Regional Economist - April 2011

8/7/2019 Regional Economist - April 2011

1/15

A Quarterly Reviewo Business andEconomic Conditions

Vl. 19, N. 2

April 2011

Dierent Gvernments,Dierent Respnses

The Federal reserve Bank oF sT. louis

CenTral t ameriCas eConomy

Banking Crises

around the World


2/15

c o n t e n t s

James Bullard, Pr ceo

Frl Rrv Bk s. L

Headline vs. Core Infation: A Look at Some Issues

P R e s i d e n t s m e s s a g e

Banking Crises around the WorldBy Silvio Contessi and Hoda El-Ghazaly

Over the past 40 years, there have been more than 120 banking crises

around the world. Dierent governments have responded in dierent

ways. Te gross and net costs as a percentage o GDP range wildly,

anywhere rom less than 1 percent to well beyond 30 percent.

10

he Regional

conomistIL 2011 | VoL.19,no.2

3 PRes i d en t s m es s a g e

4 Chinese Revaluation:

No Magic Bullet

By Brett Fawley

and Luciana Juvenal

Even i China does revalue its

currency, jobs arent likely to

come ooding back to the United

States. Much o what China

exports to the U.S. originates in

other Asian countries; the U.S.

trade decit with Asia is likely to

persist as long as U.S. domestic

preerences or savings and

investment remain unchanged.

6 Education and Health:

Exploring the Connection

By Rubn Hernndez-Murillo

and Christopher J. Martinek

Better-educated people appear

to be in better health than less-

educated people. But does more

education cause better health?

Tere are other actors at play,

such as income and access to

inormation.

8 Are Small Businesses

Biggest Jobs Producers?

By Kevin L. Kliesen

and Julia S. Maus

Its oen said that small businesses

generate the most jobs in the U.S.

Tis is true i one looks at the

gross number o jobs. But because

small businesses have a high ail-

ure rate, they are not the largest

producers o jobs at the net level.

17 n a t i o n a L o VeRV i ew

Econom Strengthens,

But Risks Remain

By Kevin L. Kliesen

GDP is rising. Financial markets

have healed. Te worst o the

housing crisis appears to be

over. But the large decit o

the ederal government poses

multiple risks to a sustained

recovery.

18 Jobless Recoveries:Causes, Consequences

By Natalia Kolesnikova

and Yang Liu

Among the causes is the decline

o middle-skill jobs over the past

30 years in this country. Among

the less-obvious consequences are

an increase in crime, poorer eat-

ing habits and ewer marriages.

2 0 d i s t R i c t o VeRV i ew

District Falls Behind

U.S. in Job Growth

By Michelle Armesto

and Maria E. Canon

Tree o the our major metro-

politan statistical areas (MSAs)in the District perormed better

than the country as a whole in

restoring jobs ollowing the 2001

recession. Tats not the case,

though, in the wake o the latest

recession.

2 2 c o m m u n i t y PRo F i L e

Bedord, Ind.

By Susan C. Tomson

Te auto-parts industry isnt

what it used to be in this southern

Indiana town, but a new commit-

ment by GM to its plant here is

allowing townspeople to hang onto manuacturing even as they

seek their niche in the new service

economy.

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Monetary policymakers are responsibleor maintaining overall price stability,which is usually interpreted as low and stable

ination. In order to decide on appropriate

policy actions given their objective, policy-

makers need to know the current rate o

ination and where it is headed. What make s

or a reliable predictor o uture ination

has been debated throughout the years and

continues to be the subject o economic

analyses today. One debate that has receivedattention recently is whether the ocus should

be on headline or core ination. Te ormer

is calculated rom an all-item index, whereas

the latter is commonly calculated rom a

price index that excludes the highly volatile

ood and energy components.

Central bankers around the world have

taken both sides o the debate. For instance,

the ination goals o the European Central

Bank and the Bank o England are explic-

itly stated in terms o headline measures,

and their policymakers pay less attention

to core measures. In contrast, the Federal

Open Market Committee (FOMC) ocuses

on ination that is derived rom the personal

consumption expenditures price index

excluding ood and energy (core PCE).

Tis does not mean, however, that the

FOMC ignores headline PCE. In act, since

2008 the FOMC has reported its orecasts

or both core and headline ination in the

semiannualMonetary Policy Report to the

Congress. At the end o the day, the Feds

main concern is long-run headline inationand the prices people actually pay.

A natural question to ask, then, is: I the

Fed ultimately cares about overall prices, why

would it ever look at core ination, thereby

excluding items on which Americans spend

a nontrivial portion o their income? Te

reason is because, historically, the ood and

energy components were highly variable (or

example, due to temporary supply disrup-

tions), and their large price uctuations were

usually expected to correct themselves within

a relatively short period o time. Conse-

quently, the FOMC ocuses on core PCE as

a measure o underlying ination trends

and, thus, a predictor o uture headline PCE

ination. Assuming core PCE is an appro-

priate measure to use, we would expect to see

headline ination uctuate above and below

core ination over the short run.

As I discussed in a 2007 commentary,

the relationship seemed to break down inthe mid-2000s when there was persistent

divergence in headline and core ination

rates.1 Measured on a year-over-year basis,

headline PCE remained higher than core

PCE rom 2002:Q4 to 2006:Q3. During that

period, the divergence was largely driven by

rapid economic growth in Asia; the rising

global demand or commodities caused their

prices to rise aster than other prices, putting

upward pressure on headline ination.

During the nancial crisis and recession,

the expected patterns re-emergedheadline

PCE ination uctuated around core PCE

ination. But now that the economy is recov-

ering again, do we see the mid-2000s trendreasserting itsel? Since June 2010, the two

measures have been diverging slowly, with

core ination below headline. It is too early

to tell i the divergence reects another per-

sistent increase in the relative prices o global

commodities or i the divergence is more

temporary. Given the strong growth rates

o emerging economies during the global

recovery, though, the divergence in the two

ination measures deserves close attention.

What would it mean or moneta

analysis i the FOMC does expect h

and core ination to continue dive

2011 and 2012? As I asserted in my

ous commentary, one interpretatio

during times o continuous increas

relative price o energy, perhaps cor

misleading indicator o underlying

trends. Tis implies that core PCE

be a good predictor o uture headl

tion aer all. Under these circumsheadline PCE ination should prob

more weight in policymaking decis

core PCE ination.

O course, i the evidence shows

PCE is not the best measure to ocu

policy purposes, exploring other op

make sense. One alternative measu

include all components but put less

those that have highly volatile price

measure would avoid systematicall

ing certain prices and would more

reect consumers expenditur es. A

ally, studies have shown that other

core measures, such as PCE trim

or PCE weighted-median ination,

better predictors o headline PCE in

than core PCE.2 In the end, the pol

ers goal is to use the ination mea

helps them achieve low and stable h

ination in the long run.

cover illustration images.com/corbis

1 Bullard, James B.; and Pande; Geetanjali.Prices: In the Mix or Swept Under the RugReserve Bank o St. Louis National EconomApril 2007.

2 For example, see Smith, Julie K. PCE InCore Ination. Unpublished manuscriptment o Economics, Laayette College, EasJanuary 2010.

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The Reginal Ecnmist | April 2011 The Reginal Ecnmist | www.stlo


3/15

Why Fixing ChinasCurrency Is No Quick Fix

Brett Fawley and Luciana Juvenal

On net, the U.S. economy added zerojobs over the past decade: Eightillion jobs gained rom 2003-07 were

untered with eight million jobs lost rom

08-09. Te recent recession, despite its

verity, cannot shoulder all blame or this

utcome. Average job growth during the03-07 expansion was 60 percent slower

an average job growth over previous eco-

omic expansions ollowing World War II.

Te sluggish growth was likely driven by

combination o internal actors (increased

oductivity) and external actors (job

utsourcing and large sustained trade

mbalances). For example, Figure 1 shows

at rom 1994 to 2006 the U.S. multilat-

al trade decit in goods grew rom 2.5 to

5 percent o GDP. o the extent that this

end reects diminished U.S. competitive-

ss in international goods markets, some

S. manuacturing jobs may have been lost

oreign competitors.

Meanwhile, the U.S. reasury is threaten-

g to label China as a currency manipula-

r or allegedly using oreign exchange

tervention and currency controls to x

e value o its currency (the renminbi) to

e dollar in order to prevent appreciation

its currency and to gain a trade advantage

rough lower international prices or its

ports. As revealed in Figure 1, the U.S.lateral trade decit with China accounts

r a nontrivial (and growing) share o t he

S. total trade decit. Does this mean that

increase in the value o the renminbi

ould reverse declines in U.S. trade compet-

veness due to biased terms o trade and,

turn, create jobs in the United States?

nortunately, the answer is probably not

any meaningul degree.

