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The Regional


A Quarterly Review
of Business and
Economic Conditions



Community Profile

Bans Don’t Protect
Health of Economy

Laws Change for
Better and Worse

Carbondale and University
Are “Tied at the Hip”

Vol. 16, No. 1
January 2008

The Federal Reserve Bank of St. Louis

Stable Prices,
Stable Economy

c o n t e n t s

The Regional

Stable Prices, Stable Economy
By William Poole and David C. Wheelock

Conventional wisdom holds that if policymakers
are too focused on controlling inflation, then
employment, output growth and financial
stability will suffer. But the data say otherwise.

3	p r e s i d e n t ’ s m e s s a g e


e c o n o my at a g l a n c e



VOL. 16, NO. 1


The Regional Economist is published
quarterly by the Research and Public
Affairs departments of the Federal
Reserve Bank of St. Louis. It addresses
the national, international and regional
economic issues of the day, particularly
as they apply to states in the Eighth
Federal Reserve District. Views
expressed are not necessarily those
of the St. Louis Fed or the Federal
Reserve System.
Please direct your comments to:
Michael R. Pakko at 314-444-8564 or
by e-mail at, or to
Howard J. Wall at 314-444-8533 or by
e-mail at You can
also write to either one at the address
below. Submission of a letter to the
editor gives us the right to post it to
our web site and/or publish it in The
Regional Economist unless the writer
states otherwise. We reserve the right
to edit letters for clarity and length.

Clearing the Haze?
By Michael R. Pakko

20	c o mm u n i ty p r o f i l e

When smoking bans were
debated in the past, the economic costs were hardly ever
considered. But that’s changing,
as studies reveal the costs being
paid by bars, restaurants and
casinos—and their employees.

Carbondale, Ill.
By Susan Thomson
In some university-dominated
communities, there’s always tension with the locals. But in this
Southern Illinois hub, town and
gown “are tied at the hip.”



Walking a Tightrope
By Joshua A. Byrge and
Howard J. Wall

Director of Research
Robert H. Rasche
Deputy Director of Research
Cletus C. Coughlin

There’s plenty of bad economic
news going into the new year,
starting with the state of the
housing market and oil prices.
On the other hand, the pressure
on the inflation rate seems to be

Director of Public Affairs
Robert J. Schenk
Michael R. Pakko, Howard J. Wall
Managing Editor
Al Stamborski
Art Director
Joni Williams
Contributing Artists
Mark Kunzelmann, Becca Marshall
Single-copy subscriptions are free. To
subscribe, call 314-444-8809; e-mail; or write to
The Regional Economist, Public Affairs
Office, Federal Reserve Bank of St. Louis,
Post Office Box 442, St. Louis, MO
63166. You can also subscribe via
The Eighth Federal Reserve District

includes all of Arkansas, eastern
Missouri, southern Illinois and Indiana,
western Kentucky and Tennessee, and
northern Mississippi. The Eighth District offices are in Little Rock, Louisville,
Memphis and St. Louis.

2 The Regional Economist | January 2008

n at i o n a l o v e r v i e w


By Kristie M. Engemann and
Michael T. Owyang
New studies have looked at the
impact of easier divorce on a
variety of things, including
women working outside the
home, children’s education
and spousal violence.


d i s t r i ct o v e r v i e w
Not in Our House
By Michael R. Pakko
While some aspects of the
national housing decline are
reflected locally, the District
has not suffered some of the
most detrimental developments
that have affected other parts of
the country.

re ader e xchange

p r e s i d e n t ’ s

m e s s a g e

In an address to the Cato Institute in Washington
on Nov. 30, President William Poole speaks on his
research into market declines going back to 1950.

Bailing Out the Markets Is Not a Goal of Fed Policy


n some circles today, there is talk that
the Fed is, once again, bailing out greedy
investors. This time, the Fed is supposedly
running to the aid of those who bought securities backed by subprime mortgages, which,
of course, have plummeted in value as homebuyers have defaulted on the mortgages.
There’s some truth to this argument, but
it is important to understand the circumstances under which the Fed responds to
market distress. Actions by the Fed in the
wake of the subprime mess have helped out
these investors by buoying flagging prices on
securities in general. However, bailing out
those with deep pockets, or nearly bankrupt
pockets for that matter, has never been the
goal of the Fed, nor is it this time around.
First, let’s be clear that the Fed never bails
out any party—even banks—with capital or
any sort of guarantee. Instead, the Fed has
only monetary policy tools—mainly raising
and lowering interest rate targets, and making sure money is available to lend—to “bail
out” the economy.
Those last two words are key: the
economy. The Fed’s job is to stabilize the
economy—“bail out” with its pejorative
connotations is altogether the wrong term.
Whenever the Fed steps in to deal with
financial instability, its intent is to stabilize
the overall economy, not just one segment of
it, such as Wall Street. I reviewed all stock
market declines of at least 10 percent going
back to 1950, along with actions by the
Federal Open Market Committee over the
same span. The data prove that the FOMC
has not lowered interest rates in systematic
fashion at the time of stock market declines.
(See our web site for details.)

To those who say that the parties responsible for this subprime mess need to be
taught a lesson, do not worry. The Fed’s
monetary policy will not shield from loss
those who invest in failed strategies. The
Fed is less concerned about whether investors can sell their subprime paper at 30 or

“Whenever the Fed steps
in to deal with financial
instability, its intent is to
stabilize the overall economy,
not just one segment of it,
such as Wall Street.”
70 cents on the dollar than whether they
can find a buyer at all. For more than three
months, the market in subprime paper has
been almost nonexistent. An active financial market is central to economic growth;
it is that market process, not prices in financial markets per se, that the Fed cares about.
Others are worrying that if subprime
investors benefit from Fed monetary policy,
then the Fed is creating a moral hazard—
encouraging others to take the risks because
they think that the Fed will, at some point,
step in to stanch the bleeding. But these
people don’t realize that these “bailouts” are
only occurring when the Fed is concerned
that a financial upset could turn into an
overall economic crisis. Fed policy does not
protect imprudent lenders, such as those
now holding subprime loans gone bad.

Knowing that the Fed will step in to deal
with true financial shocks gives everyone,
including investors, the confidence to take
risks at the microeconomic level, risks that
lead to innovation, which, in turns, leads to
growth for the economy as a whole.
For those who still think the Fed should
never step in when financial markets
decline, consider this extreme case (which
I offer as a provocation to promote careful analysis and not as an example directly
relevant to today’s circumstances):
Fact: The U.S. stock market between its
peak in 1929 and its trough in 1932 declined
by 85 percent. Question 1: If the Fed
had followed a more expansionary policy
in 1930-32, sufficient to avoid the Great
Depression, would the stock market have
declined so much? Question 2: Assuming
that a more expansionary monetary policy
would have supported the stock market to
some degree in 1930-32, would it be accurate to say that the Fed had “bailed out”
equity investors and created moral hazard
by doing so?
Does anyone doubt that it would have been
a good idea to avoid the Great Depression?

The Regional Economist | 3


Price stability means that inflation is
sufficiently low and stable so as not
to influence the economic decisions
of households and firms.

4 The Regional Economist | January 2008

Stable Prices,
Stable Economy
Keeping Inflation in Check Must Be
No. 1 Goal of Monetary Policymakers
By William Poole and David C. Wheelock


he Federal Reserve Act as amended
in 1977 directs the Federal Reserve
to pursue monetary policy to achieve
the goals of “maximum employment, stable
prices and moderate long-term interest rates.”
The Federal Reserve and all central banks
have also long been expected to promote
financial stability. Specifically, central banks
have been expected since the 19th century
to serve as lender of last resort to the banking system by providing liquidity to prevent
financial crises and disruptions in the payments system.
Are the goals of maximum employment,
stable prices, moderate interest rates and
financial stability compatible with one
another? Many people believe that they are
not. Conventional wisdom holds that if monetary policy is too focused on controlling

This article is based on a speech given by
William Poole at the Universidad Adolfo
Ibáñez, Santiago, Chile, March 5, 2007,
at a conference organized by the Global
Interdependence Center. The views
expressed do not necessarily reflect official
positions of the Federal Reserve System.

inflation, for example, then employment and
output growth will likely fall below their
potential, and financial markets will be less
stable than they otherwise could be.
The idea of stepping on the monetary
gas pedal to boost employment and output
growth, or to protect against financial losses,
may seem appealing. Indeed, until recently,
many economists believed that moderate
inflation makes the economy perform better.
However, a growing number of economists
today believe that monetary authorities can
best promote financial stability and economic growth by making a firm commitment to maintaining price stability. There is
little evidence that expansionary monetary
policy can increase employment or economic
growth, except perhaps for brief periods,
and there is no evidence that inflation fosters
financial stability. On the contrary, history
is full of examples of how an unstable price
level can wreck a financial system and harm
the economy.
Two Views about Inflation

On the subject of inflation, most economists fall into one of two camps. One camp

believes that moderate inflation helps promote
full employment, economic growth and stable
financial markets. Inflation is seen as enabling
labor and product markets to function more
smoothly in the face of shocks that could otherwise reduce employment or output. Some
in this camp believe that central banks can
boost employment and output growth more
or less permanently by allowing the inflation
rate to rise.
The first camp had its heyday in the 1960s.
At that time, the data suggested the existence
of an exploitable tradeoff between inflation
and unemployment—the so-called Phillips
Curve, named after the economist A.W. Phillips, who first documented that the unemployment rate and changes in wage rates moved in
opposite directions in the United Kingdom.
The Phillips Curve made monetary policymaking seem beguilingly simple. Choose
a little more inflation, and unemployment
would fall; accept somewhat higher unemployment, on the other hand, and inflation
would be a bit lower. Policymaking was
viewed as simply a matter of selecting from
among a menu of inflation and unemployment options.
The Regional Economist | 5

When inflation is low and
reasonably stable, people do not
waste resources attempting to
protect themselves from inflation. They save and invest with
confidence that the value of
money will be stable over time.

figure 1
U.S. Inflation and Unemployment Rates



Several influential economists argued
that this menu could be improved upon if
policymakers were willing to discard their
old-fashioned obsession with price stability. Allow some inflation, these economists
argued, and the labor market would operate
more efficiently, employment would rise
and the economy would grow faster.
There were some notable dissents from
this view. Milton Friedman and Edmund
Phelps, both of whom later were awarded
the Nobel Prize, argued that inflationary policies do not boost employment or
economic growth in the long run. Instead,
attempts to use monetary policy to engineer higher employment or faster growth
result in ever higher inflation but no more
employment or growth than was possible
with a stable price level, they said.
Events also put a dent in the arguments
of the first camp. Inflation began to rise in
the mid-1960s, and it climbed still higher
and became more volatile in the 1970s.
Higher inflation did not bring about higher
employment or faster growth, however.
On the contrary, as shown in Figure 1, the
unemployment rate was higher on average
during the 1970s than it had been during
the 1950s and 1960s. The unemployment
rate fell in the 1980s and 1990s, albeit slowly,
as inflation came down.
The Benefits of Price Stability

Inflation Rate

’51 ’56 ’61 ’66 ’71 ’76 ’81 ’86 ’91 ’96 ’01
SOURCE: Bureau of Labor Statistics

At one time, some economists, as well as others, thought
that a bit of inflation would be good for the economy,
raising employment in particular. The data show the
opposite cause and effect, however. The figure plots the
civilian unemployment rate and the inflation rate, which
is calculated as the annual percentage change in the allitems Consumer Price Index.

