The Bureau of Business Research 105 The Case for Reaganomics Gene C. Uselton 110 The Case against Reaganomics Ray Marshall 118 Public Opinion Regarding Illegal Aliens in Texas Robert A. Peterson and George Kozmetsky 122 The Changing Nature of Home Ownership Arthur Wright 125 Inflation, Interest, and the Financial Return of Home Ownership V. Howard Savage 128 Alternative Mortgage Activity in Texas Savings and Loan Associations Beverly Hadaway 131 Whatever Happened to Low-Interest Municipal Mortgages? Jack Harris 134 The Declining Retail Trade Function of the Beaumont Central Business District Bruce W. McClendon 138 The Economic Effect of a Military Base on a Small Metropolitan Area Louis J. Rodriguez and Albert Krienke 141 The Black Population of Texas R . L. Skrabanek and Steve H. Murdock 148 The State Data Center Network as an Information Resource Jerome Olson, Rita J. Wright, and Bonnie M. Young . May-June 1982 Texas Business Review reports the results of research in business, the social sciences, and the physical sciences in language that is readily understandable. Our readership includes policy makers in government, members of the busi­ness community, university faculty, and the general public. Articles focus on topics of special interest to readers both in Texas and throughout the Southwest and South. These topics include energy, inflation, manufacturing, population, labor, public policy, transportation, the small business, regional economic development, and other related areas. Because Texas Business Review encourages a free exchange of ideas, opinions expressed in articles are those of individual authors and not neces­sarily those of the editors or the Bureau of Business Research. Texas BUSINESS The Bureau of Business Research The University of Texas at Austin Vol. 56, No. 3 May-June 1982 Bureau of Business Research Charles C. Holt, Director Review Staff Joseph E. Pluta, Editor Lois Glenn, Publications Manager Charles F. Dameron, Jr., Managing Editor Mary Jo Powell, Editorial Assistant Mildred Anderson, Data Compilation Jean Stenger, Computer Graphics Robert T. Jenkins, Production Assistant Joan F. Dameron, Compositor Meade E. Collard, Compositor Editorial Advisory Board Vernon M. Briggs, Jr. Cornell University George G. Daly University ofHouston John F. Due University ofIllinois Peter C. Frederiksen Naval Postgraduate School Malcolm Gillis Harvard University Robert W. Gilmer Tennessee Valley Authority John Stuart Hall Arizona State University Jared E. Hazleton University of Washington William H. Leahy University ofNotre Dame Charles G. Leathers University ofAlabama Edward J. Malecki University of Oklahoma Charles E. McLure Stan[ord University Edward M. Miller Rice University Jerome Olson University of Texas at Austin Thomas R. Plaut University of Texas at A us tin James P. Rakowski Memphis State University James A. Richardson Louisiana State University R. Lynn Rittenoure University of Tulsa William J. Serow Florida State University Joseph A. Ziegler University ofArkansas Subscription rate: $20.00 per year. Single copy: $3.50. Published six times a year. Second-class postage paid at Austin, Texas. Publication number 540-400. ISSN 0040­4209. Copyright © 1982, Bureau of Business Research, University of Texas at Austin. Address manuscripts to Editor, Texas Business Review, P.O. Box 7459, Austin, Texas 78712. Address subscription inquiries to Sales Office, Bureau of Business Research, P.O. Box 7459, Austin, Texas 78712. Telephone: 512-471-1616. Texas Business Review is indexed in Marketing Information Guide and Public Affairs Information Service and is available on microfilm from University Microfilms. The Case for Reaganomics Reaganomics is like the proverbial elephant described variously by blind witnesses as a tree, a rope, etc. Reagan­omics means different things to different people, and the variations in the definition are not limited to outside ob­servers. Paul Craig Roberts, Arthur Laffer, David Stockman, Jude Wanniski, George Gilder, Herbert Stein, Alan Green­span, William Simon, Milton Friedman, and many other academic economists and journalists associated with the Reagan candidacy and administration may agree on a num­ber of broad principles, but their viewpoints tend to diverge as specific issues are considered. Any picture of Reagan­omics will necessarily be painted with a broad brush. The Benefits of Voluntary Trading When two persons or two corporations or two countries engage in voluntary trading, both trading partners benefit. If it were not so, they would not trade. Extend the princi­ple to include every human being-trading by means of market transactions, directly or indirectly, with thousands of other individuals-and the potential for gains is enor­mous.1 What are these gains and whence do they come? The gains in question are net increases in goods and services produced and consumed as the direct result of trading. These gains are possible because of differences in endow­ments. For example, citrus fruit is grown in the Rio Grande Valley and shipped to customers who live in areas where such products do not grow well. Cotton is grown on the High Plains (around Lubbock and Amarillo) and shipped to other areas-including the Rio Grande Valley. The people in far south Texas and in far northwest Texas have more citrus fruit and more cotton goods because each area has special­ized in doing what it does best. Similar gains accompany all trading that is done voluntarily. Not all trading is voluntary. When Robin Hood and his Merry Men take property from wealthy noblemen and give (some oO it to their indigent friends, the poor recipients Gene C. Uselton is Professor ofFinance, Texas A&M University. Gene C. Uselton realize gains from the trades. This kind of gain is, however, not productive in the way that the gains from voluntary trading are productive. In the Sherwood Forest case the gains of the poor are identical to the losses of the rich. The total quantity of goods and services available for consump­tion does not increase. In fact, total production and con­sumption may decrease! Wealthy travelers may take circu­itous routes to avoid Sherwood Forest, hire bodyguards to protect them and their possessions, or purchase weapons that would not have been needed in the absence of the risk of.robbery. The promulgators of Reaganomics believe that the gov­ernment sometimes acts as a Robin Hood. One should not overstate the case; Mr. Reagan and his advisors do not advo­cate that governments be abolished.2 What they do believe is that the government-with its monopoly power to tax, to regulate, to legislate, and to create money-frequently re­duces the potential gains from trading by interfering unnec­essarily with free market processes. 3 The Reagan initiatives in these areas (taxation, regulation, legislation, and debt monetization) are designed "to get the government off the backs of the taxpayers." If tax rates are so high that taxpayers begin to direct more effort toward minimizing their tax bills than toward productive activities, then taxes should be reduced. If regu­lations restrict the productive activities of an industry so that consumers suffer a net loss, then some degree of deregulation is appropriate. If legislation-no matter how well intentioned-produces economic harm that exceeds the real benefits, then the law should be repealed. If the crea­tion of money to finance federal deficits causes unaccept­able rates of inflation, then the Federal Reserve Board should pursue a restrictive monetary policy and the Con­gress should cooperate with the administration's attempts to balance the budget. The preceding four statements of the "if-then" variety would probably evoke no argument in the abstract, but in the practical world of policy making the economic judgments required generate heated debate. Rea­ganomists believe that many of the government's activities have produced negative incentive effects and that those ef­fects are reversible. The program that is expected to restore MAY-JUNE 1982 incentives and increase economic productivity is supply-side economics. Supply-Side Economics The great economist Alfred Marshall is credited with having made the analogy between economic analysis and cloth cutting: scissors work poorly with one blade missing and economic analyses that ignore either supply or demand dollar value of the gross national product (GNP) follows a growth path virtually identical to that of the stock of money. Inflation, being the difference between the growth rates in the nominal value and the real value of GNP over a given time period, can be eliminated by arranging for nomi­nal and real GNP to grow at the same rate; hence, the mon­etary growth rule. 5 Having stabilized prices and eliminated the boom and bust cycles that he attributes to the stop and go monetary Supply siders argue that the Jederal government is actually receiving less revenue at current tax rates than it would receive at lower tax rates. are faulty. Why, then, would economists promulgate a supply-side theory? To understand the answer requires some historical perspective. The English economist John Maynard Keynes, writing during the Great Depression of the 1930s, argued that pri­vate investment tends to fluctuate erratically as the expec­tations of entrepreneurs shift from optimistic to pessimistic and back again. A large reduction in investment spending, Keynes pointed out, would represent a significant decline in total demand. As the inventories of capital goods manu­factures accumulate, managers will cut back on production by furloughing workers, according to the theory. The de­cline in workers' incomes will lead to reductions in con­sumer demand and the economy will spiral downward, said Keynes. His solution was simple: let the government take up the slack. Ideally, his system would have the government create money and purchase goods and services during periods of slack demand and then reverse the process and pay off its debts during the expansionary periods. Keynesian economics is the economics of demand man­agement. Supply-side economics is a contrapuntal system based upon minimizing the role of the government in the economy and relying upon incentives to stimulate produc­tion. These two theories of how the world works lead to significantly different policy recommendations. 4 Monetary Policy The architect (if not the builder) of the monetary policy of Reaganomics is Milton Friedman. Friedman advocates the adoption of a monetary growth rule that would have the U.S. money stock grow at approximately the same rate as the U.S. production of goods and services. The adoption of such a rule would effectively remove discretionary authority over monetary policy from the Federal Reserve System. The empirical work of Friedman and some of his col­leagues has led him to conclude that the nominal or current policies of the past, the monetary authorities would dis­cover a new stability in business activity, according to Friedman. Entrepreneurs would be encouraged by the stable credit conditions. The housing industry would flourish and interest rates would stabilize at levels substan­tially below those that prevailed in the early 1980s. Debt funding would be easier for utility companies and other in­dustries sensitive to interest rates. In short, the incentive effects of establishing price stability would be felt through­out the economy. Although some voices from the Reagan camp speak of restoring the gold standard by guaranteeing convertibility of the dollar, most Reaganomists would oppose this mea­sure. Paul Volker, chairman of the Federal Reserve Board (and not a Reagan appointee), appears to be committed to reducing the inflation rate by controlling the growth of monetary aggregates. Recent statistics indicate that the program is producing significant results: the Consumer Price Index (CPI) has been rising at less than S percent (annual rate) for the past several months. The process has been painful; interest rates and unemployment are high, facts that have produced some dissension within the ad­ministration's ranks. Nevertheless, the monetary policy of Reaganomics, although imperfectly implemented, seems to be on schedule. Federal Tax Policy The tax policy of Reaganomics is pure supply-side eco­nomics, a system originally promulgated by Arthur Laffer.6 The idea of an optimal tax rate (a tax rate at which govern­ment revenues would be at a maximum) is not original with Laffer (as he is quick to point out): Lionel Robbins, writing in 1930, noted that the demand for taxable income would tend to decline as the tax rate increased and to increase as the tax rate decreased. 7 The modern version of the Robbins argument is the Laffer Curve, a bullet-shaped line on a graph depicting the level of tax revenues associated with various tax rates (see figure). If the tax rate were zero, for example, tax revenues would be zero. If the tax rate were l 00 percent, tax reve­nues would be zero: workers will not work and pay all of their incomes to the government. Between these extremes tax revenues will be positive; and, at some optimal tax rate, tax revenues will be maximized. Without the benefit of empirical evidence, Laffer has argued that the average tax rate in the United States has risen beyond that optimal level and that the government is receiving less revenue than it would collect at a lower tax rate. Laffer has recommended that tax rates be lowered so that tax revenues will rise. Given present tax rates, American taxpayers expend con­siderable effort seeking ways to avoid taxes. Wealthy indi­viduals and big businesses hire attorneys and accountants to devise schemes and find loopholes that will enable them legally to avoid taxes (as the wealthy travelers entering Sherwood Forest hired bodyguards). Less wealthy citizens may participate in the underground economy where trans­actions are made in cash or in kind, so that the Internal Revenue Service (IRS) cannot trace the transactions and collect income taxes on the gains. Laffer, incidentally, be­lieves that the underground economy is enormous. When tax rates are lowered to more reasonable levels, citizens will expend less effort in nonproductive tax­ avoidance schemes and more effort in productive activities. The Laffer-Robbins Curve Average tax rate 100% r-----~ current tax rate lower rate Real production of goods and services will grow, taxpayers will gladly pay the taxes, and prosperity and balanced bud­gets will follow. Would it work and will it work? The first part of the dual question is hypothetical; it asks about the consistency of the argument. If the Laffer Curve is correct, if the U.S. tax rates are above optimal, and if the relation is symmetri­cal, then lowering tax rates will increase tax revenues and contribute to balancing the budget. Knowing whether this system will work in actuality is more difficult. The informa­tion required to answer with confidence is not available. First, empirical evidence on the Laffer Curve relation is inconclusive; and even if there were conclusive evidence, there is no guarantee that the future will be just like the past. Second, for Reagan's program to work, the Congress must support his legislative package. Third, if inflation were to continue at the same levels as in 1980, the tax cuts already enacted would be overwhelmed by "bracket creep." Even the indexing of taxes scheduled to begin in 1985 would come too late to salvage Reaganomics. Federal Spending Policy Conservatives are expected to pursue a balanced budget with zeal, but balancing the budget is not a primary objec­tive of Reaganomics. The supply-side policies, such as the tax reduction program, will, through incentive effects, in­ crease national income and fed­eral tax revenues, according to the theory, and will contribute to balancing the budget. The main objective, however, is to scale down the size of the federal government-that is, to reduce the proportional part of GNP accounted for by govern­ment spending. This desire to reduce the size of the government is a corollary of the tax reduction program. The Reagan administration is engaging in budget cutting in a number of ways. For example, Office of Management and Bud­get Director David Stockman's first budget included cuts in practically every controllable expenditure except national de­fense. Mr. Reagan has recently suggested even further budget tightening. These budget­trimming tactics are not simply motivated by supply-side theory. An important tenet of Reagan­omics is that people will choose leisure over work if leisure is current more profitable. One objective tax revenue of the Reagan administration is to restore the incentive to work. higher revenue MAY-JUNE 1982 Regulation and Legislation Initiatives for industrial deregulation did not originate with the Reagan administration, but they are certainly con­sistent with Reaganomics. 8 The deregulation of the airlines (begun under the Carter administration) is on schedule. Talk of deregulating the trucking industry (again, begun during the Carter administration) continues. Deregulation of the financial system, initiated by the Depository Institu­tions Deregulation and Monetary Control Act of 1980, is moving more swiftly than most financial economists had predicted. President Reagan has advocated abolishing the Depart­ment of Energy and the Department of Education; his ad­ministration has already eliminated the Council on Wage and Price Stability and is reducing the federal payroll through attrition. The firing of 11 ,000 air traffic control­lers was not an economizing action, but it has had that ef­fect. The air traffic system continues to work smoothly and safely with fewer than l 0,000 controllers. The action may have generated some supply-side effects in that other gov­ernment employees may be more inclined to stay on their jobs and produce than they were before the ineffective strike. Economists in the Reagan camp occasionally mention the possibility of constitutional amendments to achieve their economic policy goals. For example, some economists believe that the Congress should pass a constitutional amendment mandating a balanced budget. Others would like to insert into the Bill of Rights "the right to enter into voluntary trade agreements." No real consensus, however, exists among Reaganomists with regard to changing the Constitution. In general, the principles of Reaganomics would suggest the elimination of unnecessary laws and regu­ lations and a reduction in the rate of creation of new laws and regulations. The New Federalism Several years ago, William F. Buckley wrote a book en­titled Four Reforms, an answer to his critics who accused him of always producing negative comments but no positive recommendations. Without any clear evidence that Presi­dent Reagan has read the book, one is nevertheless inclined to associate Buckley's name with the New Federalism.9 Buckley argued that state governments should perform only those functions that could not be handled locally and that the federal government should accept only those responsi­bilities that could not be borne by local or state govern­ments. His reasoning was that the resulting decentralization would promote diversity among states and communities and that citizens could then "vote with their feet" for the kind of system that they preferred. A Bold Initiative The New Federalism of Reaganomics is strikingly similar to Buckley's recommendations in Four Reforms. Under the New Federalism the states would assume responsibility for funding the Aid for Families with Dependent Children and the Food Stamp programs. In exchange, the federal govern­ment would assume responsibility for Medicaid funding (a state budget item at the present time). Further, the federal government would return to the states the responsibility for about forty additional programs (such as education, high­ways, mass transit, and child protection) that have been funded as a part of the federal budget. IO The proposal pro­vides for initial funding of those forty programs out of fed­eral excise taxes on alcohol, gasoline, and tobacco, and the windfall profit tax. In the unlikely event that the Congress should approve of this bold initiative, the results might be far less disastrous than the critics predict. Governor Jerry Brown of California writes, "I am concerned that the 50 states will become competing colonies in their drive for more business invest­ments." Perhaps he is right, but are the states not now com­peting with each other for shares of the federal revenues pie? In the world of Reaganomics, competition is not near­ly so undesirable as is the coercive power of big govern­ment. Promoting Competition while Providing for the Indigent Policies that allow for a maximum of diversity (while, of course, guaranteeing civil liberties, equal opportunities, and security of person and property) are to be desired. Diversity increases the potential for gains from trading. Some economists have argued that the states that at­tempt to retain the entitlement programs that they inherit from the federal government will experience a disastrous immigration of underprivileged citizens; states that elimi­nate most welfare programs will, in effect, export their poor. The position of the administration is that people respond to incentives and that they will be attracted to the places where they can find jobs that pay well. State and lo­cal governments will be well advised to provide a safety net for citizens who are temporarily out of work in order to maintain a ready work force, but competition will not allow local governments to pay able-bodied persons not to work. National defense is appropriately the responsibility of the federal government, according to Reaganomic doctrine. States are not expected to purchase B-1 bombers and Tri­dent submarines. Reaganomics would not dismantle the federal courts system or the Justice Department (although it would redirect some of the efforts of the latter), but the administration of the welfare system is different: how can a person residing in Washington, D.C., ever know if a widow and her young children who live in Boerne, Texas, really need help from the government? Only her neighbors will know. The safety nets, according to Reaganomics, should be local. Implications of Reaganomics Many analysts contend that the Reagan administration's plan will never work simply because it will never be tried. Richard B. McKenzie, an economist who is certainly not TEXAS BUSINESS REVIEW unfriendly to Reaganomics, recently wrote, "Supply-side economics has not worked and will not work for one simple reason: it has not been and is not likely to be tried." 11 McKenzie argues that because of bracket creep caused by inflation, taxes will actually increase over the next four years for everyone. To complicate matters further, accord­ing to McKenzie, the states, as they assume responsibility for more programs that were formerly federally funded, will inevitably raise their tax rates. Microeconomic Reactions to Reaganomic Policies The Economic Recovery Act of 1981 provided some in­centives that will be perceived in the market place and acted upon by ordinary citizens. For example, the maxi­mum tax rate on capital gains is now, in effect, 20 percent. How does one benefit from this low rate? The only re­sponse is to purchase real or financial investments that will increase in value. Similarly, the new law provides significant new opportunities for executives who may be in a position to obtain stock options and makes certain kinds of real estate investments especially attractive. It reduces the po­tential erosion of family fortunes (large and small) through changes in the estate tax laws, and it increases the oppor­tunity for all employed citizens to shelter income from taxes through individual retirement accounts (IRAs). The new law provides tax relief and incentives to invest for virtually all citizens. The few people in the adjusted gross income category of $215,000 and above have been paying seventy cents of every additional dollar of unearned income (interest, stock dividends, etc.) in taxes. That marginal tax rate is now 50 percent. An executive earning $60,000 adjusted gross in­ come (joint return for a couple) will have paid almost $20,000 in income taxes in 1981. For the same adjusted gross income the tax bill will be only $17 ,000 in 1982, $16,000 in 1983, and $15 ,000 in 1984. If the inflation rate continues to decline, this couple will have benefited tre­ mendously. For the couple filing jointly and earning, say, $22,000 (adjusted), the tax rate will drop from 28 percent in 1981 to 22 percent in 1984. They will have approximate­ ly $800 a year more to spend as they choose. The period for depreciating business property has been reduced to fif­ teen years (from thirty or forty years) . The formula for computing depreciation has also been liberalized. Taxpayers who invest in new ventures are given added incentive through tax benefits that are especially attractive for re­ search and development firms. Macroeconomic Effects of Individual Initiatives As taxpayers become aware of the improved opportuni­ties for real estate investors, a major boom in the real estate market may develop. Similarly, the special tax treatment being given to new ventures in high technology and research and development may generate a boom in those industries as well as some significant technological breakthroughs. The new tax rules make risky ventures more attractive, and in­vestors will respond to this incentive. The 1980s may be remembered most importantly for a stock market boom. The maximum tax rate on capital gains of 20 percent is now determined as 40 percent of one-half of any long-term capital gain. That figure, however, applies only to people in the 50 percent tax bracket (those couples with adjusted gross incomes of $215 ,000 or more). What about the average, middle-class couple whose tax rate may be 25 percent? The tax on a long-term capital gain would be 25 percent of one-half of the gain (a tax rate of 12.5 per­cent). As taxpayers begin to appreciate these facts, the stock market will soar. What about the macroeconomic effects of the new in­centives to save, such as the opportunity to shelter $2,000 a year from taxes in an IRA? How many individuals will take advantage of this opportunity? The members of the post­war baby boom are now over thirty, and as these individ­uals mature, have children, send them to college, and begin to think about financing retirement, the demand for IRAs should expand rapidly. One can conceive of a major shift in the American saving function, and, as the saving rate in­creases, the pressure on the financial markets will conse­quently abate. The 1980s could prove to be a very good decade (from an economic standpoint) for all Americans. If taxpayers re­spond to the incentives that have been proposed, the 1980s could be a period of prosperity and boom. If this scenario does develop, the taxpayers will be indebted to a number of individuals and groups: to Paul Volker and the Federal Reserve Board for pursuing restrictive monetary policy de­spite its unpopularity, to the Congress for passing the ad­ministration's programs, and to separate states for partici­pating in the experiment with the New Federalism. Most of all, the country will be indebted to Reaganomics and its advocates. Notes 1. Henry Hazzlitt, Economics in One Lesson (New York: Harper and Row, 1946). 2. Gene C. Uselton, ed., Milton Friedman and Paul A. Samuelson Discuss the Economic Responsibility of Government (College Sta­tion: Texas A&M University, 1980). 3. Friederick Hayek, The Road to Serfdom (Chicago: University of Chicago Press, 1944 ). 4. Jude Wanniski, The Way the World Works (New York : Simon and Schuster, 1978). 5. Milton Friedman and Rose Friedman, Free to Choose (New York: Harcourt, Brace, Jovanovich, 1980). 6. Arthur B. Laffer and Marc A. Miles, International Economics in an Integrated World (Dallas: Scott, Foresman and Company, 1982). 7. Lionel Robbins, "On the Elasticity of Demand for Income in Terms of Effort," Economica 10 (1930): 123-29. 8. Murray Weidenbaum, The Future of Business Regulation (New York: American Management Association, 1979). 9. William F. Buckley, Four Reforms (New York: G. P. Putnam's Sons, 1973). 10. Benjamin A. Rogge, Education in a Free Society (Indianapolis: Liberty Fund, Inc., 1973), pp. 29-55. 