Wednesday, September 17, 2014

EXPLAINING THE FAILURE OF WV'S CORPORATE TAX CUTS TO PRODUCE PROSPERITY

In this month's Harvard Business Review, William Lazonick writes in an article titled "Profits Without Prosperity", that between 2003 and 2012 companies in the Fortune 500 "used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market. Dividends absorbed an additional 37% of their earnings. That left very little for investments in productive capabilities or higher incomes for employees."

This heavily skewed allocation of earnings in favor of stock buy-backs and dividends is almost a complete reversal of the way earnings were allocated in the mid-twentieth century, when the majority of funds was reinvested in companies and employees in the pursuit of long-term growth. Lazonick goes on to speculate that the change is likely a reflection of present day incentives that reward management for maximizing present stock value.

But, whatever the cause, the effect is to largely undermine the historical causal relationship between economic growth and widely shared prosperity. Hence the failure of our current recovery to spur robust job and income growth in the nation as a whole. But, the failure has been even more pronounced in West Virginia where, during five years of economic recovery in which the nation added more than ten million new jobs, almost none were added here.

That's probably because, at the same time the US economy was plunging into recession and then slowly crawling out, West Virginia was implementing a series of corporate tax cuts on the theory that, by increasing corporate profits, companies would be encouraged to re-invest those profits in West Virginia.

The theory was doubtful from the outset based on the fact that nearly all of West Virginia's largest corporate employers and their shareholders are based out of state, which means that most of the tax savings is automatically repatriated to other places. But, now it turns out that, whether repatriated or not, more than 90% of the profits aren't reinvested here or anywhere else virtually eliminating any stimulative effect. And West Virginia has the results to prove it.

In short, the economic strategy on which West Virginia placed its bet and continues to place its bet, actually exacerbated the problem. Put another way, it never had a chance of working.

Monday, August 4, 2014

WEST VIRGINIA COAL LAYOFFS DRIVEN BY DECLINING PRODUCTIVITY, NOT EPA

Sean O'Leary "the smarter" of the West Virginia Center on Budget and Policy provides a chart that quantifies in even more compelling detail the point I recently made about how market forces in general and the rising cost of mining coal in southern West Virginia in particular are primarily responsible for the recent spate of mine closings and layoffs.

Layoffs in the coal industry this year have been largely confined to "Central Appalachia" (southern West Virginia and eastern Kentucky) and the following chart shows why. (Click on chart to enlarge)



Mines in Central Appalachia produce only about 2 short tons of coal per labor hour as compared to a national average of over 5. Powder River Basin mines produce almost fifteen times that much and even Northern Appalachian mines in West Virginia and Pennsylvania produce 50% more. Finally, as the best coal seams are mined out, Central Appalachian productivity is only getting worse having dropped by 20% in only three years between 2009 and 2012.

Labor costs make up a significant portion of the coal industry's cost of doing business, which is why companies have worked assiduously over the past seven decades to eliminate workers even when production was booming. But now southern West Virginia's geological facts of life are reversing the immense productivity gains companies realized in the last half of the twentieth century and it's happening at a time when the price of coal is plunging. As a result, for some mines, most of them in Central Appalachia, the revenue and cost lines are crossing, which means it's time to turn out the lights.

Friday, August 1, 2014

MANCHIN SPINS THE TALE ABOUT COAL LAYOFFS






In Manchinland, it's simple. When coal companies announce layoffs in West Virginia, there is only one cause -- government regulation. Never is there a hint that market forces might be playing the slightest role.

That's strange because in the past few months, we've seen a series of market conditions arise that would have suggested to non-self-interested observers that southern West Virginia coal was headed for a reckoning. These include:

-- A glut in the supply of coal and a corresponding weakening of demand in Europe.

-- 3 years of continuous drops in the coal prices.

-- Declining productivity with corresponding increases in production costs in West Virginia's southern coalfields.

-- The high value of the US dollar relative to the Australian dollar, the country from where much of our competition for the European market comes.
-- And we haven't even gotten to the challenge from low-cost natural gas.


In other words, foreign markets upon which West Virginia coal producers depend heavily are in a state of oversupply, competition from Australia is greater than ever, the price of coal has plummeted, and production costs in southern West Virginia mines have been soaring. As I said, a reckoning was due.

So, why instead of acknowledging and addressing the implications of this onslaught from market forces does Joe Manchin choose to divert attention and scapegoat the federal government? It's a question we would all do well to contemplate.




