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Sunday, February 17, 2019
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  • MUNCIE – A year ago, my Center colleagues and I met with staff from Accelerating Indiana’s Municipalities to consider several different issues facing Indiana over the coming years. Among the leading issues they asked us to study was housing. That is the genesis of a housing study published by Ball State last week. The results will be surprising to many Hoosiers. Our study examined more than 20 years of home prices, construction costs, and other factors that influence new home construction across all Indiana counties. The chief finding of the study is that the traditional economic factors of supply and demand explain nearly all new home construction in Indiana’s counties. In short, in a world where markets often do not work well, housing is a place where markets set home prices and quantities very effectively.  The problem is that many folks don’t like those market outcomes. This will be especially hard for many groups who have been arguing that there is a shortage of housing in many corners of the state. That view is mistaken and it doesn’t take sophisticated economic models to debunk the notion of a housing shortage in Indiana. After all, the U.S. Census reports more than 300,000 vacant homes across our state. There are enough vacant single-family homes to house almost one-third of all Hoosiers. 
  • MUNCIE – Monopoly is again becoming interesting, and I don’t mean the board game. Over the past few years, both academic and policy researchers have found growing evidence of market concentration or lack of competition in many business sectors. For a variety of reasons, this will likely emerge as a campaign issue in the next national election, so it is helpful to understand what economists mean when they talk about competition. Economists favor competitive markets over monopoly-like markets because competition yields much better outcomes to both consumers and producers. However, this remains a hard concept for many to grasp. It’s likely that everyone understands that competition yields lower prices, higher levels of production and, over the long run, more innovation. It also yields more efficient use of inputs such as land, talent and capital. Competitive firms also adjust more quickly to consumer demand, supplying everything from water or gasoline in a natural disaster to high-end consumer goods in the place and time people want to buy them. 
  • MUNCIE – The past few weeks have contained more reports of newspaper downsizing at metro daily papers in Indiana. This news involved some of our state’s largest daily print publications, but it is a familiar story affecting papers large and small in the age of the Internet. Last week Muncie saw the first sentencing in a broad federal investigation of local government corruption. If reports are to be believed, this investigation has already touched nearly every arm of local government, the city’s largest institutions and has peeked into nearly every local public project. The local paper reported all of this to taxpayers, serving its primary goal as a watchdog of the public sector.  With local newspapers threatened, it is useful to evaluate the connection between newspapers and the corrupting influence of power in local government. One of the better studies of this is by Dr. Pengjie Gao of Notre Dame and two colleagues from Chicago. In this very carefully crafted study, Dr. Gao finds that the closure of a local newspaper leads to higher costs of local government borrowing. He attributes this to loss of monitoring of local government leading to higher inefficiencies in several areas. 
  • MUNCIE – Manufacturing employment has enjoyed a long recovery since the darkest days of the Great Recession. As of late last year, we have a full 108,000 more factory jobs than in summer 2009, which marked the trough of the business cycle. This recovery eased some of the deep impacts of automation and trade that cost the United States and Indiana about one third of all factory jobs. Here in Indiana, from January 2000 through the start of the Great Recession, factory employment dropped some 126,600 workers. From the December 2007 through the end of the Great Recession in July 2009, factories shed a further 119,700 jobs. This employment loss was a full 36.8% of all factory jobs in Indiana. There is an interesting debate among economists about just what caused those factory job losses. The consensus appears that the majority of job losses in factories were due to productivity gains. However, much of the observed increase in productivity likely came from businesses responding to significant threat from foreign competition. It’s not clear how those job losses should be accounted for, but there are a few facts that bear on the discussion.  First, growth in transportation and logistics jobs has more than offset the losses in manufacturing, and so has growth in other sectors. International trade doesn’t cause a net loss of jobs, but changes the skills and location of jobs. Second, trade deficits and deals are not correlated with large factory job losses. The last two lengthy periods of factory job growth occurred in the years after NAFTA and following the Great Recession. These were two periods of growing trade deficits. However, the big factory job losses of the early 2000s occurred at a time of both rapid growth in our trade deficit and very rapid growth of factory productivity. 