11. Richard B. McKenzie, "An Introduction to the Personal Tax 'Cuts,"' Wall Street Journal, Jan. 8, 1982, p. 22 . The Case against Reaganomics Ray Marshall The economic program of the Reagan administration, popularly known as "Reaganomics," suffers from three major defects. It is based on unrealistic assumptions that lack credible support in both economic theory and the ex­perience of industrial economies. It is an inefficient eco­nomic policy that relies on the theory that tax breaks for the wealthy and large corporations will stimulate the economy by "trickling down" to ordinary working people and the poor. Finally, it is regressive, redistributing wealth and power to the wealthy and powerful and shifting more of the tax burden away from business and onto low-income and middle-income consumers. While Reaganomics is seriously flawed, it could produce some important benefits, especially in the economic stimu­ lus from the administration's massive tax cuts. The econo­ my needs this boost in order to combat the longest sus­ tained period of high unemployment since the Great Depres­ sion. The administration's policies also will increase savings and investment and provide some improvement in produc­ tivity and economic growth. These things, however, could have been done more efficiently and with a more equitable sharing of the costs and burdens of economic change. In addition, debate accompanying the administration's radical proposals undoubtedly will improve our understand­ing of economics and the role of government and could produce more agreement about the causes of and cures for our economic problems, the role of different levels of government, and the logical division of labor between the public and private sectors. Unfortunately, so far the debate has mainly been over the size of government and, to a lesser extent, about the distribution of responsibility between federal, state, and local governments rather than about the more important question of how to improve the efficiency and responsiveness of government at every level. Since the decentralized private market system is one of our most valuable assets, it is important that we make it work as efficiently as possible. We will preserve our liber­ties-including free enterprise-by strengthening both government and competitive markets, not by the mistaken theory that strong and efficient government and strong and efficient markets are incompatible. Ray Marshall is Rapoport Professor of Economics and Public Af­fairs, University of Texas at Austin, and former U.S. Secretary of Labor. Reaganomics also underscores some of the weaknesses of Keynesian or demand-side economics, which served as the basis for economic policy in the industrialized democ­racies from the time of the Great Depression of the 1930s until the economic dislocations of the 1960s. Keynesian economics was designed primarily to redress the problems caused by the Great Depression, which had come about in part because of excessive reliance on imperfect market forces. The Keynesian emphasis on demand management to assure the full use of resources was relatively successful in preventing depressions but became less effective in a world characterized by greater global interdependence, low pro­ductivity growth, "stagflation," and slow growth in total output. Because of their preoccupation with massive unem­ployment, the Keynesians gave inadequate attention to inflation, resources, productivity, and efficiency. Although the Reagan supply-siders serve a useful purpose in empha­sizing the deficiencies of demand-side economics, they, like the Keynesians, have failed to give adequate attention to sector-specific problems that will yield only imperfectly, if at all, to general monetary and fiscal policy. Supply-Side Theory Keynesian economics stresses the periodic need for government credit, spending, and taxation policies to sustain national production, employment, and prosperity. Unemployment occurs, according to the Keynesians, because the savings from higher levels of income do not flow automatically into investment. Without intervention, it is difficult to maintain high levels of production and low unemployment. Demand management can also restrain growth and upward pressure on prices when demand ex­ceeds productive capacity. The Keynesians prescribe an active role for government in economic stabilization. Beyond the responsibility for maintaining prosperity, the Keynesian approach supported policies to help those least able to protect themselves from depression and economic change. The New Deal eventually expanded government responsibility to investing in educa­tion, transportation, and housing and strengthening the hand of workers and trade unions in dealing with business. This combination of Keynesian stabilization principles and New Deal programs created the basic structure of progres- TEXAS BUSINESS REVIEW sive income taxes, collective bargaining, minimum wages, unemployment insurance, and other public investments designed to sustain purchasing power, aid economic growth, and redress economic inequality. In short, these policies were intended to help the whole country by helping work­ers and low-income and middle-income groups. Supply-side economics, by contrast, emphasizes radical tax and budget cuts to increase savings and investment that, in tum, would increase supply or production. To achieve its supply-side objectives, the Reagan administration put five changes through Congress in 1981. The first involved sus­tained cuts in personal tax rates skewed towards higher­income groups and meant to induce increased work effort and savings. The 5-10-10 (or 25 percent over 3 years) plan aims at increasing incentives to produce new income by lowering the rate at which it is taxed rather than by return­ing dollars to the taxpayers' pockets. According to the 1982 Report of the Joint Economic Committee, when it is fully effective, families with incomes of $200,000 will get a tax cut averaging $30,000, while a family with $15 ,000 would receive only $385. Taking into account bracket creep and an already scheduled increase in Social Security taxes, families earning $30,000 or less will actually pay more-not less-in taxes by 1984 under the Reagan program. Second, business taxes will be substantially reduced to stimulate increased capital investment. The centerpiece of these reductions is the modified 10-5-3 accelerated depreci­ation or capital recovery plan that will reduce business taxes by at least $60 billion a year by 1986 and probably will cost the U.S. Treasury much more than that. In fact, the new accelerated depreciation scheme and the invest­ment tax credit eliminate taxes for many corporations and provide negative taxes (or subsidies) for others, as was suggested by the following advertisement in the Wall Street Journal: "If your company still plans to pay taxes in 1981, you obviously don't know enough about the new tax law." Third, a "monetarist" fixed rate rule of money growth will bring monetary expansion in line with the economy's long-run growth potential. Fourth, fiscal tives who argue that inflation can only be cured by rising unemployment and recession. The supply siders' tax policy is based on the assumption that high marginal tax rates have discouraged incentives to work and invest. At first they contended that the greater savings, investment, and work resulting from their regres­sive tax cuts would, in turn, increase productivity and growth, reduce unemployment and inflation, and increase tax collections enough by 1984 to offset the revenue losses from the tax cuts and balance the budget. Critique of Reaganomics The early optimism about Reaganomics soon faded as unemployment and budget deficits mounted and interest rates remained high and unstable. After having originally called for a balanced budget by 1984, the administration predicted in November 1981 that annual federal deficits would swell to $160 billion by 1984, while the Congressio­nal Budget Office predicted a $210 billion deficit by that time. Confidence in the administration's policies was shaken by the growing realization that there was a funda­mental inconsistency in Reaganomics : huge tax cuts and in­creases in defense spending tended to stimulate the econo­my while the limitations on the money supply prescribed by monetarism tended to restrict growth. There also was growing concern that the tax cuts would not generate enough economic stimulus to restore federal revenues, causing large and continuing budget deficits, which would keep interest rates high, choking off economic recovery and generating considerable uncertainty in financial markets. Economists began to believe that, despite its claims, the administration was not likely to reduce the proportion of GNP accounted for by government spending below what it would have been without the 1981 Reagan budget decisions. Projections of the results of those decisions (based on the Table 1 Budget Trends (Percentage of GNP) and monetary "fine-tuning" will Fiscal year 1985 be ended to allow the free Projections market economy to stabilize Fiscal year before Reagan Reagan 1981 itself. Last, the growth of Category 1941 1955 1965 1975 1980 administration• decisions government spending will slow Expenditures 12.5 in order to reduce taxes relative Defense 5.5 to gross national product (GNP) Net interest 0.9 and free financial resources for Entitlements 1.5 All other 4.6 private investment. Revenues 7. 9 The supply siders believe (or 17.9 17.9 20.3 22.6 22 .7 23.9 10.4 7.2 5.8 5.3 5.6t 7.0 1.3 1.3 1.6 2.0 2.4 3.3 3.7 4.9 10.2 10.6 10.9 10.6 2.5 4.5 4.4 4.7 3.9 3.0 17.2 17.7 19.0 20.3 22.8 18.4 •Based on tax and authorization laws and budget policies in effect in January 1981. Projections assume an optimistic path of economic recovery from the current recession, with inflation at least they did at the beginning of the Reagan administration) falling to 6 percent in 1985. that curing inflation, unemploy­tThis projection assumes that defense will be a constant (fiscal year 1981) share of GNP and allows for about 3 percent a year real growth in defense spending. ment, and productivity could be Sources: Office of Management and Budget, The Budget of the United States Government (Washing­ painless if policy makers had the ton, D.C.: Government Printing Office, various years); Congressional Budget Office, An Analysis nerve to make radical tax and of the President's Budgetary Proposals for 1983 (Washington, D.C.: Government Printing Office, 1982); estimates of effect of 1981 Reagan decision from Charles Schultz, "Long-Term Budget budget cuts. They reject the Strategies" in Joseph Pechman, ed., Setting National Priorities: the 1983 Budget (Washington,ideas of traditional conserva-D.C.: Brookings Institution, 1982), pp. 187-220. optimistic assumption that growth will reduce unemploy­ment to 6 percent by 1985) is that federal spending will be 23.9 percent of GNP by 1985 rather than 22.7 percent if 1981 trends had continued without those decisions (see table 1). The budget trends without the administration's 1981 decisions would have caused a $5 billion budget surplus by 1985, instead of a probable $232 billion deficit by that time (see table 2). The difference, of course, is that the administration's huge tax cuts and defense spending increases (from 5 .6 percent of GNP to 7 .0 percent, with very optimistic assumptions about cost overruns) will not be offset enough, even by the administration's draconian domestic program cuts, to achieve the required spending savings to balance the budget. Similarly, the exaggerated positive economic growth and revenue forecasts from the supply-side tax cut simply are unlikely to materialize. The budget deficit itself is less a problem than the fact that the administration's need to borrow almost half of a very re­stricted supply of loanable funds to cover the deficit and service the national debt by 1985 will keep interest rates high, choke off investments, and require interest payments as a proportion of GNP to increase from 2.4 percent to 3.3 percent. One of the most serious technical limitations of suppiy­ side economics is that it is a radical departure in economic policy that has never been tested. Economists have thor­ oughly studied the effects of changes in marginal tax rates on individual work, consumption, and savings. The effect on work and savings has not been large; most significantly, no experience or research suggests that these relations could ever account for the large-scale shift in national economic performance originally projected by the adminis­ tration. Oddly enough, the administration has based its case primarily on the positive effects of the Keynesian-inspired 1964 Kennedy-Johnson tax cut. This comparison is faulty. The 1964 cut was preceded by measures, like the invest­ment tax credit and increased federal employment and training programs, to expand industrial and labor market capacity; it went mainly to middle-income and lower­income groups; and it was accompanied by wage-price guidelines. Equally important, inflation and unemployment Table 2 were much lower in 1964 (1.3 percent and 5.4 percent); the low rate of inflation meant a real cut in marginal tax rates, not an illusory one offset by high inflation. Similarly, the 1964 cut was a demand-side policy unaccompanied by deep cuts in domestic human resource investment programs. Finally, the effect of the 1964 tax cut has been exaggerated because it occurred at a time when other forces were also working to reduce unemployment. The unemployment rate declined from 5.4 percent in 1964 to 3.5 percent in 1969, but over half of this decline ( 1.1 points) can be accounted for by the Vietnam War build-up and changes in the defini­tion of unemployment. It is doubtful that one-half to two-thirds of the tax cuts will be saved, as Treasury Secretary Donald T. Regan has predicted. If past experience is any guide, consumption in­creases are likely to be higher than savings, even with tax cuts so heavily tilted toward high-income groups. In terms of hi.creased work effort, people with higher after-tax in­comes are just as likely to opt for more leisure as more work. Even in the unlikely event the tax cuts were to result in a large increase in savings, these would not automatically flow into productive investment. The tax cuts do nothing to eliminate the tax loopholes and other structural defects that currently are not only inequitable but also encourage speculation and unproductive investment. Also, the new de­preciation schedule (or cost recovery program) is not only biased against smaller labor-intensive and high-technology companies, but also creates new shelters by wiping out the tax liabilities of many enterprises and gives great tax ad­vantages to short-term equipment-intensive activities. Moreover, careful studies by Bob Chirinko and Bob Eisner of Northwestern University show that the adminis­tration's investment tax proposals are not likely to increase investment significantly.1 Indeed, the administration's own projections indicate that American business will spend less, in real terms, on new plant and equipment in 1982 than it spent in 1981 . Even if the administration's tax cuts increased invest­ ment relative to GNP as much as was originally predicted (from the postwar high of 11.3 percent in 1981to14.5 per­ cent by 1984), this increase would not restore productivity to the l 965-to-1972 trend rate of 2.5 percent. Historically, one administration's program would reduce the disposable in­come of workers who also get welfare to the extent that the worker's families would be scarcely better off than those who rely exclusively on public assistance. Nationally, the typical welfare mother would receive $518 a month if she did not work and only $535 a month if she took a job paying $300 a month-a 95 percent marginal tax on work. The Reagan 1981 Choices: Effect on Budget of Fiscal Year 1985 percentage investment point increase in relative to GNP in­ Billions of dollars Percentage of GNP creases productivity by only 0.2 Reagan 1981 Reagan 1981 percent. Category Projected decisions• Change Projected decisions• Change Finally, President Reagan's Expenditures Defense 945 233 996 293 51 60 22 .7 5.6 23.9 7.0 1.2 1.4 program contains a curious in­consistency in its incentive sys­ Net interestt Entitlements All other 99 452 161 138t 440 125 - 39 12 36 2.4 10.9 3.9 3.3 10.6 3.0 0.9 -0.3 0.9 tem. It provides great reductions in marginal tax rates for high­ Revenues Surplus or deficit 950 5 765 -232 -185 -237 22.8 0.1 18.4 -5.6 -4.4 -5.7 income groups but huge in­creases in marginal rates for the *Reagan tax and expenditure program as modified and enacted by Congress in 1981. working poor. According to a tEstimates for interest assume that the Reagan deficits are in fact reduced by about $65 billion a year in 1983, 1984, 1985. Otherwise 1985 interest payment would be $20 billion higher than shown in this table. Sources: Same as table 1. 1981 report by the Center for the Study of Welfare Policy at the University of Chicago, the 112 TEXAS BUSINESS REVIEW Inflation: False Diagnosis, Ineffective and Costly Cures While placing its hope in a form of economic magic, the administration has failed to see the real causes of inflation. Inflation is not caused primarily by the federal government and, therefore, will not be eliminated by simply making government smaller, controlling the money supply, or relying on market forces. The problem is more complicated. The underlying rate of inflation has increased from about 1 percent during the 1960s to 10.2 percent in the fourth quarter of 1980 and 8 .1 percent in the fourth quarter of 1981. This increase has its origins in the way the Vietnam War was financed; inflation has been increased by external shocks from food and oil price increases and has been perpetuated by high interest rates and the ongoing infla­tionary spiral. Inflationary pressures were moderated in 1981 and 198 2 primarily because of the recession, lower energy and food prices, and lower costs of imports because of the rising value of the dollar relative to the currencies of other countries (caused mainly by high real interest rates in the United States) and not because of the administration's policies. The answer to inflation is not to generate costly recessions, but to adopt policies that deal with inflation's specific causes. The administration's confidence in monetarism or tight money policy is based on unrealistic assumptions. Mone­ tarism would apply only in a world of perfect competition with no lags between cause and effect events; in such a world inflation could occur only if the money supply in­ creased. This theory, however, is not likely to be very helpful in the real world, where it is difficult either to define money or to control it. Moreover, the international­ ization of money makes it even more difficult for a particu­ lar country to control its money supply. Multinational corporations and financial institutions can avoid controls through internal financing, borrowing from each other, and tapping the international money supply. The conse­ quences of attempts to control the aggregate money supply are therefore likely to be recessions in such interest-sensitive sectors as family farming, small business, and construction. Indeed, high interest rates are themselves inflationary as they increase the costs of borrowing and doing business. These extra costs will then emerge as higher prices.2 Even sympathetic economists have observed that the administra­ tion's restrictive monetary policies are incompatible with its optimistic growth projections. 3 By virtue of their zeal to put most of the blame for infla­ tion on government, supply siders discount the effect of external inflationary shocks like the 125 percent increase in energy prices in 1979, which, they argue, could not have been a major cause of inflation because the oil bill is a small percentage of the GNP. The problem with this argument is that in a dynamic economy, the impact of any price change cannot be measured by simply adding separate price increases. Energy is so important that an increase in its price will have a pervasive or cumulative effect. It has been estimated that almost all of the increase in the con­sumer price index (CPI) between 1976 and 1979 could be accounted for by the direct effects of higher energy and food prices and higher interest rates.4 Excessive reliance on monetarism not only will cause the administration to fail to develop policies to deal with cost­push inflation and the effects of external energy and food price shocks, but it will also create other inflation prob­lems. The competitive market is an efficient short-run deci­sion mechanism, but in many sectors, such as defense procurement and health care, competitive conditions do not exist, so markets must be supplemented by govern­mental or other cost-control procedures. As an example, hospital costs alone increased at an annual rate of 16 per­cent in the first half of 1980, 18 percent in the second half of 1980, and 20 percent in the first quarter of 1981. With­out some measure to control these costs directly, health­care inflation will continue to escalate. Similarly, the ad­ministration's huge and rapid increase in defense spending, unless curtailed and slowed down, will tend to generate inflationary pressures because about 30 percent of the goods-producing industry would be diverted to the military, creating inflationary resource bottlenecks after the slack in the economy is absorbed. Unemployment Costs Too Much The supply siders, as well as traditional conservatives, give inadequate attention to the human and material costs of unemployment. They often argue that the unemploy­ment figures are overstated anyway, that workers are un­employed because their wages are too high, or that high unemployment is worth the reduction in inflationary pres­sures. These attitudes ignore the real losses from unemploy­ment, which are truly staggering. The late Arthur Okun estimated the costs of trying to reduce inflation through recessions to be $200 billion in lost output for each point we reduce inflation.5 He concluded: "A $1 trillion cure for chronic inflation is unthinkable." The supply siders deny that their policies would use un­employment to reduce inflationary pressures. Without a quick and painless cure for inflation, however, unemploy­ment is the practical consequence of Reaganomics, especial­ly if the administration maintains tight money policies or creates large budget deficits that lead to monetary restraint. Even assuming that the administration's tax program eventually creates the number of jobs the administration forecasts-and there is little reason to be optimistic-it will still be the most expensive and inequitable job creation effort in recent memory. By 1986 almost $700 billion in tax cuts will have created fewer than three million jobs, and over one million jobs will be lost through cuts in the domestic budget including jobs and training programs, housing assistance, and economic development that are MAY-JUNE 1982 aimed at poor people and distressed areas. In spite of its enormous investment, the Reagan administration still expects unemployment to be around 6 percent in 1986, and most forecasters consider that to be an optimistic projection. Government Is Not the Cause of All Our Problems The idea that government produces little of value, while fashionable these days, is clearly wrong. The absence of government services like transportation, fire and police protection, education, water supplies, and sanitation ser­vices can be a serious obstacle to economic development. Similarly, basic research, education and training, transporta­tion, currency, deposit insurance, information and com­munications, and other federal activities all increase produc­tion. Indeed, a characteristic of many of the American industries that are most competitive internationally is their partnership with government, especially in research and development (for example, in agriculture, electronics, air­craft, communications, and medical technology). It is also curious that the Reagan administration favors reducing the federal government and increasing the responsibility of state and local governments, despite the fact that most of the growth in expenditures and employment in the last three decades has been at the state and local levels and not the federal level. 6 Basic Economic Strength: Selling America Short Most of the early rhetoric and policy pronouncements flowing from the Reagan administration exaggerated the weakness of the American economy. Measured in real (or purchasing power parity) terms, America still leads the in­dustrialized world in important performance indicators­especially productivity and standard of living-in spite of the fact that other countries are closing the gaps. France and Germany have about two-thirds of the U.S. standard of living and the United Kingdom and Japan about 60 percent. The Japanese have about two-thirds and the Germans and French about four-fifths of our productivity. The resilience of the American economy is particularly clear with respect to its management of international crises. The United States recovered from both the oil price increases of 1979 and the 197 4-1975 recession better than any other major country did. During the 1970-1980 period the United States had the fastest growth in employment of any major industrial country. The U.S. work force grew by 25 percent, compared to 8 percent for Japan and -3 per­cent for Germany. The Germans actually had fewer jobs in 1980 than in 1970, while we were adding about 20 million new jobs. Among the major industrial economies, only Japan had faster growth in industrial production (56 percent) during the 1970s than the United States (41 percent) ; growth in industrial production was 29 percent in Germany, 36 percent in France, and 15 percent in the United Kingdom. Unfortunately, unemployment is rising throughout the industrialized world, a problem aggravated by high real interest rates in the United States, which causes a flight of capital from other countries, disrupting their economies. The main areas where the U.S. economic performance has been less impressive than that of Germany and Japan is in productivity growth and inflation. Our inflation ex­perience, however, has been better in recent years than that of many other industrial countries. While Americans face many problems in the 1980s, it would be a serious misreading of the record to argue that we were not better off in 1980 in terms of almost every measurable indicator than we were in previous years. Nor can it be argued that this progress would have taken place without an active federal government. Real disposable in­comes have increased-after adjustments for taxes and inflation-from $2,393 in 1950 to $2,709 in 1960, $3,668 in 1970 and $4,567 in 1980. Federal income and social security taxes have increased relative to personal income since 1960, but most of the increase has been for social security taxes. Federal income and social security taxes claimed 13 percent of personal income in 1960 and 15.9 percent in 1980. Income taxes alone were 10.8 percent of personal income in 1960 and 11.9 percent in 1980. In addition, the proportion of people below the poverty line declined from 22.4 percent in 1960 to 11 .1 percent in 1972. Although the economic prosperity of the 1960s helped, much of this decline in poverty is the direct result of federal antipoverty programs. Curiously, some critics consider the decline in poverty resulting from Keynesian policies since the 1930s to justify supply-side or "trickle down" policies. Both conducive general economic environ­ments and selective antipoverty programs have reduced the incidence of poverty-these are complementary, not com­petitive, policies. By cutting or eliminating these programs, the Reagan administration is directly increasing the poverty population of the nation; this population had increased to 13 percent by 1980. Poverty today is disproportionately concentrated among the elderly, women, and children. Quality of life has also improved significantly in this country. Life expectancy was almost 74 years in 1980, more than four years longer than it was in 1960. Infant mortality, a good indicator of a country's quality of life, started moving down during the 1960s after a period of stagnation and declined 46 percent between 1960 and 1980, largely as a result of federal social programs. Educa­tion levels have continued to improve from an average of 11.4 years in 19 59 to 12.1 in 1979. Many of these gains result from public health and education programs, such as nutrition and prenatal care programs for poor women­programs subject to cuts in the Reagan program. In spite of our recent gains in health statistics, the United States, in comparison with other countries, still has a long way to go. Despite our relative wealth and technological advance­ment, the U.S. falls behind other developed countries in the rate of infant and child mortality; in 1977 the United States had the sixteenth highest rate of infant mortality in the world. Furthermore, our life expectancy is exceeded by several other countries. Despite a clear need for accelerated progress, the condi­tion of black Americans and other minorities has improved dramatically since the 1960s. Unfortunately, the adminis­tration's policies, especially its domestic program cuts and weakened civil rights enforcement, threaten to reverse these gains. Inadequate Attention to People The administration's huge tax cuts and defense spending increases create great pressures to reduce mounting budget deficits by drastically cutting domestic programs, especially those serving low-income people. As Richard Munro, presi­dent of Time, Inc., put it: "We all know there was fat in these social programs. But the [ 1982) budget cut deeply into the muscle. [The 1983 budget) cuts into the heart."7 The administration's policies have increased physical invest­ment while reducing real investments in civilian research and development, public infrastructures, and human re­sources; have heavily taxed the earnings of welfare recipi­ents; have failed to evaluate job training programs adequate­ly; and have seriously damaged programs that serve needy people. Reduced Real Investments Despite the administration's negative attitude about government, investments in civilian research and develop­ment, public infrastructures, and human resources are just as important to productivity and economic growth as in­vestments in physical capital. Indeed, as Walter Heller has pointed out, "the Reagan team seems to forget that the real secret weapon of the U.S. economic leadership has been its generous investment in human capital-education, training, health, nutrition, and similar intangibles. Deep budget cuts in these areas ... threaten to reverse progress toward a more skilled, healthy and productive work force." 