6 The Regional Economist | January 2008

Under the weight of persuasive reasoning
and empirical evidence, many economists
abandoned the first camp and joined a
growing second camp of economists, who
believe that central banks can best promote
high employment and economic growth, as
well as financial stability, by focusing on the
goal of price stability.
“Price stability” is usually interpreted
to mean a low and stable rate of inflation
maintained over an extended period of
time. In our view, the ideal rate of inflation is zero, properly measured. Biases in
price indexes imply that, in practice, price
stability will likely be consistent with a
small positive rate of measured inflation, say
0.5 to 1 percent, depending on the specific
price index one looks at.1 Further, price
stability does not mean that the price index
is constant. Monetary policy could never
eliminate every wiggle in the inflation rate;
nor should policymakers try to do so.

Price stability means that inflation is sufficiently low and stable so as not to influence
the economic decisions of households and
firms. When inflation is low and reasonably stable, people do not waste resources
attempting to protect themselves from
inflation. They save and invest with confidence that the value of money will be
stable over time.
In a market economy, consumers and
firms base their consumption and investment decisions on information derived from
prices, including asset prices and returns.
Efficient allocation of economic resources
depends on the clarity of signals coming
from the price system, as well as the clarity
of signals from governments and central
banks about economic policy.
Uncertainty about the price level makes
it difficult for firms and households to
determine whether changes in individual
prices reflect fundamental shifts in supply and demand or merely changes in the
overall rate of inflation. By eliminating this
uncertainty, a monetary policy that maintains long-run price stability eliminates a
potential drag on the efficient allocation of
resources and, hence, on economic growth.
Long-run price stability contributes to
financial stability in a similar fashion. An
unstable price level can lead to bad forecasts of real returns to investment projects
and, hence, to unprofitable borrowing and
lending decisions. Unexpected bouts of
inflation, for example, tend to encourage
optimistic forecasts of real returns. Errors
in distinguishing nominal and real returns
result in misallocation of resources and
eventually to financial distress that would
not occur if the price level was stable. Business decisions based on expectations of
continuing inflation often turn out badly
when inflation falls, resulting in higher
default rates and business failures. Outright
deflation is particularly notorious because
a falling price level increases the real cost of
servicing outstanding debt.
Price stability is the most powerful tool
the central bank has to promote economic
growth, high employment and financial stability. Price stability also enables monetary
authorities to pursue secondary objectives,
including the reduction of fluctuations in
real economic activity and the management
of financial and/or liquidity crises. These

Hyperinflations Make
the Great Inflation
Seem like a Walk
in the Park


any countries have seen the deleterious effects of price level instability, and some have had
far worse experiences than the United States has had. Many lesser developed countries

have experienced extreme inflation at one time or another, often with disastrous consequences
for financial stability and economic growth. Perhaps the most obvious examples of the destructive
force of inflation are hyperinflations, such as those occurring in Germany after World War I, in various eastern European countries after World War II and in Latin America and Africa more recently.

In every case, hyperinflation was associated with collapsing financial markets and a wrecked
Countries that have very high rates of inflation typically have weak institutions, including poor
enforcement of contracts and property rights, and inefficient tax systems (and consequently
large budget deficits). Many countries have made efforts to improve their political and economic
institutions, and these countries are now experiencing lower inflation and higher economic growth.
Several have made price stability the paramount objective of monetary policy and have adopted


Zimbabwe’s inflation, the highest in the world, stood at 3,700
percent last spring. The rate has continued to skyrocket—
to the point where many say it’s impossible to calculate.

are referred to as secondary goals because
a central bank is unlikely to succeed at
limiting fluctuations in economic activity or
containing financial crises unless the price
level is stable.
Lessons from U.S. Economic History

Recent experience supports the view
that price stability contributes to financial
stability and economic growth. Since the
mid-1980s, the United States has seen a
reduction in the volatility of both output
growth and inflation in an environment
that closely approximates price stability.
As shown in Figure 2, the variability of
both real GDP growth and inflation reached
postwar lows during the 1990s and first six
years of the 2000s. Further, while there
have been temporary financial upsets
associated with various shocks, such as the
Sept. 11, 2001, terrorist attacks and, more
recently, increased defaults in the subprime
mortgage market, these events have had
little impact on the economy as a whole.
With inflation expectations well-anchored,
the Fed has been able to provide liquidity in
response to financial disruptions without
causing uncertainty about the long-run
goals of policy. This confidence in the Fed
has probably made such interventions

The advantage of announcing a quantitative target for inflation, especially when coupled with
institutional reforms, such as increased operating independence for central banks, is that it reduces
uncertainty about the long-term inflation rate. This, in turn, reduces inflation risk premiums in
interest rates and promotes long-term contracting and investment. These benefits can be especially
important for countries that have had a history of high or unstable inflation, though presumably any
country could benefit from announcing and sticking to a specific numeric inflation objective.

more effective than they would otherwise
have been.

The inflation record of the United States
and many other countries over the past
20 years has been far better than it was from
the mid-1960s to the early 1980s. The recent
period has also had a better record of economic growth and financial stability than the
preceding years of high and highly variable
inflation. Both logic and history suggest that
low and stable inflation has contributed to
improved real growth and financial stability.
Low inflation and well-anchored inflation
expectations have also likely enhanced the
Fed’s ability to respond to the declines in
output growth and financial upsets that have
occurred. The Fed responded aggressively
to encourage economic recovery from the
2001 recession. The Fed’s interest rate cuts
did not trigger widespread fears of higher
inflation because the public had confidence
in the Fed’s commitment to price stability.
If expected inflation had risen, long-term
interest rates would likely have risen and
hampered efforts to encourage economic
recovery. Hence, price stability likely made
the Fed’s easing more effective than it otherwise would have been.

figure 2
Variability of Inflation and GDP Growth


formal inflation targets as a way of anchoring inflation expectations.











SOURCES: Bureau of Economic Analysis and Bureau of Labor Statistics

Since 1990, inflation and output growth have been
only about half as volatile as they were during the
preceding postwar decades. The figure plots the
standard deviations of real GDP growth and inflation, which is calculated as the annual percentage
change in the all-items Consumer Price Index.
Data for the 2000s are for 2001-2006.

The Regional Economist | 7

Financial markets have confronted a number of shocks in recent history, including the
Asian financial crisis and Russian government
bond default in 1998, the terrorist attacks of
9/11 and, more recently, the increase in subprime mortgage defaults in 2007. Each time,
the Fed quickly provided additional liquidity,
and the financial disruptions were contained.
Again, well-anchored inflation expectations
likely made the Fed’s job easier and kept these
shocks from having a more serious impact on
the economy.
Under the Federal Reserve Act, the Fed
operates with a dual mandate to encourage
maximum employment and price stability,
as well as to act as lender of last resort to the
banking system. These goals are not incompatible but fundamentally the same goal.
Maintaining low and stable inflation is central
to achieving maximum employment and the
highest possible rate of economic growth.
Price stability also tends to promote financial stability and enhance the central bank’s
ability to respond to financial disruptions that
do occur. Maintaining price stability does
not require that the central bank come down
hard on every uptick in the inflation rate, but
a disciplined response is required when the
inflation rate threatens to rise in a sustained
fashion or to fall into deflation.
Central bankers need to apply their best
judgment—and they will not always be
correct in those judgments. But if they
have a good record, and if the public retains
confidence that the central bank will correct
its mistakes, errors in judgment will not do
lasting damage.

Price Instability Knocked Economy
Off Its Feet in 1930s, 1970s


hereas the recent record demonstrates the benefits of price
stability, there is no shortage of evidence that an unstable price
level leads to financial instability and a poorly performing economy.
Sadly, history is full of examples where

rate and pumping reserves into the bank-

mismanaged monetary policy resulted in

ing system. The Fed did not react aggres-

financial instability and serious disruption

sively to subsequent crises, however. Bank

of economic activity. The experiences of

runs and gold outflows bled reserves from

the United States during the Great Depres-

the banking system, which reduced the

sion of the 1930s and the Great Inflation of

money stock and allowed deflation to take

the 1970s provide two such examples.

hold, as shown in Figure 3.

The Great Depression is a classic illustra-

Deflation drove up the real cost of

tion of how financial disruptions can wreak

servicing debt and led to widespread busi-

havoc on the economy. Policy mistakes by

ness failures and unemployment. Falling

the Federal Reserve were critical, as Milton

incomes and increased loan defaults put

Friedman and Anna Schwartz demonstrat-

further strain on banks and other financial

ed in their A Monetary History of the United

firms. More than 1,000 banks were forced

States, 1867-1960. The Fed’s principal error

to suspend operations each year between

was in failing to act as lender of last resort

1930 and 1933.

to the banking system as banking panics

The monetary hemorrhage finally ended

and other financial shocks swept across

when the entire banking system, including

the United States. These shocks included

the Federal Reserve banks, was shut down

the stock market crash in October 1929;

by government decree in March 1933. The

banking panics in October 1930, March

money stock and price level began to rise

1931 and January-February 1933; and a

once confidence in the banking system had

massive withdrawal of gold reserves from

been restored. The real interest rate fell as

U.S. banks when Great Britain left the gold

the price level rose, encouraging business

standard in September 1931.

investment and consumer spending, and
the economy began to recover.