Its Not Just U.S. vs. China

Assuming that the renminbi is underval-

ued,1 any eect its revaluation would have

on U.S. labor markets depends entirely on its

impact on the U.S. multilateral trade decit

with all countries, not on the bilateral trade

decit with China taken in isolation. Smaller

U.S. trade decits with China, oset by larger

bilateral decits with other countries, cannot

be expected to provide material job growth.

A renminbi revaluation is unlikely to

seriously impact the multilateral trade

decit or two reasons. First, multilateral

trade balances are in part determined by

domestic preerences that may not hinge on

the exchange rate. For example, a country

importing more than it exports must und

this spending with inows o oreign capital.

Te magnitude o capital inows is primarily

determined by the gap between gross domes-

tic investment and gross domestic savings.

Revaluing the renminbi is unlikely to un-

damentally shi U.S. domestic preerences

or saving and investment. Se cond, regional

specialization patterns in Asia suggest that a

major component o t he U.S. bilateral trade

decit with China is a persistent trade decit

with Asia. Te price, and hence quantity, o

Chinese exports may be surprisingly resilient

to changes in the value o the renminbi.

In 2003, tension was equally high withrespect to Chinas dollar peg, and the U.S.

Congress was also considering retaliatory

measures. Te Congressional Budget Oce

(CBO), however, concluded that a revalua-

tion o the renminbi would have little eect

on U.S. manuacturing employment. In

particular, China, owing to cheap labor

costs, unctioned primarily as a place o

assembly or the Asian region. Intermediate

goods were exported to China rom other

Asian countries; these goods were then

assembled and exported to the United

States. As evidence o this emerging spe-

cialization pattern, the CBO reported that

rom 2000-02 a large portion o the increase

in imports rom China was oset by declin-

ing imports rom Japan. Among developingAsian countries (outside o China), nearly

all showed declining exports to the United

States during this period.

Accurately estimating the size o this

regional trade eect over a longer period o

time is essential or U.S. trade policy, but

such estimation is not without obstacles. In

particular, the CBO analysis beneted rom

looking at a period o U.S. recession. Dur-

ing times o economic expansion, imports

rom nearly all trading partners increase,

making it hard to distinguish between the

eects o increasing globalization and the

potential redirection o exports within

trading partners.

o help disentangle the two eects,

consider what bilateral exports would be,

had countries export growth been evenly

distributed across all trading partners.

Specically, we compute or 174 countries

what exports to the United States and China

would have been in 2007, had each shipped

the same raction o its total exports to the

United States and China as it did in 1994.We then compare this hypothetical number

to actual exports and plot the dierences

in Figure 2. Interestingly, the countries

that stick out with the largest unpredicted

increases in exports to China (and corre-

spondingly largest unpredicted decreases

in exports to the United States) are, in act,

the Asian countries implicated by the CBO

as moving their assembly to China. Tis

is in stark contrast to the high density o

points centered at zero-zero, revealing that

most countries trade shares with the United

States and China remained roughly con-

stant. Incidentally, a simple linear regres-

sion reveals that the relationship between

greater-than-predicted exports to China and

less-than-predicted exports to the United

States is strongly statistically signicant.

o the extent that Chinese exports to

the United States originate beyond Chinas

borders, such trade ows are generally insen-

sitive to the value o the renminbi: Most

o the value o the goods is added in other

countries and denominated in other cur-

rencies. Specically, the 2003 CBO report

cites estimates that only 20-30 percent o the

total value added o Chinese exports occurs

in China. Hence, only 20-30 percent o the

value o Chinese exports is subject to the

eects o a renminbi revaluation. Te dollar

value o the remaining 70-80 percent o thegoods would remain unaected. Chinese

manuacturers could import intermediate

inputs or less money ollowing a renminbi

revaluation and pass the cost savings directly

through to the nal price, la rgely osetting

any increase in the price due to the higher

value o the renminbi. Such results conrm

that persistent global trade imbalances will

require multilateral solutions.

Revaluation Ma Be Inevitable

China will probably have to revalue its

currency in the near uture even without

the threat o U.S. retaliation. Te true

relative purchasing power o two countries

is determined not by the nominal exchange

rate (the price o one currency in terms

o another as reported on a currency

exchange), but by the real exchange r ate,

which takes into account relative changes

in domestic price levels. When China sells

renminbi or U.S. dollars in order to aect

the exchange rate, it adds currency to its

domestic money supply. All else equal,the increase in the currency base increases

domestic prices, canceling out any change

in the real exchange rate due to nominal

depreciation o the renminbi.2 Countries

can absorb some o the additional liquidity

through sterilization, i.e., buying back

the currency by selling bonds, but only to a

point. Te dependence between monetary

and oreign exchange policy will ultimately

orce Chinas hand, but the United States

cannot expect any quick labor market

xes due to Chinese currency revaluation.

Instead, the United States would be best

advised to ollow Chinas suit in identiy-

ing and exploiting its own comparative

advantages.

Luciana Juvenal is an economist and BrettFawley is a research associate at the FederalReserve Bank o St. Louis. See http://research.stlouised.org/econ/juvenal/ or more on Juve-nals work.

E N D N O T E S

1 Consensus estimates are that the

is undervalued by 25-40 percent

are reasons (like a still developin

banking sector) why even i allow

the renminbi could depreciate, r

appreciate.2 I the renminbi loses hal o its v

the dollar, but domestic prices in

ble, the cost o a Chinese good, in

remains the same. No eect on

be expected rom the nominal d

R E F E R E N C E

Holtz-Eakin, Douglas. Te Chine

Rate and U.S. Manuacturing Em

Congressional Budget Oce test

the Committee on Ways and Me

House o Representatives, Octob

imaginechina/corbis

R a d e

FIGURE 2

Asian Exports Have Shited Toward China, Awa rom U.S.

FIGURE 1

U.S. Balance o Trade in Goods

1994 1996 1998 2000 2002 2004 2006 0

1

2

3

4

5

6

7

Decit with China

Remaining Decit

%O

FGDP

18% 20% 22% 25% 23% 21% 1 9% 2 0% 22% 23% 25% 26% 28% 32%

source: imF D td s (Dots) d b e a.

source: imF D td s (Dots) d .

note: t f p pd 2007 xp ud s d c w w

d d 1994 xp w d p. a

xp c w d xp ud s.

xp d f d pdd d

10 0 10 20 30 40 50 60 7

10

0

10

20

30

40

50

60

70

KoreaHong Kong

Singapore

Thailand

Malaysia

Philippines

2007 EXPORTS TO CHINA LESS VALUE PREDICTED BY 1994 SHARE OF EXPORTS TO CHINA (BIL. $)

2007

EXPORTS

TO

U.S.

LESS

VALUE

PREDICTED

BY

1994

SHARE

OF

EXPORTS

TO

U.S.

(BIL.

$)

The Reginal Ecnmist | www.stloThe Reginal Ecnmist | April 2011


4/15

Which Came FirstBetter Educationor Better Health?

Rubn Hernndez-Murillo and Christopher J. Martinek

he more you learn, the more you earn!Tis phrase has been used by educationoponents to encourage young students to

y in school or pursue higher education.

t higher lietime earnings are not the only

sitive outcome rom increased schooling.

it turns out, the more you learn, the moreu live in good health. For example, in

07, the age-adjusted mortality r ate (mea-

red in deaths per 100,000 people) among

merican males between 25 and 64 years was

5.2 or individuals without a high school

ploma, 600.9 or individuals who com-

eted high school and 238.9 or individuals

th some college or higher.1 In terms o

althy behaviors, the estimated incidence

smoking among American males over the

individuals with better access to inorma-

tion and improves critical thinking skills. 7

What this means is that people with more

education tend to be better-inormed and

make better use o the inormation theyacquire when making health-related deci-

sions. Tese attributes o education are, in

turn, reected in health-related choices. For

example, people with more education seem

to understand more clearly the dangers o

smoking, are more likely to be inormed

about new drugs or complex medical pro-

cedures and seem to better understand dis-

charge instructions aer emergency room

visits. Te authors estimate that cognitive

skills account or up to 30 percent o the

education eect on health behaviors.

Passing Good Health on to Children

On top o its association with adult health,

greater educational attainment also promotes

the transmission o health rom parents to

children. Economist Janet Currie provides a

recent overview o the economics literature

addressing two ways this occurs. First, she

nds evidence that parental socio-economic

status (measured by income or education)

has a strong relationship with childhood

health. Te reasons or this are very intuitive.Wealthier amilies can aord better quality

health care and general consumption that

promotes better health (better ood, saer toys

and so on). Children o poorer amilies, in

contrast, tend to suer more adverse health

shocks than children o richer amilies; the

ormer also recover more slowly. In the case

o chronic diseases, such as asthma, poorer

children are less likely than r icher children

to manage their condition properly.