8 The private sector, according to Sar Levitan, "has inevitably fallen short of making adequate investment in human capi­tal, or of providing some guarantee of income adequacy."9 Taxing the Earnings of Welfare Recipients As noted earlier, the administration's welfare reform policies will put a 95 percent tax on the earnings of welfare recipients. The administration is not worried about this work disincentive because its proposed workfare system would force welfare recipients to work as a condition for receiving welfare; but this reasoning is curious for an administration that praises the market system and opposes "public service jobs," which the administration charac­terizes as make work and has virtually eliminated from the CETA system. Without available jobs it will be very diffi­cult to make workfare work. It is also surprising that Presi­dent Reagan is proposing workfare since such a program failed in California during 1971-1974 when he was gover­nor of that state. According to Spencer Rich, a study by the California Employment Development Department reported that "only 9,627 persons were given community job assignments by that program, although California had about 2 million welfare clients at that time. The report also says that there was no evidence the program had any success in discouraging people from applying for welfare or in getting those already on the roles to go off and find normal employment." 10 Evaluating Training Programs It is easy to find fault with employment and training programs, which have had many problems and fundamental defects; but progress will be made by continuing to improve these programs, not by eliminating them for ideological reasons. With all of its problems, the Comprehensive Employment and Training Act (CET A) has been judged by careful studies to be a good investment that should not be drastically reduced at a time of rising unemployment when the only alternatives for many unemployed workers are welfare and unemployment compensation. Unfortu­nately, it is easier to exaggerate CET A's weaknesses than it is to get a realistic appraisal of the program's successes. An Illinois congressman recently reported what happened when CET A funds stopped for one employee at a small day-care center in his state: "The result: the former CET A employee is now drawing unemployment compensation; the four women who were full-time employees of the day care center are drawing unemployment compensation; four of the women who were able to work because they had a place to leave their children have had to quit their jobs and go on welfare. "And so the bottom line: one CET A employee's salary saved, and nine added to the unemployment rolls. Everyone is a loser, including the taxpayers." 11 Damaging Programs Despite the administration's assurances about preserving the safety nets for the "truly needy," the record suggests that many low-income people will be seriously damaged by the budget cuts. About 70 percent of the 1982 budget cuts and 90 percent of those for 1983 affect the poor. With unemployment at the highest level since the Great Depres­ sion, public service jobs are being eliminated, the relatively successful Job Corps is being cut by one-third, and the employment service, which already was grossly under­ staffed, is being cut to one-half of its 1981 level. Medicaid is being weakened along with Aid to Families with Depen­ dent Children (30 percent cuts in 1983, 15 percent in 1982); food stamps for elderly and disabled families will be cut an average of 25 percent, child nutrition by 15 per­ cent (because of these cuts, an estimated 1.6 million fewer children will participate in school lunch programs); and legal aid for the poor is being eliminated. The effects of these and other deep cuts in programs for the poor are not likely to be offset by the New Federal­ ism, especially since the administration is reducing funds for the programs it plans to shift to the states. Indeed, the evidence suggests that few states are likely to take up the MAY-JUNE 1982 slack in federal program reductions, not because of any necessary callousness by states, but because the poor, blacks and other minorities, women, and the handicapped are not likely to be able to exert as much political influence with state and local governments as they have in Washing­ton. Moreover, hard-pressed state and local governments are likely to let some human resources and infrastructure ser­vices deteriorate in response to political pressures for activi­ties that provide short-run political gratification but neglect long-term needs. There is also a danger that states will reduce welfare benefits and worker protection in order to compete for industry. Finally, even if the states continue these services, they will have to raise sales and property taxes, which ordinarily are more regressive than the federal income taxes that previously paid for the services. The administration's policies clearly will cause great trouble for the poor and disadvantaged. According to a study by the Congressional Budget Office, 86 percent of all federal income tax benefits from the administration's tax program will go to families with incomes over $20,000 a year, while two-thirds of all the benefit reductions will be taken from families with incomes below $20,000. 12 When benefit and tax cuts are combined, the average family with income under $10,000 will lose $360 in benefits and gain only $120 in tax reductions, for a net loss of $240, not counting increases in social security taxes, state and local government user charges, and excise and property taxes, which will be proportionately higher for low-income groups. By contrast, families with incomes of $80,000 and above will gain $15,130. These losses for low-income people, especially the work­ ing poor, are compounded by other aspects of Reaganomics. The emphasis on removing government regulations will weaken protection from occupational safety and health hazards and discrimination. The unemployment effects from monetarism, high interest rates, and budget deficits will hit the poor, especially the working poor, very hard . The effect of high interest rates is to transfer income from the poor (who tend to be net borrowers) to high-income groups (who tend to be net lenders). In other words, if we are going through an economic readjustment period, as the administration contends, it is clear that the benefits and burdens of readjustment are being unequally shared. There is a growing concern that the administration is encouraging a meanness of spirit ; what Richard Munro termed "a decline in the ethic of common obligation .. . that makes our society a decent place to sustain family life, to reach our individual potential and to live at peace with each other. " 13 The National Council of Churches, censuring an administration for the first time in the council's history, said the administration's domestic and foreign policies "threaten the vision of America as the model and embodi­ment of a just and humane society."14 The Alternative The main features of an alternative to Reaganomics would include the following principles: A recognition that since there are no miracle cures for our economic prob­lems, these problems must be analyzed carefully and solu­tions must be developed from facts and analyses rather than ideological wishful thinking. The principal economic actors-representatives of the Congress, the administration, the Federal Reserve, and the private sector-must have a continuing forum to exchange ideas, achieve as much agree­ment as possible on the facts, gain a better understanding of private and public motives and intentions, and achieve as much agreement as possible on both the causes of prob­lems and the remedies for their amelioration. In addition, we must recognize that strong, competitive markets are compatible with strong, efficient government. Serious national problems will not be solved without cooperation between public and private institutions. Investment in plant and equipment must be stimulated, but this need is not incompatible with the government's investments in human resources and public infrastructures (transportation, communication, public services). Indeed, our deteriorating public services and transportation sys­tems, our inadequate support for basic research and tech­nology, and our inadequate commitment to education and training (especially of engineers, technicians, and skilled workers) and to research and development investments are important impediments to economic growth and pro­ductivity. The resources to solve our problems need not be a zero· sum game if we develop the policies and mechanisms to eliminate the waste from unemployment and capture the national dividend that could come from the relatively full use of our resources. Such a national dividend is a better way to balance the federal budget and to acquire the savings for productive investment than draconian cur­tailment of consumption by middle-income and low-income people. It is particularly questionable economics to argue that personal earnings are impediments to investment at a time when plant equipment and human resources are not fully used. The best way to increase investment is to increase its profitability by reducing interest rates, stimulating sales, and creating greater continuity and stability in economic policy, not by radical, untried, and questionable means like Reaganomics. Similarly, inflation is a serious national and international problem with complex, multiple causes. It is inefficient and wasteful to try to use unemployment to reduce inflationary pressures. An effective antiinflation policy requires an eclectic approach to deal with specific cost and price problems; monetary policy alone is not likely to be effec· tive in solving them. The alternative mix of policies to deal with inflation must therefore include monetary and fiscal policy, a general wage and price strategy based on con· sensus among the main public and private economic actors, innovative approaches that will provide greater economic flexibility, measures to insulate the economy as much as possible from such external shocks as rapid energy and food price increases, policies to deal with the problems of each major industry group, and measures to improve produc­tivity growth. Finally, national policy must be based on a concern for all people. We must give much greater attention to eco­nomic efficiency and competitiveness (and cooperation to solve international problems) in a world of scarce resources and global interdependence, but we should be prepared to sacrifice some economic efficiency in order to provide mini­mum levels of support for people who cannot or should not work. To some degree, these support programs are good national investments that will pay rich future dividends; even if they sacrifice some economic efficiency, we should continue them. A number of specific policies should be implemented immediately. First, a continuing national economic policy board, made up of the principal public and private eco­nomic actors, should develop a consensus on the causes and cures of our economic problems. The federal budget deficit should be reduced by rescinding the income tax cuts for 1983 and moving the 1982 cut forward (we need stimulus). The depreciation schedule should be amended to compensate businesses for depreciation and to avoid huge and unnecessary subsidies to corporations that do not need them. The tax code also should be amended to discourage speculation and unproductive investments. The real growth in defense spending should be reduced (and more attention given to the effectiveness of weapons systems, disarma­ment, and cooperation from our allies in shouldering a larger share of the defense burden). A payroll tax credit (which would not be inflationary or regressive but would provide employment incentives) should be substituted for part of the income tax cuts. In addition, policies should be developed to deal with the unique cost and price problems in the health, food, energy, defense, and financial sectors. The Federal Reserve Board should lower interest rates and loosen monetary constraints in exchange for reducing budget deficits. It would be much better economic policy to establish nominal levels of GNP growth as targets than to concentrate on unattainable monetary objectives. GNP growth, after all, should be the main objective of macroeco­nomic policy, but it cannot be achieved very effectively with monetary policy alone. Jobs, training, and income support programs should be restored to their original levels, in conformance with the administration's original promise to preserve safety nets and only cut out fraud, abuse, waste, and inefficiency. The concept of capital should be widened to include human, technical, public, and organizational capital, not just private physical capital. Notes l. Robert S. Chirinko and Robert Eisner, The Effects of Tax Policy on Investments (Washington, D.C.: Office of Tax Analysis, 1981). 2. For an excellent critique of monetarism, see Don Nichols, Mone­tarism: A Time for Retreat (Washington, D.C.: National Policy Ex­change, 1982). 3. The inconsistencies in the Reagan administration's targets for the growth in money and the GNP are illustrated by the following example: In 1980, the nominal GNP growth rate (8.9 percent) equaled the growth rate of money (6 .7 percent) plus the growth rate of the velocity of money (2.2 percent). The administration's projec­tions for 1982-1985 are as follows (in percentages): Implied Target ranges growth rate Nominal GNP for growth rate of velocity Year growth rate of money• of money 1982 12.8 3.0-5.5 9.8-7 .3 1983 12.4 2.5-5 .0 9 .9-7.4 1984 10.8 2.0-4.5 8.8-6.3 1985 9.8 1.5-4.0 8.3-5.8 •currency in circulation plus checkable deposits at commer­cial banks and thrift institutions. Source: Administration projections from the Office of Management and Budget, fiscal year 1982, budget revision, March 1981, Table 6, p. 13. The implied growth in the velocity of money to between 5.8 per­cent and 9 .8 percent is very unrealistic since there has never been a two-year period when the average growth of the velocity of money has exceeded 5 percent. These velocity increases would therefore have to defy all historical experience for the administration's ob­jectives to be realized. The velocity of money could be raised to these levels by increasing interest rates even higher than they are now, but such an action would surely make it difficult or impossible for the administration to achieve its real GNP growth targets. If the administration's inflation and interest rate objectives were achieved, the growth in the velocity of money would decline. 4. The factors accounting for the increase in the CPI of 13 .3 percent in 1979 (the rate was 4.8 percent in 1976) were as follows: new definition, 0.4 percent; energy, 2.7 percent; interest, 1.5 percent; and food, 1.6 percent for a total of 6.2 percent. These items would have brought the CPI in 1976 to 11 percent, not much lower than the 13.3 percent in 1979. The differences between 13.3 percent and 11 .0 percent could have been accounted for by the secondary effects of external factors increasing prices, such as higher fuel and interest costs paid by businesses and passed on in higher prices to consumers; see Arnold Packer and Nancy Barrett, "Inflation's New Math," Washington Post, March 24 , 1980, p. A23 . 5. Arthur Okun, "The Invisible Hand and the Inflationary Process," Challenge, January-February 1980, p. 10. 6. Between 1949 and 1979, federal employment increased by 850,000, or 41 percent, while state and local government employ­ment increased by 9.7 million, or 400 percent. Federal employment did not increase at all between 1969 and 1979; in fact, federal em­ployment declined from 6.9 percent of total U.S. employment in 1955 to 4.1 percent in 1979. Employment in state and local govern­ment, on the other hand, increased from 6.9 percent to 11.8 percent over the same period. Between 1958 and 1977, federal purchases of goods and services increased from $53.9 billion to $143.9 billion, or 167 percent, while state and local expenditures increased from $44.3 billion to $270 billion, or 500 percent. 7. Richard Munro, speech to the Association of National Adver­tisers, Media Workshop, New York City, February 25, 1982. 8. Walter Heller, "The Supply-Side Follies of 1981," Wall Street Journal, June 12, 1981. 9. Sar Levitan, speech to National League of Cities, Washington, D.C., February 28, 1982. 10. Spencer Rich, "Reagan's Workfare Program Failed in California, Report Reveals," Washington Post, March 30, 1981, p. Al. 11 . Munro, speech to the Association of National Advertisers. 12. U.S., Congress, Congressional Budget Office, An Analysis ofthe President's Budgetary Proposals for Fiscal Year 1983 (Washington, D.C.: Government Printing Office, February 1982). 13. Munro, speech to the Association of National Advertisers. 14. Quoted in the Washington Star, May 16, 1981, p. 1. MAY-JUNE 1982 Public Opinion Regarding Illegal Aliens in Texas Robert A. Peterson George Kozmetsky In recent years, the number of undocumented Mexican workers in the United States has been on the rise. 1 The im­plications of such increases have a direct bearing on a vari­ety of national and state policies ranging from labor policies to agricultural policies to equal opportunity. Partially in response to the increasing number of un­ documented Mexican workers, President Ronald Reagan proposed, in July 1981, numerous changes in U.S. immigra­ tion policies. In commenting upon the proposed changes, Attorney General William French Smith stated that the administration was proposing five related initiatives to cur­ tail illegal immigration: • increased enforcement of existing immigration and fair labor standard Jaws; • passage of a Jaw imposing penalties against employers who knowingly hire undocumented Mexican work­ers; • development of a new experimental temporary worker program for up to 50,000 Mexican nationals an­nually; • provision of legal status for qualifying undocumented Mexican workers currently residing in the United States; and • promulgation of international cooperation within the western hemisphere to enforce immigration laws and discourage illegal migration.2 In late 1981 Governor William P. Clements, Jr., ap­pointed a task force to investigate the number and loca­tion of undocumented Mexican workers in Texas and the types of jobs they hold. Despite the importance of the illegal alien problem, there is little factual information on Robert A. Peterson is Senior Research Fellow at the Institute for Constructive Capitalism and Sam Barshop Professor of Marketing Administration, University of Texas at Austin. George Kozmetsky is Dean of the College ofBusiness Administration and the Graduate School of Business and Director of the Institute for Constructive Capitalism, University of Texas at Austin. the topic. Much of the evidence used to support or refute positions in the controversy has been anecdotal. Premises Table 1 Survey Responses Identifying Illegal Aliens As the Most Important Problem Facing the State Demographic characteristic Percentage response Sex Male 10.5 Female 10.2 Age 18-24 11.6 25-35 10.7 36-49 9.9 50-64 11.3 65 or older 7.5 Marital status Married 11.0 Not married 8.1 Education Some grade or high school 8.7 High school graduate 10.9 Some college, trade, or business school 13.4 College graduate or more 7 .5 Annual household income Under $6,000 10.6 $6,000-9,999 8.8 $ 10 ,000-14,999 13 .9 $15,000-19,999 6.4 $20,000-29,999 10.7 $30,000-39,999 10.6 $40,000 or more 9.9 Ethnicity Anglo or white 10.9 Black 2.0 Mexican-American 14.3 Asian or other 4.8 Length of residence in Texas Less than I year 2 .3 1-5 years 8.6 6-10 years 6.3 Over I 0 years 11.0 Residential location SMSA IO.I Non-SMSA, over 10,000 I I.I Non-SMSA, under I 0,000 11.9 Total sample 10.4 and conclusions alike tend to be based on an individual's were the most likely survey participants to respond with perceptions of what the public may believe, think, or want. such an answer (see table 1 ). Before any policy decisions are undertaken or any sub­stantive implications are set forth on the illegal alien prob­State Involvement in the I/legal Alien Problem lem, representative input from the general public should be evaluated. Survey participants were also asked about the extent to which the state should be involved in thirteen problem Survey on Broad Economic and Political Issues In a recent survey, Facing the State of Texas In August 1981 the concerns and opinions of Texans most Texans said the state regarding certain broad economic and political issues facing the state were surveyed and quantified.3 Telephone inter­views were conducted with a representative sample of 2,041 should increase efforts to adult male and female heads of households selected from all areas of Texas. Because of the research methods used, survey results are projectable to all geographical regions in prevent illegal immigration. the state. Of immediate interest are the answers survey participants gave to three questions relating to the illegal areas, including preventing illegal immigration. Of the 2,037 alien problem. Survey participants were asked what they thought would be the single most important problem facing the state of Texas during the coming years. Survey partici­pants were free to respond to this open-ended question with any answer they deemed appro­priate; no answers were sug­gested by the interviewers. Most Important Problem Of the 1,668 survey partici­pants who answered this ques­tion, 10.4 percent specifically mentioned illegal aliens as the most important problem facing the state. This subject was the fourth most frequently men­tioned problem. Only elected officials (mentioned by I 7 .0 per­cent of the respondents), over­population and growth (I 5.7 percent), and inflation and fi­nancial concerns (14.6 percent) were mentioned more frequent­ly. When responses to a question about the second most impor­tant problem were included in the analysis, nearly one out of five respondents (19 percent) believed the issue of illegal aliens was an important problem facing the state. Blacks were the least likely survey participants to mention illegal aliens as a prob­lem, while Mexican-Americans individuals responding, 83 percent said that the state should Table 2 Survey Responses Regarding State Involvement in Increasing Efforts to Prevent Illegal Immigration (Percentage responses) Probably Definitely Definitely Probably not no t Demographic characteristic involved involved Uncertain involved involved Sex Ma le 66.0 Female 68.6 Age 18-24 25-35 36-49 50-64 65 or older Marital status Married Not married Education Some grade or high school High school graduate Some college, trade, or business school College graduate or more Annual household income Under $6,000 $6,000-9,999 $ 10,000-1 4 ,999 $I 5,000-19,999 $20,000-29 ,999 $ 30,000-39 ,999 $40JOOO or more Ethnicity Anglo or white Black Mexican-American Asian or other Length of residence in Texas Less than 1 year 1-5 years 6-10 years Over l 0 years Residential location SMSA Non-SMSA, over 10,000 Non-SMSA, under 10,000 66.4 64.6 67.8 69.6 71.2 65.7 71.0 68.1 72 .2 69.8 59.2 70.l 66.7 7 1. 5 67 .8 64.9 67.7 63.3 70.4 69.8 52.9 74.1 65.6 63.3 59.8 68.2 67.1 68.0 67.6 16 .8 14.7 16.9 17 .5 l 5.6 14.5 11.7 16.l I 5.0 12 .7 10.9 I 5.5 22 .7 12.5 11.8 12.0 20.4 17 .3 16 .l 12 .8 18.3 15.2 20.4 7.4 21.3 18.3 24.6 14.8 15 .7 13 .2 18.5 3.1 4.5 2.6 3. 3 3.4 4 .2 7.0 4.1 3.4 3.9 3.7 4.3 3.0 3.9 7 .7 4 .0 3.8 1.6 2.2 3.9 3.0 5.2 6.3 0.0 2.9 3.5 1.8 4.0 3.9 2.6 4.5 6.7 6 .5 6.4 7.9 7.2 4 .0 6.1 7.0 5.5 8.3 7.3 5.2 6.6 6.2 8.8 5.3 7.4 6.6 5.3 7 .8 6.1 5.8 9.4 3.7 5.5 8.0 6.4 6.5 6.5 11.2 3.6 7.4 5.7 7.7 6.7 6.0 7.7 4.0 7. 1 5.1 7.0 5.9 5.2 8.5 7.3 5.0 7.4 5.7 4.3 6.5 8.9 5.3 6.4 11.0 14.8 4.7 6.9 7.4 6.5 6.8 5.0 5.8 MAY-JUNE 1982 definitely or probably be involved in increasing efforts to prevent illegal aliens from entering Texas. Indeed, over two­thirds of the survey participants stated that the state should definitely be involved in such an endeavor. More than 7 5 percent of the respondents in each demographic subgroup, except the Mexican-Americans, responded that the state should be involved in preventing illegal aliens from entering Texas (see table 2). The survey participants' relatively strong opinions about state involvement in preventing illegal immigration can be placed in better prespective by considering answers regard­ing the remaining twelve problem areas. Of the thirteen areas queried, the illegal aliens issue, on the average, ranked sixth. Five problem areas were perceived as needing more state involvement, while seven were perceived as requiring a lesser degree of state involvement than the illegal alien problem.4 Documented Guest Worker Plan Toward the end of the interview, survey participants were asked whether the state should develop a documented guest worker plan. Opinions on this question were somewhat po­larized. Of the 2,038 individuals responding, approximately 30 percent believed that the state definitely should develop such a plan and another 30 percent be­lieved that the state definitely should not develop such a plan. Slightly more than half of the individuals interviewed (5 5 per­cent) responded that the state should either definitely or prob­ably develop a documented guest worker plan. The patterns of responses were relatively similar across the demographic subgroups (see ta­ble 3). Survey participants with incomes under $6,000 were not as favorable toward development of a plan as were other demo­graphic subgroups; only 41.5 per percent of this subgroup stated that a documented guest worker plan should be developed, while 39. I percent said that such a plan should definitely not be de­veloped. Of the survey partici­pants with some grade school or high school education, 45 per­cent were in favor of a docu­mented guest worker plan while 39 percent were opposed to such a plan. Survey participants with college degrees and those with household incomes greater than $40,000 were relatively more favorable toward developing a plan allowing documented guest workers; approximately two-thirds of the individuals in these groups favored such a plan. To provide more insights into survey participants' opinions regarding a documented guest worker plan, re­sponses to this question were compared to those given to the question of state involvement. Of the survey partici­pants who responded that the state should definitely be involved in preventing illegal aliens from entering Texas (67 percent of the sample), 48 percent said that a docu­mented guest worker plan either definitely or probably should be developed. Another 48 percent of those who definitely wanted the state involved in preventing illegal immigration responded that the state should either definite­ly or probably not develop a documented guest worker plan. Of the survey participants who said the state probably should be involved in preventing illegal aliens from entering Texas, 71 percent responded that the state should definite­ly or probably develop a documented guest worker plan. Of the entire sample, 25 percent indicated that the state should definitely be involved in preventing illegal aliens Table 3 Survey Responses toward Developing a State Documented Guest Worker Plan (Percentage responses) Probably Definitely Definitely Probably not not Demographic characteristic develop develop Uncertain develop develop Sex Male Female Age 18-24 25-35 36-49 50-64 65 or older 33.0 27.2 23.4 27.5 32.2 35.3 32.9 Marital status Married 30.4 Not married 30.2 Education Some grade or high school 21.8 High school graduate 28.4 Some college, trade, or business school 30.5 College graduate or more 36.2 23 .0 26.5 21.9 26.3 25 .0 23.9 24.5 25.6 21.8 23.1 21.0 25.9 28.5 2.4 4.5 0 .7 2.0 3.4 4.4 10.0 3.5 2.7 5.4 4.2 2.2 2.8 11.7 11.3 17.5 13.0 10.7 6.8 8.9 10.9 13.4 11.2 11.0 12.8 10.8 29.9 30.5 36.5 31.2 28.7 29.6 23.7 29.6 31.9 38.5 35.4 28.6 21.7 Annual household income Under $ 6,000 $6,000-9,999 $ 10 ,000-14,999 $ 15 ,000-19 ,999 $20,000-2 9,999 $30,000-39 ,999 40,000 or more Ethnicity Anglo or white Black Mexican-American Asian or other 24.3 17.2 8.8 10 .6 39.1 26.2 22 .2 5.2 12.2 34.2 30.2 26.1 2.2 12.3 29.2 25 .0 27.4 2.0 16.1 29.5 32 .3 23.4 2.3 10 .6 31.4 . 