The Federal Reserve responded to the
stock market crash by lowering its discount

figure 3
Financial Shocks and Deflation during the Great Depression

Price Level (right scale)



Money Stock (left scale)














Stock Market Crash




Banking Panic

Banking Panic


Gold Crisis

Banking Panic




SOURCE: Friedman, Milton; and Schwartz, Anna J. A Monetary History of the United States, 1867-1960. Table A-1, Col. 8. Princeton,
N.J.: Princeton University Press, 1963

The figure plots monthly data on a measure of the money stock consisting of currency and
commercial bank deposits.

8 The Regional Economist | January 2008




William Poole is president and CEO of the Federal
Reserve Bank of St. Louis. David C. Wheelock
is an economist there. To see more of Wheelock’s
work, go to
wheelock/index.html. To read other speeches by
Poole, go to


© Owen Franken / CORBIS




The 1970s were a time of economic turmoil in this country. Inflation hit double-digit levels. Economic growth slowed and
unemployment rose. An energy crisis led to restrictions on sales of gasoline, as seen in this photo taken in Connecticut.
Inflation Is No Better

Although the industry was kept afloat for a

The Great Depression illustrated how

time by government-sanctioned accounting

deflation can wreck a financial system and

gimmicks, many thrifts were walking dead—

economy.3 The Great Inflation, by contrast,

“zombies,” some called them—that had to be

showed the destructive power of inflation.

closed.4 Because the deposit liabilities of most

Inflation began to rise in the mid-1960s. Politi-

thrifts were federally insured, the collapse of the

cal pressure for low interest rates, combined

industry was costly for taxpayers, who ended up

with the common view among economists

on the hook for some $150-200 billion.

that a moderately inflationary monetary policy

Inflation declined sharply in the early 1980s,

would boost economic growth and raise

thanks to a change in the course of monetary

employment, gave policy an inflationary bias.

policy. The decline was largely unanticipated,

But subsequent economic performance

however, and because few people expected

discredited the notion that higher inflation

inflation to remain contained, real interest

could produce faster employment or growth.

rates soared as savers continued to demand

If anything, the data indicated just the oppo-

high inflation risk premiums.

site. As inflation rose still higher and became

The dollar also appreciated sharply in foreign

more variable, the average growth rate of

exchange markets. The strong dollar was hard

the U.S. economy slowed, and business cycle

on U.S. exporters and particularly devastating

fluctuations became more pronounced.

for farmers, as the dollar prices of agricultural

Inflation, and especially inflation instabil-

commodities fell sharply. Many farmers had

ity, proved disruptive for financial markets

borrowed heavily to buy land during the 1970s,

and firms. Thrift institutions—mutual savings

when commodity prices were soaring and land

banks and savings and loan associations—

values were appreciating rapidly. Falling com-

were particularly devastated by inflation.

modity and land prices in the 1980s left many

After World War II, thrifts became the mainstay

unable to service their debts. A large number

of housing finance in the United States. These

of farmers went bankrupt.

financial intermediaries borrowed short-term


These biases arise from the difficulty of capturing improvements in the quality of goods
and services, as well as substitutions among
products that comprise consumers’ total
purchases. Differences in how price indexes
are put together imply that the specific rate of
inflation that is consistent with price stability
will likely vary across countries and over
time. For the United States, zero true inflation likely translates to an annual rate of
increase in the CPI of about 1 percent and
in the broader price index for personal consumption expenditures of about 0.5 percent.
See Robert Barro (1996) and Michael Bruno
and William Easterly (1996) for cross-country
empirical evidence on the impact of high
inflation on economic growth.
Although many economists believe that
deflation was an important cause of the Great
Depression, some remain unconvinced. See
Parker (2007) for a survey of research on the
causes of the Great Depression.
See Kane (1989).

Barro, Robert. “Inflation and Growth.” Federal
Reserve Bank of St. Louis Review, Vol. 78,
No. 3, May/June 1996, pp. 153-69.
Bruno, Michael; and Easterly, William. “Inflation and Growth: In Search of a Stable
Relationship.” Federal Reserve Bank of
St. Louis Review, Vol. 78, No. 3, May/June
1996, pp. 139-46.
Friedman, Milton. “The Role of Monetary
Policy.” American Economic Review, Vol. 58,
No. 1, March 1968, pp. 1-17.
Friedman, Milton; and Schwartz, Anna J. A
Monetary History of the United States, 18671960. Princeton, N.J.: Princeton University
Press, 1963.
Kane, Edward J. The S&L Insurance Mess: How
Did it Happen? Washington, D.C.: The
Urban Institute Press, 1989.
Parker, Randall E. The Economics of the Great
Depression: A Twenty-first Century Look Back
at the Economics of the Interwar Era. Cheltenham, U.K.: Edward Elgar, 2007.
Phelps, Edmund S. “Phillips Curves, Expectations of Inflation and Optimal Unemployment over Time.” Economica, Vol. 34,
No. 135, August 1967, pp. 254-81.
Phillips, A.W. “The Relationship between
Unemployment and the Rate of Change
of Money Wages in the United Kingdom
1861-1957.” Economica, Vol. 25, No. 100,
November 1958, pp. 283-99.

The general principle common to these

funds to make long-term loans. As inflation

cases of financial distress is that significant

premiums became built into market interest

changes in the inflation rate cannot be

rates, short-term interest rates rose much

accurately foreseen. Forecasting errors, and

more rapidly than did the return on the thrifts’

resulting financial losses and bankruptcies,

assets, which were heavily invested in fixed-

are inevitable when the price level is unstable.

rate 30-year home mortgages. Evaluated at
market prices, the capital of a large portion of
the thrift industry was exhausted by 1980.
The Regional Economist | 9

S m o k i n g

B a n s

Clearing the Haze?
New Evidence on the Economic Impact of Smoking Bans
By Michael R. Pakko


hen making decisions about adopting smoke-free laws, advocates often
give policymakers a Pollyannaish outlook in
which communities can achieve public health
benefits with no economic consequences. In
particular, the lack of statistically significant
economic effects is interpreted as indicating
an absence of economic costs. Recent economic research indicates that this is a far too
simplistic view of the issue.
A previous article in The Regional Economist (“Peering Through the Haze,” July
2005) described some early evidence on the
economic impact of smoke-free laws and
suggested that the findings were far from
As more communities have adopted
smoke-free laws and more data have been
gathered, economists have discovered new,
significant findings. As an earlier article
suggested, economic costs often focus on
specific business categories—those that
smokers tend to frequent.

decline was 14.9 percent. Using slightly different methods that estimate demand for casino
gambling, economists Richard Thalheimer
and Mukhtar Ali estimate the total revenue
loss at 15.9 percent.
These revenue estimates may significantly
understate profit losses. For example, the
racino that suffered the smallest loss in
revenues—Dover Downs—also was the only
one with a luxury hotel on site. Dover Downs
management responded to initial revenue
losses by offering more discounts on hotel
rooms.4 Efforts to prop up revenue may have
been partly successful, but at a cost to the
bottom line.
Evidence on the effect of smoking bans on
gaming revenue shows that when analysis can
be narrowly focused on data from specific
businesses, statistically significant findings
emerge. Another approach is to use very large
data sets. As smoking bans have spread across
the country, the variety and timing of adopting smoke-free laws have generated data that
can help identify effects.

a higher ratio of smokers to nonsmokers
than the national average, employment
losses at bars were significantly larger, and
the employment changes at restaurants went
from a small positive effect to a small negative
effect (in neither case, statistically significant).
Climate also affected restaurant employment.5
Restaurants in warm climates fared better
than those in cooler climates. The authors
suggest that the reason for this might be that
restaurants in warmer climates can more
easily provide outdoor seating where smoking is not prohibited. (See also the sidebar on
Columbia, Mo.) Restaurants that suffered
the dual curse of being in regions with colder
climates and a high prevalence of smokers
suffered statistically significant employment
losses, on average.

Bar and Restaurant Employment

California Dreamin’

Two papers, one by Ryan Phelps and the
other by Scott Adams and Chad Cotti, have
used data available from the Bureau of Labor
Statistics to examine the employment effects
of smoking bans. Using nationwide countylevel data, these two studies examine the
changes in employment at bars and restaurants after communities adopt smoking bans.
Neither study finds significant employment
changes at restaurants, on average, but both
find statistically significant employment
declines at bars, with loss estimates ranging
from 4 percent to 16 percent.
Adams and Cotti also examine some additional factors. For communities in states with

Another recent economic study examines
taxable sales receipts of bars and restaurants
in California, the home of the smoke-free
movement. Because California communities passed some of the nation’s first smokefree laws, much of the early evidence on the
subject was based on these data on California
taxable sales receipts; as time has passed,
those data have accumulated. The experience
of California also provides a case in which a
statewide smoking ban was superimposed on
a patchwork of local smoke-free laws, providing useful variation in the coverage and jurisdiction of smoking bans that can be exploited
in empirical analysis.

Gambling and Smoking

Several papers have examined the cost
of smoke-free laws on the gambling business, using data from slot machine revenue
at Delaware racetracks (“racinos”).2 Recent
economic research finds conclusive evidence
of revenue declines at the racinos after the
Delaware Clean Indoor Air Law took effect
in December 2002.
In my recent research on the topic, I find
statistically significant losses at all three Delaware racinos—ranging from 8.9 percent to
17.8 percent.3 Overall, the statewide revenue
This article is based on a presentation at the
Sixth Annual ERIE Conference on Local Government and Economics, Erie Pa., Aug.14, 2007.
10 The Regional Economist | January 2008

District Focus: Smoking Ban Singes Columbia, Mo.


ince January 2007, all bars and restaurants in


exemption. According to an article in the Colum-

Columbia, Mo., have been required to be smoke-

bia Missourian, owners of at least two bars are

free. Only some sections of outdoor patios are

building or planning outdoor patio expansions.

exempt from the requirement.

