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Sunday, August 14, 2022
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  • MUNCIE – I’ve been living in Rustbelt towns in West Virginia, Ohio and Indiana for more than two decades. One shocking thing I continue to hear is the belief that something will cause an increase in factory jobs. Whether this fantasy is heard on the national stage or in cities and towns, I remain stunned by the ignorance that otherwise intelligent people have about manufacturing in the United States. One trick I have to show how misinformed folks are about factory employment is simply to ask, “When was peak manufacturing production in the USA?” The answers range from 1942 to the 1970s. The correct answer is 2021. That’s right, the inflation-adjusted peak year of manufacturing production in the USA was 2021. That shouldn’t be too shocking to folks, but apparently it is. I then ask, “When was peak manufacturing employment in the USA?” The answer there is 1979, which seems not to shock too many people. Here in Indiana, the answers are 2021 and 1973, respectively. So what’s been going on, and why do so many folks believe that salvation in the form of factory jobs is right around the corner?
  • MUNCIE – The start of Indiana’s special legislative session has caused a number of folks to ask me about the economic impact of restrictive abortion rules. The plain answer is that I don’t know, and cannot really know with the type of certainty I feel comfortable with. The nation has been under one reasonably common set of rules for half a century. Thus, we are just beginning the type of natural policy experiment an economist might use to estimate impacts. That does not mean we cannot use other policies that might influence the migration of people and jobs as a proxy for how changes to what abortion laws might influence our state’s economy. But, before evaluating the issue, it is important to acknowledge that there is a wide variety of truly principled positions on abortion. One valuable duty of citizenship in our Republic is to respect principled positions and those who hold them. That does not mean all positions are principled or that many folks will fail to consider competing views in ways that are consistent with the U.S. Constitution. The plain fact is that we’ve been through a half century of cheap rhetoric about abortion. The bill is now due, and I expect it is going to be very steep. The best study I’ve seen that might inform us about the effects of restrictive abortion laws comes from two economists at Kent State and the University of Akron. Curtis Lockwood Reynolds and Amanda Weinstein estimated gender differences in quality of life preferences in U.S. cities.
  • MUNCIE – Over the past four decades, the United States suffered its first prolonged period of economic divergence. This type of divergence occurs when rich places grow at a noticeably different rate than poor places, which causes the standard of living to diverge. Roughly around 1980, the nation experienced broad convergence, and capital (businesses) and people migrated from poorer (lower-income, lower-cost) areas to richer (higher-income, higher-cost) areas. Understanding why this growth happens is important because increasing differences in prosperity leads to fissures in American culture and politics. Increasingly poor places differ substantially from growing places. In these poor places, far fewer families thrive, social institutions such as churches and fraternal organizations weaken, economies languish, and health is worse. This is a growing problem nationwide, one that far too few Americans take seriously. To address the problem through policy, we must first understand what causes this divergence. Whether or not divergence is happening is not in dispute. However, the details of why this is happening are not fully understood. A few general facts do give us some clues.
  • MUNCIE – The United States appears to be in the middle of a major political realignment. Really, this topic is in the domain of historians and political scientists, so I’ll largely confine myself to writing about what this means for economic policy. To be honest, it is difficult to make a thoughtful assessment of where we are headed. Perhaps the best way to think about this is to consider the coalition debates surrounding abortion and how it challenges internal alliances within political parties. If polls are to be trusted, there are about 15% of Americans who think abortion is always wrong, though most would allow it to save the life of the mother. If one believes life starts at conception, this is a wholly moral viewpoint. These people are mostly motivated by faith, and find themselves overwhelmingly supportive of GOP candidates, at least on this issue. There is another, similarly sized share of Americans who do not believe that abortion decisions are within the appropriate sphere of government control. They feel government should not be permitted to interfere on these matters, as it outside their competence. That is a decidedly Libertarian viewpoint, but for most of the past few decades, Libertarians have tended to lean towards the GOP. Still, this is not a typical GOP position on abortion legislation.
