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Wednesday, July 8, 2020
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  • MUNCIE  — The past several months ushered in unprecedented changes in economic activity. By the end of May, roughly one in four workers was unemployed and many sectors of American commerce ground to a virtual stop. The previous high of unemployment was registered at 25.5% in the summer of 1933, the depths of the Great Depression. While our data may soon eclipse that level, our economic conditions are far better. After adjusting for inflation, we are six times more affluent than we were during the Great Depression. This fact manifests itself in our economic worries. Today, we concern ourselves with internet access for students, economic security for gig workers and other matters an epochal distance from the worries of the Dustbowl. Our affluence permits us the ability to replace lost income and subsidize healthcare. In terms of human suffering, our economy today is not comparable to the Great Depression. Still, current economic conditions may well grow bad enough to destabilize the Republic. No democracy with an unemployment rate of 25% has failed to face significant challenges to its liberty. In 1932, the communist and socialist parties received nearly a million votes in the U.S. presidential elections.
  • MUNCIE  — If the media buzz is true, the Trump Administration will use the solemn occasion of Memorial Day weekend to further expand the disastrous trade war with China. This time, he will use the global pandemic as an excuse to restrict imports of medicine and medical devices. This is a bad policy that will raise health care costs on Americans while doing nothing to boost U.S. jobs. It is nothing more than a cynical ploy to divert attention from an erratic and unfocused response to this pandemic. Before explaining why this is such an imprudent turn of events, I must report some truths about China’s government that the Trump administration is unwilling to say out loud. The People’s Republic of China is a deeply evil enterprise. Right now, they have more people in concentration camps than did Hitler at the height of his powers. Their government scoffs at the value of the individual, and they export a malicious presence across Asia and Africa. If we lived in a moderately just world, tens of thousands of Chinese government officials would face Nuremburg-type trials for crimes against humanity. 
  • MUNCIE  — Along with many states, Indiana is moving slowly away from some restrictions in the stay-at-home or shelter-in-place orders implemented in late March. Over that six-week period, more Hoosiers died of COVID-19 than died in the Vietnam War. The state’s economy experienced unprecedented damage. The next jobs report will be the worst since the Great Depression, even though it will understate the actual share of unemployed by 5% or more. State tax revenues were more than $1 billion beneath the expected level in April. While part of this reflects payment delays, we clearly face the bleakest government budgets in a lifetime.  In previous columns, I argued that Indiana’s response to COVID-19 saved lives and was clearly justifiable on economic grounds. As evidence continues to mount, my analysis looks even more right than it did three weeks ago. But, as we move away from the most restrictive shelter in place rules, evaluating the efficacy of those reductions proves more difficult. Both the economics and the epidemiology of the disease are now more complex. With this comes greater uncertainty.  It is clear Indiana flattened the curve, and so the challenge now is determining what restrictions to loosen or tighten over time. 
  • MUNCIE — Precautionary steps to stop the spread of coronavirus have obviously affected the world’s economy. I use the term “affected” instead of “hurt” because this is a policy choice between two bad options. I think it is clear we chose the least damaging option. Over the past few weeks, the center in which I work, as well as others around the nation, have attempted to model the economic, fiscal and labor market effects of this less painful option. As with any economic analysis, there is uncertainty about the depth and persistence of the path we have chosen. The source of some of this uncertainty is obvious, but much is not. As we look forward to more normal economic times, it is helpful to think about what we cannot yet know, and what this means for our projections about the economy. The first and most obvious source of uncertainty is just how long this first onslaught of the coronavirus might be. Right now, the economic shutdown most states have ordered is designed to preserve lives. However, even if we manage to keep the death toll down to an astonishing 100,000 this spring, it is pretty clear the economy will not magically rebound back to the pre-COVID-19 levels. 
  • MUNCIE  — The nation’s monthly jobs report published earlier this week was jarring. I write before its publication, but expect the unemployment rate to more than double. Monthly job losses are sure to crush the previous record of September 1945. Despite this, it is worth noting that September 1945 was surely the most welcomed month in all of human history, marking the end of World War II. We would be wise to view the unemployment rate and other short-term economic data as imperfect measures of human flourishing. Last week, Dr. Tony Fauci, a man who no longer requires introduction, predicted 100,000 to 200,000 deaths from COVID-19. This eye-popping figure accounts for the extreme measures now being taken in many parts of the nation. Business as usual would’ve likely resulted in a tenfold loss of life. Faced with these large numbers, we need to place a more personal context on this tragedy, and muse upon the potential change this will lead to in our economic lives.  At the top range, Dr. Fauci’s estimates are more than five times the annual American deaths from automobile accidents. This means that by late April, nearly every adult will know someone who has died of COVID-19, and someone in every neighborhood, school and place of work will have been sick with it. Such suffering cannot fail to have broad effect on the structure of our economy. 