One owner was quoted as saying, “You have to

Some local businesses have continued to oppose


have a patio to survive.” 7 The expenses associ-



the Columbia Clean Air Ordinance, circulating peti-

ated with these renovations may help buffer the

tions to repeal the law by ballot initiative. According

sales revenue of these establishments, but they


to local press reports, owners of at least four estab-

also represent profit losses that are above and


lishments have cited the smoking ban as a factor in

beyond the measured sales declines.


their decision to close their doors in 2007.
Recent data from the city of Columbia show a
distinct decline in sales tax receipts at bars and
restaurants. After rising at an average rate of
6.8 percent from 2002 through 2006, tax revenue
declined at an annual rate of 1.3 percent over the
first seven months of 2007. (See graph.) Although

Columbia, Mo., Dining Tax Revenue


the data are still preliminary, initial analysis suggests
a 5 percent decline in overall sales revenue at Colum-


bia dining establishments since the implementation
of the smoking ban. This estimate takes into account


past trends, seasonal fluctuations in the data and an
overall slowdown in sales tax revenue in Columbia.6
One interesting feature of the Columbia story is
the response of restaurant owners to the patio

Economists Robert Fleck and Andrew
Hanssen analyzed quarterly restaurant sales
data for 267 California cities over 25 years.
They find that the measured impact of smoking bans differs between local bans and the
statewide ban. In what the authors call their
“naïve” specification that treats all smoke-free
laws the same, they find a statistically significant 4 percent decline in revenues associated
with smoking bans.
When they estimate the effects of the statewide ban and local bans independently, they
find that the measured decline in restaurant
sales is attributable to the statewide ban on
cities without local bans. The measured effect
of the statewide ban is nearly 4 percent, and
it is statistically significant. The independent
effect of local smoking ordinances is estimated
to be very small and is not significant. These
findings are consistent with the interpretation
that locally originated smoking bans have little effect, but smoking bans that are imposed
on a community by a higher jurisdiction can
have a detrimental economic impact.
Fleck and Hanssen go on to uncover an
important specification problem: They find









Scollo et al. (2003) provide a review of previous literature, much of which has been published in medical and public health journals.
Previous studies of the Delaware racino case
study have been published—and disputed—
in the public health journal Tobacco Control.
See Pakko (forthcoming).
See Dover Downs (2004).
Bar employment was not significantly affected
by climate differences.
See Pakko (2007).
See Solberg (2007).


SOURCES: City of Columbia, Mo., and author’s calculations

that cities that adopted smoke-free laws were
systematically different from those that did
not. The authors find that sales growth tends
to be a predictor of smoking bans, rather than
the other way around. This “reverse causality” calls into question many earlier findings,
and it poses problems for using data from
California in drawing inferences about the
economic impact of smoking bans elsewhere.
The Role of Economic Research

Economic effects of smoke-free laws may
be difficult to identify and interpret, but
analysis suggests that at least some businesses
do suffer costs. When they consider passing
smoking bans, policymakers should study
evidence both from public health professionals and from economists.

Adams, Scott; and Cotti, Chad D. “The Effect of
Smoking Bans on Bars and Restaurants: An
Analysis of Changes in Employment.” The
B.E. Journal of Economic Analysis & Policy:
Vol. 7, Issue 1, Contributions, Article 12. See
See Dover Downs Gaming and Entertainment
Inc. Annual Report for the Fiscal Year ended
Dec. 31, 2003 (2004).
Fleck, Robert K.; and Hanssen, F. Andrew.
“Why Understanding Smoking Bans is
Important for Estimating Their Effects:
California’s Restaurant Smoking Bans and
Restaurant Sales.” Economic Inquiry (forthcoming).
Pakko, Michael R. “The Economics of Smoking Bans: Peering Through The Haze.” The
Regional Economist, Federal Reserve Bank of
St. Louis, July 2005, pp. 12-13.
Pakko, Michael. R. “No Smoking at the Slot
Machines: The Effect of Smoke-Free Laws
on Gaming Revenues.” Applied Economics
Pakko, Michael R. “The Economic Impact of a
Smoking Ban in Columbia, Missouri: A Preliminary Analysis of Sales Tax Data.” CRE8
Occasional Report, Dec. 11, 2007. See http://
Phelps, Ryan. “The Economic Impact of 100%
Smoking Bans.” Kentucky Annual Economic
Report 2006, Center for Business and Economic Research, Gatton College of Business
and Economics, University of Kentucky, 2006,
pp. 31-34.
Thalheimer, Richard; and Ali, Mukhtar M. “The
Demand for Casino Gaming with Special Reference to a Smoking Ban.” Economic Inquiry
Scollo, M.; Lal, A.; Hyland, A.; and Glantz, S.
“Review of the Quality of Studies on the Economic Effects of Smoke-free Policies on the
Hospitality Industry.” Tobacco Control, 2003,
Vol. 12, pp. 13-20.
Solberg, Christy. “Effects of Smoking Ban Still
Debated.” Columbia Missourian, Sept. 27,
2007. See

Michael R. Pakko is an economist at the Federal Reserve Bank of St. Louis. To see more of
Pakko’s work, go to http://research.stlouisfed.

The Regional Economist | 11

D i v o r c e

SplitS ille
The Economics of Unilateral Divorce

By Kristie M. Engemann and Michael T. Owyang

Studies have
looked at the
impact of
easier divorce
on a variety of
things, including
women working
outside the home,
and spousal

12 The Regional Economist | January 2008


common perception in the United States
is that half of all marriages will end in
divorce. While this may be true today, it was
not always the case. The chart on Page 14
shows that the number of divorces for every
1,000 people rose steadily from 1960 to the
early 1980s and has since somewhat declined.
The rise in this divorce rate coincided with the
time when many states modified their laws,
allowing divorce to be initiated unilaterally.
Divorce laws began to change in 1970 when
California adopted no-fault divorce; the rest
of the country followed suit over the next 15
years. No-fault divorce allowed the courts
to dissolve marriages based on, for example,
irreconcilable differences rather than requiring the fault of one spouse (e.g., because of
adultery). Additionally, more than half of the
states adopted unilateral divorce during this
time, meaning a divorce no longer required the
mutual consent of both spouses.1
Altering the family structure—by making
divorce easier to obtain—may have economic
implications, as well as social consequences.
Several studies have explored the effects of
such changes in divorce laws on a variety of
economic outcomes, some of which we discuss.
Among the findings: The presence of unilateral

divorce may have led to an increase in married women’s labor supply, to a decline in the
average educational attainment of girls and to
changes in various rates of spousal violence.
In our discussion of these studies, we focus
on the effects of enacting unilateral divorce law
rather than instituting no-fault divorce.
The Divorce Rate

Perhaps the most obvious impact of enacting unilateral divorce is its effect on the divorce
rate. Economist Leora Friedberg used data
spanning 1968 to 1988 to examine such effects.
Controlling for the year and state, she found
that unilateral divorce laws increased the
divorce rate by nearly 10 percent of the average
over the entire sample period (which was 4.6
divorces per 1,000 people). She also found that
different separation requirements and property
settlement rules in states with unilateral divorce
affected the rate of dissolution differently.
For example, unilateral divorce laws with no
requirement of separation before divorcing and
no-fault property division were associated with
the largest increase in divorce—almost 12 percent of the average divorce rate. On the other
hand, laws that required no separation but did
have fault property division increased divorces

by 9 percent. Unilateral laws that required a
period of separation raised the rate by less than 5
percent. Overall, Friedberg found that unilateral
divorce contributed 17 percent of the increase in
the overall divorce rate during her data sample.
Economist Justin Wolfers arrived at a different conclusion, arguing that Friedberg’s results
overstate the effect of the unilateral divorce laws
on the divorce rate. Whereas Friedberg estimated
the impact of the laws over her entire sample,
Wolfers broke up the effect into two-year increments. He reasoned that, by examining two-year
increments and extending the sample to 1956 to
1988, he captured only trends that existed before
the laws were enacted. Using the same model as
Friedberg with only the aforementioned change
in sample, Wolfers found that, for the first eight
years after a state adopted unilateral divorce, the
increase in the divorce rate was two-thirds the
size of Friedberg’s finding. Furthermore, Wolfers
showed that after 10 years, unilateral divorce
had negligible effects on the divorce rate. This
is in direct contrast to Friedberg’s assertion that
the laws had a permanent effect on the divorce
rate. Both studies, however, agree that unilateral
divorce caused some increase in divorce rates, at
least in the short term.
Married Women’s Labor Supply

Unilateral divorce may also have an effect on
married women’s incentives to enter the work
force. Economist Jeffrey Gray argued that a state’s
marital property law may influence the degree to
which unilateral divorce laws affected a woman’s
labor market decisions. (See the sidebar at right
for an overview of the property division rules
and their potential effects on bargaining power.)
Using data from several sources, Gray compared
married women aged 18-55 who lived in states
that adopted unilateral divorce between 1970 and
1974 with women living in states that did not.
Gray found that, after controlling for the type
of property law and other variables that may influence a woman’s decision to work (e.g., age, education, number of children, husband’s income),
her bargaining power affected her tendency to
work. A married woman in a unilateral divorce
state with a community-property law—meaning
she would get half of all marital property upon
divorce—saw her bargaining power increase and
was more likely to work outside the home than a
woman in a state without unilateral divorce. In
contrast, a woman in a unilateral divorce state that
had a common-property law—meaning she would

retain only her own property—saw her bargaining power decrease and became less likely to work
in the labor market than a married woman not
in a unilateral divorce state. These results might
indicate women’s preferences of working outside
the home and men’s preferences of having a wife
who works in the home.
A variety of other factors, such as whether a
couple has children, can also influence whether
she enters the labor force. A study by economists
Katie Genadek, Wendy Stock and Christiana
Stoddard considers which married women
increased their labor force participation (LFP)
between 1960 and 1990. The authors compared
the labor market decisions of married mothers
in states that adopted unilateral divorce laws
with all other married women. The economists’
theory was that the new divorce laws would
transfer bargaining power from the mother to the
father—regardless of the state’s property division
law—because wives with children typically have
more marriage-specific capital (e.g., from childrearing) and less labor market capital than their
husbands do. This might reduce wives’ ability
to initiate divorce since it reduces their outside
earning opportunities. In order to reclaim some
of that bargaining power, wives were more likely
to enter the labor force.
After accounting for state, year, demographics
and income variables, Genadek, Stock and Stoddard found that married women with young children responded most to a change in divorce laws.
For married women with a child under the age of
2, the net effect was an increase in their LFP rate
by 2.1 percentage points, relative to nonmothers.
When their youngest child was between 2 and 5
years old, women had a participation rate that was
1.6 percentage points higher. The authors found
a similar increase in weeks worked the previous
year by married mothers of young children.
The type of property law also played a role in
women’s LFP. Married women with children
under the age of 6 increased their participation
more for equitable distribution than for other
types of property allotment laws. Community
property produced the second-highest increase in
married women’s participation in the labor force.
Hence, in the states with unilateral divorce laws,
the increase in the LFP of married women with
young children implies that easier divorce would
have left them worse off due to the cost of raising
children. By entering the labor force, these women
were able to increase their bargaining power in the
marriage (by raising their threat of leaving).