  • MUNCIE – On the 246th anniversary of our founding, many Americans will find reason for pessimism about the nation’s future. There are many difficult challenges before us, which I will list shortly. Still, we are also possessed with deep wells of strength from which to craft a free and prosperous future. In 2022 we suffer a large public debt, but as a share of our GDP our external debt ranks 38th highest globally, behind nearly all the rest of the developed world. Our population growth rate has slumped, but nothing like that of China, Japan or most of Europe. Our murder rate ranks 64th worldwide, putting us well above most of the developed world. Many of our institutions suffer deep stress. Church attendance is down, and young people in particular have fewer formal institutions or clubs with which to reinforce their sense of community and shared responsibility. Our political institutions have recently come under attack. Just last year, the United States was targeted by an attempted coup by a sitting president. A substantial share of sitting members of Congress enabled that coup attempt either directly or through their lack of moral courage.
  • MUNCIE – In the past few months, I’ve had several folks ask if recent inflation is the worst it has ever been. To those sweet summer children, I say what should be obvious, inflation has been much worse. That is why economists at the Federal Reserve are burning the midnight oil trying to figure out how much monetary tightening will be needed to prevent it from worsening. A far better question is how does inflation affect the economy, and also, who benefits and who bears the cost? It’s important to note that inflation has toppled governments, throwing power to ruthless despots from Hitler to Mugabe. And yet, those were events unlike ours in every conceivable way. I have a 1 million Reichmark bank note and a 1 million Zimbabwean dollar note to prove it. Neither of these was worth its face value in toilet paper when printed. The inflation we suffer is of the more ordinary kind. Year over year, the price level has risen at just over 8% for the last quarter.
  • MUNCIE – This current bout of inflation reminds us just what a bipartisan policy fiasco looks like. Before chronicling policy proposals that range from the goofy to counterproductive, it’s good to clearly define inflation and outline its causes. Inflation is a decline in the value of our currency. That’s the disease, one symptom of which is higher prices. But, sometimes higher prices are caused by problems other than inflation. Wars almost always lead to higher prices for some commodities. Other shocks, like hurricanes or pandemics also cause higher prices for some items. The decline in the value of currency isn’t an accident; it is a policy trade-off between higher prices and higher unemployment. The source of that trade-off is rarely a one-time event. Our current inflation has many sources. A quick inventory of recent inflation-inducing policies should be sobering. A decade of low interest rates and easy monetary policy set the conditions for inflation. Mr. Trump’s Tax Cuts and Jobs Act substantially added to the deficit and set the stage for inflation. The bipartisan CARES Act passed in the first weeks of the pandemic and signed by Trump was the single largest stimulus bill ever passed. Mr. Biden’s American Recovery Plan of 2021 added yet more inflation risk. Each of these bills was designed to aid economic growth or save us from a depression. 
  • MUNCIE – Among the more influential economic narratives in recent decades has been a publication by the American Legislative Exchange Council (ALEC), “Rich States, Poor States.” That work, now in its 15th edition, is authored by Arthur Laffer, Stephen Moore and Jonathan Williams. This document is a ranking of states across 15 policy variables that includes the highest marginal tax rates on households and businesses, the progressivity of the income tax system, burden of all other taxes, the presence of an inherence tax, along with recent tax policy changes (efforts to reduce taxes), size of debt, number of government workers per 10,000 residents, tort environment, workers compensation rates and state minimum wage and a tax or expenditure limit. The index is transparent in its method and data, and provides a great deal of narrative. It has been enormously influential in Indiana. The index is designed to generate policy change that leads to economic growth. The 15th (2022) edition makes clear what the purpose of the ranking is for: “Each of these factors is influenced directly by state lawmakers through the legislative process. Generally speaking, states that spend less – especially on income transfer programs, and states that tax less – particularly on productive activities such as working or investing – experience higher growth rates than states that tax and spend more.” Laffer, Moore and Williams 2022
  • MUNCIE – Whenever I explain why Indiana needs more kids to attend college, I get some version of the comment, “a young person doesn’t need college to do well; we need more people in the trades.” While it is true for a few talented individuals, that is not true for a city or state. Economists call this the ‘fallacy of composition,’ which I can explain with a few facts. In a typical year, more than 85,000 Hoosiers turn 18 years old. Of these, fewer than 75,000 finish high school, and of these fewer than 42,000 head to college. Ultimately, about 60% of those will complete their degree. That means the state’s pipeline of college-educated workers is today about 27,000 per year. However, the net loss from brain drain is about 10% and growing. That means Indiana can expect only about 25,000 college graduates per year to finish college and live in Indiana. This is an economic development disaster. To see how this hobbles Indiana, we should consider how national labor markets value education. Nationwide, about eight in 10 of all net new jobs go to four-year college graduates. The remaining two in 10 jobs go to those who hold either an associate degree or have been to some college. This means that if Indiana were growing like the national economy, all the new job growth would go to those who’d been to college. 