Saturday, July 26, 2014

THE CALLOUSNESS OF NICK CASEY & THE PROMISE OF EPA'S NEW EMISSION REQUIREMENTS

A few weeks ago I posted a column titled "No Sense of Decency: West Virginia's Leaders and The Politics of Coal" in which I excoriated West Virginia Democrats and Republicans alike for their reflexive condemnations of efforts to slow global warming and their nearly complete disregard for the suffering climate change has already begun to inflict. And that was BEFORE Nick Casey, Democratic candidate for congress from West Virginia's second district, dropped this little bomb.

Paul Nyden of the Charleston Gazette reports that, while speaking at a candidate forum in Charleston, Casey dismissed the entire issue of climate change saying simply, "It's not our problem."

Even antediluvian global warming deniers, such as first district congressman David McKinley, recognize the moral implications if in fact climate change is the product of human activity, which is precisely why they argue ferociously that it's not. But, Casey seems to lack even that compunction. Never mind if tens of millions of people are displaced from their homes by rising sea levels. Never mind if diseases spread to hundreds of millions because formerly inhospitable environments become cushy new homes for disease-carrying insects. Never mind if agriculture and food supplies are disrupted worldwide -- "It's not our problem."

Does that kind of callousness know any boundaries? Does anything that is not in our self-interest matter to Nick Casey? Or, more pointedly, does anything that is not in Nick Casey's self-interest matter to Nick Casey? What happens when the day comes that Nick Casey is forced to choose between the interests of his second district constituents and his financial backers in the coal and natural gas industries?

Oh and, by the way, Casey is supposed to be the "liberal" in the race.

That brings me to the real purpose of this post, which has to do with the question of how West Virginia should respond to the new EPA carbon emissions requirements, which Casey roundly condemned and under which the state must cut its emissions by 20% between now and the year 2030. Casey's dismissive attitude notwithstanding, we have a year in which to submit a compliance plan to the EPA for approval.

Call me cynical, but given West Virginia's track record and current leadership, I suspect we'll have to be dragged kicking and screaming into compliance, that millions of dollars will be wasted in futile legal attempts to fight the new standards, and that any plan we submit will do only the bare minimum necessary to achieve compliance while protecting the coal industry to the greatest extent possible.

If that's the course we take, we will squander what may be West Virginia's best chance in a generation to diversity its economy and bring new businesses and jobs to the state. Renewable forms of energy such as solar and wind are already at or near price parity with coal in generating electricity. And as a recent New York Times article on energy policy in Minnesota shows, state government has the legal and regulatory tools at its disposal to force the regulated monopolies that provide electricity to support the development of alternative sources.

Meanwhile, the US Department of Engergy's DSIRE.org web site (DSIRE stands for "Database of State Incentives for Renwables & Efficiency") offers complete menus of the policy initiatives every state has enacted to encourage the development of alternative energy sources.

In short, there is no shortage of ideas available to West Virginia policy makers if they are willing to strain their necks to gaze into the future rather than into the past. And those ideas are having an immensely beneficial impact. Although you wouldn't know it living in West Virginia the solar industry already provide more jobs for Americans than the coal industry does -- well over 100,000 of them. And wind power provides almost as many jobs as coal as well. Solar power generation is also growing faster than coal, not just in percentage terms, but in absolute terms.

So, it becomes a question of whether we're going to hitch our wagon to a horse that's gaining speed and strength and that's already going faster than our current nag or are we just going to continue riding "Ol' King Coal" until he collapses beneath us?

Of course, it's not clear that West Virginians will even be presented with that choice. Political leaders will probably try to avoid even acknowledging that there is an economically viable and more promising alternative to coal -- just as they avoid discussing or acknowledging the human consequences of climate change. So what are we to do?

My suggestion, which I'm pitching to organizations such as the West Virginia Center on Budget and Policy, Downstream Strategies, and the Sierra Club West Virginia, is that we hold a "call for papers" or a "call for ideas" in which citizens, companies, and organizations have the opportunity to propose their ideas for how West Virginia can most effectively meet the new EPA requirements and capitalize on the economic opportunities that compliance offers.

With the benefit of publicity and sponsorship by respected and credible organizations, this exercise could command attention and demonstrate to West Virginians that there is an economically and environmentally superior alternative to our reflexive tendency to double down on our perpetual bet on coal.

If we don't do this or something like, West Virginia will yet again make the worst of a good situation leaving us to wallow for another generation or two in self-inflicted victimhood.

Friday, July 25, 2014

CONGRESSMAN PAUL RYAN'S PROPOSAL FOR REFORMING THE SOCIAL SAFETY NET

This week Wisconsin congressman Paul Ryan released a proposal for reforming how America funds and administers the social safety net. The plan is titled "Expanding Opportunity in America" and it's a fascinating document because it's not clear whether the plan's likely negative consequences are intended or unintended.