  • MUNCIE  – The Brookings Institution recently published a study for the Central Indiana Corporate Partnership outlining labor market challenges in the region. It is a good study that I admire because it restates many of the points I have been making over the past years regarding failures of economic development and workforce training policies in Indiana.  Most of the media coverage of the study has focused on mistakes in business attraction policies. In particular, the finding that a quarter of the jobs attracted to Central Indiana are essentially dead-end jobs. They are right, of course, but anyone who understands job attraction efforts should be surprised that only one quarter of the jobs we subsidize are, in effect, dead-end jobs. The important part of the Brookings study was its broad and scathing assessment of Indiana’s workforce development policies. Space limits prevent me from doing their criticism full justice, but I will try to cover the major points. The first complaint about Indiana’s workforce development policies is an implicit criticism of the state’s research of workforce issues. The Brookings research team performed an analysis of the skills workers need to see wage growth. That is a study that our workforce development officials could and should have done years ago. That modest piece of analysis should be sufficient to cause a major redeployment of dollars surrounding the ways Indiana educates and trains workers. 
  • MUNCIE – The research center in which I work released our 2019 economic forecast this week. Like all economic forecasts, this one is likely wrong, but is hopefully useful. To talk about the forecast, it is best to re-examine 2018. In many ways, this has been a good year for our economy. Employment growth nationally has been strong, and median wages for the world rose roughly one full percentage point above inflation. More people returned to work, with labor force increases strong throughout most of the year. It was, in short, a mostly good year, but the end of year news is far less salutary. The Tax Cuts and Jobs Act, which I supported, proved a disappointment. Among its goals was the repatriation of between 2.0 trillion and 2.5 trillion dollars in assets held abroad. Only about 10% of that actually returned as investment. Another goal was to cause businesses to invest domestically. Business investment actually slowed deeply by year’s end. As it appears today, most of the economic effect of the TCJA was to promote domestic consumption.
  • MUNCIE – Over the summer, Indiana’s economy showed clear signs of weakening. This same story played out across the manufacturing and farming intensive states of the Midwest. To be sure, it is still easy to paint a rosy picture of our economy. Jobs are plentiful, pay has finally begun to rise and tax coffers are full. We are less than a year away from tying the longest recovery in U.S. history, which began in early summer of 2009. Still, the warning signs are clear. Nationally, manufacturing employment growth has slowed since April, and here in Indiana, it dipped into negative territory for two consecutive months. The index of leading economic indicators declined modestly since spring, and auto sales dropped sharply across spring and summer. The manufacturing portions of the Fed’s Midwest economic index have been negative for four months. It’s risky to draw conclusions from a single six-month period, but growing evidence suggests manufacturing growth stalled over the summer. There’s more. This is a stunningly beautiful season in the Midwest, when combines harvesting beans fill the fields on warm October days. Driving by these fields, I often wonder what majesty and dignity a modern Winslow Homer might portray in this setting. However, even in these idyllic scenes, all is not good. 
  • MUNCIE – Amazon announced last week that it would be raising its entry wage to $15 an hour and would lobby for a higher minimum wage at federal, state and municipal governments. Other companies have announced this in recent months, including Walmart, who bumped their starting wages to $10 an hour. These are interesting developments that merit a bit of discussion. I’ll begin with a cynical view. Amazon is about to choose a headquarters location, and in the process will likely extract well over one billion dollars in incentives from some American city. For this, the company and its chosen city will receive significant criticism, and much of it will be well-founded. So, Amazon is likely trying to insulate itself from some of that criticism with some well-timed do-gooderism. To be honest, I’d rather see businesses be a bit more proudly self-sufficient in this regard. 
