Monday, August 29, 2016

Gross Domestic Product - 2016 First Quarter

The Bureau of Economic Analysis (BEA) releases an estimate of gross domestic product (the output of all goods and services) by individual states. For the first quarter (Q1) of 2016, the figures signaled bad news for WV - the annualized (scaled to one year) rate of growth was -2.5%. The economic output contracted from the final quarter of 2015. WV was the only state in Appalachia to suffer negative growth over the first three months of the year, although Kentucky featured a very low 0.4% growth rate that is basically stagnate. Other Midwest states featured negative GDP growth over the same period with Wyoming (-4.9%) and North Dakota (-11.4%) being the hardest hit. The dependence on mining natural resources is the common denominator in states with negative growth. As the BEA notes, "Mining declined 11.1 percent for the nation in the first quarter. The industry subtracted 1.82 percentage points from real GDP growth in Wyoming...and more than 2.0 percentage points from Alaska, North Dakota, and West Virginia, which declined 1.0 percent, 11.4 percent, and 2.8 percent, respectively."
A decline in the mining industry shrunk GDP in WV by more than 2.0% and the total decline for Q1 was 2.5%. Basically, the state's output shrank by the same amount that mining output declined. As bad as that sounds, North Dakota shows a bleaker boom-bust picture. The low price of oil over the last 18 months (at or below $60/barrel) has decreased the revenue from the Bakken Shale. Production in North Dakota has slowed slightly in response, dropping from an average of 34.23 million barrels per month in 2015 to 32.247 million barrels per month for Q1 2016. But mainly it was a drop in the price of oil at the start of 2016 that drove down oil revenue for North Dakota. The decline over in GDP over what mining directly contributed to North Dakota shows how much services are directed at supporting mining in that state.
Meanwhile, WV declined in line with the amount its mining sector declined. There was no "multiplier effect" that subtracted more economic activity due to decreased mining production and revenue. It was a 1-to-1 relationship. Wyoming also fared worse in terms of total economic activity. It is more closely related to WV in that both states are large coal producers. Both states had a decrease in coal production from 2014 to 2015, the decline in WV -14.7%. The production for WV for Q1 2016 was 19,260 short tons down from 27,239 short tons in Q1 2015. Consider that while coal production has been declining, the price of coal exports has remained flat or decreased since 2012. Lower production and less revenue for each unit of coal produced results in less tax revenue and fewer service industries in the state. The natural gas industry has undergone similar duress in WV due to over expansion in the Marcellus Shale, resulting in sustained low gas prices and less production.
With the Northeast, South, West Coast, and a few Midwest states featuring moderate to strong output growth, it is depressing to see negative growth in WV. It is true that output as measured by GDP is not the most important indicator for a healthy society. However, health and welfare are often tied to economic output (be that causation or simply correlation). For a state with a drug abuse problem and unemployment rate in the bottom 25% of the country, contracting economic output is a bad sign (duh, I know). Pundits can decry political opposition to natural resource extraction and blame policies for the decline of the mining sector. But to respond proactively and diversify industries will do more to boost economic output than arguing along boring, banal, stagnant political lines. "Diversifying" is easier said than done. And the mining industry has a large footprint that will not easily be filled by even a few industries. The service sector will always need industry to support it. Barbers, retailers, restaurants, doctors, and more, their work exists to serve the surrounding populace. Finding the next generation of "makers" is a problem for society to solve together. I know I don't have the answer, but drilling holes in the ground is increasingly not what will support the well-being of WV and Appalachia at large.