Second, she nds strong evidence that

childhood health plays an important role in

uture outcomes. In act, some economists

believe the observed relationship between

income and health in adulthood may have itsroots in childhood.8 Currie reports that in

developing countries there is a lot o evidence

indicating that individuals with poor health

during childhood also tend to achieve lower

education levels later in lie. A similar rela-

tionship is ound in developed countries; in

particular, low weight at birth (a strong pre-

dictor o childhood health) has been associ-

ated with lower uture test scores, educational

attainment levels, wages and probabilities o

being employed.

Understanding the role o health in the

intergenerational transmission o socio-eco-

nomic status is a promising avenue or policy.

Currie notes that the evidence supporting a

causal relationship between parental socio-

economic status and child health and a causal

relationship between child health and uture

outcomes is or now still limited. As noted

earlier, distinguishing between simple correla-

tion and causality is important or designing

eective public policy. I parental socio-

economic status does not impact child health,

then public policies aimed at improving socio-economic status o the parents will not neces-

sarily improve their childrens health.

Rubn Hernndez-Murillo is an economist andChristopher J. Martinek is a research associateat the Federal Reserve Bank o St. Louis. Seehttp://research.stlouised.org/econ/hernandez/

or more on Hernndez-Murillos work.

E N D N O T E S

1 See National Center or Health S

2010a.2 See National Center or Health S

2010b.3 See Cutler and Llera s-Muney, 204 See Cutler and Lleras-Muney, 205 Te authors use sel-reports o th

o disease as opposed to objectiv

(doctor diagnosis). For some o t

serious diseases considered, such

conditions and cancer, sel-repo

indicate that individuals have be

diagnosed, however.6 Cutler and Lleras-Muney report

additional year o education is a

a reduction in the probability o

3 percentage points, a reduction

ability o being obese o 1.4 perc

and a reduction in the probabilit

heavy drinker (dened as drinki

o ve or more drinks when a pe

o 1.8 percentage points.7 Te most common o these cogn

authors consider is reading.8 Economists Anne Case, Darren

Christina Paxson nd that gap i

health status between children o

economic status and high socio-

status grows with age. Children

income amilies enter adulthood

lower socio-economic status and

R E F E R E N C E S

Case, Anne; Lubotsky, Darren; and

Christina. Economic Status an

Childhood: Te Origins o the G

American Economic Review, Dec

Vol. 92, No. 5, pp. 1,308-34.

Currie, Janet. Healthy, Wealthy, a

Socioeconomic Status, Poor Hea

hood, and Human Capital Devel

Journal o Economic Literature, M

Vol. 47, No. 1, pp. 87-122.

Currie, Janet; and Hyson, Rosemar

Impact o Health Shocks Cushio

Socioeconomic Status? Te Case

Birthweight. American Econom

March 1999, Vol. 89, No. 2, pp. 2

Cutler, David M.; and Lleras-Mune

Education and Health: Evaluati

and Evidence. National Bureau

Research (NBER) Working Pape

June 2006.

Cutler, David M. and Lleras-Muney

Understanding Dierences in H

iors by Education. Journal o He

January 2010, Vol. 29, No. 1, pp.

National Center or Health Statistic

Final Data or 2007. National VReports, Vol. 58., No. 19. Hyatts

May 20, 2010a. able 26. See ww

nchs/data/nvsr/nvsr58/nvsr58_

National Center or Health Statistic

United States, 2009: With Specia

Medical echnology. Hyattsvil

ary 2010b. able 61. See www.c

data/hus/hus09.pd

u B L i c P o L i c y

Mortalit Rates or People Ages 25 to 64, b Sex and Level o Education, 2007

Less Th an H ig h School D ip loma o r No GED Hig h School D ip loma o r GE D S om e Co ll eg e or Col lege Deg ree

800

700

600

500

400

300

200

100

0

Female

Male

DEATHS

(PER

100,

000

PEOPLE)

600.9

336.8

238.9

156.8

665.2

387.4

source:nvsrp,2007

note:D 22 pd Dc 2003 u.s.sddcfD. D

1989 u.s.sddcf D,wfd d ,

xd.

2007, -j rl r (r

r 100,000 ppl) ar l ... 665.2 r

vl l pl, 600.9 r vl

pl l 238.9 r vl

ll r r.

e o 25 with a bachelors degree or higher

as 10.4 percent, while this gure among

ales with a high school degree or less was

out 30 percent.2 Similar dierences exist

r obesity and or alcohol use.3

I more education can lead to better

alth, addressing the processes by which

erences in education translate into di-

ences in health can be useul to public

licymakers. Identiying a causal relation-

ip is o crucial importance in the design

policy. For example, i more education

uses better health, then policies to

crease education might also be eective

improving health in the population.

However, i the association (oen called

correlation) between education and health

exists because better health allows individu-

als to attain a better education (reverse cau-

sation) or because the correlation between

education and health results rom the cor-

relation o education with other actors t hatalso improve health (such as income o the

parents), then education-improving policies

might not be eective at improving health.

Better Education=Better Behaviors

Economists David Cutler and Adriana

Lleras-Muney are among those analyzing the

education-related health disparities.4 Te

authors examine responses to the National

Health Interview Survey in the United States

and nd a statistically signicant eect o

education on various measures o health,

including mortality (measured as death

within ve years o the sur vey) and incidence

o common acute and chronic diseases (suchas heart condition, stroke, hypertension, high

cholesterol, diabetes, asthma and so on). Te

authors report that more-educated people

are less likely to suer rom these diseases.

Interestingly, some common diseases, such as

cancer, do not seem to exhibit an eect rom

education (which indicates that incidence

does not vary with education).5

A major reason or the dierences in health

outcomes is, not surprisingly, dierences in

healthy behaviors. For example, in the United

States, the incidence o smoking, obesity and

heavy drinking is lower among the better

educated.6 More-educated people are more

likely to exercise and obtain preventive care

(u shots, vaccines, mammograms). More-

educated people are also more likely to use seatbelts and have smoke detectors in the house.

Dierences in behavior, however, do not

explain all the dierences in health outcomes

by education, but they do explain a signi-

cant proportion: Cutler and Lleras-Muney

nd that the eect o education on mortality

is reduced by 30 percent when they control

or exercise, smoking, drinking, seat belt use

and use o preventive care.

Income, Inormation

Cutler and Lleras-Muney consider several

alternative mechanisms or why education

aects health. Perhaps the most obvious ac-

tor to explain dierence in health outcomes

would be dierences in income. More

education generally leads to higher income,

which, in turn, allows or better access to

better health care. However, they argue

that it is unlikely that income and health

care can account entirely or the association

between education and health as many o the

behaviors they analyze occur independent o

health-care access. Te authors estimate thatdierences in income account or about 20

percent o the impact o higher education on

health behaviors. Price dierences are also

unlikely to be an important determinant,

considering that unhealthy behaviors such as

smoking, drinking and overeating are costly

but are, nevertheless, more prevalent among

less-educated individuals.

An interesting theory developed by Cutler

and Lleras-Muney is that education provides

JlP/Jose l. Pelaez/corbis



5/15

t is oen claimed that small rms are

responsible or a disproportionately large

are o new jobs that are created in the U.S.

onomy. I true, this speaks well o the

trepreneurial spirit o the U.S. economy,

hereby newcomers introduce new ideas or

oduction processes that lead to new andproved products or services. Te rise o

obal companies like Wal-Mart, Microso

d Google rom small beginnings is a testa-

ent to the importance o small businesses

d the economic orces they sometimes

leash. However, the claim that small

sinesses generate a large percentage o new

bs must be evaluated careully. First, there

uses the ollowing breakdown o rm size:

1-19 employees; 20-99 employees; 100-499

employees; and 500 or more employees.

Job Gains b Firm Size

Te table shows average gross and net job

gains at all private business establishments

rom the third quarter o 1992 through the

rst quarter o 2010.5 Over this roughly

18-year period, gross job gains per quarter

averaged a little less than 2.8 million, or

about 929,000 per month. Since the 2007-

2009 recession was extremely severe, the table

includes a separate column that excludes the

data rom that period. Te lower hal o the

table shows that businesses with ewer than

20 employees provided the largest percentage

o gross job gains (about 30 percent). Busi-

nesses with between 20 and 99 employees

accounted or the next largest share (about

27 percent), with the largest rms (500 or

more) accounting or a somewhat smaller

percentage (about 26 percent). Te remain-

ing categorybusinesses with between 100and 499 employeesaccounted or a smaller

percentage o gross job gains. All o these

percentages are little-changed i we exclude

the recession period.

Te analysis in the table seems consistent

with the conventional wisdom that small busi-

nesses are the largest source o job creation in

the economy. Howeve r, as suggested by pre-

vious studies, the conclusion tends to change

when the ocus switches to netjob creation.

Te two right-hand columns in the table

examine net job gains. Net job gains are

dened as job gains minus job losses. Tree

ndings are apparent rom the table. First,

net job gains were signicantly smaller than

gross job gains. Te net gains per quarter

averaged only 105,000, or 35,000 per month.