29.3 33.9 2.5 7 .6 26.7 39.1 24 .2 3.0 10.9 22.8 31.0 25.6 3.5 10.7 29.2 28.5 21.5 5.3 11.6 33.1 26.8 23.7 2.4 14.8 32.3 40.7 22.2 0 7.4 29.6 Length of residence in Texas Less than 1 year 25 .5 25.1 1-5 years 31.6 32 .l 6-10 years 29.9 26.3 30.1 24.0 0 er 0 years:...,.----------· Residential location SMSA 30.5 24.4 3.2 11.7 30.2 Non-SMSA, over 10,000 27.1 29.9 3.5 10.4 29.1 Non-SMSA, under 10,000 29.8 22.7 5.2 11.4 30.9 from entering Texas but should definitely not develop a state should definitely be involved in preventing illegal documented guest worker plan. aliens from entering Texas but should definitely not de­ Conclusions The Texas public generally does perceive illegal aliens as a relatively important state problem. A large majority of the individuals interviewed, regardless of their demo­graphic characteristics, believed that the state should in­creasingly be involved in efforts to prevent illegal aliens from entering Texas. At the same time, though, opinion was nearly equally divided over whether the state should develop a plan that permits Mexican citizens to work in the state legally. A slight majority of the survey partici­pants, nearly 5 5 percent, favored such a plan. Support for a documented guest worker plan was relatively stronger among those survey participants who were college graduates or whose annual household incomes were $40,000 or more. A quarter of the individuals interviewed believed that the velop a documented guest worker plan. Notes 1. See, for example, Niles Hansen , The Border Economy (Austin : University of Texas Press, 1981). 2. Testimony of William French Smith before the Senate Subcom­mittee on Immigration and Refugee Policy and the House Sub­committee on Immigration, Refugees, and International Law, July 30, 1981, pp. 4-5. 3. Details are available in Concerns, Issues and Attitudes: A Texas Survey (Austin: Institute for Constructive Capitalism, University of Texas, 1981). 4. Survey participants were most predisposed toward state involve­ment in improving existing highways and ensuring adequate water supplies. They were least predisposed toward state involvement in developing deepwater ocean shipping ports and in encouraging sales of state crops to foreign countries. 1982 DIRECTORY OF TEXAS MANUFACTURERS Up-to-date information on more than 14,500 manufacturers. 1 ALPHABETICAL BY NAME GEOGRAPHICAL BY CITY Complete information for each company : location mailing address phone number type of company number of employees chief officer sales & purchasing agents product listings 2 TYPE OF PRODUCT Complete plant information: location phone chief officers with phone numbers sales or purchasing agents products manufactured INDEX OF PRODUCTS with Standard Industrial Classification numbers $80/set. Texas residents add 5% sales tax. BUREAU OF BUSINESS RESEARCH• BOX 7459 •AUSTIN, TEXAS 78712 MAY-JUNE 1982 The Changing Nature of Home Ownership Arthur Wright The nature of single-family home ownership started changing substantially during the 1970s. Changes in house­hold characteristics, age composition of the population, and new life-styles have all had an effect, but inflation has been responsible for most of the adjustments in the housing sec­tor. Many of these trends will continue into the 1980s and have a major effect on society. The Costs of Home Ownership The rapid escalation in home prices has resulted in an in­ crease in both the amount of capital required to buy a property and the annual costs of operating the structure and retiring the mortgage debt. Between 1970 and 1981, the median price of a new home nationwide rose from $23,400 to approximately $68,900, while effective mort­ gage interest rates rose from 8.5 percent to 14.8 percent (see table 1). The two forces exerted a multiple effect on the size of the monthly payments. Typical 1970 new home prices and mortgage terms resulted in monthly house pay­ ments of about $168 a month, but by 1981 the monthly payments had jumped to $768. Some of the price increase was the result of larger units with such amenities as double garages, central air conditioning, carpeting, and dishwashers that were not found as frequently in the earlier houses. The final results, however, are that between 1970 and 1981 home prices rose 194 percent, mortgage rates 74 percent, and the monthly house payments 357 percent. Housing costs in Texas are somewhat lower than they are for the nation as a whole, but the difference may be narrowing as the general economic activity of the state con­tinues to attract people from the rest of the nation. In 1973, the average sale price of an existing single-family home in Texas was $25,700, 78 percent of the national average sale price (see table 2). By 1981, the average sale price of homes in Texas rose 169 percent to $69,000, while the national average price rose 137 percent to $78,300. While housing costs in Texas are generally still below the Arthur Wright is Research Economist, Texas Real Estate Research Center, Texas A&M University. national average, housing costs in some of the most rapidly growing Texas cities are considerably above the national average. Many of the housing problems and adjustments of the 1980s will be similar in both Texas and the nation. Inflation has increased the wealth of many real estate owners, but, at the same time, it has increased the relative importance of assuring that the purchaser's annual income will handle all current expenses. If expenses exceed income, the owner could be forced to sell the property or at least provide supplemental funding even though the market value may continue to rise because of expectations of inflation. This shift in emphasis from net worth to income considera­tions is also reflected in the home buyers' problems of af­fordability. In the past, new home buyers were primarily concerned with making the initial down payment; now their major concern is in making monthly payments. Not only has the absolute price of new housing risen during the last few decades, but a larger proportion of household in­come is required to service the payment. Shortly after World War II, only 13 percent of the typical household's in- Table 1 Housing Costs in the United States Median Mortgage price of a interest rate Monthly Monthly payments/ new home (in per­ paymen ts• household income Date (in dollars) centage) (in dollars) (in percentage) 1940 6,165 4 .7 39 21.6 19 50 9,400 4 .6 51 13.0 1960 16,700 6.0 103 18.7 1970 23,400 8.5 168 18.3 1980 64,600 12 .9 636 33.7 1981 68,900 14.8 768 37. 1 *Consists of principal payment, interest, insurance, and property tax. Percentage down payment varies each year between 23 per­cent and 34 percent. Sources: U.S. Department of Commerce, Bureau of the Census, New One-Family Houses Sold and for Sale, Series C-2 5 (Wash­ington, D.C.: Government Printing Office, various issues); Federal Home Loan Bank Board, News (Washington, D.C.: FHLBB, various issues); and Council of Economic Advisors, Economic Indicators (Washington, D.C.: Government Printing Office, various issues). TEXAS BUSINESS REVIEW come went for the monthly new house payments of princi­pal, interest, insurance, and taxes. By 1981 this rate ex­ceeded 37 percent. Changing Household Characteristics Although the portion of household income going for shelter costs has risen substantially during the past decades, it will not likely be coming down-for two reasons. First, a growing share of our population is entering the home buy­ing age. The nation's 1990 population will be 29 percent greater than the 1970 levels, but the population between the ages of 25 and 34, which is the primary first-time home buying age, will rise 63 percent in that period. Although some people in that age bracket have already purchased a home, demand for housing will continue to be strong during the 1980s. Second, in spite of the higher proportion of income going for housing expenditures, the ratio is still low relative to expenditure patterns in other countries. In many parts of Europe and Japan nearly 5 0 percent of in­come is spent on housing. This fact suggests that people are willing to make a rather large sacrifice in order to have homes of their own. In spite of this "affordability crisis," owner-occupied housing units are presently at an all-time high (see table 3). During the 1980s this ratio is expected to rise as the number of people preferring home ownership increases, and, perhaps, as people better understand housing econom­ics. In the past, housing was primarily expected to provide shelter with some privacy and pride of ownership; today, however, housing is increasingly perceived as providing an investment against inflation and a tax shelter for some of the owners' incomes. The nature of housing in the future will change as life­styles, social needs, and economic conditions change; con­struction and financing costs will likely remain high. House­holds are becoming smaller, older, and more mobile. The average size of a household is expected to shrink 3 2 percent from 3.7 to 2.5 between 1940 and 1990 (see table 4). Thus, Table 2 Average Sale Price of Existing Single-Family Homes in Texas and the United States Year Texas United States 197 3 25,700 32,90 0 1974 29,900 35 ,800 1975 32,500 39,0 00 1976 35,200 42,200 1977 39 ,900 4 7,900 1978 45,700 55,500 1979 52,900 64 ,200 1980 60,800 72,800 198 1 69 ,0 00 78,000 Sources: Arthur Wright, Housing Sales in Texas: 1973-1 980 (College Station: Texas Real Estate Research Center, Texas A&M Univer· sity, 1981), p. 2; and National Association of Realtors, Existing Home Sales (Washington, D.C.: NAR, various annual and month­ly issues). the space in each dwelling can decline considerably. As a result future homes will be considerably smaller, perhaps averaging 1, I00 square feet compared to the current 1,600. Attached units in some type of high-density arrangement­such as cluster homes, town houses, patio homes, and con­dominiums-will be more common. Future Financing and Capital Formation The challenge to the real estate industry during the 1980s will be to adjust to these changing conditions by de- In the future, households will be smaller, older, and more mobile. veloping mortgage instruments that provide an adequate supply of capital to the housing industry for future home buyers and to lower the entry barrier for first-time home buyers by developing new financing instruments. The shared-appreciation mortgage and the graduated-payment mortgage are two recent efforts in this direction. During the 1980s additional capital will be demanded by virtually all sectors of our society. Huge sums will be required to re­vitalize the efficiency of many manufacturing industries; government expenditures will require capital to improve national security and care for the aged ; commercial and consumer demands for capital are also expected to grow because of an expanding population. The housing industry has to compete with these other segments of the economy for an adequate supply of funds. During the past few years the capital market has become much more responsive to changing conditions as savers and capital suppliers have become more aware of the available yields of various alternative money market instruments. No longer are they willing to leave funds in the local savings and loan association unless that yield is comparable to that Table 3 Percentage of Owner-Occupied Housing Units in the United States Date Percentage 19 40 43.6 1950 55 .0 1960 61.9 1970 64.2 1980 64.4 1990 70-7 5. *Estimated. Source: U.S. Department of Commerce, Bureau of the Census, Census of Population and Housing (Washington, D.C.: Govern­ment Pri nting Office, various years). MAY-JUNE 1982 obtained through other instruments. Consequently, funds for housing finance no longer hold a competitive advantage. Savers and capital suppliers are now much more aware of the effects of inflation and taxation upon the purchasing power of their savings. In the future their compensation for providing capital through savings will have to be consistent­ly greater than the inflation rate. During the last twenty years suppliers of capital have been severely penalized for making long-term loans at fixed interest rates by being repaid in cheaper dollars of reduced purchasing power. In the future, funds will probably not continue to be available under this arrangement. Inflation hurts the capital formation process, but volatile inflation is even worse because it creates additional un­certainty and risk. This additional risk must be compensat­ed for to induce savings and lending activities. In the past when the inflation rate was relatively low and stable, lend­ing institutions could borrow money on a short-term basis and lend the funds out on long-term thirty-year mortgages. Because the inflation rate has become more volatile in re­cent years, the lenders' cost of money now varies weekly. The result has been a pronounced shift away from the tra­ditional thirty-year mortgage loan with a fixed interest rate to several alternative mortgage instruments. These instru­ments shift the risk of interest rate changes from the lender to the borrower by allowing the interest rate on the mort­gage to vary with the changing cost of money. Borrowers generally can choose who will pay for this ad­ditional risk. The fixed interest rate mortgage is frequently available at about 0.50 percent higher than the initial rate charged by the alternative mortgage instruments. In effect, lenders want additional compensation if they are to assume additional risk. Borrowers are frequently hesitant to pay the premium of the fixed-rate loan but are also reluctant to assume the risk associated with the alternative mortgage instruments. The borrowers' alternatives are limited: they can borrow under the new rates or not borrow at all; bor­rowing under the old rates is no longer an alternative. Conclusion The days of relatively cheap land, food, capital, and shel­ter are apparently past. Most people will likely be spending a larger portion of their incomes on necessities than they did in the 1960s and 1970s. In spite of this, home owner- Table 4 Average Size of U.S. Households Date Persons 1940 3.7 1950 3.4 1960 3.3 1970 3.1 1980 2.8 1990 2.5* *Estimated. Source: Same as table 4. ship will still be one of the best investments most house­holds can make. During the 1970s the annual appreciation rates of most homes was approximately 11 percent in the United States and more than 13 percent in Texas. The ap­preciation rate should exceed inflation levels during most of the 1980s because of the growing population, the increased number of people in the home-buying age range, and the in­creased perception that home ownership provides some hedge against inflation and some tax advantages, as well as shelter and pride of ownership. The Southwest will probab­ly have higher appreciation rates than will some other re­gions of the nation. Atlases. For research, reference, or just plain curiosity. Atlas of Texas Stanley A. Arbingast et al. 1976. 1 79 pages. 11" x 14" spiral bound. Sketches by Buck Schiwetz and Charles Beckendorf; many color maps. $25. "Among state atlases, this volume is second to none." -Southwestern Historical Quarterly "An almost inexhaustible mine of factual informa­tion about the state, its history, its development, its resources, and its people." -The Cattleman Atlas of Mexico Stanley A. Arbingast et al. 1975. 164 pages. 11" x 14" spiral bound. $20. "An excellent compilation of over 200 maps plus tables." -The American Cartographer "All school libraries should have it and all Mexi­canists will want it." -journal of Geography Atlas of Central America Stanley A. Arbingast et al. 1979. 70 pages. 11" x 14" spiral bound. $18. "Very well done." -North American Congress on Latin America "The only cartographic treatment of the Central American region published in English since 1955." -The American Cartographer Bureau of Business Research P.O. Box 7459 • Austin, Texas 78712 ,,j Inflation, Interest, and the Financial Return of Home Ownership Despite the recent rise in interest rates and prices, those who can afford to purchase a residence can still obtain a positive financial gain. A typical Texas house purchase ($83,333)1 results in a gain of about $35 ,6872 at the end of a thirty-year mortgage period at 16 percent interest. At lower mortgage rates the gain is larger; for example, a 10 percent rate will yield an estimated gain of $75,677. The financial return is positive at rates from 10 percent to 16 percent. Even though most house purchasers will not totally retire their mortgages but will pay them off early because of a sale, refinancing, or some other arrange­ment, the home sellers will still probably make financial gains if the mortgage terms end after the first five years or at any of the interim five-year periods. The estimated return on houses priced between $55 ,555 and $167 ,667 at a 16 percent interest rate ranges from a modest loss of $731 to a gain of approximately $549,148. The estimated gain increases with the price of the prop­erty. The Method of Estimating Financial Gain The foregoing conclusions are the results of the compu­tations of the net returns of home ownership. These returns and the costs of home ownership were computed for five home prices ($55,555, $83,333, $111,111, $138,889, and $166,667) and at mortgage interest rates from 10 percent through 16 percent in 1 percent increments. 3 The purchas­ing unit was assumed to be the traditional family of four (a husband, wife, and two dependent children aged 12 years and 6 years) with an income level, at the time of purchase, just adequate to service the debt and maintain the family standard of living. All income to the purchasing unit was assumed to be earned income. The down payment was assumed to be 10 percent of the purchase price. The remaining 90 percent was computed as if it were financed with a thirty-year amortized mortgage. This family income was calculated to be such that the payment of principal, interest, taxes, and insurance was 25 percent of the total. This income was allowed to increase at a compound esti- V. Howard Savage mated rate over time,4 and the children were assumed to become independent at age 22. These assumptions and calculations resulted in different income levels for property of different prices and different incomes for property at the same price as the rate of interest varied. The different purchase incomes resulted in a wider diversity of income over time because of the compounding process. The Return from Purchasing a Residence Many returns, both real and imagined, arise from owning one's own residence. Most of these are intangible and can­not be measured. Three components of the return to ownership, however, can be estimated: appreciation in value, rental savings, and income tax savings. Appreciation on the variously priced residences was estimated on a net basis (the expected price increase over time on comparable property less an allowance for real depreciation). 5 Since most residence purchasers apparently increase their outlay for shelter when they buy, rent was estimated indepen­dently as a percentage of gross income and was increased by an inflation factor. 6 Estimating tax savings was more complex. Both interest and taxes on a residence are deductible from taxable in­come and can reduce tax liability by an amount equal to the income tax bracket applied to the estimated property tax and interest payments. This relatively simple procedure, however, is complicated by the existence of a zero tax bracket, the estimation of other deductions, and the com­putation of the most likely tax bracket each year. Tax savings are dependent on each of these factors, and each was considered.7 Recent revisions in the federal income tax prompted by the Reagan tax cut cloud this computation even further. While the application of the new law may make minor changes in the estimated amounts of profit from home ownership, it should not change the basic results. The Costs of Ownership V. Howard Savage is Associate Professor ofFinance and Economics, The costs of ownership also involve some intangibles Southwest Texas State University. that cannot be measured-for example, the lack of flexi- MAY-JUNE 1982 bility and the illiquidity of assets. The costs that can be estimated are the down payment and the estimated compound after-tax yield on this down payment, the yearly sum of the principal and interest payments, the yearly property taxes, yearly maintenance, and insurance. The payment for principal and interest was constant over the mortgage under the assumption of a fixed interest rate on a thirty-year note. (Rollover notes and other new methods of mortgage financing were not considered.) Property taxes, maintenance, and insurance were estimated to increase at a compound rate. The estimated rate of increase was based on the historical trends in various costs. (This historical period, which covers twenty years, includes the recent very unsettled mortgage situation and a more settled previous time.) The value of the down payment was com­puted to be the base amount plus a compound interest rate over time. The appropriate interest was considered to be about 2 percent less than the mortgage rate. The net re­turn was the down payment at compound interest minus estimated income taxes. 8 Net Financial Gain The net financial gain for the various classes of resi­dences was computed in five-year increments based on Financial Gain Derived from Home Ownership $55,555 house $83,333 house $111 ,111 house $138,889 house $166,667 house Minimum Minimum Minimum Minimum Minimum Interest Term of qualifying Gain qualifying Gain qualifying Gain qualifying Gain qualifying Gain rate mortgage income or loss income or loss inco me or loss income or loss income or loss (percentage) (in years) (in dollars) (in dollars) (in dollars) (in dollars) (in dollars) (in dollars) (in dollars) (in dollars) (in dollars) (in dollars) 10 5 26,160 556 39,264 4,553 51 ,744 8,283 65,472 15,013 78,528 19,637 10 3,384 17 ,236 24,924 49,782 53,111 15 4,960 30,957 51 ,785 72,105 131 ,2 18 20 4,11 8 47 ,257 82,996 126,690 172,137 25 3,739 61 ,848 134,954 208,408 272,783 30 2,767 76,667 196,064 296,947 404,405 11 s 27,984 537 41,952 5,412 55,294 7,283 69,936 15,479 83,904 18,958 10 37 16,045 23,858 46,394 52,586 15 2,629 28,943 48,269 87,917 102,026 20 620 43,689 89,607 175,843 176,329 25 -1,552 55,844 144,673 209,951 283,328 30 3,318 68,211 215,324 350,207 426,479 12 5 29,808 484 44,688 5,854 58,992 7,933 75,544 14,618 89,434 18,384 10 1,768 25,050 2 1,734 42 ,2 38 52,320 I 5 2,838 21 ,696 51 ,436 84,608 103,647 20 204 36,62 5 90,094 148,686 181 ,2 12 25 -4,059 48,056 149,7 13 242 ,416 299,445 30 -7,200 57 ,5 45 227,710 358,589 448,666 13 5 31,680 582 47,567 3,963 62,688 8,327 79,200 11,949 94,992 18,232 10 1,698 11 ,361 26,319 40,169 52,965 15 5,705 26,708 59,580 90,654 113,614 20 848 35 ,124 97,918 151,093 187,658 25 -4,297 49,545 164,281 250,287 307,555 30 6,979 58,621 253,174 375,875 471,182 14 5 33,569 3,809 50,352 2,687 66,313 11 ,415 83,904 14,507 100,656 18,102 10 1,279 9,604 29,450 44,689 53,680 I 5 5,892 18,772 57 ,770 90,949 107,9 19 20 427 30,022 103,182 162,777 193,160 25 7,874 29,31 1 172,746 269,332 319,670 30 -12,311 47 ,6 54 267,796 406,850 496,759 15 s 35 ,471 736 53,154 2,068 70,535 12,313 88,704 15,638 106,416 10 1,689 8,541 26,945 45,546 IS 2,006 17,311 57,056 92,076 20 407 28,592 104,299 164,892 25 8,642 41,450 179,193 274,827 30 -15,514 47,196 282,119 428,942 16 s 37 ,392 188 56,112 983 74,437 8,469 93,504 14,707 112 ,176 18,643 10 3,2 45 5,872 28,229 45 ,827 56,822 15 5,585 13,017 59 ,679 174,345 116,226 20 5,491 22,481 110,801 182,087 209,767 25 659 33,7 49 189,382 353,124 433,154 30 731 35 ,687 299,842 452,633 549,148 Sources: Computed from data from the University Savings and Loan in Austin, the Federal Home Loan Bank, the Internal Revenue Service, Federal Tax Course (Englewood Cliffs, N.J .: Prentice-Hall, 1980), and Economic R eport of the President (Washington, D.C.: Government Printing Office, January 1981). total returns minus total costs plus the remaining debt (see table). 9 The modestly priced residence ($55,555) yields a low financial gain from ownership for each interest class. In fact, the owner could suffer a loss. The range of gain is from a high of $5,892 after fifteen years of ownership at 14 percent to $204 after twenty years at 12 percent. The range of loss is from $37 after ten years of ownership at 11 percent to $15,514 after thirty years at 15 percent. Given the assumption that no more than 25 percent of in­come may be applied to the house payment, the required amount of income for the modestly priced house rises from $26,160 a year at 10 percent to $37,392 at 16 percent. The rising cost of finance effectively limits the market as it reduces the number of prospective buyers. Lack of a sub­stantial tax savings over the mortgage term, lower total in­crease in value, and the reduced value of imputed rent re­duce the possibility of gain from ownership of the $55,555 dwelling. Each of these items is related to income levels, and lower incomes entail fewer benefits for the modestly priced dwelling. Owning a house at the next price level ($83,333) entails no losses, although the gains vary widely. As the interest rate rises the net financial gain at this price level declines. The range of gain is from $35,687 after thirty years at a 16 percent mortgage rate to $76,677 gain after thirty years at 10 percent. The gain is positive at each of the interim five-year periods and increases over the mortgage term. The income necessary to service the assumed debt at this price category increases from $39,264 to $53,154. The increase in price, coupled with the increase in interest, severely lim­ its the housing market. Given current tax laws, the level of estimated imputed rent, and the estimated advance in the nominal value of the property, a housing investment is still attractive, however. At the next price level ( $111 , 111) the estimated gain from ownership not only is positive at every interest rate considered, but also displays what would appear to be irrational behavior: the absolute gain increases directly with the assumed interest rate. This increase occurs despite the increasing mortgage rates and is a result of the income level required to purchase a dwelling in this price range. Increased income causes increased tax savings and increased amounts of imputed rent that more than compensate for the increase in interest costs. This compensation amounts to about $100,000 as rates rise from 10 percent to 16 percent in this price category. This amount would be even greater, but not by as much as might appear, if the higher income level purchased a dwelling of the same price at a lower interest rate. As interest rates rise, however, only a portion is paid by the purchaser and the balance is a tax­ payer burden, because interest payments are deducted from taxable income. In the higher income group an increase in interest of more than I percent only increases the after-tax interest rate by 0.50 percent. The gain actually ranged from a modest $7,283 in five years at 11 percent to about $300,000 in thirty years at 16 percent. The first five-year gain varies somewhat, but the tendency is still toward increased gain with increased income. The additional benefit that accrues to higher incomes and higher-priced properties is also evident in the gain to be derived from owning housing in the $138,889 and $166,667 price categories. This gain increases to about $450,000 on the $138,889 dwelling and to about $550,000 on the $166,667 dwelling. The maximum gain occurs in both cases at the end of the mortgage period and at the highest rate of interest. These gains exceed gains in any other price category. The increase in interest does not preclude gain from those who can afford to pay. It does, however, restrict the number of purchasers who can afford to pay. The income needed to purchase a $138 ,889 dwelling rises from $65 ,472 if the mortgage rate is 10 percent to $93 ,504 if the rate of interest is 16 percent. On the $166,667 house the increase is from $75,528 if the interest is 10 percent to $112,176 at 16 percent. The increased income levels required very distinctly limit the market. Notes 1. The typical house purchase is, of course, a myth, but the data suggested that this figure is reasonable. The average cost of housing, both new and used, as reported in The U.S. Federal Home Loan Board Bank Journal 4 (September 1981), was about $80,000; the price used here is not significantly different from this number. The above data are reinforced by the classified sections of major news­papers in Houston, Dallas, San Antonio, Fort Worth, and Austin. 