Roger W Ferguson, Jr: Economic progress and small business
Speech by Mr Roger W Ferguson, Jr, Vice-Chairman of the Board of Governors of the Federal
Reserve System, before the African American Chamber of Commerce of Western Pennsylvania,
Pittsburgh, Pennsylvania, 12 November 2002.
* * *
I am pleased to join you today. I would like to focus first on the economic status of minority Americans,
including some information from the Federal Reserve's most recent Survey of Consumer Finances. I
will then turn to the role of small businesses in our economy, drawing on our research on small
business finances and our efforts to promote small business access to capital and credit.
Labor market developments
During the 1990s, we were fortunate to have experienced the longest uninterrupted economic
expansion in U.S. history. By late 2000, the unemployment rate was the lowest it had been in more
than thirty years. The expansion benefited all segments of the population, including minority groups. In
fact, the unemployment rate for blacks dropped to less than 7-1/2 percent in late 2000; it had not been
lower than 9 percent since statistics on the minority labor force were first collected in 1972. But despite
the improvement, blacks still lagged, with an unemployment rate that was nearly twice the national
average.
Over the past year and a half, as all of you know, we have experienced a business cycle downturn that
has been followed, more recently, by a very slow recovery in the labor market. As a result, we have
retraced some of the gains recorded during the 1990s. The overall unemployment rate has moved
back up to 5-3/4 percent in recent months, and the jobless rate for blacks has hovered just below
10 percent.
The fact that the business cycle has had broad effects on the labor market outcomes--both on the
upside and on the downside--highlights the limited scope for monetary policy to be calibrated to target
or to exempt a particular segment of our economy from cyclical changes in economic activity. Over the
course of the business cycle, in both good times and bad, minority unemployment rates tend to run
significantly higher than the national average. Economists have determined that a variety of factors
contribute to that persistent disparity, including educational levels, work experience, and proximity to
available jobs. Nonetheless, the particularly troubling longer-run trend of declining labor force activity
of black men remains subject to considerable debate.
Monetary policy alone cannot address the underlying structural causes of differences in economic
outcomes for various groups, but it can contribute to an environment in which progress toward equality
is more likely to be made. Adjusting monetary policy in a forward-looking manner to attain the
maximum sustainable growth path for the aggregate economy and stable prices will help foster
conditions under which the greatest number of Americans--including minorities--share in the nation's
prosperity. The Federal Open Market Committee's accommodative policy over the past 22 months has
been aimed at supporting aggregate demand to lay the groundwork for a return to a sustainable rate
of economic expansion. And, last week's decision to ease further was aimed at increasing the chances
that the economic recovery would stay on track and not be derailed by the recent soft spot.
Private wealth creation
Just as the long expansion of the 1990s brought marked reductions in unemployment, it also
supported individual wealth creation. Because the creation of wealth is an important benefit of policies
that encourage stable economic conditions and sustainable job creation, my colleagues and I at the
Fed take an active interest in understanding the process of wealth creation. The Board's Surveys of
Consumer Finances, which are conducted every three years, help us understand issues of personal
finance.
With the information for 2001 tabulated so far, our survey shows that U.S. families saw sizable gains in
both their mean and their median net worth over the past decade: Median real net worth rose
40 percent, and mean net worth rose 72 percent, between 1992 and 2001. Roughly half those gains
occurred between 1992 and 1998, and half occurred in just three years, from 1998 to 2001. Between
1992 and 1998, although the level of net worth for minority families remained well below that of other
families, their median real net worth was rising at roughly the same pace, 20 percent, as nonminority
families. However, between 1998 and 2001, inequality in family net worth increased significantly:
Median real net worth changed little for minority families while it increased an additional 17 percent for
nonminority families. As a result, the striking difference in the level of wealth between minority and
other families widened further: In 2001, the median net worth was $17,100 for minority families versus
$120,900 for non-Hispanic white families. I note, for this audience, that the story for African Americans
alone is somewhat more positive: Median wealth did increase about 13 percent between 1998 and
2001, but the median level of net worth in 2001 was still only $19,000.