Second, the table shows that the recession

dramatically reduced the rate o net job

creation. Once net job losses during the

recession are removed rom the ca lculation,

the number o net jobs rose to 173,000 per

quarter (about 58,000 per month). Finally,

and perhaps most importantly, the BED

data show that since 1992, net job creation

tended to be largest among the largest rms:

Tese rms accounted or about 38 percent

o the total. Te smallest rms showed the

smallest percentage o net jobs created. Tis

result does not change i the past recession is

excluded rom the sample.

In short, small businesses showed higher

rates o gross job creation, but they also

exhibited high rates o job destruction.Looked at rom this standpoint, net job cre-

ation matters most.

Kevin L. Kliesen is an economist and Julia S.Maus is a research associate at the FederalReserve Bank o St. Louis. Linpeng Zheng

provided research assistance. Se e http://research.stlouised.org/econ/kliesen/ or moreon Kliesens work.

E N D N O T E S

1 Birch ollowed up his original stu

several subsequent studies (not c2 One drawback o this study is tha

on the manuacturing sector, whi

tively small share o the economy

probably not a good representatio

job creation.3 See Neumark, Wall and Zhang.4 Te BED is a quarterly series that

on the Quarterly Census o Empl

and Wages, which uses state unem

insurance records. See Spletzer e

inormation about the BED.5 Changes in employment can aris

opening or expanding businesses

or contracting businesses. Gross

include the sum o all jobs added

ing and at expanding establishm

job losses, then, include the sum

at both closing establishments or

establishments.

R E F E R E N C E S

Armington, Catherine; and Odle, M

Small Business: How Many Jobs

Brookings Review, Winter 1982, V

pp. 14-17.

Birch, David L. Te Job Generation

Cambridge, Mass.: MI Program

borhood and Regional Change, 1

Brown, Charles; Hamilton, James; a

James. Employers Large and Sma

bridge, Mass.: Harvard Universit

Davis, Stephen J.; Haltiwanger, John

Schuh, Scott. Job Creation and D

Cambridge, Mass.: MI Press, 19

Haltiwanger, John .C.; Jarmin, Ron

Miranda, Javier. Who Creates J

vs. Large vs. Young. NBER Wor

16300, August 2010. See www.nb

papers/w16300

Neumark, David; Wall, Brandon; an

Junu. Do Small Businesses Cr

Jobs? New Evidence or the Unit

the National Establishment ime

Review o Economics and Statisti

2011, Vol. 93, No. 1, pp. 16-29.

Spletzer, James R.; Faberman, R. Jas

Akbar; alan, David M.; and Cla

L. Business Employment Dyna

Data on Gross Job Gains and Los

Labor Review, April 2004, pp. 29

Average job gains (in thousands) per quarter, 1992:Q3 to 2010:Q1

Gross Job Gains Net Job Gains

SizeTotal Sample Period Excluding 2007-09

RecessionTotal Sample Period Excluding 2007-09

Recession

1 19 821 828 16 28

20 99 747 758 25 40

100 499 496 505 25 37

500 722 739 40 68

total 2,787 2,831 105 173

Percent of Total

1 19 29.5% 29.3% 15.0% 16.1%

20 99 26.8% 26.8% 23.6% 23.1%

100 499 17.8% 17.8% 23.4% 21.3%

500 25.9% 26.1% 37.9% 39.4%

total 100.0% 100.0% 100.0% 100.0%

source:adb lsbepDd.spd 100d d.

Gross and Net Job Gains b Firm Si ze

lr r ll b r q . ar

Br Lbr s, l b l b-

p 1994 r ll pr v r lr.

t a universal agreement on the deni-

n o a small business. Furthermore, the

lure rates o small business are quite high.

cording to the Bureau o Labor Statistics,

ly about hal o the businesses that opened

1994 were still operating ve years later.

us, when one accounts or job destruc-

n, small businesses appear to account

r a signicantly smaller share o net newbs created in the private sector than many

ople might believe.

hat Do Past Studies Reveal?

Te importance o small businesses to

b creation has been part o the economic

licy narrative or some time. In 1979,

en-Massachusetts Institute o echnology

oessor David Birch claimed that rms

th 20 or ewer employees accounted or

two-thirds o all new jobs created between

1969 and 1976; rms with 100 or ewer

employees accounted or 82 percent o all

new jobs created. Conversely, he ound

that large rms (500 or more employees)

accounted or only 15 percent o net job

growth. Birchs nding challenged theconventional wisdom about job creation at

the time and, accordingly, had enormous

inuence on policymakers and researchers.1

Some economists soon began to challenge

Birchs ndings. Using the same data as

Birch, Catherine Armington and Marjorie

Odle ound in 1982 that businesses with

100 or ewer employees accounted or only

39 percent o net new jobs. Several years

later, Charles Brown, James Hamilton and

James Meddo pointed out that 40 percent

o jobs created in small businesses in 1980 no

longer existed in 1986. A more up-to-date

assessment o the job-creation characteristic

o small businesses can be ound in work

published by Stephen Davis, John Haltiwan-

ger and Scott Schuh in 1996. Tese authorsnoted that a common conusion between

net and gross job creation distorts the overall

job creation picture and hides the enormous

number o new jobs created by large employ-

ers.2 Te authors ound that although

gross job creation is high or smaller rms

(100 or ewer employees), so is job destruc-

tion. Slowly, researchers were coming to the

conclusion that small businesses did create

a lot o new jobs, but the high ailure rate o

these businesses suggested that their net job

creation was much lower.

Earlier this year, a study designed to look

at the entire economy was published.3 Te

researchers ound that small rms create

more net jobs than do large rms, which is

consistent with the conventional wisdombut generally not the thrust o past research.

However, they concede that Birch overesti-

mated the importance o small business in

job creation and ound that there is a much

smaller dierence between the net number

o new jobs created by large rms and small

rms than Birch originally suggested.

Business Emploment Dnamics

Researchers who want to assess the claim

that small businesses account or a dispropor-

tionate percentage o new jobs must rst con-

ront several issues. First, what is the best data

source or the hypothesis to be tested? Second,

how should a small business be dened? ( Te

Small Business Administration says a business

is small i it employs ewer than 500 people.

However, it may not be wise to lump together

a Silicon Valley startup with a relatively large,

established manuacturer.) Tird , should the

ocus be on the gross number o jobs cre-

ated or the net number o jobs created? Te

research suggests the latter. Why? Because

even during the depths o the 2007-09 reces-sion, businesses were still adding an average

o nearly 800,000 new jobs a month. But they

were shedding an even larger number o jobs

per monthabout 971,000.

In this article, we use the Business Employ-

ment Dynamics (BED) dataset rom the

Bureau o Labor Statistics.4 One drawback

o the BED is that it has less than 20 years o

history, which may limit the ability to draw

rm conclusions. Te analysis in this article

m P L o y m e n t

Are Small Businesseshe Biggest Producers o Jobs?

Kevin L. Kliesen and Julia S. Maus

John henley/corbis

The Reginal Ecnmist | www.stloThe Reginal Ecnmist | April 2011


6/15

Banking Crisesaround the WorldDierent Governments, Dierent Responses

By Silvio Contessi and Hoda El-Ghazaly

he latest U.S. nancial crisis is one o many in the recenteconomic history o both advanced and emerging economies.Each crisis is somewhat unique and is t riggered by dierent

processes and events. However, some common elements can be

identied in the way dierent governments intervene to help

nancial sectors return to health and to soen the economy-wide

impact o the crisis.

Central banks tend to adopt measures that provide liquidity to

the system and that can be considered as part o a broader mandate

to carry out monetary policy. In contrast, governments and parlia-

ments tend to design and implement programs that provide more

direct support to specic i ndustries and occasionally to specic

institutions; these programs are more properly associated with s-

cal policy intervention. Tis article will ocus on the latter: direct

support to commercial banks and savings institutions. Te article

will compare the United States Capital Purchase Program (part o

the roubled Asset Relie Program) with capital-injection programs

enacted by other countries around the world during banking crises.

Fuse/gettyimages

Deanturner/istock


a n K i n g c R i s e s


7/15

Most o these programs are oen justied

politically by the objective o preventing or

reducing lending declines and recapitalizing

nancial institutions, with the ultimate goal

o alleviating strains in nancial markets and

restoring their unctioning. But instead o

providing general liquidity to the nancial

system, they target specic nancial insti-

tutions. Perhaps this is one o the reasons

whyeven when they are necessary and

eventually prove useulthey requently ace

vocal opposition rom the public. axpayers

worry that the costs o the support programs

may outweigh their benets and may eventu-

ally lead to higher taxes. Economists worry

that government intervention may plant the

seed o uture crisis by exacerbating moral

hazard problems.1

It is air to say that there is no consensus

among economists and policymakers on

the optimal resolution mechanisms o bank-

ing crises.