  • MUNCIE – Gov. Holcomb recently announced a new program allocating $100 million to promote broadband access in rural places. This is a bold and thoughtful policy experiment that will yield significant benefits. Nevertheless, it is important to understand what the problem with broadband really is, and what this policy can, and cannot address and where the benefits actually accrue.  There can be little doubt that many Hoosiers, maybe 100,000 or so, lack any landline wireless and maybe one million lack the sort of reliable service that most urban dwellers expect and pay for. The reason for this is straightforward. Wireline telecommunications access to a home is what economists call a natural monopoly. In this case, nearly all the costs come in the form of laying the wire or fiber optics to a home, not in the actual service provision. 
  • MUNCIE – Monday’s announcement of a revision of the 1994 North American Free Trade Agreement (NAFTA) was met with real skepticism. That’s a wholly appropriate response, as is the inevitable political fallout over the growing trade war. Let me explain. There has long been some skepticism over NAFTA in Canada, Mexico and the United States. This skepticism has never come from a majority of Americans, who even today support free trade by a margin of four to one. Rather, the worries have come from manufacturing unions who feared the competitive pressure of businesses in more southerly countries. Canada was worried about job losses to the U.S., and the U.S. to Mexico. That isn’t what happened.  As it turned out, American factory jobs boomed for more than half a decade after NAFTA. They also grew in Canada and Mexico. This is precisely what economists said would happen, and wholly contrary to the fluff from NAFTA’s opponents. These facts ought to be powerful tools to mitigate unease about NAFTA. Evidently, not everyone cares about facts. 
  • MUNCIE – The United States is close to 40 years into the “War on Drugs.” What began as a campaign of good intentions has become among the most costly policy failures of the last 150 years. We seem unwilling or unable to grapple with the immense consequences, or indeed even fully appreciate the depth, of the problem. Before I explain the issue and discuss some reasonable alternatives, I wish to make clear my personal feelings about illegal drug use. I am about as anti-drug as a Baby Boomer can possible be, and personally view much addiction and even casual use as at least partially a moral failing. Coming of age in the 1970s, even casual marijuana use could disqualify someone from military service, so I steered clear of drugs. Later, as a young officer in an army hospital, I witnessed the seductiveness of intravenous opioids, and saw plenty of soldiers ruin their lives with drug convictions.  Finally, I came to see the havoc American demand for drugs played on the economies and societies in the Middle East and South America. Illegal drug use is a scourge, and it imposes great harm on the most vulnerable citizens of the world, here and abroad. I am not an apologist for illicit drug use, but see that we need another approach. 
  • MUNCIE – One of the joyful indulgences of my profession comes in chatting with people about the economics of their jobs. The very best folks to chat with are those who deal with prices and wages. Men and women in the trades are maybe the most informed about the immediate vagaries of the economy. Local bankers, insurance agents and small business owners are usually just as good. My interest in these business folks is nothing special in economics. Alfred Marshall, the British economist who might rightfully be called the father of the profession, encouraged economists to walk about ports and markets to learn about the profession. So, I try to never skip an invitation to visit a factory or warehouse. Mostly, these conversations confirm what economists know, and that much is useful. The real value is in revealing things that I didn’t know before. Let me share two of these in the context of the growing trade war. I’ve a friend who is a roofer and small business owner. The business is challenging and involves dealing with the price of roofing a home or business, as well as hiring workers and buying materials like aluminum for roofing and gutters. Few people buy a new roof on a whim, so one would suppose that a price increase wouldn’t cost too much business. However, with the increase in aluminum and steel that accompanied the trade wars, he must charge between 15 and 25% more for much of his materials. 
  • MUNCIE – Last month I attended a Federal Reserve Bank and Upjohn Institute conference on expanding opportunity within workforce development programs. It isn’t possible to review the breadth of the research or programs I heard about within the confines of this column, but I think many readers will appreciate one issue that raised its ugly head throughout the conference. That is the role of state departments of labor in distorting labor markets and poorly projecting skill needs. These issues offer a great deal to write about, so let me just focus on two matters, education and ‘labor shortages.’ Since 1990, the United States has not created a single net new job for workers who have not been to college. Worse still, wages for non-college attendees are now lower than they were in 2000. So, even at full employment, labor market outcomes for workers who have not been to college are, on average, terribly poor. The situation in Indiana is about the same. We haven’t created a single new job for high school graduates in 20 years, which is as long as we have reliable data. 