2. This gain, and all the subsequent gains computed for this paper, was computed before capital gains taxes were deducted. Under most circumstances the net gain (on the 1981 basis) is 80 percent of the gross gain. 3. The mortgage market has been extremely volatile recently. Al­though mortgage interest rates have recently been greater than the highest rate considered in this analysis, the basic results are not altered by this difference. 4. Income was extrapolated at its twenty-year historical trend. This procedure resulted in a rounded-off compound rate of increase of 7.4 percent. Source for these data was Economic Report of the President (Washington, D.C.: Government Printing Office, January 1981). 5. The rate of appreciation was computed on the basis of gross appreciation minus estimated depreciation. These rates are 5.5 per­cent -2.2 percent =net appreciation of 3.3 percent (rounded off). Source for appreciation data : Economic Report of the President. Source for depreciation data : Federal Tax Handbook (Englewood Cliffs, N.1. : Prentice-Hall, I 980), average depreciation rate table. 6. Imputed rent was calculated on the ratio of increase in the Eco­nomic Report of the President. 7. The change in the determinants of the tax bracket and the zero bracket amount are lumpy in that they will be constant for years and then will change. Other deductions were computed from Inter­nal Revenue Service Statistics ofIncome, Individual Income Tax Re· turns, 1973 (Washington, D.C.: Government Printing Office, 1976). 8. Taxes, maintenance, and insurance were computed on the basis of a historical trend. Beginning data on taxes and insurance were obtained from the University Savings and Loan in Austin; mainte­nance numbers from recent experience. The rate of growth in taxes was estimated to be 6.2 percent; maintenance was computed at a compound rate of 3.9. 9. Return to the required down payment was at the estimated mort­gage rate less two percentage points. The appropriate tax bracket rate was applied. MAY-JUNE 1982 Alternative Mortgage Activity in Texas Savings and Loan Associations Beverly Hadaway Texas savings and loan associations, like their counter­parts in the country as a whole, have had serious financial problems in recent years. Traditionally, savings and loan associations have used short-term deposits to finance long­term, fixed-rate mortgages. This practice, even in a highly regulated setting, posed no serious difficulties when interest rates were stable and inflation was minimal, but the volatile interest rates and double-digit inflation of the past three years have forced savings and loan associations to seek ways to restructure their asset and liability portfolios. Alterna­tives to the conventional fixed-rate mortgage were intro­duced to improve asset yields. A survey of alternative mort­gage activity in Texas has shown that many savings and loan associations view the variable-rate mortgage and the rollover mortgage as the best replacements for the conventional fixed-rate mortgage. These two types of alternative mort­gages, in addition to improving asset yield, were viewed as the most marketable among the seven alternative mortgages surveyed. (Alternative mortgage instruments are any in which one of the variables of the mortgage contract is allowed to change over the life of the mortgage.) In addi­tion the Texas savings and loan associations saw the vari­able-rate mortgage and the rollover mortgage as increasingly important in their mortgage portfolios. As long as interest rates remain volatile, alternative mortgages will continue to replace the conventional fixed-rate mortgage. Alternative Mortgage Instruments As the traditional financiers of the housing and construc­tion industry, savings and loan associations hold most of their assets in the form of mortgage loans. Asset portfolios of conventional fixed-rate mortgages became increasingly burdensome as deposit costs rose in the last decade. In the Beverly Hadaway is Assistant Professor of Finance, University of Texas at Austin. mid-l 970s the industry began to consider various forms of alternative mortgage instruments. In 1977 the Federal Home Loan Bank Board (FHLBB) sponsored a comprehen­sive study of alternative instruments; the study noted the increasing inadequacy of the fixed-rate mortgage and re­commended that several types of alternatives be authorized by the FHLBB. 1 Since that time a number of instruments have been developed and authorized, but implementation problems have arisen. Consumer resistance to the use of these instruments has slowed their development, just as ever-tightening margin spreads have led more associations to offer them. There are seven commonly used alternative mortgage in­struments. In the deferred-interest mortgage the mortgage lender receives deferred interest plus a fee upon the sale of the house in return for a significantly lower interest rate during the life of the mortgage. A loan in which monthly payments are linked to the price appreciation of the mort­gaged property and the lender can share in the capital ap­preciation of the property is called an equity-adjusted mort­gage. When the interest rate is either fixed or variable, but the payments start out low and increase at a predetermined rate, the loan is called a graduated-payment mortgage. If the lender pays the borrower a fixed annuity based on a percentage of the present value of the property and the bor­rower is not required to repay the loan until his or her death, at which time the loan would be paid through pro­bate, the instrument is a reverse-annuity mortgage. A re­negotiated loan in which the maturity is fixed but the inter­est rate is renegotiated every few years is a rollover mort­gage or a renegotiable mortgage. In a shared-appreciation mortgage the borrower agrees to share the property's ap­preciation with the lender in return for an interest rate be­low that on a standard mortgage. The variable-rate mort­gage varies the interest rate according to some reference in­terest rate index, and changing interest rates are accompa­nied by changes in monthly payments, maturity, or a com­bination of the two. To determine the extent of alternative mortgage activity in Texas we surveyed all federally insured Texas savings and loan associations about their mortgage offerings, their port­folios, and their attitudes toward regulation. The survey was conducted in the summer of 1981 ; of approximately 315 associations in Texas 101 (or 32 percent) responded. Present and Future Mortgage Activity Of the seven alternative mortgages, only variable-rate, rollover, and graduated-payment mortgages were offered by the respondents. Variable-rate mortgages were offered by Many savings and loan associations in Texas have shifted to variable-rate mortgages and rollover mortgages. 48 percent of the respondents. Over half of the savings and loans offering this form did so both for sale in the second­ary mortgage market and for their own portfolios. Rollover mortgages were offered by 36 percent of the respondents, and 60 percent of these institutions indicated rollover mort­gages for their portfolios only. Only 4 percent of the re­spondents offered graduated-payment mortgages; 12 percent of the respondents offered no alternative mort­gages at all. Future potential for the seven alternative instruments was mixed. Respondents indicated that the shared­appreciation mortgage, the deferred-interest mortgage, the equity-adjusted mortgage, and the reverse-annuity mortgage would not be offered in the future even in the absence of any regulatory constraints. Those most likely to be offered in the future by the respondents were the variable-rate and rollover mortgages, although 39 percent of the respondents said they would consider the graduated-payment mortgage. About 60 to 70 percent of the respondents believed that the deferred-interest, equity-adjusted, reverse-annuity, and shared-appreciation mortgages lacked marketability because borrowers were not familiar with them. The variable-rate, graduated-payment, and rollover instruments were believed to be more marketable because of their lower monthly payments. The responding savings and loan associations indicated that consumers inquired most about these three and showed only slight interest in the shared-appreciation, equity-adjusted, or deferred-interest mortgages. Based on the inquiries received by the respondents, consumers have little or no interest in the reverse-annuity mortgage. Not surprisingly, activity in conventional fixed-rate mortgages declined considerably during the period from January to June of 1981. In January, 72 percent of the re­spondents offered fixed-rate mortgages ; by June that figure had declined to 41 percent. The average percentage for fixed-rate mortgages in May was 15 percent. Of the re­spondents 44 percent offered twenty-year maturities on fixed-rate mortgages and 66 percent offered thirty years. Private mortgage insurance was required on all maturities by 68 percent or more of the respondents offering conven­tional mortgages. Loan-to-value ratios on these mortgages varied from 9 5 percent to 7 5 percent. If interest rates continue to be volatile the future use of conventional fixed-rate mortgages appears to be limited. Of the 101 respondents, 60 percent indicate that fixed-rate mortgages would represent less than 10 percent of their in­stitutions' loan portfolios in the future. About 19 percent believed these mortgages would take up as much as 25 per­cent of their mortgage portfolios, while 23 percent saw them accounting for more than 25 percent. Average loan fees and closing costs on fixed-rate mortgages (expressed as a percentage of loan principal, exclusive of real estate trans­fer and mortgage insurance fees) were 2.82 percent and 2.06 percent. Characteristics of Alternative Mortgages Survey results indicated that the rollover and variable­rate mortgages were the most popular alternatives. The terms and conditions offered on these instruments, how­ever, varied among savings and loan associations. Rollover mortgages, offered by 36 percent of the re­spondents, were available with varying maturities and loan­to-value ratios. Of those providing these mortgages 83 per­cent offered thirty-year maturities. Over 80 percent of these required private mortgage insurance. In fact , private insurance was required by over 70 percent of all associa­tions offering rollovers on all maturities. The most preva­lent loan-to-value ratio on these mortgages was 80 percent. For all loan-to-value ratios, one half of the respondents of­fered rollover mortgages at twenty-five or fewer basis points below the conventional fixed rate. In all loan-to-value cate­gories, approximately one-fifth offered rollovers at fifty­one to one hundred basis points below the fixed-rate mort­gage rate. The most frequently indicated minimum begin­ning loan-to-value ratio was 90 percent. Loan renegotiation periods ranged from one to five years, with three years the most frequent (65 percent) period for renegotiation. The FHLBB index was used as the basis for renegotiation by 53 percent of the respondents with rollovers; 59 percent of the respondents offering rollover mortgages indicated that renegotiation was optional to the lender, while, only 16 percent made renegotiation optional to both the lender and the borrower. Average loan fees and closing costs on the rollovers (expressed as a percentage of loan principal exclusive of real estate transfer and mortgage insurance fees) were 3.00 percent and 1.77 percent. Variable-rate mortgages were offered by more (48 per­cent) of the respondents than any of the other alternative instruments and were available with varying maturities and MAY-JUNE 1982 loan-to-value ratios. Of the respondents offering these mort­gages 89 percent offered thirty-year maturities and 86 per­cent required private mortgage insurance on all maturities. The most prevalent loan-to-value ratio was 80 percent. For all loan-to-value ratios, most respondents offered variable­rate mortgages at twenty-five or fewer basis points below fixed-rate mortgage rates. In all loan-to-value categories, ap­proximately one-third offered variable-rate mortgages at fifty-one to one hundred basis points below the conven­tional fixed rate. The minimum loan-to-value ratio was 95 percent for almost half of the respondents. Of those issuing variable-rate mortgages 43 percent in­dexed rate changes to the FHLBB index, 18 percent used the Federal Home Loan Mortgage Corporation index, and 15 percent used the Federal National Mortgage Association index. The maximum rate change allowed for each change ranged from 5 percent to 0.5 percent; 41 percent of the re­spondents allowed a maximum of 1 percent. Over the life of the loan the maximum change in the interest rate for 93 percent of the respondents was 5 percent. Rates change anywhere from quarterly to once every three years; 64 per­cent allowed rate changes once a year. Average loan fees and closing costs on the variable-rate mortgages (expressed as a percentage of loan principal, exclusive of real estate transfer and mortgage insurance fees) were 2.63 percent and 2.05 percent. Table 1 Alternative Instruments as a Percentage of Total Mortgage Portfolio Percentage of total mortgage portfolio Percentage in alternative instruments of respondents .05-5 75 >5-10 14 >10-15 6 >15 5 Table 2 Regulatory Changes Desired by Texas Savings and Loan Associations Percentage Change of respondents Competitive restrictions Authorize commercial accounts for savings and loan associations 31 Regulate money market funds or give savings and loan associations authority to issue money market funds 24 Authorize a tax-free savings certificate 18 Reinstitute the one-quarter rate differential under Regulation Q 17 Deregulate savings and loan associations' assets (terms and conditions of loans) 12 Reduce reporting requirement 11 Balloon authority on single-family housing 5 Remove homestead restrictions (Texas only) 5 Reporting restrictions Remove truth-in-lending requirements 21 Remove home mortgage disclosure requirements 7 Remove community reinvestment regulations 7 Since only four respondents offered the graduated­payment mortgage, details of that form will not be pre­sented here. Portfolio Structure Respondents varied on the current role of alternative mortgage instruments in their institutions' portfolios. Port­folio representation of alternative instruments ranged from zero to 5 percent for 7 5 percent of the respondents to 50 percent for one respondent (see table 1 ). Of the respon­dents 14 percent currently have between 5 percent and 10 percent of their mortgages in alternative instruments. On average, 7 percent of each respondent's total mortgage port­folio was in rollover mortgages; the portfolio percentages indicated for rollovers ranged from 1 percent to 20 percent. On the average, 5 percent of each respondent's portfolio was in variable-rate mortgages, with a range from 1 percent to 45 percent. Of the respondents that issued alternative mortgages between January and June of 1981, the average number issued was thirty-seven and the average total dollar value was $3,781,000. The average dollar amount for an alternative mortgage instrument was $102, 189. Regulation of Savings and Loan Associations The responses to an open-ended question on regulatory changes can be divided into two broad classifications: those who would remove competitive constraints or equalize existing constraints and those who would reduce the report­ing burden on savings and loan associations. For those con­cerned with competitive changes two areas were of particu­lar concern: the authorization of commercial accounts for savings and loan associations and the regulation of money market funds (see table 2). Respondents felt these two regulatory changes were essential for industry success in an increasingly competitive environment. Without the authori­zation of commercial lending privileges, savings and loan as­sociations will find it difficult to improve their asset yields sufficiently to remain competitive. Similarly, as long as money market funds escape regulatory constraints, dis­intermediation (in which funds are withdrawn and invested directly in financial markets) will strap savings and loan associations for funds. Those wanting changes in reporting regulations most frequently wanted the removal of truth-in­tending requirements; this desire probably reflects the sentiments of all similarly regulated firms. Notes 1. The survey data were collected as part of a research project by Richard Dennis, a finance student. The project was funded by the Friedlander Fund, which supports student research at the University of Texas at Austin on the savings and Joan association industry. For a copy of the survey contact the author. 2. Donald M. Kaplan, Alternative Mortgage Instruments Research Study, 3 vols. (Washington, D.C. : Federal Home Loan Bank Board, November 1977). Whatever Happened to Low-Interest Municipal Mortgages? Double-digit home mortgage rates and rapidly nsmg property values have had a dampening effect on the long­run trend toward universal home ownership. Middle-income families that do not currently own houses are being priced out of the market at a time when the investment advantages of owning houses are possibly even more compelling than the pride and security of ownership. Moreover,-some people are beginning to believe that they will be permanently ex­cluded from a runaway market. The extreme volatility of interest rates in 1979 and early 1980 virtually shut down the private mortgage market. Buoyed by a strong demand for capital and expensive new sources of funds, mortgage rates reached unprecedented heights. In states with interest rate restrictions, mortgage lending ceased. In other areas, the rates eventually reached a level at which few borrowers could qualify for loans. People were reluctant to change jobs if it meant moving and the possibility of not finding an affordable replacement house; those who did move faced increasing difficulty in selling their vacated house. Builders were forced to carry their inventory. Brokers suffered declining sales activity. A crisis of such magnitude often invites a response from government officials. In this particular case, a response came from some local governments. Taking advantage of a relatively simple tax device that did not require using local revenues, cities across the nation began providing funds for home loans at rates affordable to medium-income families. The mechanism was the sale of long-term municipal revenue bonds on the open market. The bonds could be sold at rela­tively low face rates of interest because they offered tax­exempt interest income. Furthermore, since the bonds were backed solely by the underlying mortgages, they had no direct effect on the obligations of the sponsoring munici­pality. The low cost of the bonds allowed the issuance of mortgage loans at correspondingly low rates. A small Jack Hanis is Assistant Research Economist, Texas Real Estate Re­search Center, Texas A&M University. Jack Harris differential in rates paid all costs of floating the bonds and administering the loans. A seemingly costless solution to a mounting problem had been found. Encouraged by successes in Chicago and several other cities in 1978, municipalities began to form "housing finance corporations" at an accelerating pace. A report prepared for the Congressional Budget Office predicted that the volume of local housing issues would approach $35 billion by 1984. 1 In Texas, where the legislature provided the necessary authority in 1979, single-family housing mortgage programs made up 22 percent of the state's tax­exempt bond market by 1980. 2 By 1981, municipal mortgage programs had come to a complete halt. An idea that sprang up rapidly and seemed headed for limitless horizons suddenly died. Yet the de­mand for houses remained as strong as ever, and con­ventional mortgage interest rates were as formidable as ever. Certainly, the programs still had a constituency. The answer to what happened is no mystery. Economic and political factors killed the programs. The economic vil­lain was the continuing upward push of interest rates and the corresponding depressed state of the bond market; the political obstacle was federal legislation that severely limited the appeal of the programs to local governments. The Bond Market The basic premise of the municipal mortgage program­borrowing in the tax-exempt bond market to provide mort­gage loans with significantly lower interest rates than con­ventional loans-was eroded by the state of the bond mar­ket in the early 1980s when market interest rates became high and volatile. As observed by Michael Stegman, a Uni­versity of North Carolina professor, the prime rate was changed sixty times during 1980, reflecting unprecedented money market instability.3 Such conditions made long­term, fixed-rate investments relatively unattractive and MAY-JUNE 1982 raised yields required to sell bond issues, including tax­Congress to fear a major outflow of federal tax revenues to exempt issues. Upwardly floating interest rates narrowed the amount of relief that could be provided to mortgage borrowers through the program. For smaller municipalities, forced to pay as much as two percentage points more than the average for bond money, the program was hardly worth­while. When an arbitrage fee, the spread necessary to cover bond issue expenses, was added, the rate offered to bor­rowers was not substantially lower than conventional loan rates (see table). High rates caused a further problem for Texas municipal­ities. Until the 1981 legislature raised it to 15 percent, the interest payable on municipal bonds was limited to 10 per­cent. This restriction disrupted the rush of programs in the winter of 1980, causing at least one large issue to be post­poned to the spring. Issues with yields below 10 percent would have been difficult to sell after the 1980 summer. Federal tax legislation passed in 1981 could further limit the tax-exempt bond market. New opportunities for tax­sheltered investment were created in the form of all-savers certificates offered by depository institutions, and tax­sheltered real estate investments were made more attractive by changes in depreciation rules. Further, the gradual re­duction of tax rates (in particular, the lowering of the top rate on unearned income to 50 percent) will render all tax shelters less attractive. These developments affected the entire municipal bond market, not merely the housing programs. With a restricted market, however, municipalities were forced to be more selective in their financing plans, reserving their efforts for such essential needs as roads and water systems. While the economy and tax legislation had indirect effects on the housing programs, special federal legislation was aimed directly at the programs. The Mortgage Subsidy Bond Tax Act of 1980 The rapidly growing popularity of municipal bond mortgage programs during 1979 and 1980 led many in provide housing subsidies. This concern resulted in passage of the Mortgage Subsidy Bond Tax Act late in 1980.4 This legislation placed both qualitative and quantitative limita­tions on housing bond programs and effectively stopped the proliferation of such programs. The law placed several qualifications on a loan originat­ing under eligible programs. The property financed had to be owner occupied and had to become the principal resi­dence of the borrower. Purchase loans on properties outside of specially designated target areas could only be granted to borrowers who had not owned a home in the last three years. This provision was intended to focus benefits on first-time buyers, supposedly those who suffer most from the combination of high purchase prices and interest rates. The purchase price of the residence (except in target areas) could not be more than 90 percent of the last year's averag~ price for homes in the local area. This qualification was intended to restrict benefits to medium-income families. Most local programs established limits on the mortgage amount or on the borrower's income; these limits, however, were typically rather generous. The law stated that should more than 5 percent of the proceeds of an issue be used for loans that are found not to qualify, the tax-exempt status of the issue would be jeopardized. Many issuers felt this provision introduced significant risk since they were forced to rely on the hon­esty of borrowers in reporting their status as first-time buyers and the purchase price of the dwelling. Further­more, qualification of a mortgage could be affected by future decisions of the home buyer to rent out the house. This fear was apparently not assuaged by the act's mention of good-faith efforts to comply with the qualifications. A clearer definition of these provisions was needed before any issuer felt safe. Issuers were also prohibited from charging more than one percentage point over the bond yield for mortgage loans originated. Most programs priced mortgage loans at one and a half to two points above yield so the program would be self-supporting. Most issuers considered a one point markup too thin to pay expenses. Finally, the act placed a ceil­Comparison of Municipal Bond Costs to Conventional Mortgage Rates ing on the volume of bond issues in each state for each year and set Average yield Probable cost Probable Average on high-grade to Texas mortgage conventional December 31 , 1983, as the final Period municipal bonds municipalities• rate offeredt mortgage rate deadline for all bond programs. December 1979 February 1980 April 1980 June 1980 August 1980 October 1980 December 1980 February 1981 Aprill981 June 1981 August 1981 7.1 8 .0 8 .6 8.4 7.6 9.1 10.1 10.0 10.6 10.6 12.1 7 .6-8 .6 8.5-9.5 8.9-9.9 8.1-9.1 9 .1-10.1 9.6-10.6 10.6-11.6 10.5-11.5 11.1-12. 1 11.1-12.l 12.6-13.6 9 .1-10.1 10.0-11.0 10.4-11.4 9.6-10.6 10.6-11.6 11.1-12. 1 12. 