How To Defne a Banking Crisis

Tanks to its expertise in monitoring

and analyzing a large number o countries,

the International Monetary Fund (IMF) is

particularly well-positioned to collect, study

and disseminate inormation about banking

crises in a comparative perspective. IMF

economists Luc Laeven and Fabian Valen-

cia analyzed crises between 1970 and 2007

among a large set o countries, and much o

what ollows derives rom their work.

Banking crises can occur either indepen-

dently or concurrently with a currency crisis

(a so-called twin crisis) or with a sovereign

debt crisis, or both.

How are these crises dened? In a

systemic banking crisis, a countrys nan-

cial and banking industry experiences a

signicant number o deaults while

nancial entities ace vast problems ul-

lling nancial contracts on time. As a

consequence, a country experiences a largeincrease in nonperorming loans, and a

large part o the capital in the banking

system is reduced. Sometimes, these events

ollow a all in asset prices (or example,

in the real estate market) and sometimes

overlap with runs on banks, but in order to

be dened as systemic, such crises must

involve a large number o institutions or

cover a large portion o the banking system.

Sweden and Latvia experienced such crises

in the 1990s. (A more detailed account o

the mechanisms involved is provided later

in this article.)

A currency crisis is oen dened as a

situation in which a country experiences

a nominal depreciation o its currency o

at least 30 percent, while at the same time

the rate o depreciation increases by at least

10 percent compared with one year ea rlier.

Te collapse o the Tai baht during the

Asian Crisis o 1997-98 is a prime example

o a large currency crisis: Te currency had

depreciated by more than 30 percent less

than two months aer the xed exchange

rate was abandoned in the summer o 1997.

In a sovereign debt crisis, a government

ails to pay its own debt, either in part or in

ull. For example, in 1998 Russia deaulted

on its Soviet-era debt and began restruc-

turing the components o its sovereign

debt. Notice that at least partial deault is

required to meet the denition o sovereign

debt crisis used by the IMF. Tat means

the current diculties experienced by some

European countries would not qualiy as a

sovereign debt crisis.

During the recent nancial crisis, no twin

or triple crisis (as just dened) has occurred so

ar. Some European countries have experi-

enced diculties in managing and renancing

their debt, but so ar none has deaulted.

Many countries have experienced com-

binations o these types o crises in recent

history. Economists Laeven and Valencia

identied 124 systemic banking crises, 208

currency crises and 63 sovereign debt crises;

the two economists observed that some

countries were repeatedly aected by these

events between 1970 and 2007. One such

country is Argentina. Its prosperity rivaled

that o the United States in the beginning o

the 20th century. Yet in the past 30 years,

Argentina has experienced our banking

crises (1980, 1989, 1995 and 2001). All but

the 1995 crisis were also currency crises,and one (2001) was contemporaneous to a

sovereign debt crisis.

Argentina is not an isolated case. Te

IMF study identies 26 twin crises (banking

and currency) and eight triple crises. Over-

all, banking and currency crises were more

requent in the 1990s, while sovereign debt

crises were more requent in the 1980s.

Te recent global nancial crisis wit-

nessed many countries experiencing

banking crises. Aer 2007, there were 13

cases o systemic banking crises in which

all countries experienced extensive liquid-

ity support, increases in guarantees on

liabilities and signicant nationalizations.

In some cases, the countries also experi-

enced signicant asset purchases (as in the

United Kingdom and United States) and

sizable restructuring costs.2 During the

same period, a smaller group o 10 countries

experienced serious problems in its ba nk-

ing sectors that entailed extensive liquidity

support and increases in guarantees on

liabilities; in these 10 countries, there was

only one case o asset purchases (Switzer-

land) and there were no cases o signicant

nationalization.3

Luckily, none o these countries has experi-

enced either a currency crisis or a sovereign

debt deault since 2007.

Options or Direct Support

in Banking Crises

Commonly adopted resolution policies

include various types o large-scale govern-

ment intervention, such as bank closures,

nationalizations, mergers, sales to oreigners,

the creation o a bank restructuring agency

and/or an asset-management company, and

recapitalization. Sometimes, these actions

are accompanied by orbearance that allows

the suspension or reduction o loan payments

under certain circumstances and or speci-

ed lengths o time; sometimes, changes in

loan classication and loan-loss provisioning

are also allowed.

Oen, direct government support to

ailing nancial institutions takes the orm

o recapitalization, a process in which the

amount o debt and assets o a particular

entity are reorganized in order to meet a

nancial goal. Te goal may be an attempt

to limit the amount o tax owed on assets in

hand or, as part o a reorganization, to avoid

bankruptcy.Financial institutions can be recapitalized

using a variety o measures: cash transer,

government bonds, issuance o subordinated

debt, issuance o preerred shares, govern-

ment purchase o bad loans, assu mption o

bank liabilities or the purchase o ordinary

shares by the government.

Governments intervened with some orm

o recapitalization or capital injection in 32 o

the 42 banking crises identied by the IMF

economists between 1970 and 2007 or which

detailed comparable inormation could be

gathered. Recovery programs during the

global nancial and banking crisis o 2007-09

were no dierent: 16 countries opted or out-

right recapitalization, with some combining a

wide variety o asset guarantees and liquidity

programs similar to some o the programs

implemented in the United States.

A Sample o Past Crises Abroad

Sweden

Various economic policies adopted by

Sweden in the 1970s and 1980s encouraged

a sizable credit and real estate boom, in

which house prices more than doubled

between 1981 and 1991. At the same time,

the economy was becoming much more

exposed to exchange rate risk.

Because o Swedens exchange rate tiewith Germany, when interest rates in

Germany increased in 1990 as a result o

unication, Swedens interest rates also

experienced a rapid increase. Tis tipped

Swedens economy into crisis. Real estate

prices dropped dramatically, with commer-

cial real estate prices dropping 42 percent in

ve years and nonperorming loans increas-

ing to as high as 11 percent o GDP in 1993.4

Swedens largest banks were unable to meet

capital requirements and required assistance

rom the state. I nstead o maintaining private

large banks and injecting capital through a

direct support program, the Swedish govern-

ment nationalized two o Swedens largest

banks and supported a third by providing it

with a loan guarantee. Te ownership o these

banks allowed the government to provide

equity to ailing borrowers and restructure

deaulting companies. Liqu idating bad assets

took the government less than six years and

ended up costing Sweden less than 2 percent o

its GDP (with some estimates close to zero).

Latvia

In 1991, Latvia gained independence rom

the Soviet Union and transitioned rom a

centrally planned economy to a market econ-

omy. With in our years o its independence,

Latvia had more than 60 licensed banks or

a population o 2.3 million.5 As government

policy established the right or any person or

entity to establish a bank, the motivation or

ounding a bank quickly became the ability

vr rv

r rp-

lz r pl j

32 42 bkr b imF

b 1970

2007. ...



8/15

than one year aer the initial problems

in the nancial system had emerged. For

the rst year o the crisis (which began in

August 2007), there were no signicant

legislative changes, perhaps because the risk

o a major crisis seemed minimal or because

sucient institutional exibility seemed to

guarantee the ability to intervene with exist-

ing instruments.

However, the existing toolkit o support

programs was substantially expanded soon

enough. By October 2008, in the midst o the

panic that ensued aer the ailure o Lehman

Bros., the reasury proposed to Congress

the idea o purchasing troubled assets to

stabilize the nancial system, through ARP,

an essential component o the Emergency

Economic Stabilizat ion Act. Within a week

o approving the legislation, the core sup-

port was reocused toward buying equity in

nancial institutions, using a new instrument

o support, the Capital Purchase Program

(CPP), which ell under the big umbrella pro-

vided by ARP. Within weeks, nine major

banks received a capital injection o $145billion, and the idea o purchasing troubled

assets was temporarily set aside in avor o

buying equity.

In November 2008, one o the benecia-

ries o the CPP, Citigroup, received a second

round o government assistance, under

another program o the ARP, and in Janu-

ary 2009, Bank o America also was given

additional government support. Te new

administration dened a set o criteria or

stress tests aimed at determining the capital

adequacy o the largest banks and presented a

new program aimed at purchasing assets (the

Public-Private Investment Program), which

makes up a small percentage o ARP unds.

Similar to other countries, U.S. authorities

adopted a complex strategy to support the

economy during the nancial crisis; almost

all o the policy options deployed in the U.S.

were attempted in Japan during the 1990-

2003 period.8

ARP eventually included 13 programs

implemented by the U.S. reasury. Te

reasury allocated $250 billion or CPP,

which represents a large part o the total

allocation o government unds under

ARP ($700 billion). O the $250 billion

allocated, approximately $205 billion was

distributed to 707 institutions, largely

toward the end o 2008 and the beginning

o 2009, with the last disbursements occur-

ring Dec. 29, 2009. Figure 1 plots the

monthly number o beneciaries (red bar),

the total amount o gross disbursements

(gold line) and the value o outstandingdisbursements (gross payment net o repay-

ment, blue dots) until the end o 2010. It

should be noted that some nancial institu-

tionsCitigroup, Bank o America, GMAC

and Chrysler Financialwere supported

with other ARP programs, as well.