  • MUNCIE – David Ricks, CEO of Lilly, recently told members of the Indiana Economic Club that state policymakers need to address poor educational attainment and high health care costs. These topics will sound familiar to faithful readers of this column, but it is refreshing to hear these points made so publicly by a business leader. In a future column I’ll detail comprehensive policy options for reducing health care costs. As difficult as it will be to remedy this important issue, it is easy compared to our educational challenges. To fix our low levels of educational attainment, Indiana must better educate a higher share of its young adults and make more communities into places they’d like to live. This may sound easy, but any progress here requires that almost everyone set aside some long-held, mistaken opinions. The two most misunderstood issues are about what ails education and how taxes factor in to the location decisions of people and businesses. Indiana’s comprehensive school reforms are not the problem. In fact, the success of broad school choice masked other problems. The evidence from several high-quality studies makes clear that school choice mostly benefitted students in local public schools. 
  • MUNCIE – For most of my adult life, I’ve described myself as a free market economist. But, I should explain just what that means, and how it influences what I research and write about. The best way to start this essay is to observe that nearly all economic research examines the points at which markets fail. It is rare to find a technical economic paper that reports markets working especially well. In the past 25 years, across several hundred studies, I think I’ve concluded markets are working well in no more than one or two papers. This is largely how the rest of scientific publishing works. There would be no need for virologists if there were no viruses that made people unwell. But, most of the time we are not unwell due to viruses, and very few papers in virology focus on well people. Markets are much the same. Most of the time, in most places, markets work well. They allocate goods or services to those who value them most and they push factors of production, such as talent or equipment, to the places they’ll be most productive. Without any conscience design, markets tell us when there is too little or too much of a commodity in a certain place. This causes humans to ‘truck and barter’ from places of plenty to places of scarcity.
  • MUNCIE – The inflation data this week pointed to continued high prices, despite an announcement by the Federal Reserve of significant efforts to end inflation this year. At the same time, more than one economist suggested that we face higher recession risks this year. Both of these develops are worrying, and I think there is cause for concern both on inflation and recession risks. But, there is also reason for some optimism, along with plenty of uncertainty. It is clear today that the American Rescue Plan passed by Congress was too big, and helped fuel the inflation we now see. Last March I wrote in this column that the bill could’ve been about half the size and achieve most of the same goals. I was not alone in that sentiment, but I also wrote that one of the lessons of the Great Recession is that too little stimulus is also a significant risk. What was not clear in March 2021 was that household savings were much healthier than expected, and that labor markets were performing better than the preliminary data suggested. In that same column, I noted that labor markets were still several years away from full recovery. We still have not recovered the jobs lost in the pandemic and may not catch up to trend for several years.
  • MUNCIE – Late last year, Indiana’s Senate pro tempore and speaker of the House wrote an open letter to leaders of the healthcare industry, urging them to craft a plan to reduce costs. This was a particularly smart, pragmatic and principled approach by Sen. Rodric Bray and Rep. Todd Huston to seek compromise in one of the more vexing challenges faced by the state. At issue is the broad monopolization of hospital services and the resulting hospital prices that make Indiana a national outlier for healthcare costs. The deadline for the plan was April 1, and we now have an answer from the hospitals. In an op-ed couched in careful, lawyerly prose it said to the Indiana legislature, “Drop Dead.” The op-ed was signed by eight hospital CEOs who again denied that any sort of hospital pricing problem exists. It was a stunning example of falsities and misrepresentation that should enrage Hoosiers of every stripe. I will do my best to expose just a few. The hospital CEOs began with a laundry list of woeful complaints. They first grumbled of skyrocketing costs for travel nurses and drug prices. As it turns out, there are quantities of data on both of these issues. And, you guessed it, the facts don’t match the hospital CEO narrative.