1-13.1 12.0-13.0 12.6-13.6 12 .6-13.6 14.1-15.1 11.6 11.9 13.0 12.7 12.3 12.6 13.3 13.5 14.2 14.7 15.3 Following passage of the act, the rule that at least 95 percent of the loans must qualify caused concern among potential bond issuers. Under a strict interpreta­tion of the law, discovery that more than 5 percent of the committed funds were devoted to nonqualifying loans could •Based on actual yields for bonds issued in early 1980. void the issue's tax-exempt sta­tAssuming a 1.5 point arbitrage fee. tus retroactively. On November Sources: Data on average yield from Standard and Poor, various sources; data on probable costs pro­ 5, 1981, the Internal Revenue jected by author from data in early 1980; data on a·1erage conventional rates from Federal Home Loan Bank Board, News, various issues. Service issued rules establishing TEXAS BUSINESS REVIEW procedures by which issuers could satisfy the qualifications of the program without risk of future jeopardy to the bond's taxable status. These rules allowed issuers to use affidavits from borrowers attesting to the location of the property and its purchase price. Borrowers could supply tax returns for three previous years as proof that they had not owned houses in that period. The limit on arbitrage fee-the difference between the cost of bond funds and the price of mortgages originating from the proceeds-continued to cause concern. Raising the fee was felt to be essential to maintaining the self­sufficiency of the programs. Most issuers were interested in creating an independent finance corporation, thus giving it the ability to sell tax-exempt bonds and letting it run the programs. With the arbitrage limitations, this procedure was no longer possible. Legislation was introduced by Sen. Jim Sasser (D , Tennessee) and Sen. David Durenberger (R., Minnesota) that sought to raise the limit. Both proposals were opposed by the administration. A representative of the Treasury said that the White House believed that if the program had merit it should be as a federal-local joint venture, "not as a program in which the federal government supplies lOO percent of the subsidy."5 Hearings on these bills seemed to bring out a great deal of skepticism regard­ing local governments' commitment to the programs. Sen. Robert Dole (R., Kansas) commented that raising the arbitrage limit "has little to do with housing for the poor and a lot to do with substantial fees for well-to-do bond 6 lawyers and underwriters. " Programs at Standstill Faced with new restrictions and the necessity to sub­ sidize the mortgage programs, cities across the country have brought these mortgage programs to a halt. The last activity in Texas consisted of five issues that were allowed to operate under the old rules because of previous com­ mitments. Single-family housing was not the only housing sector affected. The act also restricted the multifamily housing programs conducted by most state housing finance agen­ cies. Some members of Congress have also expressed in­ terest in restricting localities' authority to issue tax-exempt industrial bonds.7 Some members have criticized the use of tax-exempt bond revenues to benefit essentially private developments, such as fast-food restaurants and discount stores. Such establishments compete with other private concerns that must pay market rates for their financing, an apparently inequitable situation. Of course, underlying all these efforts to tighten restrictions on tax-exempt programs is an effort to raise federal revenues to head off projected budget deficits. In such a political environment, it is ex­ pected that all losses to the federal treasury will be care­ fully scrutinized. With clarification of the new rules imposed by the Bond Subsidy Act and reduction in long-term bond rates, activity has revived somewhat. Several state housing finance agen­ cies sold issues in late l 98 l, overcoming the arbitrage limitation by infusing state money into the program. Alaska kept its single-family loan program alive by selling taxable bonds and directly subsidizing the mortgages. (The Alaska Housing Finance Agency is the source of almost all single­family home loans in the state.) This activity is almost neglible, however, compared to the potential represented by the municipal programs. It appears likely that subsidized single-family mortgages have seen their zenith. Those who were fortunate enough to obtain one of the loans will benefit for years to come. Other aspiring home buyers are left to face the realities of the mortgage market or wait for the next government venture into housing finance. Notes 1. Congressional Budget Office, Tax-Exempt Bonds for Single­Family Housing (April 1979), prepared for the House Committee on Banking, Finance, and Urban Affairs. 2. Related during an interview with Earlene Jewett, Executive Ad­ministrator, Texas Housing Agency, 1981. 3. Michael A. Stegman, "Housing Finance Agencies: Technicians as Policy Makers," Journal of Housing, October 1981, p. 4 78. 4. Pub. L. 96-499 (December 5, 1980). 5. "Treasury Opposes Mortgage Bond Amendments, Promises Regulatory Relief," Housing Development Reporter, October 26, 1981, p. 420. 6. lbid. 7. Tom Nelson, "Tax-Exempt Financing: Rep. Archer Predicts Reforms in Development Bond Program," Houston Post, December 5, 1981, p. 15C. Texas Railroads A Record of Construction and Abandonment Charles P. Zlatkovich Texas Railroads offers a complete record of the construction and partial abandonment of the railroad system of the state of Texas from 185 3 through 1980. Along with previously unpub­lished material from the records of the Texas Railroad Commission, the book offers maps of the railroad system over time, illustrations, photographs, and brief histories of the major railroad lines operating in Texas. Hardcover $10 Paperback $7 ........................ Bureau of Business Research P.O. Box 7459 • Austin, Texas 78712 MAY-JUNE l 982 The Declining Retail Trade Function of the Beaumont Central Business District Bruce W. McClendon Changing patterns of living in the United States, brought about by increased dependence on automobile transporta­tion, have revolutionized the entire structure of the local commercial marketplace. The primary victim of this change has been the downtown retail outlet. In the central business district of Beaumont the retail function has declined be­cause merchants have been unable to maintain regional market shares. The decline can be traced directly to the phenomenal increase in automobile ownership after World War II and the development of competitively superior shopping centers. While sales and number of retail estab­lishments have been increasing in the city as a whole, they have been declining in the central business district. Changing Transportation Patterns Before World War I, the principal mode of mechanized travel within and around cities was on tracks: street cars, elevated lines and subways, or suburban railroads. In Beaumont electric streetcar service was first offered in 1900 over three lines by the Beaumont Traction Company. These streetcar lines radiated from the downtown area and made it easier to travel to the central business district than to any other point in the city. Consequently, most retailing was conducted downtown. In addition to retail activities, industrial, financial, and general office concerns were con­centrated in the Beaumont central business district. A few merchants took advantage of the limited number of streetcar lines and located stores along the radial routes. Potential customers congregated along such routes and would often shop after leaving the streetcar on the way home. These characteristics led to a pattern of development still evident in Beaumont, and many other cities, today-a row of stores fronting on a street (the streetcar route) and built to a depth of 100 to 150 feet. The replacement of local streetcar service with a motor bus operation in the 1930s encouraged the growth and Bruce W. McOendon is Planning Director, City ofBeaumont, Texas. development of suburbs, corner grocery stores, and con­venience shops near major bus stops and transfer locations. The flexibility of the bus routes opened up new retail markets and expanded retailing opportunities, but major retailing activities remained concentrated in the central business district because this area was still the most acces­sible. Between 1940 and 1950 the population of Beaumont increased from 59,061 to 94,014-a gain of 59 percent. Retail sales in Beaumont's central business district declined 62 percent from 1958 to 1977. During the same period, automobile registration increased from less than 50,000 to just over 90,000, with most of the increase taking place between 1946 and 1950. Residential construction, attempting to catch up with demand and development, was concentrated in accessible suburban fringe areas where land was cheap and easy to purchase. Because of increased prosperity and out-migration from the urban core to the suburbs, people in Beaumont, and else­where, were no longer content to depend on the public transportation facilities available to them but began to rely on personal automobiles. The increased accessibility pro­vided by the automobile enabled potential retail devel­opment locations in outlying areas to compete with the central business district. In addition, decentralization of retail activities was accelerated because of downtown con­gestion and parking problems. Although large established downtown department stores were reluctant to become involved in outlying retail devel-opments because of concern about their investments in the downtown area and fear that the profitability of their existing operations would be affected, market conditions forced them to move to the suburbs. It soon became apparent that the initial response of locating department stores on major arterial roads would not by itself meet consumer needs. This recognition led to the acceptance of the planned shopping center, the predominant type and pattern of retail commercial development since the early 19SOs. The 400,000-square-foot Gateway Shopping Center built in 1957 was the first planned shopping center in Beaumont. Retail Sales Trends Retail sales in the city of Beaumont increased from $167.4 million in 1958 to $589.7 million in 1977-an increase of 252 percent (see figure I). At the same time, retail sales in the Beaumont central business district de­clined 22 percent from $43.4 million to $32.1 million. The result of increasing retail sales in the city in combination with declining retail sales in the central business district has been a precipitous decline in the retail significance of the downtown area. In I 9 S 8 retail sales in the central business district account­ed for 25.9 percent of total re­tail sales; by I 977, however, the district accounted for only S .4 percent of retail sales. When retail sales figures are adjusted to compensate for increases in the consumer price index (CPI) to discount the effects of inflation and to reflect the actual relative purchasing power of the dollar, retail sales (ex­pressed in constant dollars) in the Beaumont central business district declined 62 percent between 1958 and 1977 while, over the same period, retail sales increased 68 percent in the city of Beaumont and 81 percent in the Beaumont standard metro­politan statistical area (SMSA). 1 The downward trend in retail sales in the Beaumont cen­tral business district first became apparent with the opening of the Gateway Shopping Center. In the past, most downtown mer­chants have listed I 9 S 7 as the year in which they first noticed an appreciable change in retail sales patterns. The merchants in­terviewed who had been located Beaumont 393.9 Beaumont central business district 330.8 182.3 167.4 43.4 1958 1963 1967 1972 1977 in the central business district at that time reported an average decline in total retail sales volume in 1958 of approximately I 0 percent. Jn the decade that followed the opening of Gateway, most retailers in the central business district had an average annual loss in retail sales volume of 7 percent to I 0 percent.2 While downtown retail sales have declined sharply since 1958, major retail centers in Beaumont recorded a collec­ tive increase in retail sales from $20.3 million to $I 00.1 million between 1963 and 1977. (Major retail centers are defined by the U.S. Department of Commerce as concen­ trations of retail stores with at least $5 million in retail sales and at least ten retail establishments, one of which is classified as a major department store.) In recent years, the significant growth in retail sales in Beaumont has been generated by new shopping center developments, such as the Parkdale Mall, which was developed in 1973 and reported total retail sales of $6 S. 7 million in 1977. Available information indicates that the retail sales for stores selling general merchandise in the central business district actually increased from $15.9 million in 1958 to $17 million in 1972 (see figure 2). Reported sales for all Figure 1 Retail Sales in Beaumont, 1958-1977 (In millions of dollars) MAY-JUNE 1982 other major retail groups, how­ever, declined during the same period, with the largest reduc­tion being registered by the automotive dealers, whose retail sales declined from $11 .3 mil­lion in 1958 to $766,000 in 1972. This $10.5 million decline accounted for almost 7 5 percent of the total reduction in retail sales in the central business district between 1958 and 1972. Retail Establishments Between 195 8 and 1977 the number of retail establishments in the central business district declined from 179 to only 54-a Joss of 69 percent (see table 1 ). The percentage loss in the number of retail establishments in the central business district accelerated during each report­ing period from 1958 to 1972 and was sustained at the high rate of 29 percent over the 1972-1977 period. Food stores recorded a 100 percent decline in the central business district between 1958 and 1977. Auto­motive dealers and gasoline service stations reported a reduc­tion of 83 percent, and the number of apparel and accessory stores declined 77 percent. The number of retail establishments has declined in the downtown area but increased modestly in Beaumont as a whole. Between 1958 and 1977 the total number of retail establishments in Beau­mont grew from 1,189 to 1,229. At first glance, the decline in downtown retail stores appears to be minor compared to the total pattern of shrinkage in the number of establishments. The extent of the loss, however, is exacerbated by the magnitude and importance of the establish­ments that were lost. For example, of the twelve major retail and department stores listed in a 1973 survey of the downtown area by the Urban Land Institute, four have closed and two others have announced plans to relocate to shopping Figure 2 Retail Sales by Selected Business Groups in Beaumont Central Business District, 1958 and 1972 (1 n mi llions of dollars) 10 I 5 Ge neral merchan dise group stores Automotive dealers Apparel and accessory stores Furniture, home furnishings, and equipment sales Eating and drin king places Source: Calculated from U.S. Department of Commerce, Bureau of the Census, U. S. Census of R etail Tra de, 1958 and 1972. Table 1 Retail Establishments in the Beaumont Central Business District, 1958-1977 Establishment 1958 1963 1967 19 72 1977 Building materials, hard ware, and farm eq ui pment 3 3 3 I I Re tail trade and ge neral merchandise 8 9 9 7 5 Food stores I 6 2 I 0 Auto motive dealers and gasoline servi ce sta tions 30 23 12 9 2 Apparel and accessory stores 53 38 30 24 12 Furniture, home furn is hin gs, and eq uipm ent stores Ea ting and drin king places Miscellaneous retail stores II 32 41 I 5 20 34 12 2 1 23 7 II 17 5 13 16 Total 179 148 11 2 77 54 Source: U.S. Department of Commerce, Bureau of the Census, Census of Retail Trade: Texas, vario us years. tween 1963 and 1977, a period Figure 3 when retail sales were declining by 5 percent. It will be increas- Annual Sales Productivity per Employee $5 8,428 ingly difficult to reduce down­ in Beaumont, 1963 and 1977 town employment to increase productivity because a competi­tive sales environment for in­creased market shares is forcing retailers to offer attentive em­ployee services at competitive prices. Notes I. U.S. Department of Commerce, Bureau of the Census, Statistical Abstract of the United States: 1980 (Washington, D.C.: Government Printing Office, 1980), p. 63. 2. This information was obtained from survey results in Beaumont Texas Central Business District Devel­opment Plan, Technical Report No . l, Reconnaissance and Overview {Beaumont: Gladstone Associates, July 1973). 3. See Beaumont, Texas-A n Evalua­tion of the Redevelopment Potential of the Central Business District (Washington, D.C.: Urban Land Insti­tute, 1973). centers in suburban areas. 3 At the same time, no major retail facility has opened or even expressed interest in locating in the central business district. Employment and Employee Productivity The number of retail employees in the Beaumont central business district has also declined at an increasing rate from 1,643 in 1963 to 731 in 1977 (see table 2). During the same period, total retail employment increased in both the city of Beaumont and the Beaumont SMSA. The Beaumont SMSA includes the cities of Beaumont, Orange, and Port Arthur, as well as Jefferson and Orange counties, all of which had strong, steady growth in retail trade activity between 1963 and 1977. Table 2 Retail Trade Employment in Beaumont, 1963-1977 Area 1963 1967 1972 1977 Beaumont central business district 1,643 1,4 30 1, 160 731 City of Beaumont 6,320 11,946 7,970 10,996 Beaumont SMSA 12,933 14,084 17,755 22,489 Note: Retail employment and sales between 1967 and 1972 were adversely affected by the closing of the home offices of the Sun Oil Company in the late 1960s. Source: U.S. Department of Commerce, Bureau of the Census, Ce n­sus of Retail Trade: Texas, various years. 1963 1977 Source: Calculated from U.S. Department of Commerce, Bureau of the Census, U.S. Census of Retail Trade, 1963 and 1977. A simple relative measure of retail employee produc­tivity can be derived by dividing the number of retail employees into the total volume of retail sales (see figure 3). Retail employee productivity in the Beaumont area, as measured by average sales for each employee, has steadily increased in recent years. In the Beaumont central business district, average retail sales for each retail employee grew from $20,657 in 1963 to $43,867 in 1977. In constant dollars, adjusted to discount the effect of inflation, average sales productivity of retail employees in the central business district increased by about 1 7 percent between 1963 and 1977. Retail employee productivity in the central business district has, however, been significantly below the city average. In 1963 each retail employee sold an average of $20,657 in the central business district and an average of $28,845 in the whole city of Beaumont. This productivity advantage enjoyed by retail merchants located outside the central business district undoubtedly has contributed to the decline in downtown retail trade activity. Between 1963 and 1977 this productivity gap narrowed appreciably. Retail sales for each retail employee in the city of Beaumont averaged 22 percent above those for down­town employees-down from the almost 40 percent rate reported in 1963. While the gap has narrowed, a significant competitive disadvantage remains for the central business district. Increased employee sales productivity in the central business district was achieved by reducing retail employment by 56 percent be­ MAY-JUNE 1982 The Economic Effect of a Military Base on a Small Metropolitan Area Louis J. Rodriguez Albert Krienke Sheppard Air Force Base plays a major role in the econo­my of the Wichita Falls standard metropolitan statistical area (SMSA). In 1980, for example, Sheppard generated about 30 percent of the gross income in the Wichita Falls SMSA. The base also contributes indirectly to the local economy through a number of civic and cultural contribu­tions. Furthermore, retirees and dependents of Sheppard personnel have constituted an important component of the area's civilian work force. Wichita Falls SMSA Wichita Falls is located in North Texas, 14 miles south of the Oklahoma border. The nearest major cities are Fort Worth and Oklahoma City, which are 115 and 91 miles away. Because of its relatively isolated location the city serves as a shopping hub for a large area. The census of 1980 indicated that 94,201 people lived in Wichita Falls and that Wichita County had a population of 121,200. The Wichita Falls SMSA consists of Wichita and Clay counties and covers 1,524 square miles. Its population was 128,642 in 1970and 130,664in 1980.1 Wichita Falls originally was a ranching town located near the Chisolm Trail. It later obtained rail service and became important in ranching and agriculture. With the discovery of oil in the 1 900s, the city business base became more diversified . Reduced oil reserves resulted in an organized effort to broaden and expand the industrial component. Since 1970 this effort has resulted in the creation of 4,300 jobs in over a dozen new plants. With industrial expansion, the number of middle-income families increased rapidly. Louis J. Rodriguez is Professor of Economics and President, Mid­western State University. Albert Krienke is Professor ofEconomics, Midwestern State University. In 197 5 about 27 percent of the households in the SMSA had incomes of $15 ,000 and above; and in 1980 this group represented 58 percent of the population.2 The labor force in the Wichita Falls SMSA in 1980 averaged 61,220 and total employment was 59,280, a 35 percent increase since 1970. Civilian employees at Sheppard Air Force Base accounted for 6.6 percent of the nonagricul­tural employment of the area. While unemployment has been a problem in many cities in recent years, Wichita Falls' unemployment was only 3.2 percent in 1980 (see table 1). The low rate of unemployment, however, may hinder future industrial expansion because of shortages of needed skilled employees. Nonagricultural wage and salary employ­ment in the Wichita Falls SMSA increased by 39 percent during the 1970s. Local demand for labor grew in the 1970s because of expanded new manufacturing in the SMSA and the influence of oil prices. People leaving active duty in the military often have demonstrated work responsibility and are considered desir­able workers by many business people. Consequently, former military people often become integrated into the civilian work force within a short time. Skills required by a new manufacturer can be varied, however, and a firm may need to employ many workers in a short period of time. A Table 1 Nonagricultural Civilian Labor and Unemployment in the Wichita Falls SMSA, 1978-1980 Civilian Perce ntage Year labor force Unemployment unemployed 1978 60,800 2, 100 3 .5 1979 60 ,600 1,8 00 3.0 1980 61 ,220 1,940 3 .2 Source: Industry Data Book (Wic hita Falls: Board of Commerce and Industry, 1981), p. 11. low unemployment rate requires both that local workers shift their employment and that labor be attracted from other cities. Relocating businesses, however, might decide that the characteristics of the local market mean a high cost for their needs. These factors could make it less likely for nationally based firms to locate in Wichita Falls in the near future. A mitigating factor in the attraction of new industry is the number of people in the labor pool who have specific skills. For example, qualified welders are scarce in the SMSA.3 With the current industrial base, a new business would have to expect to be able to entice employees away from several firms . A shortage in the supply of given skills would be shared by several firms. In the Wichita Falls SMSA the civilian labor force de­ clined from 60,800 in 1978 to 60,600 in 1979. The April I 979 tornado, one of the largest in recorded history, may have affected 1979 employment, and some labor force activity in I980 was associated with the rebuilding of tornado damage. Reconstruction work after the tornado probably explains the abnormally high proportion ( 4.9 percent) of labor force involvement in construction during 1980. Despite the economic abnormalities of 1979 and I 980, mining and manufacturing increased their shares of the labor force by one percentage point between I 977 and 1980 (see table 2). The revitalized oil industry probably explains this increase. For example, much machinery manu­ facturing was associated with oil industry employment, and this sector increased from I ,940 workers in January 1980 to 2,050 workers in December 1980, an increase of 5.7 percent. The median income of households increased in the Wichita Falls SMSA by about 74 percent from 197 5 to 1980; it reached $17 ,378 in the latter year. Total estimated effective buying income for the metropolitan area in 1980 was $I ,003,2 I 6,000.4 Retail sales increased in the SMSA by 78 percent from 1975 to I980 when they reached $702 million. Of these sales, 23 percent were automotive (nation­ally I 7 percent of retail sales were automotive) and 20 per­cent were retail food. Agriculture sales were approximately Table 2 Percentage of Employment in the Wichita Falls SMSA Annual Averages, 1977 and 1980 Category 1977 1980 Mining 5.2 6.2 Construction 5. 1 4 .9 Manufacturing 17.0 18. J Transportation, communication, and public utilities 5.1 5.0 Trade 25 .6 25 . J Finance, insurance, and real estate 4 .6 4.4 Services and miscellaneous 15.2 15 .5 Government 22.2 20.8 Total 100.0 100.0 Sources: Charles P. Zlatkovich, "Wichita Falls: An Emerging Manu­facturing Center," Texas Business Review, November 1978, pp. 228-30; and Industry Data Book (Wichita Falls: Board of Com­merce and Industry, 1981), pp. 16-19. $30,000,000, with 50 percent coming from field crops and 45 percent from livestock and poultry. Personal income (earned income and transfers received by individuals) for the Wichita Falls SMSA was $1 . I billion in I 978; by I 979 this figure had increased to $1 .2 billion. If the same 12 percent increase holds true, personal income in the area in 1980 should have been approximately $1 .3 billion. If gross national product (GNP) as a percentage of personal income is a ratio that can be applied to the total value of goods and services in the Wichita Falls SMSA, then total goods and services produced in the SMSA in 1980 should be valued at $1,616,000,000. 5 Direct Economic Effects of Sheppard Air Force Base During fiscal year 1980 Sheppard Air Force Base had an average of 7,023 employees. Of this group 677 were of­ficers, 2,876 were enlisted persons, and 3,470 were civil­ians. Average salaries paid were $24,811 for officers, $11 ,588 for enlisted personnel, and $17,905 for civilians. The total base payroll was $115,079,409. The base's opera­tion expenditures were $1 ,852,300 for transportation and rentals, $3, 186,300 for utilities, $21,396,400 for services, $23,727 ,826 for fuels and materials, $104,000 for claims, and $5, I 50,200 for construction repairs. Thus $55,427 ,026 was required to operate the facility for the 1980 fiscal year. Procurement expenditures by the base in the Wichita Falls area totaled $12,799,962. After their stay at Sheppard, many individuals decide to retire in the area. Over the years, 2,287 military person­nel and l ,264 civil service employees have retired and re­mained in the area. This combined group received a gross annual salary of $30,761 ,708 in 1980.6 Many of the retirees obtained jobs after they retired and provided needed skills in the local labor market. During fiscal year 1980 there were 400 official visitors to Sheppard Air Force Base. The average length of stay was three days; these visitors spent an estimated $25 a day for an annual outlay of $30,000. During this year 25,000 pipe­ line students (who had completed basic training but needed additional training before reporting to their permanent duty stations) passed through Sheppard. These individuals spent an average of eleven weeks on base and an estimated $14 a day or $28,028,000 for the year. Additionally, dur­ ing 1980 8,000 temporary duty students (who were tempo­ rarily away from their permanent duty stations in order to complete short training courses) were at Sheppard for an average of five weeks each and spent about $10 a day, a yearly total of $2,800,000. The total estimated expendi­ tures in the Wichita Falls SMSA from these three categories of visitors was $30,858,000. 7 During this particular year 28,57 I tickets were pur­ chased from commercial airlines by the base for its per­ sonnel and by base emplorees as individuals. Assuming a unit expenditure of $200, Sheppard Air Force Base and base personnel spent approximately $5,714,200. Of this figure $3,999,940 (70 percent) was spent by the base in the SMSA. MAY-JUNE 1982 According to base headquarters, during fiscal year 1980 base employees purchased 288 homes, 26. 