Te pool o eligible institutions that

could apply or CPP unds included more

than 8,000 commercial banks, savings and

loan institutions, and some other nancial

source: aw dd tp. tcpPP(cPP)d

tdarP(tarP).

URE 1

RP-CPP Disbursement

to access cheaper unding rather than go

through more-established channels. Tese

private banks continued to grow with little

supervision rom the Central Bank o Latvia

and, as a result, much bad lending took place.

Te precipitating actor o the crisis

occurred in early 1995 when the Central

Bank o Latvia requested that all banks

present their audited nancial statements.

Te largest Latvian bank in terms o assets

and depositsBank Baltijaailed to pres-

ent its statements, revealing its potential

insolvency. Te central bank took control

o Bank Baltija in July 1995, and a liquida-

tor took control in 1996. Other mid-size

and smaller banks also aced diculties

during this time, and several were catego-

rized as insolvent. About 40 percent o the

banking systems assets and liabilities were

impacted.6

During the tra nsition period, nonper-

orming loans increased throughout the

banking sector as banks granted loans even

to high-risk borrowers, and collect ions were

made dicult by a lack o laws governingloan collateral. However, a swi stabiliza-

tion policy helped restore viability to the

banking system with the liquidation o cer-

tain banks, oreign help rom the European

Bank or Reconstruction and Development,

and a new banking law strengthening the

central banks regulatory powers. Te coun-

try also established a deposit insurance sys-

tem, and the government decided to reu nd

lost deposits to depositors up to a certain

amount and conditioned on the existence o

proceeds rom the bank liquidation process.

Argentina

Argentina has experienced our banking

crises since the 1980s, with one tr iple crisis

in 2001. During the 1990s, the government

transormed the banking sector through

privatization and consolidation and allowed

or increased entry by oreign institutions, all

o which improved the banking systems e-

ciency. However, bank protability remained

low, and more than 20 percent o total assets

in 2000 were represented by government

debt, which le banks vulnerable in the case

o government deault.7

Te triple crisis broke in 2001 when, out

o ear rom the deteriorating economic cli-

mate, people rushed to withdraw their pesos

rom the banks in order to convert them

into dollars and ship them abroad. Tealready ailing banks were urther devastated

when the government deaulted on its debt

in December 2001.

As a result o the nancial distress, the

country was orced to exit its currency board

regime, a convertibility program that tied the

peso to the dollar at parity. At the same time,

the government responded to the bank runs

by restricting withdrawals, essentially reez-

ing all accounts. In addition, private deposits

and credit to the private sector declined

dramatically, which urther weakened the

ailing economy. Te resolution o the bank-

ing crisis was part o a larger set o policies

that had to deal with the economy-wide

crisis. Te government ended the currency

board regime in early 2002 (allowing a mas-

sive devaluation o the peso) and eventually

restructured its debt.

Besides reezing bank accounts, the

government intervention took several

additional orms, including converting

dollar-denominated loans and deposits rom

dollars to pesos at dierent rates, authoriz-

ing regulatory orbearance and a temporary

decrease in banks capital, and nationalizing

three banks and closing another.

The U.S. Experience

In the United States, the main instrument

o direct support to banks by the U.S. rea-

sury is within the roubled Asset Relie

Program. ARP was established at the peak

o the crisis in the all o 2008, a bit more

source:l,l;d v,F.sbc:anw D. imFd (imF)WPp

08/224,n2008.

FIGURE 2

Governments Gross and Net Costs o Restructuring the Financial Sector

40

35

30

25

20

15

10

5

0

Gross Recapitalization Cost to Government (% of GDP) Net Recapitalization Cost to Government (% of GDP)

PERCENT

Argentina(95)

Argentina(01)

Bolivia(94)

Brazil(94)

Bulgaria(96)

Chile(81)

Colombia(82)

Colombia(98)

Croatia(98)

CzechRepublic(96)

Ecuador(98)

Estonia(92)

Finland(91)

Ghana(82)

Jamaica(96)

Japan(97)

Korea(97)

Indonesia(97)

Lithuania(95)

Malaysia(97)

Mexico(94)

Norway(91)

Paraguay(95)

Philippines(97)

SriLanka(89)

Sweden(91)

Thailand(97)

Turkey(00)

UnitedKingdom(

07)

Uruguay(02)

Venezuela(94)

Vietnam(

97)

United

States

(2009)

Average

(1970-

2007)

Oct.

08

Dec.

08

Feb.

09

April09

June

09

Aug.

09

Oct.

09

Dec.

09

Feb.

10

April10

June

10

Aug.

10

Oct.

10

Dec.

10

250

200

150

100

50

0

800

700

600

500

400

300

200

100

0

Number of Beneciaries Disbursement Net of RepaymentsDisbursement

NUMBEROFINSTITUTIONS

t h e u n i t e D s t a t e s ( 2 0 0 9 ) c o m P a r e D W i t h 3 0 c o u n t r i e s ( 1 9 7 0 - 2 0 0 7 )



9/15

termediaries. However, onlyqualifed

ancial institutions, those deemed strong

ough to survive the crisis, were considered

r direct support. As later events showed,

ry ew o the CPP beneciaries ailed in the

riod between 2008 and 2010.9

Te application process or the CPP

volved several stages, which involved con-

ltations with primary regulators, analysis

their regulatory ratings and nal approval

the reasury. Investment amounts ini-

lly varied rom 1 percent to 3 percent o

e institutions risk-weighted assets (up to a

aximum o $25 billion).

Aer May 2009, some nancial institutions

unteered to return their capital injections

rlier than expected. Te position o repay-

ents is clear in Figure 1. By the end o 2010,

ly one-h o the original pledged unds

d yet to be returned by the beneciaries.

mparing U.S., Other Countries

In the 42 aorementioned banking crises

tween 1970 and 2007, the estimated cost

direct support recapitalization varies sub-

ntially, with gross costs (not accounting

r repayments) ranging rom an estimated

28 percent o GDP in Argentina during

e 1995 crisis to 37 percent in Indonesia

ring the 1997-98 crisis.

Initial estimates or the 2007-09 nan-

al crises, available in another study by

onomists Laeven and Valencia, place gross

sbursements o scal outlays in a range

tween 0.7 percent o GDP (Sweden) to

percent o GDP (Iceland). As some o

ese crises are still unolding, it is possible

at these gures will be revised upward in

e uture.10

Te study also provides interesting details

out the median costs o a banking crisis

governments. While pre-2007 crises

tailed a smaller median scal cost in

vanced economies relative to emerging

arkets (3.7 percent o GDP compared with.5 percent o GDP), they also increased

e ratio o public debt to GDP more in

vanced economies (36.2 percent versus

.7 percent o GDP). Output lossesthe

rcentage deviation o actual output rom

trendassociated to crises in advanced

onomies were also larger than in emerg-

g economies (32.9 percent o GDP versus

.4 percent o GDP), although output losses

e notoriously dicult to measure.

Te gross direct scal cost o nancial sec-

tor restructuring during the recent nancial

crisis has been estimated at roughly 5 percent

o GDP or the U.S. (counting the $700 billion

that was the total budget or ARP), close

to the median across advanced countries

that implemented similar programs during

this crisis. While countries like the Neth-

erlands and Iceland had sizable direct scal

costs (reaching between 12 and 13 percent o

GDP), some other advanced economies had

substantially smaller outlays because they

had ewer troubles in their banking systems.

France, Germany and Sweden, or example,

had direct scal costs o less than 2 percent o

their GDP. I only the CPP were considered

or the U.S., the ratio or the U.S. would all

to approximately 1.4 percent o 2009 GDP.

A more-inormative measure o the cost

o direct support programs looks at the net

costs, calculated as the dierence between

the amount o unds disbursed and those

repaid to the government. Te median net

cost across 42 banking crises between 1970

and 2007 was 3.4 percent o GDP. Its dis-

tribution across some o these countries or

which data are available is plotted in Figure

2. In the U.S., in the unlikely case that no

more unds are returned, the net cost o the

CPP will remain at most 0.266 percent o

2009 GDP, substantially lower than in previ-

ous banking crises.11

Compared with Japan (the only other large

economy that has experienced a widespread

banking crisis ollowing a housing crisis),

the United States appears to be transitioning

out o the crisis relatively quickly. Although

the U.S. has had more bank ailures (mostly

small institutions), banks have more swily

repaid the majority o their CPP unds than

have banks in Japan and other countries

aected by banking crises.

Silvio Contessi is an economist and HodaEl-Ghazaly is a research associate at the FederalReserve Bank o St. Louis. See http://research.stlouised.org/econ/contessi/ or more onContessis work.