  • MUNCIE – Jeff Bezos recently announced that Amazon is looking for a location other than Seattle for a second headquarters building. The proposal is for perhaps 50,000 total jobs with annual compensation of $100,000 or higher. This would make it the largest potential economic development deal in U.S. history. Naturally, this announcement sent city fathers across the U.S. scrambling to craft a proposal for Amazon. The specifications for the new site leaves just a dozen or so metropolitan areas as potential places for the facility dubbed HQ2. Any reasonable analysis would rank the Indianapolis area in the top half dozen potential sites. This raises a few issues that everyone in Indiana and the Midwest as a whole should consider. This proposal comes on the heels of what is arguably the most irresponsible economic development deal in modern history, Wisconsin’s $3 billion plus bid for 3,000 Foxconn jobs. Compared to that piece of fiscal insanity, the Amazon deal should be worth about $25 billion in incentives. By comparison, Indianapolis spends a tad bit more than $1 billion running the city each year, and New York City’s annual budget is about $75 billion a year. Beyond offering an immediate illustration of Wisconsin’s folly, there are other insights into this deal.
  • MUNCIE – Indiana’s business personal property tax remains a hot topic across much of the state. Tax abatements, TIF and an outright repeal are getting more of the attention they deserve. There is reason for optimism in this debate; however, the most critical issues are persistently ignored. In Fort Wayne, the city council will vote on a proposal to eliminate the business personal property tax. The proponents of this make two arguments. First, a lower tax will make the region more enticing to business investment. Second, that the city approves tax abatements and TIFs so often that new businesses receive huge windfalls while existing businesses bear higher taxes, or reduced services, because of the TIF or abatement. Both of these arguments have the benefit of being factually true; however, both entirely miss the real issues about tax policy and economic development. Let me explain.
  • MUNCIE – Most Americans think incorrectly about the benefits of free trade. The general view is that it is good to export more than you import, and that the advantage is to the seller. This is how many in the “buy local” movement view the world, along with those folks still clinging to the “economic base theory” of local economic development. It is also precisely how George III viewed the world, but also he had the excuse of insanity. Trade is the selling of goods made in one place to people in another place. It should be obvious that a favorable balance of trade can hardly have anything to do with growth. After all, the world’s standard of living has grown some twenty fold since 1700, and there is scant evidence we run a balance of trade with Venus.
  • MUNCIE –  It is election season and the Op-Ed pages are filled with commentaries on the good and bad features of the Hoosier economy. As an economist, I have a somewhat different perspective. Today, the Hoosier economy is performing much better than it should be expected to. In nearly every metric Indiana outperforms the nation as a whole. Job growth is strong, incomes rise, the labor force expands, GDP and investment all grow briskly. Viewed through the short-term prism, Indiana’s growth is the envy of most of the nation. The credit for much of this unexpected prosperity lies both in significant policy changes of the last decade and serendipity. Quite simply, as the Great Recession began to ebb, Indiana had its fiscal and regulatory policy house in order. This meant the recovery was stronger, and broader than it should have been. Objectively viewed, growth in Indiana’s economy is much faster than expected. The problem is that we start so far behind. Indiana incomes continue to be much below the nation as a whole, and cost of living differences don’t get close to making up the difference.
  • MUNCIE – The May 2016 jobs report was bad news in every meaningful way. Even ignoring the ongoing CWA strike, job creation was too low to absorb new workers. Nearly a half of a million folks quit looking for work and job losses plagued nearly every sector. A spike in involuntary part-time work erased months of full-time job gains and inflation-adjusted hourly wages declined. In total, this report was too bad to be merely a white noise error or data gathering anomaly. The reason why it was bad is another issue. Labor markets are lagging economic indicators, and so the only solace in these numbers is that they may be a hangover from the global slowdown that already appears to be stabilizing. Still, this challenges the Federal Reserve to reconsider the expected interest rate hikes later this month. It also begs the question of just how much policymakers can rely on macroeconomic models to explain the world. Macroeconomic forecasts perform fairly well in every domain except one; the timing and magnitude of a downturn. Given that there have been only a dozen U.S. recessions since the computer was invented, that’s not too surprising.