  • MUNCIE – Over the past 30 years, companies in the United States have added 40 million jobs. This is a remarkable achievement that enriches Americans and dramatically improves our standard of living. As we think about this growth, it is helpful to consider what type of jobs have been created, what types of workers are hired and what these facts tell us about the types of economic policies we pursue at the state and local level. I’ll begin by dividing all job types into two categories. The first are “global” jobs. These are jobs that produce goods or services that are sold mostly outside the region in which they are produced. Think of manufactured goods such as automobiles or RVs, agricultural commodities, petroleum products, software or medicines. The global definition also includes services such as website design and development, back office financial services and, increasingly, medical diagnostics. The other type of job is a “local” job. These jobs produce goods and services that are consumed locally. So, preparing a meal in a restaurant, mixing cement, teaching school or litigating a court case are done primarily for local consumers. So are physician and nursing services, lawn care and home construction, retail, child care and grocery sales.
  • MUNCIE – The 21st Century has been terribly unkind to Indiana’s economy. Indeed, over the next few paragraphs I will lay out the case that it has been the worst two decades in the state’s economic history, and that prospects for the next two decades are even poorer. I write this because I believe our political debate about tax and spending would benefit from greater honesty about the subject. I also want to make clear that it is an error to blame one political party or the other for the poor state of the Hoosier economy. Bad luck as much as bad policy has played a role. Adjudicating the past is helpful only in focusing on the present and future. Today, Indiana has about 75,000 more jobs than we had in 2000, and about 155,000 more residents. But, over the same time, the Indianapolis metro area has about 190,000 new jobs and 200,000 new residents. So, not all of Indiana is doing poorly, and these bright spots blind many to the much broader troubles. Our growth is happening in just a few places, in one large metropolitan region. Everywhere else in the state is either stagnating or in decline.
  • MUNCIE – Over the past year, I’ve had a friendly disagreement with a couple of  colleagues. Together we’ve authored several studies about economic development. Our work focuses on the role quality of life plays in population and job growth. This work uses statistical models to tease out how families and businesses rank every county in the U.S. on quality of life. The way this works is fairly intuitive, but it benefits from an economic thought experiment. Suppose all homes in America were identical, with the same construction, color scheme, size and appliances. In that case, the difference in home prices would tell us how much residents valued the community containing the home. Higher prices mean nicer communities, and lower prices mean less attractive communities. Now suppose every worker in America was identical, with the same education and experience, and only one occupation available. In that case, any wage difference would reflect how desirable the location was. Workers would demand a wage premium to live in an unpleasant place, and take a lower wage to locate somewhere nice. These dynamics are known to every realtor and human resource professional in America.
  • MUNCIE – Last month I had the good fortune to sit down with the nation’s oldest Avon Lady, Mrs. Evelyn Nowakowski. Our chat was a treat for me, providing many interesting and relevant economic lessons. A more accomplished writer could easily get a full book out of her experiences. Readers of this column will have to be content with those economic lessons that are important today. Mrs. Nowakowski’s work at Avon began on Oct.  5, 1966, shortly after her youngest child entered kindergarten. The company’s direct sales model meant that she could have a career that was flexible enough to allow her to prepare meals, look after her five children and make some extra money. In October 1966, just 40.7%  of working-aged women worked outside the home. That figure peaked in 2000 at 60%, and sits at 56.8% today. But, today’s number is a full percentage point lower than the pre-Pandemic level. That is a million fewer women working today than in February 2020. There are echoes of Mrs. Nowakowski’s experiences in today’s labor market. Her concerns about balancing home and work life made Avon’s model appealing, and her recollections helped me better understand where we are in 2022. Of course, women’s experiences in labor markets are vastly different than in 1966.