E N D N O T E S

1 Moral hazard is when an individual or a com-

pany does not entirely bear the consequences

o its decisions and, thereore, acts less care-

ully than it otherwise would, leaving another

party (e.g., the government) to bear part or all

o the cost o the eects o those decisions.2 Te 13 countries are Austria, Belgium, Den-

mark, Germany, Iceland, Ireland, Latvia, Lux-

embourg, Mongolia, Netherlands, Ukraine,

United Kingdom and the United States.3 Te 10 countries are France, Greece, Hungary,

Kazakhstan, Portugal, Russia, Slovenia, Spain,

Sweden and Switzerland.4 See Ergungor.5 See Bank o Latvia.6 See Fleming and alley.7 See IMF.8 See Hoshi and Kashyap.9 See Aubuchon and Wheelock.

10 See the 2010 study by Laeven and Valencia.11 Tis gure is computed using the 1-4-11

ransaction Report or the period ending

Dec. 31, 2010, which we accessed on Jan. 18,

2011. Te report computes the total purchase

amount ($204.9 billion), the total repaid ($167.9

billion), the losses ($2.6 billion) and the total

outstanding CPP investment ($34.4 billion).

R E F E R E N C E S

Aubuchon, Craig P.; and Wheelock, David C. Te

Geographic Distribution and Characteristics o

U.S. Bank Failures, 2007-2010: Do Bank Failures

Still Reect Local Economic Conditions? Fe d-

eral Reserve Bank o St. Louis Review, Septem-

ber-October 2010, Vol. 92, No. 5, pp. 395-415.

Bank o Latvia. Origi ns o the Banking Crisis.

Te Annual Report. 1995. See www.bank .lv/eng/

main/all/pubrun/lbgadaparsk/1995gadpars/

ku/originsbankcrisis/

Congressional Oversight Panel. April Oversight

Report, April 2009.

Contessi, Silvio; and Francis, Johanna. ARP

Beneficiaries and Teir Lending Patt erns

during the Financial Crisis. Federal Reserve

Bank o St. Louis Review, March/April 2011,

Vol. 93, No. 2, pp. 105-25.

Ergungor, O. Emre. On the Resolution o Finan-

cial Crises: Te Swedish Experience. Federal

Reserve Bank o Cleveland Policy Discussion

Papers, No. 21, June 2007.

Fleming, Alex; and alley, Samuel. Latvi an Bank-

ing Crisis: Stakes and Mistakes. Te World Bank

Beyond ransition, 2001. See ww w.worldbank.

org/html/prddr/trans/m&a96/art2.htm

Hoshi, akeo; Kashyap, Anil K. Will the U.S.

Bank Recapitalization Succeed? Eight Lessons

rom Japan. Journal o Financial Economics,

September 2010, Vol. 97, No. 3, pp. 398-417.

Internationa l Monetary Fund. Lessons rom theCrisis in Argentina. Oct. 8, 2003. See www.im.

org/external/np/pdr/lessons/100803.pd

Laeven, Luc; and Valencia, Fabian. Systemic

Banking Crises: A New Database. International

Monetary Fund (IMF) Working Paper 08/224,

November 2008.

Laeven, Luc; and Valencia, Fabian. Resolution

o Banking Crises: Te Good, the Bad, and the

Ugly. International Monetary Fund (IMF)

Working Paper 10/146, June 2010.

Oce o the Special Inspector General or the

roubled Asset Relie Program. Quarterly

Report to Congress, Jan. 26, 2011.

The Reginal Ecnmist | April 2011

During the rst year and a hal o thebusiness expansion, the U.S. recoverywas characterized by below-average growth

o real GDP, anemic job creation and a high

unemployment rate. It was airly weak by

historical standards. Early this year, however,

the U.S. economy seemed poised to grow by

more than the roughly 2.75 percent growth oreal GDP registered last year. Tis strength-

ening, which is consistent with the projec-

tions o the Federal Open Market Committee

and the consensus o private-sector proes-

sional orecasters, likely reects a ew key

actors. Tese include the economys natural

built-in corrective orces and the expansion-

ary monetary and scal policies put in place

to jump-start the economy. In addition,

nancial markets have healed, and the worst

o the housing crisis appears to be behind us.

Ke Trends Remain Positive

Last year, real GDP increased by about

2.75 percent. Tis increase was signicantly

larger than in t he previous year (0.2 percent),

but still only about equal to the economys

estimated growth o potential real GDP.

When actual real GDP and potential real

GDP are growing at about the same rate,

there is not much scope or improving labor

market conditionsparticularly aer a deep

recession. I ndeed, job gains were decid-

edly lackluster last year, as nonarm payrollemployment rose by an average o 76,000 per

month. Likewise, the unemployment rate

averaged 9.6 percent in the ourth quarter

o last year, down only modestly rom a year

earlier (10 percent).

Growth o real GDP was strengthening

over the second hal o last year aer a

springtime lull that saw the nations out-

put growth slip to about 1.75 percent in

the second quarter. Broadly speaking, the

economys momentum at the end o 2010

appears to have carried over into 2011, as

many o the nations key indicators are point-

ing to a quickening in the pace o economic

activity this year. First, the Conerence

Boards Index o Leading Economic Indica-

tors increased by nearly 8 percent in 2010,

which was the largest annual increase since1983. Second, productivity growth remains

quite strong. One immediate maniestation

o this is reected in strong growth o cor-

porate prots, which then helps to increase

stock prices. Rising stock prices against the

backdrop o an improving outlook provide

rms with an incentive to expand their capi-

tal stock. Rising stock prices also increase

household wealth, which may provide a boost

to consumption spending.

At some point, strong productivity growth

should lead to aster growth o real income

and, thus, rising employment. Indeed,

according to the February 2011 Survey o

Proessional Forecasters, nonarm payrolls

are projected to increase by an average

o 200,000 per month over the nal nine

months o this year.

Despite this robust job growth, orecasters

expect that the nations unemployment rate

will remain quite high this year (9.1 percent)

and next year (8.5 percent). Larger declines

in the unemployment rate are possible, but

probably only i real GDP increases by morethan the roughly 3.25 percent growth that

orecasters expect or this year and next.

Risks to the Outlook

Financial crises tend to have long-lasting

eects. One notable legacy o a nancial

crisis is a large increase in government debt

to GDP. Te Congressional Budget Oce

(CBO) now projects that the ederal bud-

get decit will average about 8.5 percent

o GDP or scal years 2010 to 201

compares unavorably with an aver

percent rom 1960 to 2007. ypica

economy strengthens, the decit nlessens as tax revenues increase be

rising real incomes, and governm

decline as ewer individuals requir

ployment benets or other orms o

tance. However, the CBO estimat

lions share o the decit in 2010 w

to these cyclical actors. Tus, som

more than a strengthening o the e

is required to reduce the budget de

longer-term levels.

Unless addressed promptly, thes

budget decits present several risks

economy. First, large decits tend

upward pressure on interest rates, a

government absorbs more o the u

able or private-sect or investment.

the threat o rising interest rates ma

investors to either sell t heir existin

o government securities or rerain

chasing newly issued securities. Fi

prospect o large uture budget de

cause households to save more in th

in anticipation o higher uture tax

prospect o higher uture corporate

might also cause businesses to canc

capital investment projects.

Te sooner that governments at

return their nances to sustainabl

the better o the economy will be

long haul.

Kevin L. Kliesen is an economist at thReserve Bank o St. Louis. See http://stlouised.org/econ/kliesen/ or more o

By Kevin L. Kliesen

Te Economy Continueso Strengthen, but Risks Remain

n a t i o n a L o V e R V i e w

The Reginal Ecnmist | www.stlo getty images/Dave cutler


10/15

n e m P L o y m e n t

obless Recoveries:Causes and Consequences

economic downturns experience a large,

negative and persistent eect to their lietime

opportunit ies. Young workers who enter the

job market during a jobless recovery may

experience temporary unemployment and

are more likely to accept less-attractive and

lower-skill jobs due to limited opportunities.

On average, their initial wage is signicantly

lower than the initial wage o their counter-

parts who graduate when the job market is

strong. Tis disadvantage persists; even 15

years aer graduation, their wages and career

attainment remain lower than those o their

luckier counterparts.

Te social consequences o a prolonged

jobless period may be as signicant as the

economic consequences. For example, the

majority o studies on unemployment and

crime suggest that a high unemployment rate

is positively linked to increases in property

crime.4 What is more, economists Naci

Mocan and uran Bali ound that the connec-

tion between joblessness and property crime

is asymmetric: An increase in the unemploy-

ment rate is accompanied by soaring property

crime, while a decline in the unemployment

rate is ollowed by only a gradual drop in

property crime. Serious property crimes may

urther damage the economic development

and social welare in urban areas, especially

in inner-city neighborhoods.