Tuesday, April 5, 2016

Economics of Discrimination

The late Gary Becker was one of the first economists to examine the economic motivations and consequences of discrimination. He published a book on the topic in 1957. Since then, many students and colleagues of Becker at the University of Chicago and elsewhere have continued to study the topic. There are many pieces to the discrimination puzzle to unpack, but given its current media focus, I thought it was worthwhile to archive some thoughts.
An important distinction in economics is that price discrimination is not always the same as outright bigot behavior. As John List and Uri Gneezy recognize in their 2013 book "The Why Axis," men pay about 20% more for identical car insurance than women. This is based on statistical data that women have fewer driving accidents. You can always call your insurance company and negotiate lower premium payments based on your safe driving history, but otherwise, the insurer will trust the data that says a client is more or less risky and charge him/her accordingly. Another instance of price discrimination is that senior citizens often enjoy lower priced tickets at the movie theater. This may be because they are underrepresented among moviegoers, so the theater does not lose much money, or because the theater makes most of its profits off of concession sales, or because it provides good public relations value to the theater. In both of these instances, people either would not complain about the price discrimination or they would not be successful in changing company practices.
The more opportunistic form of discrimination is harder to spot in markets. One example that List and Gneezy found in their research is quite ugly. They observed disabled men getting estimates for car repair work and compared their price quotes to those of able-bodied men getting the same work done on their cars. The study found, "On average, the disabled men received price quotes that were 30 percent higher than the able-bodied men." The authors go on to note that car mechanics likely tried to get more money out of the disabled because they realized how difficult it is for the handicapped to transport themselves. If vendors feel they have a "captive customer," (like a patron at a amusement park that wants a bottle of water) they will probably charge a higher than average price for goods and services.
But even opportunistic discrimination differs form outright bigotry. Its effects are no less important in market economies. Despite the intention of markets to be free and open to everyone regardless of age, race, gender, nationality, etc. vendors can consciously and unconsciously bias their habits along these dimensions. It can come in the form of poorer service to individuals outside of a merchant's approved social groups or lower job acceptance rates for people outside a hiring company's desired groups. The costs due to bigotry are hard to measure, but the benefits of diversity are documented in various studies. Ottaviano and Peri found that U.S. born citizens benefited economically by living in a city where the share of foreign born citizens was increasing. And Scott Page, a professor of complex systems, has found that bringing together people of diverse backgrounds in an organization increases the rate of problem solving due to the new perspectives it lends. This applies as much to merging workers of different races as it does to merging those who practice different areas of study. Often scientific discoveries occur when scientists from different fields cross into new areas and open up new perspectives on unsolved problems. Hence, the costs of discriminating in the workplace and marketplace can be large.
These findings do not include the possibility that local governments could legalize merchant discrimination against customers and potential employees. But given the research findings noted above, such developments would prove doubly harmful. Humans already have a natural predilection to identify and favor other similar humans. Making economic discrimination legal in the marketplace would only amplify its harmful effects. Much like the public denouncing trade with Mexico, where does discrimination end? Should West Virginians refuse to trade with Kentuckians? Should Kanawha County residents refuse to trade with Cabell County residents? Or should everyone refuse to trade with a person outside his/her household? Obviously by reducing the argument for trade discrimination to an absurd level the flawed logic becomes more obvious. The same type of illogical arguments populate bigotry discrimination in the broader economy. Ultimately, the current research shows that a more diverse society is a more prosperous society.

Wednesday, February 17, 2016

Effect of State Lotteries on Education

Wednesday, November 18, 2015

An Employment Snapshot - 2015

A quick look at some numbers from the Bureau of Labor Statistics can shed light on how the WV job market has been faring since the 2008 financial crisis. Since the first quarter of 2009 the labor force has been shrinking. It fell from nearly 820,000 to about 775,000 participants between 2009 and the start of 2015. That is a decline of approximately 5.5% (about 0.9% per year). However, that trend reversed course drastically in 2015, and there are close to 790,000 people working or looking for work. The bad news of that small uptrend is that there are many more people looking for work than those who have actually found jobs. Gross employment is still down since 2005. There are over 100,000 fewer workers in 2015 than there were in 2005.
In summary, there are more citizens looking for jobs in 2015 and fewer total jobs than in 2005. This can only mean one thing for the unemployment rate. It has risen. The unemployment rate had been on a steady decline since 2011 when the recovery seemed to begin reaching WV's job market. It steadily declined from 8.5% to 6% at the start of 2015. But with the recovery more job seekers are now entering the labor market. Unfortunately, the recovery has been slow and long. Thus, the unemployment rate is back around 7.5% in 2015.
The government, large national chains, health care organizations and natural resources are the main sources of state-wide employment. So the national economy can serve as a fairly good predictor of WV's employment fortunes. Higher environmental standards and lower commodity prices have spelled bad news for the coal and gas industries, so that source of employment will be less promising in the coming years. Government budgets have taken a hit since the financial crisis as lower tax revenues struggled to keep pace with expenditures. Some cuts have been made to state employee insurance policies; I imagine this is one way to protect against layoffs, which are rarely done in government. Stagnant pay and benefits in government and natural resources will hurt the service industry. But since most of the service industry consists of national brands, it will be somewhat immune to lower regional sales in WV. The health services industry will remain a steady source of employment, but for some unsettling reasons - mainly, an ageing and ailing populace.
Employment prospects are always dependent on the individual and his/her level of qualification as well as the demand for workers in a specific industry. But the overall picture for 2015 is this: slightly higher employment, much higher demand for work.