  • MUNCIE — No individual human life is possessed of infinite value. At least, none of us actually behave as if it does. No matter how fully each of us wish to live, we inevitably take risks. We ride in automobiles, eat food prepared by unknown hands, trust in medicines and home appliances tested by scientists. At some point, nearly all of us take some risks to save another, care for or comfort a loved one, or volunteer for some public service that risks injury or death.  Economists have long worked to place a dollar value on individual human life. We do this so that we can better understand how rational people value their own lives and those of others. Some of that calculation is readily tractable. It is straightforward to estimate lifetime earnings or the contributions someone can make to their care of their family. Estimating the value that others place upon a life is harder. We acknowledge that companionship has value but is much harder to calculate than lifetime earnings. Of course, people don’t do mental mathematics this way anymore than a teenage gymnast on the uneven parallel bars solves differential equations in her head. Instead, we have social norms that help guide us. 
  • MUNCIE  — This is the third column I’ve written this week. The first two were overcome by fast changing events. So, I will surrender to the deadline and pen a few words about how to think about COVID-19 over the longer term. This should help us formulate and accept the challenges of the coming months.  We are in recession which will be very deep one. Before today, the single largest increase in unemployment came in September 1945, right after V-J Day.  That month we lost 1.9 million jobs. As of March 1, the U.S. had 2.66 million waiters and waitresses. Nearly all of them are now unemployed. The U.S. unemployment rate will double in two weeks, and rise to double digits by May. By June the unemployment rate will be higher than at any point since the Great Depression. From that point forward, things might get worse. It depends mostly on the path of this disease, and how we respond.  Some believe we are overreacting to the coronavirus. They may be right, but for the past several weeks, many epidemiologists across the globe have produced startling research about this disease. These aren’t people who read casually about it, but the men and women in university laboratories who will write the book on this disease. If you argue that we are over reacting, the world wants to see your epidemiological projections and cost estimates. If you don’t have any, follow Abraham Lincoln’s advice and remain silent.  

  • MUNCIE  — The unfolding response to the Covid-19 disease is helpful in clarifying both the limits to government and the wisdom of our federal system. What most of us are now learning is that our most useful governments are local. The farther away government gets from us, the less useful it becomes in matters that directly affect our lives. This is not only a good lesson, but a fine fact of governance. Many of us look to the federal government for guidance in all matters of policy. In reality, the federal government is responsible for very little of the public sector’s influence on our lives. The events of the day should make it clear that this is a fortunate truth. While it is true there is a Center for Disease Control, most of the world’s experts on communicable diseases work in universities around the country. There are economists in the federal government who can help design policy responses, but most of the new ideas come from universities and think tanks dispersed around the nation. Our expertise on these critical issues is broad and diffuse. 
  • MUNCIE  — This week’s volatility in capital markets captures some of the growing concern over Covid-19, or coronavirus. Stock markets are very poor guides to the overall economy, but that does not mean they are wrong this time. In fact, I think they are late to the game. Much of the global economy has been slowing in recent months, and Covid-19 strikes directly at supply chains for the already struggling U.S. manufacturing industry. At the very least, the next few months will see much of the globe enter recession. With those prospects, it is useful to think about the effects of viral pandemic on our economy. Large-scale disease has long been with us, but few Americans under 70 have meaningful memory of them. Before the polio vaccine of 1955, summer polio outbreaks closed pools and fairs and delayed school openings. Americans younger than roughly age 53 don’t have smallpox vaccine scars, and mostly dodged the mumps and chicken pox, which nearly all of us older that 55 endured. We have seasonal flu, sometimes very bad strains, but the last large-scale viral disease pandemic was the 1918-1919 Flu, which killed 685,000 Americans out of a population less than a third of the current size. The unfortunately named Spanish Flu killed four times as many Americans as did World War I, which ended in 1918. To place that experience in context, the 1918 Flu killed more Americans in one year than all the cumulative U.S. deaths from HIV/AIDS. I understand the mathematics of epidemiology, but not the biology of the disease. There is much we don’t know about Covid-19. We don’t know how many people are infected but show no symptoms, or whether some populations will enjoy some immunity. This also means we don’t know what share of infections lead to disease or death. However, there are some aspects of this disease that may magnify its economic effect. 