Dividing Property
Some of the studies also
explore the effects of different
property division rules subsequent to divorce. The three
types of division are community
property, common law and
equitable distribution.

Community property laws
distribute equally upon divorce
all property acquired during
the marriage. Under common
law, property is retained by
the owner upon divorce; in
cases of joint ownership, the
property is divided equally
between the spouses. Equitable distribution leaves it up
to the court to determine fair
allotment of the property.

Let’s Bargain
Because unilateral divorce made
dissolution of marriages easier,
people’s economic decisionmaking both prior and subsequent to divorce might depend
on which property law prevailed
in their state. Bargaining
power within a marriage might
also be affected. For example,
a wife’s threat of leaving the
marriage might increase if her
state has a community-property
law because she would get half
of everything. In contrast, her
threat of leaving might decrease
if her state has a common law
because, typically, husbands
own more property, thus leaving
the woman worse off financially.
In the first case, the wife’s
bargaining power increases,
and in the second,
it decreases.

They instead began to focus more on their
own careers, perhaps as insurance in the
event of marriage dissolution.





Ratio: Divorces/Marriages









Children’s Outcomes














SOURCE: U.S. National Center for Health Statistics; obtained from various editions of Statistical Abstract of the United States (2000, 1995, 1984,
1969) and the U.S. Census Bureau web site:

Marriage-Specific Capital

A change in divorce laws can affect
whether a couple decides to invest in
marriage-specific capital, which is the subject
of a study by Betsey Stevenson. An example
of marriage-specific capital occurs when one
spouse specializes in household production
while the other focuses on market production. Stevenson posited that unilateral
divorce leads to, on average, shorter marriage
durations and, therefore, reduces the incentive for a couple to make such investments.
To determine what effect unilateral divorce
had on several forms of capital, Stevenson
examined newlywed couples—those who
had been married for two years or less—from
the 1970 and 1980 censuses. She compared
couples in states that adopted new divorce
laws between 1970 and 1980 with those in
states that did not. Her study accounted
for various factors that might affect marital
capital investment, such as the year, state of
residence, length of marriage, race, ethnicity,
whether the couple lived in a metropolitan
area, property division laws that accompanied divorce, and both spouses’ age and
education. Stevenson found that, in the presence of unilateral divorce laws, the likelihood
that one spouse financially supported the
other for education during the first two years
of marriage was 10 percent lower. The couple
was also 8 percent less likely to have children
within that time frame. Additionally, both
spouses were 8 percent more likely to hold
full-time jobs, and the woman was 5 percent
more likely to be in the labor force.
Her results suggest that when divorce
became easier, couples became less likely to
invest in elements related to their marriage.
14 The Regional Economist | January 2008

A common concern regarding divorce is
the potential negative effect it has on children.
Economists John Johnson and Christopher
Mazingo explored the effects on children’s
outcomes as adults when they were born in
states with unilateral divorce laws. Using data
from the 1980 census, Johnson and Mazingo
found that, for each additional year a child
lived in a state with such laws, his or her
parents were 0.6 percentage points more likely
to divorce. To determine how this affected
children, Johnson and Mazingo examined
individuals aged 25-34 during the 1990
census—those who were children at the time
unilateral divorce was enacted. The authors
compared the outcomes of children born in
states that adopted unilateral divorce between
1969 and 1977 and those in states that did not.
Accounting for the number of years
exposed to unilateral divorce laws before age
18, Johnson and Mazingo found that educational attainment was negatively affected,
more so for women than for men. The largest
effect was on women with nine to 12 years of
exposure to unilateral divorce, who obtained,
on average, 0.12 fewer years of school. Additionally, those same women were less likely
to graduate from high school (1.4 percentage
points), to obtain an associate’s degree (3.2
percentage points) and to obtain a bachelor’s
degree (2.3 percentage points). For men, the
only significant effect was on high school
graduation—men with nine to 12 years of
exposure were two percentage points less
likely to graduate from high school.
Although women’s wages were negatively
affected by increased exposure to unilateral
divorce laws, men’s wages were not significantly different. Again, women with nine to
12 years of exposure experienced the largest
negative outcomes, earning 3.7 percent less
than women who lived in states that did not
enact unilateral divorce laws.2
Johnson and Mazingo also studied whether
exposure to unilateral divorce laws influenced a child’s future decisions to marry/
divorce and to have children. When analyzing their full sample of data, Johnson and
Mazingo found that both men and women

who had been exposed to unilateral divorce
as children were significantly more likely to
be married and less likely to have never been
married at the time of the survey. Although
women’s divorce rate was not affected, the
men were slightly less likely to be divorced.
Also, growing up in a unilateral divorce state
increased the likelihood that a woman had
children. For the disaggregated groups, only
women with nine to 12 years of exposure had
a significantly higher probability of having
children than women with no exposure.
Overall, Johnson and Mazingo’s results
suggest that girls’ educational attainment and
wages earned as an adult were more negatively affected than boys’ by the adoption of
unilateral divorce laws during childhood.
However, the fact that both were more likely
to marry as adults perhaps suggests that
easier divorce laws made marriage seem less
risky or like less of a commitment.
Spousal Violence

Another unexpected outcome of the adoption of unilateral divorce laws was a change
in the rates of spousal violence. Economist
Thomas Dee examined the annual number
of spousal homicides across states from 1968
to 1978 in order to capture the effect of new
divorce laws. During his sample, the average
number of spousal homicides was similar
for both spouses—19 husbands killed their
wives and 17 wives killed their husbands per
state per year. Dee argued that unilateral
divorce laws could have had several possible effects. First, women could more easily
dissolve an abusive marriage. However, the
property division after divorce could leave
women worse off financially, which might
alter one or both spouses’ behavior within
the marriage. For example, the husband
might increase his level of abuse. Additionally, the wife’s incentive to kill her husband
might increase, whether or not his level of
abuse changes, if her alternative is to be left
financially destitute in the wake of divorce.
To determine which, if any, outcome
occurred, Dee controlled for the state of
residence, year and several other factors that
might influence spousal homicide (e.g., state
personal income per capita and police officers
per capita).3 He found that the adoption of
unilateral divorce did not cause a significant
change in the number of husbands who killed

their wives. However, he found that the
number of wives who killed their husbands
increased by 20 to 26 percent. Dee then considered whether the marital property treatment mattered for the number of husbands
killed by their wives. He found no effect
when the state had community-property division, which generally favored wives. However, when a state had equitable-distribution
or common-law property treatment, both of
which tended to favor husbands, the number
increased by one-fourth to one-third. In light
of these results, Dee concluded that spousal
homicides—in the form of wives killing their
husbands—increased when the possibility
of unilateral divorce left wives economically
Economists Betsey Stevenson and Justin
Wolfers also examined the effect of unilateral
divorce on spousal homicide. Whereas Dee
studied the number of spousal homicides,
Stevenson and Wolfers considered the rate
of spousal homicide from 1968 to 1994 and
found different results. They also controlled
for various economic, demographic and
social policy factors, as well as criminal
justice indicators. Stevenson and Wolfers,
contrary to Dee, found no significant change
in the rate of husbands killed by their wives.
In contrast, unilateral divorce appeared to
reduce the rate at which wives were killed by
their husbands by 12.6 percent.
Stevenson and Wolfers also examined how
unilateral divorce affected the rates of domestic violence and suicide. Using domestic
violence data from the Family Violence Surveys in 1976 and 1985, Stevenson and Wolfers
found that the rate of husband-on-wife
violence decreased by about 36 percent during
their sample, but the rate of wife-on-husband
violence did not change significantly.4
For suicide rates, they used data from the
National Center for Health Statistics for 1964
to 1996. After controlling for the state and
year, as well as for economic, demographic
and social policy factors, the rate of female
suicide decreased by an average of 8.3 percent
over the 20 years after the adoption of unilateral divorce laws.5 The effects were larger as
more time passed—the rate had decreased by
16.4 percent 19 or more years after the laws
had been passed. Overall—and contrary to






Background information on changing divorce
laws and data on which states adopted unilateral divorce (which excludes states that have
unilateral divorce but require a separation
period first) were obtained from Friedberg
All regressions include a control for state of
residence except for the one involving level of
education. The results here from the regression involving wages do not include controls
for education because it is also affected by the
divorce laws.
Additional factors are the unemployment
rate, welfare aid per recipient, population,
whether the state had the death penalty and
the homicide rate by strangers.
The surveys were conducted by sociologists
Murray Straus and Richard Gelles and only in
those two years. Stevenson and Wolfers noted
that only intact marriages were examined. As
a result, the decline in violence could partly
reflect an increase in divorce among abusive
There was no significant effect on the male
suicide rate.

Dee, Thomas S. “Until Death Do You Part:
The Effects of Unilateral Divorce on Spousal
Homicides.” Economic Inquiry, January 2003,
Vol. 41, No. 1, pp. 163-82.
Friedberg, Leora. “Did Unilateral Divorce Raise
Divorce Rates? Evidence from Panel Data.”
American Economic Review, June 1998, Vol.
88, No. 3, pp. 608-27.
Genadek, Katie R.; Stock, Wendy A.; and Stoddard, Christiana. “No-Fault Divorce Laws and
the Labor Supply of Women with and without
Children.” Journal of Human Resources, Winter 2007, Vol. 42, No. 1, pp. 247-74.
Gray, Jeffrey S. “Divorce-Law Changes, Household Bargaining, and Married Women’s Labor
Supply.” American Economic Review, June
1998, Vol. 88, No. 3, pp. 628-42.
Johnson, John H.; and Mazingo, Christopher J.
“The Economic Consequences of Unilateral
Divorce for Children.” University of Illinois
CBA Office of Research Working Paper 000112, July 2000.
Stevenson, Betsey. “The Impact of Divorce Laws
on Marriage-Specific Capital.” Journal of
Labor Economics, January 2007, Vol. 25,
No. 1, pp. 75-94.
Stevenson, Betsey; and Wolfers, Justin. “Bargaining in the Shadow of the Law: Divorce
Laws and Family Distress.” Quarterly Journal
of Economics, February 2006, Vol. 121, No. 1,
pp. 267-88.
Wolfers, Justin. “Did Unilateral Divorce Laws
Raise Divorce Rates? A Reconciliation and
New Results.” American Economic Review,
December 2006, Vol. 96, No. 5, pp. 1,802-20.

continued on Page 16
The Regional Economist | 15

e c o n o m y

a t


g l a n c e

This issue introduces several changes to this Economy at a Glance page. First, we are now plotting market-based measures
of long-term inflation expectations. These are spreads between yields on nominal and inflation-adjusted U.S. Treasury
securities. Second, to gauge how market expectations of future changes in the federal funds target rate change over
time, we are now plotting rates on federal funds futures on selected dates. To make room for these two new charts, we
have made the U.S. Crop and Livestock Prices chart a web-only chart. To view this chart and additional web-only charts,
go to




CPI–All Items


See how the number of divorces in each
state changed over a 25-year period. Go to

Kristie M. Engemann is a research analyst, and
Michael T. Owyang is an economist, both at the
Federal Reserve Bank of St. Louis. For more on
Owyang’s work, go to http://research.stlouisfed.