  • MUNCIE – Authoritarian governments are frequently thought to be more decisive than democracies. They can appear stronger and more likely to win the future than do liberal democracies, where debate is marked by public disagreement. Democracies are slow, with actions guided by compromise and the consent of the governed. Working toward compromise and consensus takes deep strength and conviction that too few people possess. This is one reason why admiration for authoritarian leaders is largely confined to the most insecure of us. This truth is exploited by authoritarian leaders who offer their followers the pretense of physical bravado and toughness, accompanied by flashy uniforms, caps and slogans. If the past couple of weeks has demonstrated anything, it is the folly of this belief. The future belongs to liberal democracies, where respect for individual rights, political freedom and the rule of law are nurtured and grow. A second lesson of the past two weeks is that this future demands a fight. We are again engaged in this fight, and it is wise to consider the cost.
  • MUNCIE – An immediate question facing Americans today is the economic effect of war in Ukraine. As I write, it is not clear how the Russian invasion of Ukraine will proceed. However, it is impossible not to see echoes of Hitler’s occupation of the Sudetenland in the late 1930s or Saddam Hussein’s 1990 invasion of Kuwait. The primary difference appears to be the willingness of much of the developed world to actively oppose autocratic nations invading democracies. This makes the 1990 experience more salient to understanding the likely economic effects of this war. The choice of what economic or military sanctions to pursue is largely dictated by the practicality of armed intervention, and the belief that failure to act will lead to worse outcomes. Both NATO and the European Union members have concluded that significant sanctions are in order. This reflects a reasonable belief that Putin has far larger territorial interests than Ukraine and, if left unmolested, will pursue them.
  • MUNCIE – It is time to write about inflation again, although I allocated three columns to the subject in 2021. The first, in April, argued that inflation was a distant threat compared to the still sluggish economy recovery. With the passing of months, newer data confirmed that the economy was in worse shape than it then appeared, but also that inflation worsened faster than I expected. The second column, in August, explained some of the deep challenges economists faced in analyzing inflation. That was a column that pushed the need for humility in our understanding of when and how bad inflation could get. The third column, in October, noted the rising price level that was clearly apparent to shoppers. To be clear, from April to October there were plenty of reasons to anticipate higher prices for goods and services. Federal stimulus payments put money into households and businesses, and the pandemic forced savings to an all-time high. Last spring, household savings were two trillion dollars higher than the previous year, foretelling a flurry of spending.
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  • Brooks excoriates Rokita over child rape case
    "We are confident of Americans’ ability to work through the issue of abortion now that the Supreme Court has returned it to the democratic process. But it’s crucial for law enforcement to stay above the partisan fray. A case in Indiana leaves us deeply concerned on that score. Initially, some doubted news reports that a 10-year- old Ohio rape victim had traveled to Indiana for a legal abortion. There were also unsubstantiated claims that the physician who performed the abortion had failed to report the abuse of a child and the abortion performed on a girl under 16, as Indiana law requires. Indiana Attorney General Todd Rokita rushed precipitously into this fray. He told Fox News he was investigating the physician and 'was looking at her licensure.' This, after admitting he hadn’t examined evidence that she complied with reporting requirements. Even worse was his inflammatory rhetoric: 'We have this abortion activist acting as a doctor,' he said. Despite the arrest and confession of a defendant in the rape, and news accounts documenting the physician’s timely reporting, Mr. Rokita continues to say publicly that he is investigating her. The justice system’s legitimacy requires that law enforcement be fair, deliberative and ethical. Government investigations should remain confidential unless and until a defendant is charged, with respect for the presumption of innocence and government’s burden of proof. A baseless investigation, if disclosed publicly, causes the target reputational damage, humiliation and loss. We are appalled that, by his own admission, Mr. Rokita announced his investigation before gathering the most basic facts."- Former Indiana congressman and district attorney Susan Brooks and John Tinder, writing in a Wall Street Journal op-ed.
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