Friday, July 10, 2015

Fiscal Condition Ranking

The Mercatus Center, a market-oriented think tank, has released a report ranking the fiscal condition of the 50 U.S. states. This is especially pertinent given the global state of public finances and the long-run viability of funding pensions and health care. Greece is dealing with the fallout of an overextended public sector and has been for the last five years. Meanwhile, the debt-to-GDP ratio of the U.S. has risen above 100% as of 2013. The solvency of the U.S. is not particularly worrisome given the low levels of interest at which the national government can borrow. However, individual states and municipalities have been running massive deficits within the U.S. This has led to some unprecedented bankruptcies and defaults. Although there have been numerous bankruptcy filings by counties, municipalities, and towns during U.S. history this collapse highlighted the magnitude of the problem in post-Great Recession America. The reasons many local governments are running deficits are very predictable: huge pension obligations; huge Medicaid costs; an assumed growth rate of state investments at unattainable levels (usually 8% or higher); high levels of state employment relative to private employment (less tax revenue to collect); an aging population that contributes less tax revenue. Many of these problems were caused and/or exacerbated by the 2008 financial crisis, but they all date back to governments over-promising benefits that they could not reasonably pay in the future based on current and future tax revenues.
West Virginia ranks in the bottom ten of the Mercatus ranking, 43rd to be exact. The state's "fiscal condition index," an aggregate of different statistics on solvency, is -1.2. For comparison Alaska, the best ranked state, has a rating of +8.26. Illinois is the worst ranked state at -1.86. Part of what is unsettling about West Virginia's public finance ranking is that many of the best ranked states have high amounts of natural resources. North Dakota, South Dakota, Alaska, Nebraska, and Florida all have either large amounts of energy resources (oil & gas), agricultural productivity, and/or natural beauty that attracts tourism. West Virginia has both high amounts of coal and natural gas activity and attractive tourism locales but still manages to be one the ten least solvent governments.

What details make the public finances of WV look bleak? The state actually did not run a deficit in the year this report was released, 2013. It had a per capita surplus of $116.65. The short term budget seems to be handled quite well. However, the state has about $6.1 billion in unfunded liabilities. WV has a ratio of Unfunded Liabilities per Personal Income of 9%. There are at least 17 states that have a liabilities per income ratio of 5% or less. Kentucky is in a much worse situation with 18% unfunded liabilities of their state's personal income, so WV is outperforming its neighbor there. WV's Current Account Ratio (Assets / Liabilities) is 2.05 whereas the national average is 3.37; the state is not too far behind average in that category. The total amount of WV pensions per state income is right on the national average at 0.29. Tax revenue taken in roughly matches the amount of state spending at a ratio of 0.18 of state income. Since WV is not a "bad" outlier in any one category it can safely be assumed that the state ranks in the bottom ten states in terms of solvency because it is consistently at or below average on the Mercatus statistics.
The relative position of WV in this list is more disheartening than the overall performance. South Dakota and Florida manage to have strong cash positions and high tax revenue despite having NO income taxes. They make up the revenue primarily through sales taxes. Similarly, North Dakota used its oil tax revenues to decrease its total debt position; West Virginia does not seem to have utilized its energy assets as well as North Dakota. West Virginia also has a high number of separate pension systems with eight. South Dakota has one - the South Dakota Retirement System. New York, one of the most populous states with a bad fiscal position, only has three separate pension obligations. If WV wants to manage its budget better it could start by consolidating the pension system and closing the unfunded liability gap. No immediate disaster appears in store for the state, but if public spending has to rise to meet the needs of the citizenry WV does not have a lot of cash to make that happen.
 Illinois we are not. But there is significant room for improvement.