A recent study by economists Dhaval

Dave and Inas Rashad Kelly ound that an

increase in the u nemployment rate results

in negative changes in eating habits among

a studied group o people with a high risk o

unemployment. A 1 percent increase in the

unemployment rate is associated with a 2-4

percent reduction in the consumption o ruit

and vegetables. Such a reduction in healthy

ood potentially aects workers health in the

long run. In low-income amilies, inadequate

nutrition could aect the physical and mental

development o children; the stress that aects

the jobless parents also aects their children.Te welare o children in some communi-

ties could be urther undermined because a

high unemployment rate may aect amily

stability by reinorcing the retreat rom

marriage.5 In less-afuent communities,

economic status has been a requirement or

marriage. Less-educated people are even

less likely to have a job when the unemploy-

ment rate is high. Because o that, they nd

it harder to meet the material threshold or

marrying. Persistent joblessness may result

in a permanent cultural change in some com-

munities i marriage becomes a luxury good.

A Long Road Ahead

Federal Reserve Chairman Ben Bernanke

said last all that job creation is probably

the most important problem acing the U.S.

economy. 6 As o January 2011, the U.S.

economy needed roughly 6.8 million jobs to

return to a 5 percent natural unemployment

rate.7 Tis estimate is more complicated i

population growth, the discouraged worker

eect and the extension o unemployment

benets are taken into account.

Unemployed individuals who stop looking

or a job are cal led discouraged workers and

are not considered part o the labor orce.

Discouraged workers may re-enter the labor

market when the economic activity bounces

back. A massive re-entry would temporarily

raise the number o unemployed workers so

that the unemployment rate could remain

unchanged or rise even as payroll employ-

ment increases.

An extension o unemployment insurance

would probably produce mixed eects on

the job market.8 Such an extension could

improve the eciency o matching workers

with appropriate jobs. On the other hand,

extended benets could discourage jobless

workers rom accepting unattractive jobs,

thus keeping the unemployment rate rela-

tively high.

aking these additional actors into

account, i the economy immediately gener-

ates 350,000 jobs a monththe pace o the late

1990sour years would be needed to reach

an unemployment rate o 5 percent, whereas

at a rate o 210,000 jobs a monththe 2005

pace11 years would be needed to achieve a

5 percent unemployment rate.9 Regardless, the

current recovery may be remembered as the

third consecutive, and likely the most severe,

jobless recovery. Te social consequences maybe as painul as economic consequences. A

generation o childhoods, career paths, eating

habits and marriage culture may be perma-

nently altered.

Natalia Kolesnikova is an economist andYang Liu is a research associate at the FederalReserve Bank o St. Louis. See http://research.stlouised.org/econ/kolesnikova/ or more onKolesnikovas work.

Although the Great Recession ended inJune 2009 and overall economic activitys exhibited signs o recovery, labor market

nditions remain disappointing. Payroll

mployment has been recovering slowly; the

erage duration o unemployment remains at

historical high; and the unemployment rate

projected to remain above 7.8 percent until

13.1 Economists are concerned that the U.S.

onomy is mired in another jobless recovery

when economic activity experiences growth

t the unemployment rate remains high.

o determine the severity o current job-

sness, it is useul to compare the current

te o the labor market with that during

evious economic recoveries. Te gure

ows the U.S. unemployment rate during

e past our recoveries alongside the cur rent

covery. In the rst two cases, shortly aer

e 1973-75 and 1981-82 recessions ended,

e unemployment rate started to decline;

months aer the end o these two reces-

ns, the unemployment rate had dropped

signicantly lower levels. Tese were not

nsidered jobless recoveries. In contrast, in

e wake o the t wo recessions in the 1990s

d early 2000s, t he unemployment rate con-

ued to increase 15 months aer the end o

e recessions. Tese were jobless recoveries.

Current developments in the labor market

e similar to the jobless recovery cases. Sincee Great Recession ended in June 2009, the

employment rate has remained high. It

pped 10 percent in late 2009, remained

ove 9.4 percent in 2010 and was still at

9 percent in February 2011much higher

an during any other recovery since the

70s. Persistent and unusually high unem-

oyment suggests that this jobless recovery

ght be more painul than the previous two.

12 9 6 3 0 3 6 9 1 2 15 1 8 21 2 4

11

10

9

8

7

6

5

4

3

1973-75

1990-91

PER

CENT

MONTHS FROM RECESSIONS END

1981-82

2001 Current

Unemploment Rates ater Recent Recessions

source: u.s. b l s

Potential Causes o a Jobless Recover

Many researchers have pointed to a labor

market mismatch as one o the reasons or

persistently high unemployment. Job growth

polarization, industrial reallocation and

organizational restructuring create a severe

mismatch between available workers and

appropriate job opportunit ies. Unemployed

workers are orced to look or jobs in dierent

occupations, industries and locations.

MI Proessor David Autor examined

U.S. employment opportunities over the

past three decades. He ound that the U.S.

employment growth has polarized into

relatively high-skill, high-wage jobs and

low-skill, low-wage jobs while middle-skillroutine jobs have diminishe d. So me routine

jobs, such as administrative and operative

positions, have been replaced by computer

automation. Other routine jobs, such as

bill-processing and manuacturing positions,

have been moved overseas to take advantage

o lower wages. Te Great Recession acceler-

ated this trend: Employment in middle-skill

and middle-wage occupations declined 7-17

percent during the recession.2

Job opportunities were also signicantly

reallocated between industries, suggests

a study by economists Erica Groshen and

Simon Potter. Te 2007-09 nancial turmoil

and housing crisis had severe impacts on

industrial structure: During the recession,

employment in the construction industrydropped 20 percent, and job opportunities

in the nancial industry declined 6 percent.

Tese industries continued to shrink aer the

recovery began. By December 2010, payroll

employment dropped an additional 7 percent

in construction and 2 percent in the nancial

industry. Manuacturing and inormation

service industries were also badly aected.

Demand in these industries may never return

to prerecession levels; a portion o their job

losses are likely to be permanent.

Organizational restructuring, which leads

to an elimination o unneeded labor, espe-

cially by small rms, also creates structural

change in job opportunities. During the

Great Recession, small rms lost proportion-

ately more jobs than larger rms: Te small

rms accounted or about 10 percent o total

net job loss despite their 5.3 percent employ-

ment share.3 Small rms also take longer

than large rms to rehire. Moreover, small

rms are more likely to close during eco-

nomic contraction; some o their job losses

might be considered permanent. Re-c reatingthese jobs takes more time than rehiring.

Consequences o a Jobless Recover

Long periods o high u nemployment are

without a doubt detrimental to u nemployed

workers and to the health o the economy.

However, there are other, less-known

consequences.

Yale economist Lisa Khan ound that col-

lege graduates entering the job market during

E N D N O T E S

1 Te predicted unemployment rat

the Survey o Proessional Foreca

Federal Reserve Bank o Philadel2 Te statistics are adapted rom Au3 Relevant data are rom Business E

Dynamics o the Bureau o Labor4 A good summary can be ound in

and Ott.5 See Edin and Kealas or details.6 See Di Leo.7 Te Congressional Budget Oce

that natural rate o unemploymen

U.S. is 5 percent. It denes the na

unemployment as the rate o un

arising rom all sources except u

aggregate demand. See Congres

Oce.8 See El-Ghazaly.9 Te calculation is perormed base

assumptions that population gro

1 percent annual rate and labor o

cipation rate returns to 66 percen

2007 level). More inormation is

upon request.

R E F E R E N C E S

Autor, David. Te Polariz ation o

nities in the U.S. Labor Mar ket.

Project, April 2010.

Bureau o Labor Statistics Business E

Dynamics. See www.bls.gov/bdm

Congressional Budget Oce. Te B

Economic Outlook: Fiscal Years 20

January 2007.

Dave, Dhaval M.; and Kelly, Inas Ra

Does the Business Cycle Aect E

NBER Working Paper No. 16638

Bureau o Economic Research, D

Di Leo, Luca. Bernanke: Job Creat

Problem. Real ime Economics,

Street Journal. Nov. 30, 2010.

Edin, Kathryn; and Kealas, Maria.

I Can Keep: Why Poor Women P

hood beore Marriage. Berkeley:

o Caliornia Press. 2005.

El-Ghazaly, Hoda. Te Ins and Ou

ployment Insurance. Federal Re

o St. Louis Liber8 Economic Ino

Newsletter, November 2010.

Federal Reserve Bank o Philadelph

Proessional Forecasters, First Qu

See www.philadelphiaed.org/res

data/real-time-center/survey-o-

orecasters/2011/survq111.cm

Garrett, Tomas A.; and Ott, Lesli S

ness Cycles and Crime. Federal

o St. Louis Working Paper 2008-

July 2009.

Groshen, Erica L.; and Potter, SimoStructural Change Contributed to

Recovery? Fe deral Reserve Ban

YorkCurrent Issues, August 2003

No. 8, pp. 1-7.

Kahn, Lis

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