NOTE: Each bar is a one-quarter growth rate (annualized);
the red line is the 10-year growth rate.



















Dec. 14







NOTE: Weekly data.













10-Year Treasury

Fed Funds Target

1-Year Treasury










NOTE: Beginning in January 2003, household data reflect revised
population controls used in the Current Population Survey.










Trade Balance















NOTE: Except for the fed funds target, which is end-of-period,
data are monthly averages of daily data.













NOTE: Percent change from a year earlier.




NOTE: Data are aggregated over the past 12 months.
16 The Regional Economist | January 2008




These studies demonstrate that unilateral
divorce laws may have important economic
and social consequences. Combined with
laws that determine how property is distributed after divorce, laws that ease the requirements for marriage dissolution can alter
marital dynamics by changing incentives and
shifting bargaining power between spouses.
Some effects of unilateral divorce were positive—e.g., a reduction in the rate of spousal
violence—while others were negative—e.g., a
reduction in the level of education completed
for girls who grew up in unilateral divorce
states. Other outcomes, such as an increase
in the LFP of mothers with young children,
have uncertain ramifications.




For Better … or Worse?




continued from Page 15

the study by Dee—Stevenson and Wolfers’ study suggests that adults’ well-being
improved after states adopted unilateral
divorce laws.




melted down into a bullet.”

All Items Less Food and Energy




“I’m having my wedding ring














NOTE: Data are aggregated over the past 12 months.


n a t i o n a l

o v e r v i e w

Walking a Tightrope into 2008
By Joshua A. Byrge and Howard J. Wall


he Federal Open Market Committee
(FOMC) on Dec. 11 cut its target for the
federal funds rate by 25 basis points again
to 4.25 percent, citing continued housingmarket weakness and tight credit conditions.
Though oil and commodity prices remain a
threat, incoming price data have indicated a
reduction in inflationary pressure, suggesting that growth might once again dominate
economic concerns heading into 2008.
Despite strong estimates for growth in the
second and third quarters of 2007—3.8 and
4.9 percent, respectively—the FOMC foresees
growth between 1.8 and 2.5 percent for 2008,
with core inflation expected to moderate to
about 1.8 percent.

Inflationary Pressure Eases

Though the price of oil continues to be a
key threat to the outlook for inflation and
growth, spot oil prices fell from near $100 per
barrel in mid-November to $92.30 per barrel
Dec. 13. Over the same period, the price of
regular-grade gas decreased from $3.11 to
$3.06. Futures markets suggest that some
additional oil-price moderation may be in
store. On Dec. 13, the six-month futures contract for crude oil was priced at $91.20 per barrel. Further out, the one-year contract price
was $88.80 per barrel. Though the spread
between the spot price and 1-year futures price
narrowed in mid-December, some additional
relief for consumers might be in sight.
Rising productivity and falling labor costs
have also helped ease the strain of high oil
prices and the falling dollar. The revised estimate of third quarter productivity growth in
the nonfarm business sector—an annual rate
of 6.3 percent, up from a modest 2.2 percent in
the second quarter—was well above expectations. Over the same period, unit labor costs

fell by 2 percent. Despite
strong gains in payroll
employment in the fourth
quarter of 2007, labor costs
seem unlikely to rebound, as
the employment rate held steady
at 4.7 percent in November and capacity
utilization remained below its average for
the first three quarters of 2007. On balance,
core consumer prices increased by 2.3 percent
in November when compared with the year
prior, remaining slightly above the FOMC’s
perceived comfort zone.
Housing Threatens Consumer Spending

The housing market shows no immediate signs of improvement, posing another
key threat to growth for 2008. Over the
third quarter of 2007, real residential fixed
investment declined at an annual rate of 19.7
percent, compared with 14.1 percent over the
first half of the year. As of mid-December,
there was a four-month supply of single family houses on the market (that doesn’t include
homes which may be rented, temporarily
occupied or held off the market altogether),
and builders were on track to begin building
1.1 million more this year. Despite falling building permits, the continued swell
of houses available suggests that residential
investment will continue to be a drag on the
economy well into 2008.
With house prices decelerating by some
measures and falling by others, concerns that
declining home equity will cause consumers to
reduce spending are on the rise. Real personal
consumption expenditure (PCE) accounts for
roughly 70 percent of real GDP and has given
the single largest boost to growth over the past
several quarters. In the third quarter of 2007,
PCE contributed 1.9 percentage points to

overall real GDP
growth of 4.9 percent.
However, according to unofficial data
based on work by Alan Greenspan and James
Kennedy, equity extraction for the purpose
of personal consumption may account for as
little as 1.5 percent of PCE.1 Thus, declining
equity extraction may be offset by revolving
consumer credit (excluding real-estate backed
loans), which has increased by more than
12 percent since the beginning of 2006.
Tighter credit standards resulting from the
contraction in the subprime mortgage market,
along with decreased disposable income
resulting from increased mortgage payments,
present perhaps the most credible threats to
the growth of spending and, thus, real GDP.
With PCE expected to moderate in 2008,
additional contributions to growth from business fixed investment and net exports might
not be enough to offset further decreases in
residential investment. With core inflation
expected to remain in check and real GDP
growth dependent on a strong contribution
from consumer spending, the downside risks
to growth may again be underscored going
into 2008.
Joshua A. Byrge is a research analyst and
Howard J. Wall is an economist, both at the
Federal Reserve Bank of St. Louis.
1 Greenspan, Alan; and Kennedy, James.

“Estimates of Home
Mortgage Originations, Repayments, and Debt On One-toFour-Family Residences.” Federal Reserve Board, Finance and
Economics Discussion Series No. 2005-41, September 2005.
The Regional Economist | 17

d i s t r i ct

o v e r v i e w



St. Louis



District Fares Better Than Nation
as Housing Market Crumbles



Little Rock

By Michael R. Pakko


ne of the top national economic news
stories of 2007 was the decline in the
housing market. Home prices fell, sales spiraled downward and many mortgage borrowers—particularly those in subprime borrowing
categories—were unable to maintain their
commitments. With a glut of unsold homes,
new construction was at a standstill.
So goes the conventional narrative.
But housing markets are, by their very
nature, localized. Many of the characteristics
of housing prices, construction and sales are
particular to local communities. Data for
the Eighth Federal Reserve District show that
while some aspects of the overall 2007 housing decline are reflected locally, the District
has not suffered some of the most detrimental
developments that have affected other parts
of the country. Even across regions within
the District, experiences differ.
Generally, areas of the country that saw
the largest increases in house prices during
the boom years of 2004 and 2005 are those
that have suffered the largest price declines
more recently. For example, according to
data from the Office of Federal Housing
Enterprise Oversight (OFHEO), house prices
in San Diego were rising at an annual rate
of over 25 percent in 2004. As of the third
quarter of 2007, San Diego house prices were
5.1 percent lower than a year earlier. In contrast, house prices in the St. Louis metro area
never accelerated to double-digit rates, rising
at an average annual rate of 7.6 percent over
2004 and 2005. Yet house prices in St. Louis
continue to increase, albeit at a lower rate:
2.3 percent for the year ending in the third
quarter of 2007.
18 The Regional Economist | January 2008


The Eighth Federal Reserve District
is composed of four zones, each of
which is centered around one of
the four main cities: Little Rock,
Louisville, Memphis and St. Louis.

figure 1
House Price Indexes for Large Metro Areas




St. Louis


Little Rock










SOURCE: Office of Federal Housing Enterprise Oversight (OFHEO)

As shown in Figure 1, all four major
metro areas in the Eighth District show
similar patterns. None experienced rates
of appreciation over 10 percent during the
house-price boom years, and all four show
year-over-year growth rates that exceed
the national average for the third quarter
of 2007. In fact, none of the 18 metro areas
within the District has shown a price decline
on a year-over-year basis for the period.
(See Figure 2.)
An alternative measure of house price
changes, the National Association of
Realtors’ median house price estimate, is
available for five of the District’s metro
areas. (See sidebar.) By this measure,
house prices have shown somewhat greater
weakness: As of the third quarter of 2007,
the median price in St. Louis is down 2.5
percent from the previous year. For Memphis, the median is down 2.8 percent, and
for Louisville, it is down 0.4 percent. The

median was unchanged from a year earlier
for Springfield, Mo., and up 2.1 percent for
Little Rock.
New home construction has slowed, but
not come to a standstill in the District: Yearto-date building permits are down from
the previous year over much of the District,
but the declines have been smaller than the
national average for most metro areas. (See
Figure 2.) Some of the metro areas showing
the largest percent changes (both negative
and positive) are relatively small; so, a minor
change in the number of permits translates
into a large percentage change. Summing
over all metro areas in the District, nearly
36,000 permits were issued over the first 10
months of 2007, down about 16 percent from
the previous year.
Similarly, state-level data suggest that the
Eighth District has fared better than the
national average. (See Figure 3.) Five of
the seven states showed positive house price

appreciation in the third quarter, and
price increases in all seven have outpaced
the U.S. average over the previous year.
Existing home sales are down in each of
the seven states, but only for Illinois is
the magnitude of the decline greater than
the national average. State-level data also
show that employment in the construction
sector has declined over the past year in
only one state, Arkansas. In all other states,
construction employment has remained

steady or increased—again in contrast to
the national average.
Clearly, the downturn in the housing
sector has nationwide and local implications. But housing markets in the Eighth
Federal Reserve District have fared better
than the national average.