7 percent of all houses sold on multilistings in Wichita Falls. The average price of homes sold in Wichita Falls during 1980 was $41,300, according to the local board of realtors. If base employees spent the average amount on their houses, $11,894,400 was spent by base employees to buy houses in the Wichita Falls SMSA. Further assuming that 10 per­cent of these homes were new, $1 ,189,440 of new capital construction outlays in the area was generated by Sheppard­affiliated employees. During fiscal year 1980, the base was responsible for total expenditures of $250,415,145 in wages, salaries, services, houses, and material purchases in the area economy. Economists use the multiplier effect to measure the number of dollars of income generated in an area by each dollar of expenditure. Income and social security taxes, savings, retirement deductions, mortgage payments to financial institutions outside of the Wichita Falls SMSA, and travel and purchases outside of the region are all leak­ages from the Wichita Falls income stream. Assuming that 51.3 percent of the Sheppard expenditures were spent out­side of the area, the multiplier for Wichita Falls would be 1.95.9 Sheppard Air Force Base thus generated approxi­mately $488,309,532 in local income-30 percent of total gross income for the Wichita Falls SMSA. 10 Indirect Economic Effects of Sheppard Air Force Base While the direct economic benefits of Sheppard Air Force Base in the Wichita Falls SMSA can be identified and quantitatively measured, a number of other economic benefits are not so visible. While the number of permanent personnel assigned to the base during fiscal year 1980 was 8,032, these individuals had 18,995 dependents. Thus, out of a total metropolitan area population of 130,664, 21 per­cent of the population was in one way or another living in the area because of Sheppard's location. Of these depen­dents 4,238 were enrolled in area school districts from kin­dergarten to twelfth grade. Sheppard Air Force Base also made available commer­cial airport facilities, classrooms on base, and specially equipped laboratories for medical and radiological training by local institutions of higher learning. In addition, the base fire department had a mutual aid agreement with the city to provide needed assistance, and civil defense assistance was provided through an agreement with area radio and television stations. During fiscal year 1980 Sheppard employees contributed $281,807 to the United Way Fund in the Wichita Falls area, approximately 17 percent of the total campaign.11 Base employees were responsible for about 20 percent of the blood donations to Red River Regional Blood Service, which includes thirty-two counties and forty-three hospi­tals. Sheppard-connected people also assisted the local Community Action Corporation and a summer youth camp and were actively involved in numerous civic, cultural, religious, charitable, and recreational activities. Many people connected with the base were civic leaders. Thus, the base has affected the economy of the area directly and indirectly and has provided needed workers, from base families and retired military personnel, for the local labor market. Notes 1. Sales and Marketing Management Magazine, Annual Survey of Buying Power 1981 (New York: Sales and Marketing Management, 1981): C-253 . 2. Karen Chironi, ed., Community Profile of Wichita Falls, Texas (Wichita Falls: Board of Commerce and Industry, 1981), pp. 13-14. 3. Industry Data Book (Wichita Falls: Board of Commerce and In­dustry, 1981), p. 7. 4. Sales and Marketing Management, July 27, 1981, p. C-207. Total effective buying income is a term used by this publication; it equals personal income less personal tax and nontax payments. 5. According to U.S. Department of Commerce, Survey of Cu"ent Business, May 1981, pp. 5-21, GNP in the country was 21.6 percent higher than personal income; this percentage was applied to Wichita Falls personal income figures. 6. Carroll Copelin, Wichita Falls Times, June 29, 1981, p. 7A. 7. Ibid. 8. Sheppard personnel estimated that $200 was the typical expendi­ture. 9. The Air Force Engineering and Services Division, Department of Environmental Protection Planning, Tyndall AFB, Florida, pro­vided the multiplier of 1.95. 10. Other areas with military installations may wish to measure their effect on the local economy. Those interested in computing such an economic measure may find the following formula useful: Y = k(a+bc+de+f+g+h+i), where Y = total amount of income generated by the military base, k = multiplier, a= total salary payments, b = percentage of nonwage operating expenditures spent in area economy, c = total nonwage operating expenditures, d = total construction outlay, e = percent­age of construction outlay spent in local economy, f = purchase of newly constructed houses by base employees, g =expenditures in area by students and others attached to the base on a temporary basis, h = expenditures (including transportation) by visitors to the base, and i = income of retired civilian and noncivilian base em­ployees. The tax deduction and the social security and other retirement deductions can be easily calculated. A problem arises in measuring the amount of leakages from the local economic area. These leakages take the form of mortgage payments to financial institutions located outside the local area, travel while away from the area, and various purchases made outside the area. The smaller the local economic area, the greater the likelihood of large expenditures outside the area . Individuals in small towns that are close to large metropolitan areas may do a considerable amount of shopping in these larger cities. Consequently, a foreign trade multiplier that treats the local economy as being apart from the rest of the nation can be used: k=_!_ d+s+l where y = gross expenditures, d =payroll deductions, s =savings, and 1 = estimated leakages of gross income going outside of the local economic area. 11. Sheppard Air Force Base, Economic Impact Data, September 1980,p.5. The Black Population of Texas Although Texas has always had a predominately white population, the black population has always been an impor­tant and integral part. Only two states, New York and Cali­fornia, had larger black populations than Texas did in 1980.1 Growth in Numbers The first known black in Texas was Esteban, a Moorish slave, who stepped ashore at Galveston Island on November 6, 1528.2 Almost three and a quarter centuries later, in 1850, when Texas was included in the U.S. census for the first time, the state's black population had increased to 58,558 (see table 1). Of this number, 58,161 were slaves and 397 were classified as free colored.3 The new state constitution legally sanctioned slavery, and the number of blacks tripled in the next decade-to 182,921 in 1860. In that year, 157,579 were listed as black slaves, 24,987 as mulatto slaves, and 355 as free colored.4 The black popu­lation has continued to grow, but at a much slower rate, since 1860. By 1980, 1,710,250 blacks were living in Texas-an increase of 311,245 over the number of blacks in the state in 1970. In spite of these sizable numbers, the proportion of the state's total population that is black has been declining since 1870. In that year, blacks made up 31 percent of all Texans. The proportion had dropped to 20 R. L. Skrabanek is Professor of Soci­ology and Demographer, Texas Real Estate Research Center and Depart­ment of Rural Sociology, Texas Agri­cultural Experiment Station, Texas A&M University. Steve H. Murdock is Associate Professor of Rural Soci­ology, Tex as Agricultural Experiment Station, Texas A&M University. Year 1850 1860 1870 1880 1890 1900 19 10 1920 1930 1940 1950 1960 1970 1980 Black population 58,558 182,921 253,475 393,384 488, 171 620,722 690,049 741 ,694 854,964 924 ,39 1 977,458 1,187, 125 1,399,005 1,7 10,250 R. L. Skrabanek Steve H. Murdock percent by 1900 and 12 percent by 1980. While the black population increased by about 1.5 million between 1870 and 1980, the remainder of the state's population increased by approximately I 2 million. Blacks made up a higher proportional share of the total population in each of sixteen states than they did in Texas in 1980. Mississippi and South Carolina topped the list with 3 5 percent and 30 percent in black population. Even four northern states (Illinois, New York, Michigan, and New Jersey) had a higher percentage of population that was black than did Texas. Geographic Distribution The eastern one-third of Texas was the major location of the black population in antebellum days, and this situation has continued to the present (see figure I). In 1870, 82 percent of the state's black population re­sided in seventy-eight counties in East Texas, 5 and over one-half of the total population of eight of these counties Table 1 The Black Population of Texas, 1850-1980 Change from previous census Percentage of to tal Number Percentage population 27 .5 124,363 2 12.4 30.3 70,554 38.6 3 I.I 139,909 55.2 24.7 94,787 24.l 2 1.8 132,55 1 27.2 20.4 69,327 I 1.2 17.7 51 ,645 7.5 I 5.9 11 3,270 17.9 14.7 69,427 8.2 14!4 53 ,067 5.7 12.7 209,667 21.5 12 .4 2 11,880 I 1.7 12.5 3 11,245 22 .2 12 .0 Sources: U.S. Department of Commerce, Bureau of the Census, U.S. Census of Population: 1 940, "Characteristics of the Population," part 43, Texas, second series, table 4; U.S. Census of Popula­tion: 1970, "Characteristics of the Population," part 45, Texas, section 1, table 17 ; and 1980 Census of Population, "Race of the Population by States: J 980," Supplementary Reports PC80­Sl-3 (Washington, D.C.: Government Printing Office, July 1981), table I. MAY-JUNE 1982 were blacks. Leading this list of counties with a high per­centage of blacks in 1870 were Wharton (85 percent), Fort Bend (78 percent), Brazoria (76 percent), and Harrison (67 percent). This concentration developed because blacks were brought into the region to provide labor for the cotton culture that flourished along the Sabine, Trinity, Brazos, and Colorado rivers. Since agriculture in other sections did not require as much labor, few blacks settled outside of East Texas. With the advent of agricultural mechanization and technology and the change from cotton farming in East Texas to the livestock industry and other types of agriculture, many blacks migrated to cities within the area or to other states. In 1980 blacks were still concentrated in East Texas, where 78 percent of the state's black residents lived. No county west of Bexar County had as many as 20,000 blacks in 1980, and none west of Travis County had as much as 10 percent of its population made up of blacks (figure 2). The distribution of blacks among Texas counties varies considerably. In 1980 two counties had more than 200,000 black residents (Harris had 473,698 and Dallas had 287,613). Harris County had 28 percent of the state's total black population in 1980, and Dallas County had 17 percent. At the other extreme, sixty-seven counties (all located in West Texas) had fewer than one hundred black residents, and ten of these had no black residents. Figure 1 Black Population in Texas Counties in 1980 -50,000 and over ~10,000 to 50,000 ~5,000 to 10,000 t::::::::::::::::J 2,000 to 5,000 c::::::J Under 2,000 The proportions of blacks in the total populations of different counties in Texas also varies greatly. In 1980 blacks constituted 42 percent of the people Jiving in Waller County and over 30 percent in Harrison, Houston, Marion, and Robertson counties. In ten counties, more than one out of every four persons were black, but blacks made up Jess than I percent of the population of seventy-three counties. Widely divergent gains and losses of blacks occurred in a number of Texas counties during the 1970-1980 decade. The biggest increases occurred in Harris County (I 23,030) and Dallas County (67,101). Harris County accounted for 40 percent of the state's total increase in blacks during the decade and Dallas County for 20 percent. At the other extreme, Ellis County had the biggest decline in black population (-1 , 160) between 1970 and 1980, and thirty­six of the seventy-eight East Texas counties had declines in the number of blacks. Sources of Population Growth The rate of population growth or decline of any group is determined by three basic factors: births, deaths, and mi­gration. When more births than deaths occur, demographers speak of a natural increase; natural decrease results when Figure 2 Percentage of Black Population in Texas Counties in 1980 MAY-JUNE 1982 there are more deaths than births. A population increase occurs when more people move into an area than move out during a given period, and a net out-migration results in a population loss. Since the registration of births and deaths was not legally required in Texas before 1933, there is no definitive infor­mation on their numbers until that year. Based on informa­tion for the last four decades, however, it is obvious that migration played a much greater role in the growth of the black population between 1970 and 1980 than it had previously (see table 2). Fertility The fertility of a given population can be described in many ways. One can observe the trend in actual number of The black population also has higher fertility ratios than the rest of the state's people. In 1980 there were 492 black children under 5 years of age for each 1,000 black women of childbearing age (20 through 44 years old) in Texas. This rate is somewhat higher than that for nonblacks, who had a fertility ratio of 422. Mortality Computed death rates (number of deaths occurring for each 1,000 population in a given year) indicate that blacks had higher death rates (8. 7) than did the remainder of the population (7.4) in Texas in 1980. The gap between the death rates of blacks and others is narrowing, however, be­cause a general decline in death rates occurred earlier among the rest of the population and only more recently In Texas more than 69 percent of all blacks, but only 44 percent of all nonblacks, live in the central cities of the state's metropolitan areas. births or can compute the crude birth rate and the fertility ratio. The number of births recorded for blacks increased fairly consistently from 1940 to 1964 and then declined until 1976, when it again began to increase. Although the state's total population followed these same general pat­terns, the total number of babies born to blacks was smaller between 1970 and 1980 than it had been in the previous decade, while the number of births in the state as a whole was greater than it had been between 1960 and 1970. Crude birth rates consistently have been higher for blacks than for the remainder of the Texas population. The gap, however, has been narrowing for the last two decades. In 1980, blacks had 23 births for each 1,000 population, while nonblacks had 19 births for each 1,000. Table 2 among blacks. In 1970, blacks had a death rate of 9 .9 while the state's nonblacks had a death rate of 8.2. Another measure of mortality used by demographers is the infant mortality rate (the number of children under one year of age dying in a given year for each 1,000 live births during that same year). In Texas in 1980 the infant mortality rate was 11.0 for nonblacks and 19 .0 for blacks. These differences largely reflect differences in prenatal and postnatal care, the degree to which births take place in hospitals, and socioeconomic differences. Migration The black population increased by 311,245 between 1970 and 1980 with a natural increase of 196,254. Thus, Sources of Increases in Black Population by Census Decades, 1940-1980 Ce nsus To tal Nat ural Ne t decade increase Bi rt hs Deaths increase migration • 1940­195 0 53,0 67 208,136 107,5 93 I 00,543 -4 7,476 195 0-1960 20 9,667 32 5,6 87 111 ,570 214,1 17 -4 ,450 1960-197 0 211 ,880 344,930 130,407 214,523 -2 ,6 4 3 197 0-1980 3 11 ,2 4 5 3 36, 6 59 140,405 19 6,25 4 114,99 1 114,911 more blacks moved into Texas than moved away from the state during the decade. Net migration accounted for 37 percent of the total increase in black population between 1970 and 1980. Texas used to have a large out-migration of blacks, es­pecially to the northern states. •Net migration was computed for each census decade in the fo llowing manner: births that occurred between April 1 and March 31 for each ten-year period were first added to the population in the beginning year. Then all deaths for the same interval were subtracted from this sum. The result was an expected population ten years later. This expected population was then compared to the actual census figure, and the difference is assumed to be the result of net migration. Sources: For 1946 through 19 80, Annual Report of Bureau of Vital Statistics, Texas Department of Healt h, Texas Vital Statistics 1980 (Austin: Texas Department of Health, June 1981); birth and death data for 19 40 through 19 45 were provided by Leland N. Carmichael, statistician, Texas Department of Health. Between 1940 and 1950 over 4 7 ,000 more blacks migrated away from Texas than moved in. The number of net out-migrants declined considerably during the 1950s and slowed appreciably again during the 1960s. Thus a net migration turnaround of blacks occurred in the 1970s and reversed a trend that had existed since the end of the Civil War. Residential Composition Since the Census Bureau began using urban and rural categories (and later adding metropolitan and nonmetro­politan residence categories), the residence patterns of blacks have shifted substantially from rural to urban and particularly to metropolitan residences. 6 In 1920 only 30 percent of all Texas blacks lived in urban areas and 70 per­cent in rural areas. By 1970 a complete reversal had taken place, and 84 percent resided in urban areas and only 16 percent in rural areas. By comparison, 79 percent of the state's nonblack population lived in urban areas and 21 per­cent in rural areas. These changes largely parallel the rural­to-urban trend that has taken place in the nation as a whole. Blacks, like the rest of the state's population, tend to be concentrated in the largest cities. In 1980 more than one-half of Texas' black population lived in five cities­ Houston, Dallas, Fort Worth, San Antonio, and Austin. Houston alone had 26 percent of the state's blacks and Dallas 16 percent. They ranked seventh and twelfth among all U.S. cities in black population in 1980. The numbers of blacks have also increased most rapidly in the largest cities in the last census decade. Houston gained nearly 124,000 blacks between 1970 and 1980, the largest numerical increase in black population of any American city. Dallas had an increase of over 55,000 blacks. Thus, these two cities accounted for 58 percent of the total black population increase in Texas between 1970 and 1980. In 1980 a slightly higher proportion of blacks (84 percent) lived in standard metropolitan statistical areas (SMSAs) than did the rest of the state's population (79 percent). Thus, 16 percent of all blacks and 21 percent of all nonblacks lived in nonmetropolitan areas. Among the nation's SMSAs the Houston and Dallas-Fort Worth SMSAs ranked eighth and tenth in black population in 1980. Within metropolitan areas blacks and nonblacks have different patterns of residence. Over 69 percent of all blacks in Texas lived within the central-city boundaries of SMSAs in 1980 and only 15 percent lived outside central cities. By contrast, only 44 percent of all nonblacks lived in the central cities of SMSAs and 36 percent lived outside the central cities. Sex Distribution The balance between the sexes is most simply expressed as the sex ratio (the number of males divided by the num­ber of females times one hundred). A consistent predomi­nance in numbers of females over males is one of the most important features of the state's black population, com­pared to the ratio for the rest of the state's residents (see table 3). In 1850 there were only 98 black men for each 100 black women, but among nonblacks men outnumbered women by 123 to 100. While differences in sex ratios have been getting smaller, there were still only 93 males for each I 00 female blacks and 97 males for each l 00 females in the nonblack population in Texas in 1980. Life in Texas (and the nation) begins with an excess of males since more boys than girls are born. Nonblack babies born in Texas in 1980, however, showed a higher sex ratio at birth (I05) than did blacks (I02). The difference in numbers of boys and girls at birth is offset by higher death rates for males at all age levels throughout their life span and through greater out-of-state migration for males. Thus, the sex ratio among blacks, which starts at I 02 at birth, drops to I 00 at ages 20 to 24. Beginning at ages 25 to 29 there are more black females than males, and women pre­dominate by increasingly larger margins with each advance­ment in age so that there are only 64 males for each l 00 females among blacks between 80 and 84 years of age and 57 for those 85 years of age and over. Essentially the same situation occurs in the rest of the population except that the differences in numbers of males and females are even more pronounced in the older ages. For example, there are only 52 males for each 100 females among nonblacks 80 to 84 years of age and 42 males for each 100 females for those 85 years of age and over. Age Distribution Blacks have proportionately more young people and nonblacks have higher proportions of older people in the Table 3 Sex Ratios of the Texas Total, Black, and Nonblack Populations, 1850-1980 Males per I 00 females Year Total Black Non black 1850 11 5.1 97.5 122.7 1860 112.7 99.8 118.9 1870 107.2 99.3 111.0 1880 II 5.0 100.I 123.2 1890 110.3 100.4 112.9 1900 107.4 99.9 109.5 1910 107.4 100.0 109.1 1920 106.9 100.3 108.2 1930 103.8 97.9 104.8 1940 100.9 95.3 101.8 1950 100.4 94.8 101.2 1960 98.1 94.4 98.7 1970 95 .9 92.7 96.4 1980 96.8 92.7 97.4 Sources: Computed from U.S. Census Office, The Seventh Census of the United States: 1850, vol. I (Washington, D.C.: Robert Armstrong, public printer, 1853), table I; U.S. Census Office, The Eighth Census of the United States: 1860, vol. 1 (Washing­ton, D.C.: Government Printing Office, 1864), table 2; U.S. Cen­sus Office, The Ninth Census of the United States: 1870, vol. 1 (Washington, D.C.: Government Printing Office, 1872), table 22; Department of the Interior, Census Office, The Tenth Census of the United States: 1880 (Washington, D.C.: Government Print­ing Office, 1883), table 36; Department of the Interior, Census Office, The Eleventh Census of the United States: 1890 (Wash­ington, D.C.: Government Printing Office, 1892), table 19; U.S. Department of Commerce, Bureau of the Census, U.S. Census of Population: 1970, vol. 1, "Characteristics of the Population" part 45, Texas, section 1, table 17; and 1980 unpublished data provided by Statistical Information Office, Population Division, Bureau of the Census. MAY-JUNE 1982 state (see table 4 ). For example, there are more youngsters under 5 years of age in the black population than there are older persons (ages 65 and older), but older people out­number youngsters under age 5 in the rest of the state's population. One way that demographers evaluate differences in the age distributions of two or more groups is by comparing their dependency ratios (the relation of the population purported to be in the nonproductive ages to those in the working ages). In a general sense, the most productive years are assumed to be the forty-five years between the ages of 20 to 65 , and the nonproductive years are assumed to be those under 20 and those 65 and over. Thus, the number of persons under 20 plus those 65 and over for each 1,000 per­sons 20 to 65 years old gives some indication of the burden of support borne by the productive members of a popula­tion . The black population of Texas had 934 persons in the dependent ages for every 1,000 in the productive ages in 1980. This figure contrasts rather sharply with the 764 persons in the dependent ages for every 1,000 in the pro­ductive ages among the nonblacks. Persons classified as economically dependent represent two widely different age groups. An index of aging (the number of persons 65 years old and over for each 1,000 persons under 20) indicates the relative importance of the two dependent groups. In 1980, there were 211 persons 65 years of age and older for each 1,000 under 20 years of age in the black population of Texas. By comparison, non­blacks had 292 aged persons for each 1,000 in the younger ages. Thus, blacks have a comparatively younger population than does the rest of the state's population. Conclusion Since blacks have higher fertility rates as well as a larger portion of their total population in the younger ages than Table 4 nonblacks, they have greater potential for population in­creases. On the other hand, their higher death rates and lower net in-migration rates more than offset any advan­tages they might have had over nonblacks for greater popu­lation growth potential during the last census decade. Blacks have what demographers generally consider to be a less favorable age distribution than nonblacks because of the higher ratio of dependent-to-working blacks. Overall, a review of differences in the major demographic charac­teristics of blacks and nonblacks and of the degree to which these characteristics have been changing leads to the general conclusion that it will be a long time before black and nonblack demographic characteristics might become essentially alike. Notes 1. Besides Afro-Americans, or American Negroes, the black popula­ tion of Texas also includes a relatively small number of persons of Spanish origin who identified themselves as blacks in response to the census question regarding skin color. While the number of perso ns of Spanish language or surname classified as blacks in 1980 is not known, in 1970 less than 0.2 percent of the black population of Texas was in this category. See R. L. Skrabanek and W. Kennedy Upham, The Population of Texas, Bulletin 1141 (College Station: Texas Agricultural Experiment Station, Texas Agriculture Extension Service, April 1974), p. 22. 2. Lawrence D. Rice, The Negro in Texas 1874-1900 (Baton Rouge : Louisiana State University Press, 1971), p. 3. 3. U.S. Census Office, The Seventh Census of the United States: 1850, vol. 1, "Statistics of Texas" (Washington, D.C.: Robert Arm­ strong, Public Printer, 1853), table 1. 4.-U.S. Census Office, The Eighth Census of the United States: 1860, vol. 1, "State of Texas" (Washington, D.C.: Government Printing Office, 1864), table 2. 5. The East Texas area of seventy-eight counties is bounded by Grayson, Collin, Dallas, Ellis, Hill, McLennan, Bell, Williamson, Bastrop, Fayette, Colorado, Wharton, and Matagorda counties. 6. Sources of data for this section are U.S. Department of Com­ Age Composition of the Texas Total, Black, and Nonblack Populations, 1980 Total Black Non black Age group Number Percentage Number Percentage Number Percentage ~~~~~~~~~~~~~~~~~~~~___:._~~~~~~~~~~~--=­ Under 5 1, 169,044 8.2 160,461 9.4 1,008,583 8 .1 5-9 1, 169,949 8.2 163,783 9 .6 1,006,166 8 .0 10-14 1, 179,799 8 .3 167,962 9.8 1,011 ,837 8 .1 I 5-19 1, 352 ,282 9 .5 191 ,591 11.1 1,160,691 9 .3 20-24 1,420,301 10.1 186,627 10.9 1,233,674 9 .9 25-29 1,301 ,873 9 .1 156,073 9 . 1 1,145 ,800 9 .2 30-34 I, 124,495 7 .9 120,713 7 .1 1,003,782 8.0 35-39 880, 145 6.2 90,436 5.3 789,709 6 .3 40-44 722,977 5. 1 75,572 4.4 647,405 5.2 45-49 681 ,332 4 .8 71 ,745 4 .2 609,587 4.9 50-54 55-59 60-64 65 and over 680,295 643,327 531 ,524 1,371 ,040 4 .8 4 . 5 3.7 9 .6 69,271 61 ,468 51,702 142,846 4.1 3.6 3.0 8.4 611 ,024 581 ,859 479,822 1,228,194 4 .9 4 .6 3.7 9 .8 Total 14,228,383 100.0 1,710,250 100.0 12,518,133 100.0 Source: Unpublished data provided by Statistical Information Staff, Population Division, Bureau of the Census. merce, Bureau of the Census, U.S. Census of Population: 1940, "Char­acteristics of the Population," part 43, Texas, second series, table 5; U.S. Department of Commerce, Bureau of the Census, U.S. Census of Popula· tion: 1960, vol. 1, "Characteristics of the Population," part 45, Texas, table 14 ; U.S. Department of Com­merce, Bureau of the Census, U.S. Census of Population: 1970, "Char­acteristics of the Population," part 45, Texas, section 1, table 17; all published by the Government Print­ing Office in Washington, D.C., at varying dates. Unpublished data for 1980 metropolitan and nonmetropol­itan residence were provided by the Statistical Information Office, Popu­lation Division, Bureau of the Census. No data were available for 1980 rural and urban residence by states when this article was being prepared. BBR Publications on Latin America Atlas of Central America Arbingast, Stanley A., et. al. 1979. 