  • MUNCIE  — A full eight weeks have passed since the unveiling of New Year’s resolutions. Like most of us, mine lies abandoned, which means I will not receive that free YMCA attendance shirt again this year. This brevity of resolve is an apt metaphor for the dilemma facing many Hoosier communities, and others across the Midwest. Over the course of a year, I am asked to deliver about 50 talks in various places around the state. Most of these presentations are about the common worries of slow-growing places. So, to groups of elected leaders, major employers, and civic-minded folks I explain the findings from decades of research on the topic. Readers of this column will find my prescriptions familiar. People hoping for a growing local economy must first make communities in which people would wish to live. I explain that this means focusing on the quality of local schools, remediating blight, ensuring there are parks and trails, and otherwise removing barriers to new residents. With the exception of school quality, I try not to be too specific about needs. Every community is different and has different priorities. Perhaps the best way to set these priorities is by asking residents in a formal, diligent and inclusive way. In finding remedies to problems, the most important voices are apt to be those who are least often consulted. This fundamental lesson is too often ignored from neighborhood association boards to city hall.
  • MUNCIE  — It is election season, so we face several more months of claims about the U.S. economy. Predictably, the economy is neither as good as the incumbents profess it to be, nor bad as those running to unseat them assert. The real truth is somewhere in between. Of course, each side will be armed with data, but politicians selectively forget to adjust for inflation or ignore seasonal adjustments that correct distortions in monthly or quarterly data. The economy is a complex affair, and each of us view it through our own lens. This is my assessment as a professional economist who wants better policies from both parties.  We are in the longest expansion in U.S. history, and employment growth continues to do surprisingly well. Every healthy adult who wishes for a job can find one. While wage gains have been modest, over the past year we have seen stronger growth, particularly among the lowest-paid workers. Nationally, the composition of job growth has been good. Only 2.5% of workers are involuntarily working part time. Job growth has been in traditional full-time employment. Even with recent softening of labor markets, particularly in manufacturing, we live in an enviable time to be a worker.  There are many other good aspects to our current economy. Much of what we don’t measure well in our economy seems to be booming.
  • MUNCIE — Indiana’s economic future will be primarily determined by the share of Hoosier adults who graduated from college. If that share remains low, our economy will languish, our incomes will continue to fall further behind the national average and our best-educated citizens will relocate elsewhere. This truth cannot be too often repeated, but it begs other questions, mostly about schooling, and the needs of citizens who do not go to college. For most of us, the bulk of our formal education comes in K-12 schools, rather than college or graduate school. Public schools remain the most common preparation for college and life afterwards. A good K-12 experience can prepare us to learn throughout our life, while giving us the basics of science, mathematics, literature and the arts.  For kids heading to college, rigorous high school programs are important. But, for kids not heading to college, the rigor and substance of K-12 is even more critical. This is the last time those students will receive formal education designed to make them a learned person. That fact is reason enough to question the way Indiana now focuses vocational education. Yet, the General Assembly has legislation before it to align curriculum from primary to college to meet workforce needs. 
  • MUNCIE  – With the year ending, the one enduring bright spot of the domestic economy is consumer spending. Over the past decade, consumer spending accounted for between 67 and 69% of our total economy or gross domestic product (GDP). Consumers are a large and stable share of total demand for goods and services. However, continued high demand for consumer goods is not the same thing as economic growth. It is mistake to think that consumer spending is causing GDP growth, when consumer spending is simply a measure of demand. Over the long term, economic growth is caused exclusively by productivity growth. That is simply, how much more, per worker, the economy can produce or supply. Globally, how much we produce is identically equal to how much we can consume. However, inside each nation, we can sometimes consume more than we produce because other nations lend us money to do so. To borrow money like this is an example of economic strength, which, by the way, leads to trade deficits. That is another story. 
  • MUNCIE - I released my 2020 economist forecast last week, projecting the U.S. economy to slow significantly next year. The model I use projects that annualized growth rates will slip from 1.9% in the first quarter of 2020 down to 1.7 percent by the year’s end. Here in Indiana, my forecasting model has growth slowing to 1.6% in the first quarter and to 1.4% by the year’s end.  This is agonizingly slow economic growth. Like most of the Midwest, Indiana’s economy slowed through 2019 and is almost certain to end the year with fewer jobs than we had last January. This is not a nationwide recession, though it seems likely Indiana will continue to shed jobs through at least the summer of 2020. 

  • MUNCIE — I deliver my annual forecast later this week, so let’s review where we have come as an economy since the end of the Great Recession. The news is far more dismal than I prefer, but it is wise to know where we are coming from before discussing our future.  The Great Recession was deep and long. It stretched from December 2007 to June 2009, over which time U.S. employment declined by 5.2%. Indiana saw a deeper decline, with job losses accounting for 7.4% of our workers. Indiana actually fared better than should’ve been expected over this time. About half of recession losses to production occurred in consumer durable and business plant and equipment. As the nation’s most manufacturing-intensive state, we had to expect much higher job losses than a state like Florida, Virginia or California. We did, but the unemployment rate peaked well beneath the 1982 level, which is much lower than anticipated.  In 2011, I co-authored a study comparing Michigan and Indiana through the Great Recession. At its peak, I reported the unemployment rate in Michigan was a full 4.5% higher. Much of the difference was attributable to plant closures that were more concentrated in Michigan than in Indiana. I believe Indiana’s tax reforms, focus on fiscal solvency and more predictable business environment helped us weather the Great Recession.  This is good news so far, but states and regions with more volatile business sectors experience deeper recessions and more robust recoveries. So, from 2009 to today, Indiana should have enjoyed a far more robust economic recovery.