A substantial part of the wealth gap is associated simply with differences in family ownership of assets.
In 2001, about 22 percent of minority families had no type of nonfinancial asset--such as a residence,
a vehicle, or a business; almost 18 percent had no type of financial asset--such as a checking or
savings account, stocks, bonds, or other such assets. For other families, the comparable figures were
well below 10 percent. Obviously, with their more limited asset ownership, minorities had less
opportunity to benefit from the substantial appreciation of assets, such as houses and corporate
equities, that occurred over the 1990s.
Nonetheless, increases in ownership are an important factor in explaining the gains in net worth that
we did see for minorities over the past decade. Two items stand out as particularly important:
transaction accounts and personal residences. Transaction accounts--including checking and savings
accounts--are the most basic type of financial asset. Without such holdings, families are unlikely to
acquire the sophistication to move further into the financial system. Over the period from 1992 to 2001,
the share of minority families with such accounts rose from 64 percent to 78 percent.
No doubt, a large part of the differences in asset holdings between minorities and other families may
be attributed to differences in income. By the definitions used in our survey, the median income of
minority families in 2001 was only 57 percent that of other families. However, earlier work by our staff
suggests that, even after controlling for such factors as income and formal education, minorities are
still less likely to hold even a basic checking account. This finding suggests that fostering equal
opportunity and supporting financial literacy campaigns may help minorities move into the financial
mainstream.
I do not have time today to cover the full range of detailed findings on asset and debt holdings from
our 2001 Survey of Consumer Finances. Clearly, the survey is an important source of information on
how changes in financial markets, innovations in lending, and other factors affect the financial situation
of families. Our staff is preparing an article for publication in the Federal Reserve Bulletin early next
year, which will provide a fuller review of the results.
Changes in home ownership
The other important contributor to the rise in wealth among minorities has been the rise in home
ownership. Indeed, for many households, the largest and most important asset is the home they own.
Home ownership is one of the cornerstones of wealth building and is generally associated with a range
of socially desirable outcomes, including good schools, less crime, and neighborhood stability. For
these and other reasons, increasing the rate of home ownership has been a long-standing national
priority.
Over the past decade or so, strong gains in employment, relatively low interest rates, and modest
price inflation have spurred home buying across all segments of our society. In addition to favorable
general economic conditions, home ownership has benefited from the introduction of new information
processing technologies, including credit scoring, that have reduced the costs of obtaining a mortgage
and from the introduction of a host of new, more affordable mortgage products.
Strong private and public support for home ownership has helped to push the national homeownership
rate to 67.8 percent in the third quarter of 2002. While rates for all groups have risen over the past
decade, minority households have experienced the largest gains in home ownership. For blacks and
Hispanics, homeownership rates averaged 47.5 and 48 percent, respectively, over the past year, up
from rates of around 43 percent and 40 percent, respectively, a decade earlier. These trends in
minority home ownership are quite positive, but more work remains to further close the substantial gap
between minorities and non-Hispanic whites, whose homeownership rate is above 70 percent.
The role of small businesses in our economy
Business ownership has been another area of economic progress for minorities. The Federal Reserve
has an ongoing interest in small businesses and their access to credit, which stems, in part, from the
significant role that small businesses play in our dynamic economy. By some estimates, we have
upwards of twenty-five million small businesses in the United States accounting for more than
99 percent of all firms. Although a great number of these firms involve individuals who are
selfemployed or who have no employees, small businesses, collectively, employ more than half the
private-sector workforce and generate about three-fourths of net new jobs each year. These firms also
generate more than half the sales revenues of all U.S. firms. In addition, research has consistently
found that small businesses contribute vitally to the economies of urban and rural communities.
The expansion of the last decade provided a favorable climate for small businesses generally and for
minority-owned firms in particular. The year 2000 alone saw the creation of more than 600,000 new
firms with employees in the United States. Moreover, in recent years, the number of minority-owned
firms has been expanding at a rate more than four times that of U.S. businesses overall. Nonetheless,
minority-owned firms still constitute only a small proportion of all small businesses. As of 1998, about
15 percent of all small businesses were minority-owned: about 4 percent each were black-owned and
Asian-owned, and 6 percent were Hispanic-owned.
Small business access to capital and credit
Given the importance of small businesses to our economy, and their heavy reliance on credit to
facilitate growth, the Federal Reserve has taken a leading role in efforts to improve the understanding
of factors that bear on the availability of funds to support small business activity. Our most recent
report to the Congress in September on the availability of credit to small businesses provides an
extensive review of developments in recent years. In the report, we noted that business-financing
flows to both large and small borrowers, after having been strong in the late 1990s, have since
moderated along with the pace of economic activity. Debt growth appears to have held up better at
small firms than it has at large firms, and small businesses did not report material difficulties in
obtaining credit during the recent downturn. From 1997 to 2002, the demand for credit by small
businesses tracked the pattern of debt growth. Equity financing of small businesses showed a similar
pattern: It surged in the late 1990s but then slowed after 2000 when stock prices began to decline and
venture capital funding became less available.
An important input into our analysis of small businesses is the Board's Survey of Small Business
Finances, which is conducted every five years; the most recent was in 1998. These surveys collect
detailed information on the financial and other characteristics of a nationally representative sample of
small businesses. To help us gain a better understanding of the nature and needs of minority-owned
firms, the survey over-samples firms owned by various minority groups.
These data have been extremely useful for our understanding of the role that discrimination may play
in affecting small business credit markets. Research based on data from the surveys has provided
many insights on similarities and differences in the characteristics of white-owned and minority-owned
firms and of male-owned and female-owned firms. For example, firms owned by blacks tend to be
smaller (whether measured by assets, sales, or employment), newer, and more likely to be located in
an urban area than their nonminority counterparts. Black-owned businesses also tend to be owned by
younger individuals with fewer years of experience and poorer credit histories. Finally, black-owned
businesses are more likely to be sole proprietorships and in the services industry. Other differences
between other minority-owned firms and white-owned firms have been identified, but they tend to be
less pronounced.
Clearly, many factors are considered in credit decisions. Smaller businesses, which tend to have less
equity capital available, fewer assets to pledge as collateral, greater variation in earnings streams, and
higher failure rates, may be expected, on the whole, to experience greater scrutiny in the process of
obtaining credit than larger businesses experience. The personal creditworthiness of the business
owner in sole proprietorships or small partnerships, as well as in small corporations, is also an
important consideration. Creditor evaluations of risk, based on these and other legitimate economic
factors, properly play a central role in credit decisions.
Aside from these differences along financial and nonfinancial dimensions, research has also shown
that many minority- and women-owned firms differ from white- and male-owned firms in some of their
credit market experiences. In general, studies have concluded that black-owned firms are generally
more likely to be turned down for credit. However, when examined more closely, the general pattern
has been found to mask more complex relationships. For example, differences in denial rates are less
pronounced in urban markets, which account for a vast majority of firms in the study, than in rural
areas. And when small retail firms are considered separately, denial rates for black-owned firms and
for white-owned firms are similar. Clearly, additional research is needed to fully understand these
complexities. Indeed, these data alone cannot identify discrimination because they do not include all
the unique factors involved in each credit-granting decision.
Whether discrimination helps to explain the various credit market experiences of small businesses
owned by individuals from different demographic groups--and, if it does, to what extent--is difficult to
determine. Discrimination in any creditor's decision is disturbing, and the moral and legal objections to
it are obvious. In addition, constraints on access to credit due to discrimination carry real costs and
serious economic consequences. Such constraints inhibit economic opportunities by limiting the ability
of victims to purchase homes, expand businesses, and accumulate wealth. At its heart, discrimination
in granting credit artificially restricts the flow of capital. It means that viable economic activity goes
unfunded and that markets that should work do not.
I can assure you that the Federal Reserve will remain vigilant for any indications of illegal
discrimination in credit decisions. We, of course, continue to examine banks to measure and ensure
their compliance with the Equal Credit Opportunity Act. And we will continue to sponsor research on
credit availability and constraints, including potential illegal discrimination.
Information and educational programs
Besides collecting and analyzing data on small businesses and consumers, the Federal Reserve has
also supported programs to encourage community development in low- and moderate-income areas
and to promote small business development. Through our Community Affairs programs at each of the
twelve Federal Reserve Banks, we conduct ongoing outreach and educational activities and give
hands-on technical assistance to help financial institutions, their customers, and communities
understand and address community credit needs. This is no small commitment. The Federal Reserve
Board and the Reserve Banks devote more than 100 full-time staff members to help institutions
understand and participate in community development.
To give you an idea of the kinds of activities we engage in, the Federal Reserve Banks over the past
three years have sponsored educational conferences, seminars, and workshops focusing on emerging
community development issues, which more than 45,000 people have attended. Some issues
addressed have been related to affordable housing, but recently our activities have focused
increasingly on issues related to small business, economic development, and financial literacy. Each
Reserve Bank develops programs that are tailored to local needs. For example, the Federal Reserve
Bank of Atlanta worked with staff at Georgia State University to research growth patterns of
minority-owned businesses. The New York Bank, in partnership with the University of Buffalo, held a
conference that explored economic challenges faced by inner-city communities and effective
strategies for business development. A recent conference at the Dallas Bank examined the role of
technology in community development, discussed financial services in distressed communities, and
considered ways of delivering financial services to those without bank accounts.
In 2001, the System's Community Affairs Offices held their second biennial research conference,
featuring studies on the delivery of financial services to lower-income populations and small
businesses. Topics included the Community Reinvestment Act, predatory lending, credit scoring,
wealth creation, and alternative financial services. The published proceedings are available on the
Board's web site. The 2003 conference will be an opportunity for researchers to explore subjects such
as evaluating the role of social and private capital in fostering economic development and measuring
the success of programs designed to support business development and economic well-being.
Besides these programs, Reserve Banks provide direct technical assistance to bankers, businesses,
and community development organizations to help them identify and address capital and credit issues.
Many of our Reserve Banks have helped bankers create multibank community development
corporations (CDCs) and other consortium lending intermediaries, which focus on equity and debt
financing for small and disadvantaged businesses. They also help banks deal with regulatory
requirements that often must be addressed before investing in CDCs, small business investment
companies, or multibank loan consortiums.
As I noted earlier, many Americans do not understand the basics of personal finance and lack the
sophistication to fully exploit the range of available financial services. Some are easy targets for
abuses or make poor choices in the use of credit. The inability of many households to effectively
budget, save, and invest is a barrier to their securing their financial future. The Fed is actively
supporting efforts across the nation to increase financial literacy. In fact, we offer programs to our own
workforce on financial matters. Our Community Affairs and Public Information Offices have recently
embarked on a national initiative to highlight the importance of financial literacy and heighten the
visibility of economic education programs. Here, for example, staff members of the Pittsburgh Branch
of the Cleveland Bank are working with officials of the Pittsburgh Community Reinvestment Group to
host a December workshop on preventing predatory lending. This event will offer credit counselors
additional information on the use of credit reports and detailed instructions on how to read loan
documents, enabling them to serve as more highly trained resources for their constituents.
Conclusion
Let me conclude by emphasizing that the Federal Reserve employs many tools that help us
understand credit markets and address credit and capital availability issues confronting consumers
and small businesses. Our goal is, through effective monetary policy, to help maintain price stability
and to create conditions for sustainable economic growth, which will provide continued opportunities
for families and small businesses to flourish. In an environment of sustainable economic growth and
stable prices, a rising proportion of our citizens will be able to enter the job market and obtain
important skills that can be life-transforming. By creating conditions conducive to maximum
sustainable growth, the Federal Reserve can best do its part to improve the chances that all
Americans have to ensure their financial well-being. Through our supervision of banks, we monitor
financial institutions' compliance with laws requiring them to offer credit fairly and impartially. We will
continue to collect information and conduct research on consumer finances and on small business
credit markets. Finally, we will continue to promote financial literacy. Through all these efforts, we are
working to ensure enhanced job opportunity, business expansion, and wealth creation for all
Americans.