  • MUNCIE – A primary election has just passed and Sen. Sanders and Mr. Trump both won comfortably with some version of a promise to “bring back jobs and manufacturing to America.” Voters clinging to this hope need to steel themselves for a letdown. Here’s why. No matter how you measure it, 2015 was the record year for manufacturing production in the USA. Right now manufacturing in Indiana and the USA is at record levels. There’s no ambiguity on this. I think inflation-adjusted dollars are the best measure, but in any available metric we are at record manufacturing production. We’re just doing it with far fewer workers. Indiana has lost a quarter million manufacturing jobs since our peak year of factory employment back in 1973. The USA has lost 7.5 million manufacturing jobs since 1977, the national peak for manufacturing employment. These are simple facts deviously hidden in every public library in the country and on the internet accessible by the 550 million smart phones and computers in use in America.
  • MUNCIE – In the darkest days of the Great Recession, enrollment at Ivy Tech exploded, allowing perhaps one in three unemployed Hoosiers to pursue an education. The women and men who made that happen in the classroom and administrative offices deserve our thanks. But, in 2016, not all is well in what might be our most important college. Unfortunately, the Ivy Tech system responded to this huge rush of students with an overabundance of construction. Ivy Tech now has more than twice the physical space it could possibly need scattered on more than 110 sites around the state. What started as an ambitious effort to offer a wide course of study turned into an overpromise and underdelivery of services. Sadly, graduation rates are in the single digits, and worse still, the school has struggled to recruit and retain its most important contribution to success, its faculty. This column is not about casting blame. Nearly everyone in Indiana has a stake in Ivy Tech’s success and has shared their opinion. And this economist won’t speak ill of anyone who forecasted poorly through the Great Recession. Still, the time has come for Ivy Tech to embrace a new model.
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  • Pence visits Auschwitz for first time
    “It seems to me to be a scene of unspeakable tragedy, reminding us what tyranny is capable of. But it seems to me also to be a scene of freedom’s victory. I traveled in our delegation with people who had family members who had been at Auschwitz — some had survived, some not. But to walk with them and think that two generations ago their forebears came there in box carts and that we would arrive in a motorcade in a free Poland and a Europe restored to freedom from tyranny is an extraordinary experience for us, and I’ll carry it with me the rest of our lives.” - Vice President Mike Pence, who visited the Auschwitz concentration camp in Oswiecim, Poland on Friday along with Second Lady Karen Pence and Polish President Andrzej Duda and First Lady Agata Kornhauser-Duda. It was Pence's first time at the scene where Nazi Germany murdered more than 1.1 million Jews and other groups during the World War II Holocaust.
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  • Our first national park at Indiana Dunes
    It continues to amaze me how many folks from central and southern Indiana have never visited Indiana's sea, known to most of us as Lake Michigan. If you need another reason to take a couple hour trip northward on U.S. 31, U.S. 421 or I-65, thank President Trump for our first national park. It's now the Indiana Dunes National Park. The move was included in the spending package compromise that Trump signed on Friday, inserted in the legislation with the help of U.S. Sen. Todd Young and U.S. Rep. Pete Visclosky. 

    Visclosky said, "I also am heartened that because of the support of our U.S. Senators, the entire Indiana Congressional delegation, and numerous Northwest Indiana organizations, we have successfully titled the first National Park in our state. This action provides our shoreline with the recognition it deserves, and I hope further builds momentum to improve open and public access to all of our region’s environmental wonders.”

    The Dunes includes white sand beaches, trails and an array of flora and bogs, with a front row seat to the Chicago skyline. It richly deserves to be Indiana's first national park.
    - Brian A. Howey, publisher
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