous.)
82,723
Calf P r i c e s ($ p e r c w t . )
62.10
B r o i l e r P r i c e s (« p e r lb.)
26.9
S o y b e a n P r i c e s ($ p e r bu.)
5.88
B r o i l e r F e e d C o s t ($ pt —
er ton)
207
133
79,341
58.90
27.0
6.04
209
143
84,089
69.80
29.7
7.59
— 229
- 8
- 2
-11
- 9
-23
-10
Agriculture
P r i c e s R e c ' d by F a r m e r s
I n d e x (1977=100)
117
Broiler P l a c e m e n t s (thous.)
32,829
C a l f P r i c e s ($ p e r c w t . )
59.55
B r o i l e r P r i c e s (4 p e r lb.)
26.0
S o y b e a n P r i c e s ($ p e r b u . )
6.10
B r o i l e r P e e d C o s t ($ p e r t o n )
205
119
31,402
55.74
25.5
6.25
205
131
31,061
66.12
28.6
7.22
223
-11
+ 6
-10
- 9
-16
- 8
Agriculture
F a r m Cash R e c e i p t s - $ mil.
(Dates: DEC, DEC)
2,089
Broiler P l a c e m e n t s (thous.)
10,497
C a l f P r i c e s ($ p e r c w t . )
56.70
B r o i l e r P r i c e s (<t p e r lb.)
25.0
S o y b e a n P r i c e s ($ p e r b u . )
6.09
B r o i l e r F e e d C o s t ($ p e r t o n )
225
9,874
54.80
24.5
6.25
225
1,927
11,141
66.80
27.5
7.10
220
Agriculture
F a r m Cash R e c e i p t s - $ mil.
3,910
(Dates: DEC, DEC)
1,979
Broiler P l a c e m e n t s (thous.)
61.40
C a l f P r i c e s ($ p e r c w t . )
26.0
B r o i l e r P r i c e s (<t p e r lb.)
6.09
S o y b e a n P r i c e s ($ p e r b u . )
B r o i l e r F e e d C o s t ($ p e r t o n )
225
-
2,006
58.10
27.0
6.25
225
3,746
1,771
69.50
29.0
7.10
255
+ 4
+12
-12
-10
-14
-12
Agriculture
Farm Cash R e c e i p t s - $ mil.
(Dates: D E C , DEC)
3,141
Broiler P l a c e m e n t s (thous.)
12,546
Calf P r i c e s ($ p e r c w t . )
55.80
B r o i l e r P r i c e s (<t p e r lb.)
25.6
S o y b e a n P r i c e s ($ p e r b u . )
5.90
B r o i l e r F e e d C o s t ($ p e r t o n )
185
12,182
54.00
25.0
5.92
189
2,826
10,695
64.00
28.5
7.06
220
+ 11
+17
-13
-10
-16
-16
Agriculture
F a r m Cash R e c e i p t s - $ mil.
( D a t e s : D E C , DEC)
1,704
Broiler P l a c e m e n t s (thous.)
N.A.
C a l f P r i c e s ($ p e r c w t . )
61.00
B r o i l e r P r i c e s (« p e r lb.)
27.5
S o y b e a n P r i c e s ($ p e r b u . )
6.10
B r o i l e r F e e d C o s t ($ p e r t o n )
250
1,648
N.A.
68.00
29.5
7.28
250
+ 3
N.A.
58.60
27.0
6.42
245
Vgriculture
Farm Cash Receipts - $ mil.
(Dates: DEC, DEC)
2,258
Broiler P l a c e m e n t s (thous.)
6,441
C a l f P r i c e s ($ p e r c w t . )
62.80
B r o i l e r P r i c e s (<t p e r lb.)
28.0
S o y b e a n P r i c e s ($ p e r b u . )
6.22
B r o i l e r F e e d C o s t ($ p e r t o n )
195
6,035
55.10
27.5
6.29
189
2,028
6,118
67.00
30.5
7.28
215
+ 11
+ 5
- 6
- 8
-15
- 9
Agriculture
Farm Cash R e c e i p t s - $ mil.
( D a t e s : DEC, DEC)
1,910
Broiler P l a c e m e n t s (thous.)
1,366
C a l f P r i c e s ($ p e r c w t . )
58.90
B r o i l e r P r i c e s (« p e r lb.)
24.5
S o y b e a n P r i c e s ($ p e r b u . )
6.03
B r o i l e r F e e d C o s t ($ p e r t o n )
210
1,305
54.40
25.0
6.18
191
1,830
1,336
61.90
27.5
7.28
225
+ 4
+ 2
- 5
-11
-17
- 7
-
-
-
-
-
6
-15
- 9
-14
+ 2
-10
- 7
-16
0
Notes:
P e r s o n a l I n c o m e d a t a s u p p l i e d b y U. S . D e p a r t m e n t of C o m m e r c e . T a x a b l e S a l e s a r e r e p o r t e d a s a 1 2 - m o n t h c u m u l a t i v e t o t a l .
Plane
P a s s e n g e r A r r i v a l s a r e c o l l e c t e d f r o m 25 a i r p o r t s . P e t r o l e u m P r o d u c t i o n d a t a s u p p l i e d by U. S . B u r e a u of M i n e s . C o n s u m e r P r i c e
I n d e x d a t a s u p p l i e d b y B u r e a u of L a b o r S t a t i s t i c s .
A g r i c u l t u r e d a t a s u p p l i e d b y U. S . D e p a r t m e n t of A g r i c u l t u r e .
Farm Cash
R e c e i p t s d a t a a r e r e p o r t e d a s c u m u l a t i v e f o r t h e c a l e n d a r y e a r t h r o u g h t h e m o n t h s h o w n . B r o i l e r p l a c e m e n t s a r e an a v e r a g e w e e k l y
r a t e . T h e S o u t h e a s t d a t a r e p r e s e n t t h e t o t a l of t h e six s t a t e s .
N . A . = n o t a v a i l a b l e . T h e a n n u a l p e r c e n t c h a n g e c a l c u l a t i o n is b a s e d
on m o s t r e c e n t d a t a o v e r p r i o r y e a r .
R = Revised
http://fraser.stlouisfed.org/
Federal 54
Reserve Bank of St. Louis
•
FEDERAL RESERVE BANK O F ATLANTA 54
Federal Reserve Bank of Atlanta
P.O. Box 1731
Atlanta, Georgia 30301
Bulk Rate
U.S. P o s t a g e
Address Correction Requested
Atlanta, Ga.
P e r m i t 292
PAID
@FedFRASER