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Wednesday, April 1, 2020
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  • 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. 
  • MUNCIE — Natural disasters, such as hurricanes and tornadoes, have economic costs. They also reveal much about market economies, government planning and response. As I pen this column, Hurricane Dorian is winding its way through the Atlantic. I cannot yet speak to its impact, but I can outline the costs that it, along with other natural disasters, may impose.  North America faces blizzards, large snowstorms, hurricanes, cyclones, earthquakes, flooding and tornadoes. All impose some of the same costs on society, businesses, households and government. There are three distinct types of impacts. Weather-related natural disasters cause trade interruptions. The effects are often modest, delaying shipments and travel by a few hours or days. Additional damages occur when businesses and conventions close, perishable foods are damaged and families miss reunions and weddings. These impacts tend to be modest, transient and easily insured. 
  • MUNCIE — Labor Day weekend is always a popular time to talk about work and worker issues. I wish to a put a twist on it and talk about some popular misconceptions about work and capital and the meaning of both. If you’ve been fed a steady diet of anti-capitalist nonsense, or are a diehard capitalist, this story is going to scramble many of your misconceptions.  I begin by noting that most American adults are actually laborers. Among those of working age, very few Americans subsist upon the accumulated capital of their ancestors. This is even though a higher share of Americans today own capital than at any other time in history. With some 60% of households owning some sort of retirement fund, it is fair to say that now we are all both capitalists and laborers. Ironically, labor force participation is higher among workers who possess capital than those who do not, though the direction of causation surely works both ways.  Many decades ago, economists spoke and wrote about economic growth as primarily caused by combining labor and capital. The profession acknowledged, but thought little about, the role of technology change.
  • MUNCIE — Last weekend’s column criticized three economic development deals. By Tuesday, the city cancelled the project that so enraged Muncie residents. This was good news, of course, but the project was bad economic development policy from the very beginning. The Muncie Redevelopment Commission should never have brought this plan to city officials. There is a lesson here for every Indiana community. At first blush, the deal to bring a recycling firm to Muncie might seem a good idea. The city has several million square feet of excess industrial property, including one behemoth factory site that used to house the Borg Warner plant. The plant would employ 90 or so workers and recycle metallic materials into usable products. Like most early 20th century industrial sites, the Borg Warner site is not usable for most activities. This might seem to be a good place for both tax incentives and a recycling plant.  Unfortunately, it never was a good idea. Fortunately, public outrage stopped the project.
  • MUNCIE — Over the past week, I attended a Muncie City Council meeting on very contentious issues and travelled to Wisconsin to speak to a group of economic developers about the Foxconn debacle. Both events have eerily similar aspects that should anger and frustrate voters.  In 2017, Wisconsin hastily put together the world’s largest tax incentive package to lure some 13,000 jobs to the state. This deal would have cost each Wisconsin family about $1,700 over the life of the project. This is more than $170,000 per job. The deal happened at break-neck speed, behind closed doors, and without benefit of any serious economic analysis. From beginning to end, this arrangement illustrated raw contempt for open government and the interests of citizens.  Once the dust settled, along came several economic and fiscal studies. All present some version of the same story; the Foxconn deal will never provide taxpayers a positive return, and as initially structured will damage the economy. This damning assessment is equally true in the matters before the Muncie City Council meeting I attended. 
  • MUNCIE  – The Federal Reserve Open Market Committee meets this week to consider whether to ease the money supply. The most obvious mechanism for doing this is by reducing the interest rates they charge member banks. This change will filter quickly to bank loans on cars, on homes and eventually on credit cards. More money leads to lower borrowing rates for consumers and businesses. The timing of the Fed’s action is subject to real criticism, and two members of the committee have spoken publicly against a rate increase. At the same time, a Fed nominee has argued in favor of a large cut. Both of these actions are unusual. Fed members usually do not air their disagreements in this way, and Fed nominees are usually tight-lipped about policy choices before the Fed. We live in interesting times. The global economy is clearly slowing. China is likely in a recession, though its publicly available data is hard to believe. There was even evidence last week of a liquidity crisis emerging between their banks. China is hardly a democracy that must suffer the ignominy of publicly available economic data, so it is hard to be sure what is happening.
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  • Club For Growth endorses Spartz in 5th CD GOP primary
    “Growing up in Soviet Ukraine and witnessing the devastation of socialism has made Victoria Spartz a principled, free market conservative who understands the importance of a strong and free economy to Indiana families. Spartz has proven herself in business and in government as a state senator, and we are looking forward to supporting her campaign.” - Club For Growth President David McIntosh, endorsing 5th CD Republican candidate Victoria Spartz. It is the first major endorsement for State Sen. Spartz in the crowded GOP primary field. McIntosh, a former Indiana congressman and 2000 GOP gubernatorial nominee, lost the 5th CD primary to U.S. Rep. Susan Brooks, who is retiring.
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  • Pence, Holcomb, Buttigieg head 2020 HPI Power 50
    By BRIAN A. HOWEY in Indianapolis
    and MARK SCHOEFF JR., 
    in Washington

    As we unveil the 2020 version of the Howey Politics Indiana Power 50 List, Hoosiers appear to be relatively satisfied with their state government, unsure about the federals and specifically President Trump, and are most concerned about health care and the economy.

    These are the latest survey numbers from the We Ask America Poll conducted in early December for the Indiana Manufacturers Association. They accentuate the formulation of our annual Power 50 list headed by Vice President Mike Pence, Gov. Eric Holcomb, former South Bend mayor and Democratic presidential contender Pete Buttigieg, and the state’s two Republican senators who will likely sit in judgment (and acquittal) of President Trump in an impeachment trial later this month. 

    As Pence appears to be heading off thinly veiled attempts by Jared Kushner and Ivanka Trump to get him off the 2020 ticket, Hoosiers by 47.4% approve to 47.7% disapprove of President Trump’s job performance. This is consistent with 2019 polling by Ball State University and Morning Consult. On the national right/wrong track, just 37% of registered voters in Indiana feel that the country is headed in the right direction, while a majority, 52%, say that things have gotten off on the wrong track, including 51% of independents and 26% of Republicans. Among female voters, the right/wrong track split is 29%/58%.

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