  • MUNCIE — I attended my first college reunion last weekend. It was a charming event, attended by well over half of the living graduates of my class at a small military college in Virginia. The weekend was even more special because my oldest son is undergoing the rigors of freshman year at the same school. The occasion allowed me to share a couple of meals with him and other young men and women in his class. That led me to think about these young people, this reunion and Veterans Day. Most of my 212 classmates spent several years in military service. Two of us advanced to general officer ranks and the four of us who roomed together my senior year all retired from the Army, Navy, or Air Force. What struck me about the weekend was how many of my classmates have sons or daughters following us into uniform. Among this group, the fact that both my college-aged children, a daughter and a son, are pursuing military careers was hardly exceptional. More than half the classmates with whom I spoke had kids in uniform.  It is no secret that military service in the U.S. has long been a family business.

  • MUNCIE — The economic recovery beginning in the summer of 2009 is now over for Indiana. Factory employment is down for the year, and overall employment is on trend to be down in 2019. Overall employment has only declined in Indiana a dozen times since the end of World War II, marking precisely the dozen post-war recessions. The nation may not slip into recession, but by any meaningful measurement Indiana now has. Sadly, the recovery has been very poor, partly because our education policies have dampened the type of workforce vibrancy that is the hallmark of a healthy economy. Worse still, this sets us up for tough decades ahead. Since Third Quarter 2007, when the economy was booming, Indiana’s workforce down-skilled profoundly. We’ve seen 31% growth in workers with less than a high school diploma, nearly no change among those with high school diploma and under 5.0% growth among those who have been to college or have an associate’s degree. The simple fact is from Third Quarter 2007 to Third Quarter 2018, a whopping 55% of new workers had less than a high school diploma.
  • MUNCIE — The debate on trade and automation was on prime display during the Democratic presidential debate this week. There is a lot packed into this discussion, from trade policy and taxation of capital to the role of place-based economic development efforts and the design of pre-K, high school and college curriculum. My colleagues and I at Ball State have written widely on these issues, and I am familiar with the technical details that underlie this debate. It isn’t going away, so it is good to focus on facts and risks, not hunches and soundbites. Over the past 50 years, the U.S. has been a job-creation machine, adding some 82 million jobs. Of this job growth, 88 million, or about 107%, have been jobs outside of factories. Yes, I did the math right. We have 6 million fewer factory jobs since 1969. The biggest loss of jobs happened from about 2007 to the end of the Great Recession. That was a time of rapid new imports from China, and it was also a time when factories were experiencing significant productivity growth. Both of these factors shifted the need for workers in U.S. factories, leading to large job losses.
  • MUNCIE – Last week’s column on Indiana’s hospital monopolies generated ten times the emails of any other column I’ve penned over the last decade. Hoosier taxpayers are interested in understanding who caused this problem and how we can fix it. I commend the thousands of readers who visited our website to read the study.  What you learned is that my study is just one of several recent reports alerting Indiana to monopoly problems in hospitals. Moreover, you know that my study combined data from several different sources including the IRS, Department of Commerce, Center for Medicaid and Medicare Services and the Rand Corporation, the nation’s most respected think tank. Awareness of this issue is important because Indiana’s not-for-profit hospital industry surely earned a billion dollars in interest on their accumulated profits last year, through their hedge fund and money market investments. That kind of money should attract thorough scrutiny of my work.
  • MUNCIE - Several weeks ago, a concerned citizen sent me a financial summary of Indiana’s not-for-profit hospitals. He asked that I look into the issue of excessive profits by these systems. I was skeptical that the issue would be relevant. Profits are critical to an economy; they serve as a guide to pricing and investment decisions and reward the men and women who create value. The demonization of profits is a sure sign of unformed thought. Moreover, not-for-profit hospitals have explicitly chosen to forgo profits as part of their operations, so I doubted the financial summary would reveal anything important. I was mistaken. What I discovered will deeply anger every Hoosier and should embarrass most hospital administrators and board members. I also expect it to cause significant changes to state policy with respect to these hospitals. This is likely to change the way we tax them, regulate their competitors and enforce anti-trust laws. It will surely lead to civil litigation involving billions of dollars of excess profits.  It turns out the not-for-profit hospital industry and their network of clinics is the single most profitable industry in Indiana. These profits are so large that when accumulated, they account for roughly 9 percent of the state’s total economy. 
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