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Tuesday, November 13, 2018
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  • 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.
  • MUNCIE –  Labor markets across the United States, including here in Indiana are edging ever closer to full employment, the happy condition in which there is at least one job opening for every person who wishes to be employed. That, of course, ain’t what you hear from presidential candidates, especially Mr. Trump, who claims the unemployment rate is maybe eight times higher. That claim is an astonishing fabrication, but fact checking Mr. Trump is like slicing Jello. It can be done, but why bother? So, today there are about 159.3 million folks in the labor force, about 63 percent of men and women aged 18 through 65. This is more Americans now working than ever before, with about 7.9 million unemployed. Advertised jobs run at more than 5.5 million and monthly job turnover in the last three months averaged about 9.0 percent of jobs, or roughly 1.44 million workers each month.
  • MUNCIE – It is early in the electoral cycle, but at least two U.S .presidential candidates have adopted as a policy platform, free college tuition. This is popular of course, but behind that popular rhetoric is simply another gift to affluent households. Let me explain. There’s no denying the sticker shock of a college education. As both a professor and father I know it is daunting. Tuition at an in-state, public research university is typically $8,000 a year. Fees, books, food and housing along with various other expenses will usually push the visible out-of-pocket expenses to more than $25,000 a year. But what does this really mean? For the past decade or so, actual expenses related to teaching have been fairly flat. The increases in tuition driven almost wholly by decreases by state aid to public universities. This decline in state aid should not surprise anyone. The share of educational benefits accrue to the graduate, they ought to pay most of the cost.
  • MUNCIE – Countless issues fuel the populist wave that animate this election cycle. Many of the concerns are easily refutable by facts, but there is one issue that is the main policy contribution to the lagging labor markets, the rising wealth inequality and the unease among so many workers. It is the very unequal way we treat workers and investors. Workers and investors contribute labor and capital to the economy, accounting for about 85 percent of the input share of GDP. Entrepreneurs pull them together to make a profit. Industries use labor, capital, and entrepreneurship in different proportions. Over time, technology change, cost and relative productivity cause businesses to change their mix of workers and capital.
  • MUNCIE – The most recent county population estimates for Indiana tell a blunt tale about the state’s future. It is part of the story that I, and others, have been offering for some time. It bears repeating. In the decade between 2000 and 2010, a dozen Hoosier counties grew faster than the nation as a whole, while 30 lost population. The remainder grew, but at a slower pace than the nation overall. So, most of Indiana was in absolute or relative population decline. In last month’s population report, the number of shrinking counties rose to 54, and those growing faster than the nation as a whole rose to 14. That left 24 counties in relative decline. All the growth is happening in urban places, and all the decline is in rural or small town Indiana. It has been this way for half a century, but the pace is accelerating. This population redistribution matters deeply for Indiana’s health through the 21st century. Cities grow for simple reasons that cannot be duplicated in rural areas no matter how wishful the thinking.
  • MUNCIE – Technology has long displaced jobs and occupations, often with little warning. The good it brings is immense but often overlooked, while the much smaller costs are more concentrated. Though the net effect is overwhelmingly positive, the workers who are unable to adapt usually fair poorly. The adoption of machines and technology to the workplace displays all the regularity that economic theory suggests. Firms strive to maximize profits with these technologies, which has led them to invest in capital that both replaces workers and complements their skills. Machines and computers have displaced the workers who perform routine but costly tasks. While this has displaced some occupations in all skill levels, it has fallen hardest on middle-skill workers. Notably, these are the workers who benefitted most from early 20th century technologies. Technology has also been used to complement the skills of workers.
  • MUNCIE – No matter the outcome of this presidential election, in most US counties a majority of primary voters will have cast ballots for some sort of economic populism (a term we interpret as platform appealing to the hopes and fears of people). That suggests one of two outcomes. Either we will elect an overt populist now or face highly polarized anger among primary voters again in 2020. Discerning actual policy recommendations from Bernie Sanders and Donald Trump is not a trivial task. To be fair to both men, few presidential candidates in recent decades (other than current Speaker of the House) have offered a clear suite of policies. Sanders has laid out policy proposals, some of which with funding details and employment projections. This doesn’t help much for the simple fact that Sanders has also spent a lengthy career as the least relevant elected official in Washington.
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  • Republican super majorities hold in General Assembly
    “Hoosiers appreciate results, and that's exactly what they get from Gov. Eric Holcomb and Republicans at the Statehouse. By voting to maintain our supermajorities in the General Assembly, Hoosiers have made it clear that Indiana is on the right track, and that we must continue this momentum." - Indiana Republican Chairman Kyle Hupfer, after House and Senate super majorities held with results finally coming in from Porter County Friday afternoon, with Rep. Ed Soliday defeated Democrat Frank Szczepanski 54-46%. Democrats did pick up three seats with Lisa Beck defeating Republican Rep. Julie Olthoff, giving House Republicans a 67-33 seat majority while Indiana Senate Republicans hold a 40-10 advantage where Democrats picked up one seat with J.D. Ford’s defeat of Sen. Mike Delph. In addition to Beck in the House, Democrat Chris Campbell defeated Rep. Sally Siegrist while Democrat Chris Chyung upset Republican Rep. Hal Slager. 
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  • Marijuana and the 56% proposition (even in Indiana)

    Michiganders approved recreational marijuana with 56% of the vote, joining neighboring Canada and along with the West Coast states, Colorado, Maine and even North Dakota. It’s only a matter of time before Illinois joins the party. The Chicago Tribune  reports that incoming Democrat Gov.-elect J.B. Pritzker favors legalization and Democrats in both chambers predict it will easily pass. “I suspect it’s a done deal,” said Pat Brady, former chairman of the Illinois Republican Party. “People see it as a new source of revenue. The true battle will be over who gets their cut of it taxwise.”

    Ohio voters rejected a referendum in 2016, but will vote on the issue in November 2019, so Indiana is poised to be the middle finger of pot prohibition, expending funds on enforcement instead of reaping a tax windfall. One thing that strikes us is with Michigan voters approving it with 56%, that's nearly identifical referendums in Washington, Oregon and Colorado, and the Howey Politics/WTHR Poll from 2016 showed about 56% of Hoosiers favored medicinal marijuana. - Brian A. Howey, publisher

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