Measuring Housing Prices


here are three commonly cited measures of
existing house prices that are available for

specific metro areas: The National Association of

Realtors (NAR) publishes estimates of median house
prices, the Office of Federal Housing Enterprise
Oversight (OFHEO) publishes a quarterly weighted-

Michael R. Pakko is an economist at the
Federal Reserve Bank of St. Louis.

average house price index and Standard & Poors
publishes the S&P/Case-Shiller home price index.
The median price is simply the price at which half
of the homes sold are more expensive and the other

figure 2 Housing Market Indicators for Eighth District Metro Areas

half are less expensive. Therefore, the NAR median
price index can change even when prices of par-

House Price Indexes (OFHEO)

Building Permits, Year-to-Date (Oct.)

ticular houses are unchanged: For example, fewer

Percent Change
(Annual Rate)

Percent Change
from Previous

Total Units






of home sales by price. The median price index is

Little Rock-North Little Rock, Ark.






calculated only for the largest 156 metro areas in

Louisville-Jefferson County, Ky.-Ind.






the U.S.; so, it covers only five of the metro areas
















Elizabethtown, Ky.






Evansville, Ind.-Ky.






Fayetteville-Springdale-Rogers, Ark.-Mo.






Fort Smith, Ark.-Mo.






Hot Springs, Ark.






Jackson, Tenn.






Jefferson City, Mo.






Jonesboro, Ark.






Owensboro, Ky.






Percent Change
from Previous

Single Family,
Percent Change from
Previous Year

Large Metro Areas

sales of expensive homes compared with relatively
cheaper homes moves the median lower. In this
sense, it provides information about the distribution

St. Louis, Mo.-Ill.

Memphis, Tenn.-Miss.-Ark.
Small and Medium Metro Areas
Bowling Green, Ky.
Columbia, Mo.

in the Eighth Federal Reserve District.
The OFHEO index is a weighted-average
measure, constructed using a matched “repeat
sales method”—meaning that it measures average price changes in repeat sales or refinancings
on the same properties. Because the OFHEO
index of house prices includes only those that are
purchased or securitized by FannieMae and FreddieMac, the index includes only those houses with
conventional, conforming mortgages, not “jumbo”
mortgages (currently, those over $417,000).
The S&P/Case-Shiller index is also calculated as a
repeat-sales index, but it includes jumbo mortgages.

Pine Bluff, Ark.






Springfield, Mo.






However, it is constructed for only 20 of the nation’s

Texarkana, Texas-Texarkana, Ark.






largest metropolitan areas. Most jumbo mortgages

United States






are issued in California, New York, Florida and Washington, D.C. For many of these metro areas, jumbo

SOURCES: Office of Federal Housing Enterprise Oversight, Bureau of the Census

loans are, indeed, an important segment of the
housing market. Nationwide, jumbo loans accounted

figure 3

for 16 percent of mortgage originations in 2006.

Housing Market Indicators for Eighth District States

The areas most reliant on jumbo loans tend to be

House Price Indexes (OFHEO)

those where home prices have suffered the greatest

Percent Change
(Annual Rate) 2007:Q3

Percent Change

Existing Home Sales, Percent Change
from Previous Year (Q3)

Payroll Employment-Construction (Oct.)
Percent Change from Previous Year










in those areas, it is not necessarily an accurate






reflection of housing prices in other parts of the






country. Indeed, none of the 20 cities in the index






is in the Eighth District.


declines. Hence, although the Case-Shiller index
may be more accurate for measuring housing prices






As of 2007:Q3, the national totals for these three






measures of housing prices showed year-over-year





growth rates of –2 percent (NAR median), +1.8 per-

United States

SOURCES: Office of Federal Housing Enterprise Oversight, National Association of Realtors, Bureau of Labor Statistics

cent (OFHEO) and –4.5 percent (Case-Shiller).
The Regional Economist | 19

c o m m u nit y

p r o f i l e

Town and Gown
Photo by DuVale Riley

In This Southern Illinois Hub,
They Are Now “Tied at the Hip”
By Susan C. Thomson


arbondale, Ill., runs on three economic
cylinders—education, health care and
retailing. Education trumps all, most visibly
and boisterously when maroon-and-whiteclad Salukis fans converge on town for big
football and basketball games and book the
hotels and motels to capacity.
More than any other enterprise, the Carbondale campus of Southern Illinois University also drives the city’s quieter, workaday
life. The university is the city’s largest single
employer by far, with 7,200 workers. Its
18,850 students—most of them nonresidents
who are not counted in the census—help
spur economic activity that is at least double
what the permanent population could generate on its own, estimates the city’s development director, Kevin Baity.
Also contributing to the local economy
are tens of thousands of other spenders, who
20 The Regional Economist | January 2008

travel for miles across the rural surroundings
for shopping and medical care because they
lack options closer to home.
In medical care, the biggest player is
Memorial Hospital, which last year finished
a two-story, $14 million addition and a
freestanding $7 million cardiology center.
George Maroney says the hospital has been
in construction mode for the entire 30 years
he’s been its administrator. Over the same
period, it has gradually added advanced medical specialties, such as open heart surgery,
and has extended its geographic reach to the
state’s eastern, western and southern borders.
Now, some patients come from nearby parts
of Kentucky and Indiana, Maroney says.
The hospital’s hometown punch has
strengthened accordingly. Maroney recalls
there being about 25 physicians on staff 30
years ago, compared with about 150 today.

SIUC’s sports draw people—and their pocketbooks—
from around the area to Carbondale. Cheering on the
Salukis women’s basketball team Dec. 8 were (from the left)
Bill Erwin of Carterville, Jodi Tamen of West Frankfort and
Rollynda Morrow of West Frankfort. Tamen is an alumnus.

Memorial Hospital has been in construction mode for decades, says its administrator. Last year,
a $14 million addition and a freestanding $7 million cardiology center were finished. The hospital
is the biggest in the area and draws patients from throughout Southern Illinois, as well as nearby
parts of Kentucky and Indiana.

Of today’s count, he estimates 110 have office
practices in Carbondale, with an average of
three employees each.
In shopping, too, the city is a regional hub,
not limited to obvious standbys like WalMart and Lowe’s. University Mall draws
customers from 50 miles away, says the general manager, Debra Tindall. The center has
been through a series of owners, expansions
and tenants since opening in 1974. It now
boasts an eight-screen movie theater and
81 stores. The lineup includes anchors J.C.
Penney and Macy’s and recent additions Bed
Bath & Beyond, Gap and Old Navy. Beyond
the mall and all new to town within the past
five years are Office Depot, Barnes & Noble,
Kohl’s and Petco. Dick’s Sporting Goods
opened in September.
City Depends on Sales Taxes

The city banks on these and other retail
outlets—literally. Five years ago, the city
stopped levying real estate property taxes.
It has since been relying on its share of
local sales taxes for slightly more than half
of its general revenue budget, with the rest
provided by the city-owned water utility and
various fees. Two years ago, the city annexed
the university’s 1,133-acre campus, enabling
it to start charging city sales tax at the stores
there. The move paid off because it didn’t
require the city to provide the university
anything beyond existing fire protection
services, Baity says.

Photo by Ryan Rendleman

The city aggressively pursues not just
retail but all development, notably through
an enterprise zone stretching along its main
commercial arteries. Businesses that expand
or build within the zone can qualify for local
fee waivers and state and local tax breaks.
The zone includes a tax-increment-financing district of six square blocks—once an
eyesore full of ruined buildings—where
additional financial sweeteners are available
to new businesses.
First Southern Bank, founded in 2002, was
forgiven sales taxes on all construction materials and was granted a 23-year, 75-percent
reimbursement on real estate taxes for parks
and schools for putting its 13,000-squarefoot building in the district. If not for those
breaks, the bank “probably wouldn’t be in
downtown Carbondale,” says its president,
John Dosier.
He offers the project as “an example of
how city government and the business community can come together” for community

Photo by DuVale Riley

First Southern Bank is an anchor in
the downtown tax-increment-financing
district, once an eyesore full of downand-out buildings. If not for the tax
breaks, the bank probably would not
have built there, says its president.
The bank has also invested in and is
offering for sale four other lots there.

University Comes Into Its Own

Ironically, for years now, Carbondale’s
major economic engine—the university—
has not, on the whole, been a factor in the
city’s growth. That’s partly because the
university has not yet “optimally developed”
its potential as an economic force in its own
backyard, says John Koropchak, SIUC’s vice
chancellor for research and graduate dean.
The Regional Economist | 21

“We’re tied at the hip,”
Trevino says. “What’s
good for SIU is good for
the city, and vice versa.”

Photo by DuVale Riley

City officials worry that as students
move out of rental housing and into new
dorms, the houses will become neglected
and abandoned. To prevent such a slide,
the City Council voted last fall to grant
$5,000 to any buyer of a rental property
who would own and live in it for 10 years.
Here, students (from left) Lauren Hickman,
Brandy Roe and Ryan Sweikert gather on
the front porch of a house on South Forest
Street that the two women rent.