70 pp. 11" x 14" spiral bound. $18.00. ISBN 87755-262-2. An economic atlas with maps of Central America and the individual countries-Guatemala, Belize, Honduras, El Salva­ dor, Nicaragua, Costa Rica, and Panama. Atlas of Mexico Arbingast, Stanley A., et. al. 1975. 164 pp. 11" x 14" spiral bound. $20.00. ISBN 87755-187-1. An economic atlas of Mexico, including political, physical, social, and historical data. Economic Integration in Latin America: The Progress and Problems of LAFT A Mathis, F. John. 1969. 112 pp. $4.00. ISBN 87755-076-X. Studies in Latin American Business No. 8. The study is con­cerned primarily with the Latin American Free Trade Asso­ciation as the organization expected to determine the suc­cess or failure of the common market in Latin America. A Spanish edition is available from Editorial Diana, Mexico. Industrial Polarization under Economic Inte­gration in Latin America Garbacz, Christopher. 1971. 101 pp. $4.00. ISBN 87755­138-3. Studies in Latin American Business No. 11 . The focus is the tendency for an economic union of countries with widely divergent levels of development to result in further extreme concentration of economic activity at a few industrial poles. Industrialization and Employment in Puerto Rico, 1950-1972 Holbik, Karel, and Philip L. Swan. 1975. 82 pp. $4.00. ISBN 87755-208-8. Studies in Latin American Business No. 16. Although de­velopment programs dating from the 1940s have made pos­sible the emergence of Puerto Rico as an industrialized economy, the economic changes have resulted in certain problems, problems that are a major focus in the book. International Tourism and Latin American Development Krause, Walter, and G. Donald Jud. 1973. 74 pp. $5.00. ISBN 87755-176-6. Studies in Latin American Business No. 15. The central ques­tions in the work are (1 ) What is the potential for tourism in Latin America? and (2) What must Latin America do to realize the potential? Mexican Migration and the U.S. Labor Market: A Mounting Issue for the Seventies Briggs, Vernon M., Jr. 1975. 37 pp. $4.00. ISBN 87755­214-2. Studies in Human Resource Development No. 3. An analysis of the effects of U.S. labor, immigration, and border poli­cies on employment and labor problems of the seventies. The Mexican Migration Numbers Game: An Analysis of the Lesko Estimate of Undocu­mented Migration from Mexico to the United States Roberts, Kenneth, Michael E. Conroy, Allan G. King, and Jorge Rizo-Patron. 1978. 33 pp. $4.00. ISBN 87755­228-2. Research Report 1978-1. A detailed account of methods used to enumerate illegal aliens in this country and a critical assessment of this approach. The Mexico-United States Border: Public Poli­cy and Chicano Economic Welfare Briggs, Vernon M., Jr. 1974. 28 pp. $4.00. ISBN 87755­200-2. Studies in Human Resource Development No. 2. A dis­cussion of the effects of U.S. immigration policies. Monetary Accommodation of Regional Inte­gration in Latin America Ziegler, Lawrence F. 1971. 83 pp. $4.00. ISBN 87755­154-5. Studies in Latin American Business No. 12. The author's focus is the monetary side of the Latin American move­ment toward market integration . Social Class and Consumption Behavior in Sao Paulo, Brazil Cunningham, Isabella C.M., et al. 1976. 177 pp. $4.00. ISBN 87755-258-4. Studies in Marketing No. 23. The authors examined the shopping and consumption behavior of individuals in vari­ous social classes in Sao Paulo. Trade and Industrialization in the Central American Common Market: The First Decade Holbik, Karel, and Philip L. Swan . 1972. 67 pp. $4 .00. ISBN 87755-167-7. Studies in Latin American Business No. 13. The authors trace the development of the Central American Common Market and evaluate its results. The United States and Latin America: The Alliance for Progress Program Krause, Walter. 1963. 35 pp. $4.00. ISBN 87755-070-0. Studies in Latin American Business No. 2. A discussion of the political and economic involvement of the United States with Latin America through the Alliance for Progress. Wage Differences between United States and Guatemalan Industrial Firms in Guatemala Maddox, Robert Casey. 1971. 57 pp. $4.00. ISBN 87755­143-X. Studies in Latin American Business No. 10. The wage levels and factors accounting for differences are analyzed. MAY-JUNE 1982 The State Data Center Network as an Information Resource Jerome Olson Rita J. Wright Bonnie M. Young A recent agreement between the state of Texas and the U.S. Bureau of the Census has established the Texas State Data Center with a state system of affiliates to facilitate the dissemination of summary data and microdata from the 1980 census. In addition to providing an outlet for 1980 census data, however, the network will also be used to disseminate economic and demographic data from other sources. Furthermore, many of the universities, councils of government, and other entities participating in the net­work offer extensive data-processing, research, and analyti­cal services, as well as raw data. The Texas 2000 project in the Governor's Office of Budget and Planning was designated lead agency of the pro­gram, responsible for organizing, coordinating, and adminis­tering a state network of agencies and affiliates. The system is organized around four core agencies, eight state affiliates, and twenty-four local affiliates, each with a designated area of responsibility. The core agencies include the Texas 2000 project as lead agency; Texas A&M University, which as the primary operational agency is charged with computer and analytical support of the program; the Texas State Archives and Library, which provides training assistance and liaison with libraries around the state and acts as a major depository of government documents; and the Texas Natural Resources Information System, which has many computer files avail­able and is responsible for serving state agencies. State affiliates of the Data Center are located in the eight service areas of the program. Each is a public univer­sity with data-processing capabilities and strong research and analytical resources. Each offers a wide range of prod­ucts and services, including tape processing, special tabula­tions, and analysis. Services are cost reimbursable. The first contact for most data users should be one of the twenty-four local affiliates (see figure 1 ). Each local Jerome Olson is an economist and Rita J. Wright is a librarian at the Bureau of Business Research, University of Texas at Austin. Bonnie M. Young is Director, Texas State Data Center. affiliate serves a single planning region. All maintain a library of printed and microfiche material provided through the Data Center program and will assist data users in locat­ing needed statistics and information. Some local affiliates also have data-processing capabilities and may maintain some computerized data. Users who believe the data in the system would help them should contact the local affiliate for their planning region (see figure 2 for planning regions). Data Available through the System The primary purpose of the data system is to make the 1980 census data available to users, but it is also well suited for disseminating all kinds of useful data. Two basic types of data are available to the public from the 1980 census-summary data and microdata. Microdata describe the characteristics of individual households or people, whereas summary data summarize the characteris­tics of the people living in a specific geographic area. In microdata, each unit of data (or record) indicates the re­sponses that a single household or individual gave on a census form. In summary data, each record contains aggre­gated information for all the people living in the area to which the record pertains. Data from the 1980 census may also be classified by the type of question asked: some were asked of everyone (resulting in complete-count data) while others were asked only of those who received the long-form questionnaire (resulting in sample data). About 20 percent of the popu­lation filled out the long form (see figure 3 for a list of both kinds of questions). Summary data are available in tape, microfiche, and print. Tapes are made available to the Data Center state affiliates and the core agencies. Hard copy (microfiche or printed reports) is made available to the state and local affiliates. Tape has more advantages than hard copy does because much more detail is available and statistical and Figure 1 State Data Center Affiliates Service Area/Affiliate Contact/Telephone Service Area/Affiliate Contact/Telephone SERVICE AREA I: STATE AFFILIATE Department of Sociology Texas Tech University P.O. Box 4590 Lubbock, Texas 79409 Local Affiliates Panhandle Regional Planning Commission P.O. Box 9257 Amarillo, Texas 79105 South Plains Association of Governments 1709 26th Street Lubbock, Texas 79411 Nortex Regional Planning Commission 2101 Kemp Boulevard Wichita Falls, Texas 76309 Permian Basin Regional Planning Commission P.O. Box 6391 Midland, Texas 79701 SERVICE AREA II : STATE AFFILIATE Texas Urban Data Service The University of Texas at Arlington P.O. Box 19588 Arlington, Texas 76019 Local Affiliates North Central Texas Council of Governments P.O. Drawer COG Arlington, Texas 76011 Texoma Regional Planning Commission I0000 Grayson Drive Denison, Texas 75020 West Central Texas Council of Governments P.O. Box 3195 Abilene, Texas 79604 SERVICE AREA Ill: STATE AFFILIATE Department of Political Science Stephen F. Austin State University Nacogdoches, Texas 75962 Local Affiliates Ark·Tex Council of Governments P.O. Box 1866 Mount Pleasant, Texas 7545 S East Texas Council of Governments Stone Road Plaza Office Building 3800 Stone Road Kilgore, Texas 75662 Deep East Texas Council of Governments P.O. Drawer 1170 Jasper, Texas 7595 I SERVICE AREA IV: STATE AFFILIATE Bureau of Business and Economic Research The University of Texas at El Paso El Paso, Texas 79968 Local Affiliates City of El Paso Planning Department Two Civic Center Plaza El Paso, Texas 79999 SERVICE AREA V : STATE AFFILIATE Bureau of Business Research The University of Texas at Austin P.O. Box 7459 Austin, Texas 78712 Dr. Paul Chalfant Dr. Evans Curry Susan Minks-Copley 806/742-2402 Vicki Jacobs 806/372-3381 Arlene Miller 806/762-8721 Tom Merritt 817/322-5281 Jerry Tschauner 91 S/563·1061 Carolyn Wietzel 817/273-3391 or 273-3071 Billie Villars 817/640-3300 Barry Le Baron 214/786-2955 James Compton 915/672-8544 Dr. Ronald Claunch 713/569-3903 Doug Piggott 214/572-1760 Vicki Buchanan 214/984-8641 Ivy Mays 713/384-5704 Dr. Edward George Ike Burke 915/747-5122 Eugenio Alcantar 915/541-4721 or 541-4722 Dr. Jerome Olson Rita Wright 512/471 -1616 Local Affiliates Concho Valley Council of Governments 5002 Knickerbocker Road San Angelo, Texas 7690 I Heart of Texas Council of Governments 320 Franklin Avenue Waco, Texas 76701 Capital Area Planning Council 2520 l.H. 35 South, Suite 100 Austin, Texas 78704 Central Texas Council of Governments P.O. Box 729 Belton, Texas 76513 Brazos Valley Development Council P.O. Drawer 4128 Bryan, Texas 77801 SERVICE AREA VJ: STATE AFFILIATE Department of Political Science University of Houston Central Campus Houston, Texas 77004 Local Affiliates South East Texas Regional Planning Commission P.O. Drawer 1387 Nederland, Texas 77627 Golden Crescent Council of Governments P.O. Box 2028 Victoria, Texas 77901 Houston-Galveston Area Council P.O. Box 22777 Hou~on,Texas 77027 SERVICE AREA VII: STATE AFFILIATE Office of Institutional Studies and Planning The University of Texas at San Antonio San Antonio, Texas 78285 Local Affiliates Alamo Area Council of Governments 118 Broadway, Suite 400 San Antonio, Texas 78205 Middle Rio Grande Valley Development Council P.O. Box 702 Carrizo Springs, Texas 78834 SERVICE AREA VIII: STATE AFFILIATE School of Social Sciences Pan American University Edinburg, Texas 78539 Local Affiliates South Texas Development Council P.O. Box 2187 Laredo, Texas 7 8041 Coastal Bend Council of Governments P.O. Box 9909 Corpus Christi, Texas 78408 Lower Rio Grande Valley Development Council First National Bank Building, Suite 207 McAllen, Texas 78501 Gail Arnn 915/944-9666 Stan Buchanan 817/756-663 1 Don Stence Sylvia Cook s12/443-7653 Morrison Parrott Jennifer Wegley 817/939-1801 Jill Hyde 7 I 3/822-7421 Dr. Richard Hofstetter 713/749-4883 Fred Hellen 713/727-2384 Pat Kennedy 512/578-1587 Max Beauregard 713/627-3200 John Romanek Barbara Riker 512/691 -4555 Ida Givens s12/225-5201 Almut Wetzig s12/876-3533 Dr. Manuel Lopez SI 2/381 -3339 or 381-3551 Julie Saldana SI 2/722-3995 Leonard Redding Tom Brown 512/883-5743 Virginia Bone s12/682-3481 MAY-JUNE 1982 arithmetic operations may be performed on the basic data on a computer. Also, since tape copy is less expensive than published hard copy, more detailed information can be made available at a lower cost than would be possible through hard copy alone. The advantage of hard copy is that a computer is not needed to retrieve small amounts of data. Different users with varying needs will require access to different forms of data. Summary data for Texas are available for the whole state and for various substate geographic levels, including the twenty-six standard metropolitan statistical areas (SMSAs); all counties; census county divisions (administrative entities designed by the Bureau of the Census) ; incorporated and unincorporated cities, towns, and villages; census tracts (area divisions in densely populated areas); enumeration districts (rural tracts of about 1,000 people); block num­bering areas and block groups (groups of city blocks); and city blocks. The larger areas have well-known boundaries Figure 2 State Planning Regions in Texas Regions 1 Panhandle 2 South Plains 3 North Te xas 5 North East Texas 17 Golden Crescent 6 East Texas 18 Alamo 7 West Central Texas 19 South Texas 8 Upper Rio Grande 20 Coastal Bend 9 Permian Basin 21 Lower Rio Grande Valley 10 Concho Valley 22 Texoma 11 Heart of Texas 23 Central Texas 12 Capital 24 Middle Rio Grande that are clearly depicted on ordinary maps, but blocks, block groups, enumeration districts, census tracts, and county divisions are not shown on most maps. Maps show­ing these areas will be available through most of the state data center affiliates. Summary data are edited to protect the confidentiality of individual answers to census questionnaires. The sum­mary of responses to a particular question is withheld from publication in any form if too few answers are being sum­marized. On, say, a block with fewer than fifteen people or five housing units, summaries regarding marital status, age, house value, and so forth will be suppressed. The Census Bureau reasons that if there are fewer than fifteen people in the area being summarized, someone could easily infer confidential information about specific individuals from the published summary statistics. Some data, however, are never suppressed: total population counts, racial and Spanish-origin population counts, and counts of housing units-total, vacant, or occupied, and whether they are occupied year-round or not. The Census Bureau evidently feels that these data are so clearly evident through noncensus sources that it is pointless to suppress them. Uses of Summary Data Summary data have many uses. The state government has used summary data in its redis­tricting of Texas congressional districts and for determining the Texas share of federal funds whose distribution depends on population and population char­acteristics. Local governments use the data for determining their share of certain kinds of federal and state funds and for determining their eligibility for various kinds of loans and grants. School districts need summary data for determining the population and population characteristics in their areas. Both government and private entities use summary data in reporting compliance with vari­ous federal and state regu­lations pertaining to racial and other demographic characteris­tics of their labor force and customer populations. Utility companies, for example, can plan for future service require­ments by relating past service requirements to past population levels. Using these relations, they ISO can estimate future service requirements by estimating future population growth. Private firms can use summary data for planning future growth. Private corporations may also use census data to make locational decisions. Retail chains, for example, want to locate in areas where they will have maximum market potentials. By relating its customer base to the demographic characteristics of a population, a firm can analyze the summary statistics relating alternative proposed locations and pick the one with the most desir­able characteristics. Similarly, manufacturing firms deciding where to locate a new plant may use summary statistics as a guide to finding areas with a high potential for providing the labor force they will need to sustain operations. Any firm considering moving will want to analyze the summary statistics to see if the social and economic characteristics of the communities being considered are suitable for its employees and executives. Firms whose customer base is clearly defined geographically (such as utilities, newspapers, and direct mail sales companies) can determine market penetra­tion by geographic area through the use of summary statistics. A comparison of the number of households to the number of customers in an area shows the degree of penetration and pin­points areas with the greatest potential payoff for future mar­keting activities. A comparison of the demographic characteris­tics of an area with the level of penetration may also give firms an idea about the kind of people who buy their products and may provide guidance in determining the kind of sales activities that would most likely influence the target population to buy their products. Data Products Summary Tape Files Summary data tapes from the 1980 census are provided in five series of files known as summary tape files (STFs). Each file represents different combina­tions of sample or complete­count data for differing geo­graphic levels. Each file is arranged by state and contains data for the lowest level of geography identified ; most files Population Household relationship Sex Race Age Marital status contain totals for the various intermediate levels as well. The first two files contain only complete-count data. STFs 3, 4, and 5 contain data based on the sample as well as the complete count. Each of the first four summary tape files is further divided into files A, B, and C, which provide the same data items for varying levels of geography. STF l contains 326 items of complete population and housing data. File l A provides data down to the block group or enumeration district level; file l B goes down to the block level in blocked areas, or enumeration district in unblocked areas. Larger geographic units also identified in STF 1 include tracts, places, county subdivisions, coun­ties, and congressional districts. Files l A and I B are issued by state. File l C is a national file that presents data for Figure 3 Items Included in the 1980 Census COMPLETE-COUNT ITEMS Housing Number of units at address Access to unit Complete plumbing facilities Number of rooms Tenure (whether unit is owned or rented) Spanish/Hispanic origin or descent Condominium identification Value of home (owner-occupied units and condominiums) Contract rent (renter-occupied units) Vacant for rent, for sale, etc.; and duration of vacancy SAMPLE ITEMS* Population All complete-count items School enrollment Educational attainment State or foreign country of birth Citi zenship and year of immigration Current language and English proficiency Ancestry Place of residence five years ago Activity five years ago Veteran status and period of service Presence of disability or handicap Children ever born Marital history Employment status last week Hours worked last week Place of work Travel time to work Means of transportation to work Number of persons in car pool Year last worked Industry Occupation Type of employment Number of weeks worked in 1979 Usual hours worked per week in 1979 Number of weeks looking for work in 1979 Amount of income in J 979 by source Housing All complete-count items Type of unit and units in structure Stories in building and presence of elevator Year built Year moved into this house Acreage and crop sales Source of water Sewage disposal Heating equipment Fuels used for house heating, water heating, and cooking Costs of utilities and fuels Complete kitchen facilities Number of bedrooms Number of bathrooms Telephone Air conditioning Number of automobiles Number of light trucks and vans Homeowner shelter costs for mortgage, real estate taxes, and hazard insurance •f or most areas of the country in 1980, one out of every six housing units or households re­ceived the sample form. In areas estimated to contain 2,500 or fewer persons, three out of every six units or households were sampled -a rate that is required in order to obtain reliable statistics needed for participation in certain federal programs. MAY-JUNE 1982 large geographic areas, including SMSAs, counties, and places of 10,000 or more inhabitants. STF 2 contains much more varied detail than does STF 1. For example, STF 2 presents counts of persons in single age-group categories from 1 to 99 years old and three age­group categories of persons over 100 years old. STF 1 has only twenty-six age-group categories, but the geographic areas identified on the file are not as extensive. STF 2 has A, B, and C files, as does STF 1. File 2A presents sum­maries down to the census tract level; file 2B provides information for county subdivisions and for places as small as 1,000 inhabitants. File 2C is a national file with data available for places of 10,000 or more inhabitants. Within each file there are also records for the total population and for each of twenty-seven categories by race and Spanish origin. For smaller geographic areas, such as census tracts and places with fewer than 2,500 persons, data will be limited to six categories. STF 3 consists of 124 tabulations of sample population and housing data for generally the same geographic areas as STF 1. STF 4 provides more detailed tabulation of sample items. For example, "year structure built" is cross-tabulated by occupancy status and tenure in STF 3, but four cross­ tabulations of this variable (units in structure, value, monthly owner costs, and vacancy status) are provided in STF 4. STF 4 also contains A, B, and C files arranged in a manner similar to those in STF 2. The lowest levels of geography identified are tracts, census county divisions, and places of 2,500 inhabitants or more. Each file is further divided into population and housing tabulations. Data are presented for the total population as well as for various racial and Spanish-origin groups. STF 5 contains detailed gross tabulations of population and housing data for SMSAs, large cities, and counties. Printed Reports and Microfiche For each summary tape file, a corresponding paper or microfiche publication contains the same kinds of informa­ tion in less detail. These publications will be made available through the State Data Center network, and most questions from users needing only a few numbers for descriptive or comparative purposes can be answered by referring to these documents. The Census Bureau has, in the past, pursued a very ambi­ tious publication program to provide data in printed form . For this census, however, budget cutbacks have caused the Census Bureau to shift its emphasis. A reduction in printed publications will be compensated for by the establishment of the State Data Center network, which makes tape data readily accessible. It will be more efficient to produce detailed statistical reports specifically for individual entities needing them than to publish numerous copies of small­ area data when only a fraction of such material will ever be used. The sheer volume of small-area data in printed form makes it likely that the data are probably transformed by the users into a machine-readable form for analysis, aggregation, or display. Microdata Microdata files, available only on tape, show the an­swers made by the sample of individuals and households who completed the long form. To ensure the respondent's confidentiality, all identification is stripped from the tape before it is made available for public use. Furthermore, the geographic identification is only specific enough to narrow the location to an area including 100,000 or more inhabit­ants, never specific enough to identify the individual respondent. The primary use of microdata is in estimating relations between the answers to the long form at an individual level. Other Data While the 1980 census data are valuable tools in them­selves, they can be made even more valuable when used in conjunction with data from other sources. Combining 1970 census data with 1980 census data, for example, permits comparison of housing and population characteristics over time and the computation of growth rates. Adding eco­nomic data on government finances, income, employment, and poverty gives an economic profile of the area that com­plements the demographic profile available from the cen­sus. All of the Data Center affiliates maintain supplemen­tary files of economic and demographic data that are distributed through the system. In addition, some affiliates maintain supplementary data files of their own that they will make available to users along with the various census data. Texas Economic and Demographic Association Users of census data may join the Texas Economic and Demographic Association (TEDA), which brings together data users from business, industry, government, and other sectors to share information, expand technical knowledge, minimize the duplication of effort, and develop contacts with persons of similar interests in economic and demo­graphic research. Chapters of TEDA will be formed in Texas cities and areas where strong local interest and sup­port is evident. All chapters will be locally governed but affiliated through a state constitution and an annual mem­bership meeting. The first TEDA chapter was organized in the Dallas-Fort Worth area in October 1981. Austin and Houston chapters are forming now. Individuals interested in TEDA should contact their local affiliates for further information. CORRECTION In the March-April 1982 issue, an error was introduced into one of the graphs in Thomas R. Plaut's article, "A Supply­Side Model of the Texas Economy: Detailed Forecasts to the Year 2000." In figure 2 (page 52), natural increase in 1974 was 110,000, not 10,000. Barometers of Texas Business (All figures are for Texas unless otherwise indicated.) All graphs except the one for nonagricultural employment are adjusted for seasonal variation. Data were compiled from the following sources: U.S. Department of Labor, Texas Employment Commission, Texas Railroad Commission, and Federal Reserve Bank. Data on oil refining and total industrial production are current through February 1982; data on crude oil production are current through March 1982; all other data are current through April 1982. Consumer Prices (Index: 1967=100) 300 280 8.0 260 240 220 6.0 200 180 160 140 4.0 120 Percentage Unemployed (9.4) ~ .. •' :' ~ r .'~· J '""': I ' .I ,...,, f I I ' ·-· ! "..•, a' ; '•.! '" '. .I "-''..I United States ..:"" (6 5) 2.o-+~""""T-19_7_4-r-~r1-9_7_6..--~r1-9_7_8,..---,,1-98-0-.-~....-19-8-12 l00-+~~1-9_7_4~--.-19_7_6~~~1-9_7_8~~r1-9_8_0r---ir1-98-2~ Oil Production and Refining (Index: 1967=100) 160 150 140 130 120 110 .,........ -,', \ ,,... , (107.3) ' .............., 100 \ ......... , Crude oil production ~; ~:-, 90 ·-­.. \..................:.... (81.9) 80 Industrial Activity (Index: 1967=100) 250 225 (224.2) 200 175 (159.1) 150 125 7o-+~~1_9_7_4~~~1-9-76~~~1-97-8-.-~~19_8_0-r-~~1-9-8-l2 lOO-t-~"""T.1~9~7~4r-~~17 9~76'.:"T""~~1-97-8.....-~.....-,9-8-0-,-~-,-,9-8~2 Nonagricultural Employment in Texas Data are current through April 1982. C/l Trade ( 1,570) m (') 0 2 c <-> i' )> C/l Services (1, 118) (/) ,, Manufacturing (1,091) 0 Government (1,019) (/) -f )> G) m ,, ~ c Construction (443) ~ Transportation and )> public utilities (393) c (/) Finance (356) -f z Mining (305) -f m >< ~ Total (6,308) l> -t m c J: c: en m :a ::! c m 2 2 l> • -c: -t < 0 mm.,, x ::a l> en m Cf) -c: -t C/l ...., -< ­ co 0 2 ...., .,, m ~ -t ~ m ::a Xm )> C/l , cnm )> l> -t ::a )> (') c J: Cf) -t 2