Tuesday, May 12, 2015

Taxpayer Return for 2015

Tax Day 2015 has come and gone. Last year I wrote a post about taxpayer return on investment by state. Wallethub has produced a 2015 return analysis, so a year-to-year comparison can be made for West Virginia. The (moderately) good news is that WV climbed one spot up the rankings, from 46th to 45th best return on investment for taxpayers. The still bad (overall) news is that WV has one of the ten worst returns in government services per amount of taxes paid.
The state's "tax rate rank" fell from 18th to 22nd best. Wallethub ranks states by looking at the average state and local taxes and comparing them to the national average. For WV, the average figure was $5,457.  That is lower than last year, but enough states cut their tax rates so that WV dropped four spots in relative terms. To provide context, Alaska had the lowest rate at $2,993/person and Illinois had the highest at $7,719/person. Despite having a perception as a state with high tax rates, WV is at least in the top half of states with the lowest tax burden. When a lower cost of living than the national average is taken into account, this tax burden is even lower. But taxes did get marginally higher from 2014 to 2015.
The overall government services rank improved from 47th to 46th best. Surprisingly, Wallethub ranks our water quality number one in the U.S.
It is hard to tell where their data is coming from for this ranking. They note The Environmental Working Group (EWG) as a source, but I could not find a recent report from that organization. Thus, last year's chemical spill in Charleston was probably not factored into their analysis. On the other end of the spectrum, WV ranked near the bottom in hospital systems. 
This is an improvement from worst (51st) last year, but is still not good. Wallethub based this rank on a number of factors. One of them was the concentration of hospitals per population, which makes WV look bad. The average life expectancy and infant mortality rates are two other "outcome" based factors that went into their calculation. Out-of-pocket medical expenses and the average health premium payment were the other factors, along with a generic "public hospital system rank". Ultimately, there is only so much hospitals can do to improve the general health of the population, so life expectancy is a bit of a poor measure of the state's health care. The amount paid out-of-pocket also does not seem very causally linked to the system's quality. Regardless, the perception is still that WV citizens are getting a low return on taxes paid when it comes to health care.
The big picture has changed very slightly from last year. We are in the top half of states for least oppressive tax rates, but we are near the bottom in terms of government services quality. Reason would dictate that either the state's services improve dramatically, or taxes decrease a little bit (marginally). For example, a state with the worst government services should have a very low (maybe the lowest) tax rate. Whereas a state that is getting very high quality services can expect a high (maybe the highest) tax rate. With the 46th best services, WV citizens could argue that they should pay the 5th lowest tax rates (51 - 46 = 5). That would mean the average West Virginian pays about $4,000 in state and local taxes instead of $5,457. That is a reduction of around 25%. 
Unfortunately, taxes appear to be moving a little higher instead of a little lower. Unless that state has solid plans on how those extra dollars in tax revenue will improve services and outcomes for citizens, it should consider reducing the average tax rate. This is easier said than done. Politics will ultimately rule the day and stamp out any well-formed public policy analysis. But at least there are organizations like Wallethub providing a clearer picture to taxpayers. 
And it could always be worse. West Virginians could move to Michigan which combines one of the highest tax rates with the 45th best government services. High taxes and poor government services, that is a recipe for disaster. 

Wednesday, February 11, 2015

Employment & Wages Update

This is an update concerning the WV wages and employment with the most recent data from the Bureau of Labor Statistics (BLS). Historical data is only available up to the second quarter of 2014, which ended in June 2014. While the average U.S. state posted a gain of 1.56% in employment from June 2013 to June 2014, WV had negative employment growth of -0.3%. It was one of three states/territories to lose jobs over that period. The other two areas to have negative job growth were the Virgin Islands and Puerto Rico. This is a continuation of the weak employment recovery from the financial crisis of 2008. But it is disappointing that WV could not post even moderate positive employment growth over that 12-month time span, especially given the ability of every contiguous state to do just that.
Looking at the breakdown of employment growth and decline among WV counties shows great inequality. Doddridge County had job growth of +19% from June 2013 to 2014 to lead the state, while Mingo County had negative employment growth of -14.9% at the bottom of the list. Thirty-six of the fifty-five counties had flat or negative employment growth for this period. Counties with stagnant or negative employment included some of the counties with relatively high average weekly wages. Mingo County had the 3rd highest average weekly wage at $936, but had the worst job losses; Putnam County had the 5th highest weekly wage ($907), however it gained 0% employment. Kanawha County had -0.1% job growth with the 12th highest weekly wages of $830.
Unsurprisingly, most of the employment decline and growth is tied to natural resources. Coal mine closures in Mingo County are probably responsible for the majority of job losses. Legislation proposed to give tax credits to employers who locate on reclaimed mine properties is unlikely to have much of an effect. Tax credits may sound appealing, but if employers have no other reason to locate in a particular area (access to markets, natural resources, skilled workforce) they will not obey some politician's whim. On the other side of the spectrum, natural gas projects in the northern counties are adding to employment growth. This is powered by Marcellus Shale drilling and its support services, pipeline transmission, and electricity generators that are flooding those counties. That growth is not without negative side-effects, as some residents cope with increased truck traffic on local roads, consumption of large volumes of water from local sources, and load noises from drilling activity. The potential for explosions from highly pressurized gas, due to inattentive operators, and the constant worry of water contamination from the public will also continue to hamper the natural gas industry.
The search for new industries and employment diversification continues in WV. Natural resource exploitation, education, health care, and government work have offered the extent of employment opportunities in recent state history. That has landed WV with the 41st highest average weekly wage ($792) of 50 states. And it failed to contribute net job growth in the most recent period. More than tax breaks will be required to alter the state's employment picture. It will take a wide-scale change in workforce skills that attract existing companies and a thriving small business sector. That may not be possible to achieve with any set of policy tools.

Addendum: To be fair, employment has mostly recovered in WV since the 2008 recession. Seasonally controlled net employment is down from a 10-year peak of 715,677 in 2008 to 711,266 in June of 2014. The recovery of jobs seems to have leveled off since 2012 with declining employment over the last few quarters. The picture is not too bleak if we consider that from 2004 to 2014 employment in WV has increased from 694,322 workers to 711,266 workers - a gain of 16,944 net jobs.