22 The Regional Economist | January 2008

But that is changing, he says, with SIUC now
subscribing to a Jackson County development
plan that pictures the university as applying
itself more to local and regional betterment.
The university’s economic impact has
also been held back by enrollment that was
edging down for several years until last fall
when—in a glimmer of hope—the campus
enrolled its largest freshman class in 17 years.
Fernando Trevino, who became campus
chancellor in July, says the university’s challenge has been not in recruiting students
but in keeping them. The cost of attending
SIUC totals about $13,000 a year, which is
beyond the means of many, mostly rural,
Southern Illinoisans, he says. “This is not a
highly affluent area. It’s a middle-class and
working-class population.”
Today’s students appear to be more the
homebody type than those of a decade and
more ago, when the campus made headlines
because of the students’ drunken, destructive Halloween parties on the several blocks
of South Illinois Avenue known as The Strip.
That stretch is quieter now, thanks in part to
enterprise-zone incentives that have served
to replace some of the bars there with, for
instance, a bookstore and a dog groomer.
Last fall, the university offered students
all the more reason to stay on campus
when it opened its first new housing in
39 years. The 410 lucky occupants have
the sort of accommodations favored on
many campuses today—single bedrooms
grouped around common areas with kitchens and laundry facilities.
Elsewhere around the city, private developers are at various stages of putting up
similar accommodations for about 1,500
occupants at rents generally competitive
with the university’s.
For a city where 60 percent of off-campus
housing is rented and two-thirds of the
renters are SIUC students, the attractive new
units pose a problem. Students “are flocking
to them,” Baity says. The prospect, then, is
many fewer tenants for the city’s oldest houses
—properties that students have “lived in
pretty hard,” Mayor Brad Cole says. To keep
these from falling into neglect and abandonment, the City Council voted in October to
grant $5,000 to any buyer of a rental property
who would own and live in it for 10 years.
The city has also extended a helping hand
to the university by pledging $20 million to

the university’s $83 million plan to upgrade
its 43-year-old basketball arena and replace
the 70-year-old football stadium. The payout schedule calls for $1 million a year for
20 years, with the money coming from the
proceeds of a new half-percent increase in
sales tax. That increase brings the city’s total
to 7 3/4 percent.
The chancellor and the mayor see the
arrangement as a case of mutual selfinterest. “We’re tied at the hip,” Trevino
says. “What’s good for SIU is good for the
city, and vice versa.”
Says Cole, “Anything that brings people
to Carbondale is a plus for us ... because
we’re sales tax-based.”
While predicting that its basic threeingredient economic recipe won’t change
much any time soon, Baity says the city
would welcome “knowledge-based, higherend, smaller industries,” such as the printer,
medical biller and water-testing company
that have come through the local small business development center or research park,
both affiliated with the university.
That park now houses 14 businesses in
various stages of development. Of these, eyes
are particularly focused on Midwest Energy
Group Inc., spun off from the university’s
chemistry department in 2006 after one of its
professors discovered what might be a new
and more efficient way to create biodiesel fuel.
Separately, for a half-century, university
investigators have been studying coal—
a natural subject for them since Southern
Illinois holds some of the nation’s richest
deposits and was once best known as mining
country. But Illinois’ coal is high-sulfur
coal, long spurned as environmentally
undesirable, and the area’s mining industry
has struggled.
The university’s coal scientists are looking
for ways to clean coal and convert it to other
fuels, such as diesel and natural gas, and for
other uses, such as feedstock and fertilizer.
Other university researchers are working on
other energy technologies, such as fuel cells
and hydrogen generation and storage.
“It’s not inconceivable to think that, with
all of the energy resources we have here, this
region could become the energy capital of the
United States,” says SIUC’s Koropchak.

Susan C. Thomson is a freelance writer.

R e a d e r

e x c h a n g e

ask AN economist
William T. Gavin joined the
St. Louis Fed in 1994;
before that, he worked
for the Cleveland Fed.
His areas of interest are
macroeconomic dynamics
and monetary policy rules.
He is also the editor of
the Review, the St. Louis
Fed’s academic journal.
When he wants to have
even more fun, he rides his
1999 Excelsior-Henderson
motorcycle. For more on
his research, see http://

Why are there so many price indexes?
Various measures of prices and inflation have been constructed
for different purposes and, therefore, reflect differing emphases.
For example, the Consumer Price Index (CPI) was designed to
adjust pensions for WW I veterans. It measures changes in prices
for a fixed basket of goods that is intended to reflect the typical
urban consumer. Although the market basket is periodically adjusted, the fixed shares make it possible to leave past data unrevised.
These properties make the CPI useful for indexing items like Social
Security payments, wage contracts and inflation-adjusted bonds.
The Personal Consumption Expenditures Price Index (PCEPI)
was designed to measure the real, inflation-adjusted consumption
component in the National Income and Product Accounts. Therefore,
the PCEPI is a more comprehensive measure than the CPI. The PCEPI
also differs from the CPI by using expenditure shares that change over
time as consumers adjust their purchases in response to relative price
changes—buying more apples when orange prices rise, for example.
Other price indexes are designed to measure prices of specific
economic activities. The Producer Price Index (PPI) tracks the prices
of materials as they move through the production process toward
finished-good status. The Import Price Index, as the name implies,
measures changes in the prices of imported goods.
For both the CPI and PCEPI, it is common to consider “core” measures, for which the food and energy components are eliminated.
Because these two components tend to be more volatile than others,
their omission leaves a measure that is thought to more accurately
reflect long-term trends in inflation. A similar motivation lies behind
the construction of the “median” and “trimmed mean” measures of
the CPI that are published by the Federal Reserve Bank of Cleveland.
The Federal Open Market Committee (FOMC) has, in recent years,
cast its inflation forecasts in terms of the core PCEPI. On Nov. 14,
2007, Fed Chairman Ben Bernanke announced that the FOMC would
begin making quarterly projections for headline PCEPI inflation (which
includes food and energy—important items in the consumer’s budget) and for core inflation (because it is a better short-run indicator of
where headline inflation is likely to end up in the long run).
Submit your question in a letter to the editor. (See Page 2.)
One question will be answered by the appropriate economist in each issue.

This is in response to October’s article titled “Trading Barbs: A Primer on the
Globalization Debate.” To read the entire letter, as well as other letters, go to
Dear Editor:
I particularly liked this article’s noting of the need for labor mobility equal to
that of capital but also of the probable impossibility of achieving labor mobility
for a variety of reasons. I agree fully that we are unlikely to ever generate the
required level of labor mobility, meaning there is a structural and permanent
advantage associated with mobile capital that, absent policy fixes, leads to high
inequality or a breakdown in globalization that ultimately hurts everyone. ...
What is good for the people of the U.S. and the world can be the same only if
policy causes a more equitable distribution of the benefits and costs within our
own country. Otherwise, I am quite certain the outcome of this globalization
episode will be similar in some fashion to the previous one, where a very few
got the benefits and most got the costs. The previous globalization episode
terminated in World War I.
Steve DeHoff, a staff consultant at the Cincinnati office of Stress
Engineering Services Inc.
Fed Flash Poll Results

Whenever a new issue of The Regional Economist is published, a new poll
is posted on the Bank’s home page, The poll question is
always pegged to an article in that quarter’s issue. Here are the results of the
poll that went with the October issue. The question stemmed from the article
“Trading Barbs: A Primer on the Globalization Debate.”
How far would you go on globalization?
All the way—in reverse. We need to put restrictions in place to protect
the jobs we have left.
All the way. Get rid of all barriers to free trade as quickly as possible.
Globalization is moving too quickly. We need to slow down and re-evaluate.

Accelerate the pace. Move toward removing barriers on goods and
services—except those deemed in the national interest.
Stick with the status quo. The current pace of globalization is just fine.
1,139 responses as of 12/17/2007

This issue’s poll question:

What Should Be the No. 1 Goal of Monetary Policymakers?
1. Price stability.
2. Maximum employment.
3. Moderate long-term interest rates.

4. Stability of the financial system.
5. A strong dollar exchange rate.

To vote, go to Anyone can vote, but please do so only once.
(This is not a scientific poll.)

Hear! Hear!
Periodically, we conduct short interviews with economists on a topic that we
think has wide interest. Then, we post these 10-20 minute audiocasts on our
web site. Go to and follow the links to
hear about:
• Payday lending: Is it predatory?
• Tracking livestock with RFID tags: What’s the fuss?
• Wal-Mart’s efforts to open banks
The Regional Economist | 23

n e x t

i s s u e

That Don’t Work
In urban areas across
the country, neighborhoods that had high
unemployment rates in
1980 saw the situation
worsen over the next
20 years, while neighborhoods that had little
unemployment back then
had even less in 2000.
The reasons for this polarization may not be surprising, but they are worrisome.
In the April issue of
The Regional Economist,
read about the concentration of joblessness and
ways in which public policy
might deal with it.

New Year Brings New Content
and New Look to Publication
Dear Readers,
Welcome to the new Regional Economist. As we
mark the publication’s 15th anniversary, we are
introducing a variety of changes: more pages, additional features and a different look. The update was
prompted, in part, by your responses to our reader
survey almost two years ago: In general, you liked
what we were giving you, but you wanted more.
Hence, the changes you see today aren’t radical.
Regular readers will notice the new design, starting with the size. We’ve switched to a standard
8.5 x 11 because many of you said this would make
for easier filing and photocopying. The nameplate
on the cover is different, as well as the typefaces
inside. As you page through the publication, you
will see fewer illustrations and more photographs—
partly to lower costs, partly because the staff craved
something different. The presentation of the charts
and other data has been simplified.
As for “more,” we are adding at least four pages
to every issue. (For those of you who worried about
the cost of this publication, be aware that we have
switched to less-expensive paper.) Sometimes,
this additional space will be used for more articles;
other times, as in this issue, the space will allow for
lengthier explanations of what our economists want
to share with you.
At least one of these extra pages will always be
devoted to a new feature, which we are calling
“Reader Exchange.” Here, we will print your letters
and give the results of our quarterly online poll,
which is always pegged to an article in that quarter’s
issue of RE. We will also list upcoming presentations by our economists (if open to the public) and

Howard J. Wall and Michael R. Pakko, co-editors of
The Regional Economist.

will alert you to any interviews with them that
you can listen to online. In addition, we are
starting “Ask an Economist,” a column in which
one of our economists answers a question posed
by readers. (This issue’s question: Why are there
so many price indexes?) The point of “Reader
Exchange” is to give you a chance to share your
thinking with us and with other readers; we also
want to steer you to our web site so that you can
see what else we—the entire St. Louis Fed—have
to offer that could prove informative and helpful
to you, from journals for scholars to newsletters for nonprofit community developers, from
FOMC news to speeches by our leaders, from
economics curriculum for teachers to regulatory
updates for bankers. Go to
to see what else you can find.
In the meantime, feel free to let us know what
you think about the new Regional Economist. To
send an e-mail, go to You can also mail a letter to either of
us at the Federal Reserve Bank of St. Louis, Box
442, St. Louis, MO 63166.
Howard J. Wall and Michael R. Pakko


Federal Reserve Bank of St. Louis
P.O. Box 442
St. Louis, Mo 63166

























commercial bank performance ratios
U . S . B an k s by A sset S i z e / third Q U A R T E R 2 0 0 7

$100 million­$300 million

less than
$300 million

$300 million$1 billion

Less than
$1 billion

$1 billion$15 billion

Less than
$15 billion

More than
$15 billion

Return on Average Assets*









Net Interest Margin*









Nonperforming Loan Ratio









Loan Loss Reserve Ratio









R E T U R N O N AV E R A G E A S S E T S *




















Third Quarter 2007
































Eighth District



























Eighth District









Third Quarter 2006

NOTE: Data include only that portion of the state within Eighth District boundaries.
SOURCE: FFIEC Reports of Condition and Income for all Insured U.S. Commercial Banks
* Annualized data

For additional banking and regional data, visit our web site at: