2009 Kentucky Annual Economic Report 

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Anatomy of the Financial Crisis of 2008
Donald J. Mullineaux
This article discusses the factors that underpinned and facilitated the financial crisis that continues to plague the global economy. We suggest that each of the causal elements can be viewed as examples of “innovation gone awry.” We explain how what appeared to be a relatively small, fairly localized problem relative to the huge scale of financial markets became a much larger problem with severely adverse implications for the global macro economy. We also consider how institutional mistakes and failures contributed to the crisis.  

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The Year the Wheels Fell Off the Economy: A Review of Economic Performance in 2008 and Forecasts for 2009

Kenneth Troske
The year 2008 will certainly be remembered as one of the most turbulent years in recent memory with the continuing deterioration of the housing market, the sudden collapse of the financial sector, and the subsequent decline in prices and output. In addition, the federal government’s response to these problems has produced one of the largest expansions of government into the private sector since the Great Depression. In this article I review the main trends we have seen in the U.S. and Kentucky economies in the past several years, discuss the trends we have seen in the parts of the economy that I expect to have a significant impact in the coming year—the housing, financial and manufacturing sectors, personal consumption and fuel prices—and discuss my predictions for 2009. My forecast for the U.S. is that the economy will contract by 0.5 percent for all of 2009, that unemployment will average 8 percent for the year—which would be the highest rate since the 1982-84 recession—and that there will be almost no change in prices. My forecast for Kentucky is that the State’s economy will grow by approximately 0.5 percent in 2009 but that the unemployment rate in Kentucky will average 8.2 percent for the year and will be slightly above the unemployment rate for the nation.  

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Citizens’ Budget Choices for the State of Kentucky
Brandon C. Koford
Efficient allocation of public funds depends on good information about citizens’ values of public programs. The present paper reports on an effort to elicit citizens’ preferences over public spending categories in Kentucky. The data come from a representative sample of Kentucky residents surveyed in the summer of 2007. Estimates show that individuals place highest value on education, followed by health care. 

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Kentucky’s Urban/Rural Landscape: What is driving the differences in wealth across Kentucky?
Alison F. Davis

Kentucky has persistently trailed behind its peer states in income and income growth, regardless of its relatively strong growth in the urban areas. It appears that Kentucky lags behind because of slow growth in its rural communities. This article empirically addresses the differences between the urban and rural counties of Kentucky. There is evidence that there are significant differences in many socio-economic and quality of life indicators between the rural and urban counties. In addition, while we typically classify Kentucky as either urban or rural, there is further significant variation among just the rural counties. Preliminary evidence suggests that the issues that plague rural areas, such as labor force participation rates, educational attainment levels, and lack of health insurance coverage, negatively influence the average household income in a county. Changes in industry, such as the loss of manufacturing or mining jobs, did not appear to be significantly related to income. Therefore, the results provide support for rural economic development policy to be directed towards the individual, specifically the improvement of workforce skills.

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The Aluminum Industry in Kentucky
John Garen, Christopher Jepsen, and Frank Scott

This article summarizes recent trends in Kentucky’s aluminum industry. Data from the Bureau of Labor Statistics and the Census Bureau show that employment and compensation in the industry have either held steady or declined in recent years. A similar trend can be seen for output, although productivity has grown substantially. Finally, safety statistics have no clear pattern

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KAM Business Manufacturing Confidence Survey
Anna Laura Stewart

The Kentucky Business Manufacturing confidence survey is produced annually through the joint efforts of the Kentucky Association of Manufacturers and the Center for Business and Economic Research. The survey asks businesses to report on their actual performance over the past year and to make predictions for the next year in areas such as employment, sales, profits, capital expenditures and industrial production. Among other findings, the 2008 survey shows the lowest levels of performance and expectation for the future in the history of this survey. This is consistent with the downturn in the U.S. economy. Last year’s report showed an expected downturn in the economy, the first downturn in many years. But even the projected downturn did not predict the current decline. Problems affecting the overall growth of the state and national economy include the tightening of the credit market and a fall in consumer confidence. Given the current volatility of the economy, it is difficult to predict the economic environment for manufacturers and whether their expectations will coincide with the reality of the economy in 2009.

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