Whatever the case, Ryan's plan is noteworthy in a few respects. First, it acknowledges important facts that many Republicans routinely deny. Among them, that "wage growth is too slow" and that for those in low-paying jobs the rewards of work are insufficient. This will regarded as heresy by some Republicans who view any increase in wages as auguring an outbreak of inflation and who believe questions of sufficiency and insufficiency should be decided by the market. Ryan also acknowledges that there is too little opportunity for upward mobility, again an issue that many Republicans believe should be left to the free market. He does not claim as he has in some recent campaign appearances that federal programs going back to Lyndon Johnson's "war on poverty" have failed to reduce the rate of poverty (They have reduced poverty by about 40%). And Ryan even discusses the "high costs of incarceration", an acknowledgment that will upset politicians of both parties who have made reputations by stumping for draconian prison sentences in order to appear "tough on crime".

In addressing these concerns Ryan sensibly recommends expanding the Earned Income Tax Credit (EITC) for low-paid workers, although he pairs it with a call to scale back the minimum wage, which would be destructive. Still, support for expanding the EITC is a reversal for Ryan who, as Mitt Romney's running mate, defended an economic plan that called for a reduction. It's a change that will not please those who, like Romney, complained about "the takers" -- low income earners who don't pay federal income taxes.

Ryan also points out that his plan is not a budget-cutting exercise in that it assumes federal funding for safety-net programs will stay at current levels. Rather, he says, he is proposing to reform how benefits are delivered with the goal of triggering results-driven experimentation at the state and local levels and of producing more customized solutions for beneficiaries -- both worthy aspirations.

It's the claim that his proposal is budget neutral and does not constitute a cut in funding that's problematic because, while temporarily true, it's likely to be undone by events, an outcome that it's difficult to believe Ryan hasn't anticipated

The primary means by which Ryan proposes to pursue the goals mentioned above is by converting most federally administered anti-poverty programs into state programs and paying for those programs with block grants that the states could apply as they see fit as long as the funding is used exclusively for poverty relief and as long as state plans for addressing poverty receive federal approval. So, while the states would not have a completely free hand to do with the block grant (or "Opportunity Grant") funds as they see fit, they would have considerably greater latitude than they do currently and, Ryan hopes, an incentive to design a more highly coordinated and flexible responses to the needs of individual recipients.

But, what the block grant approach also does is disable the automatic trigger that causes benefits and federal spending to increase in response to economic conditions and growing need. This doesn't entirely defeat the countercyclical purpose of safety-net programs, but it at least complicates their ability to perform what is really their primary function.

Ryan recognizes this problem and argues that it can be overcome in one of two ways. First, he says, the legislation could incorporate a provision that would automatically trigger supplemental funding -- for instance if the unemployment rate rose to more than 6.5%. Or states could set aside a portion of their funds -- or be required to set aside a portion of their funds -- to be used during economic downturns.

The problem with these solutions is that in the real world, they would almost certainly result in benefit cuts. The first solution, incorporating an automatic trigger, means that, instead of outlays and benefits growing or shrinking proportionally to need, funding to the states would be capped so that were unemployment to increase from say 4.5%, the level at which it was prior to the 2008 financial crash, to 6.5%, a jump of more than 40%, there would be no increase in funding. And, even if the trigger point was breached, there's no guarantee that the supplemental funding would be proportional to the additional need. In fact, given congress's current unwillingness to extend long-term unemployment at a time when joblessness is still at a historically high level, there's every reason to believe that supplemental funding wouldn't be proportional. Consequently, benefits would have to be cut.

Ryan's second option -- having the states set aside a portion of their current funding in a "rainy day fund" -- implies that their initial allocations from the federal government would contain a surplus, a scenario that's difficult to imagine when a majority of house members in Ryan's own party wants to cut, not increase, safety net spending.

Finally, Ryan's plan also involves the establishment of a new state-level bureaucracy to work with beneficiaries. His plan contains no estimate of the associated cost, although we can assume it would be taken from the funds included in the block grants.

For all of these reasons current benefits would likely be cut and, without the existing trigger that automatically increases funding proportionately to need, the effective cut in benefits might be even deeper. This is a problem on two levels. First and most immediately it would mean that many people would suffer unjustly. But it would also mean that, because increases in need are usually precipitated by economic slowdowns in the private sector, the offsetting effects of public sector stimulus would be significantly reduced with the likely effect of lengthening and deepening the slowdown.

Again, it's difficult to believe that Ryan doesn't recognize these pitfalls and, if his past efforts at cutting safety net programs are any indication, he may welcome them. We, however, should not. As worthy as Congressman's Ryan's goals of introducing more innovative and flexible solutions to the problem of counteracting poverty may be, they don't have to come at the price of exacerbating economic downturns and cutting benefits to those in need.

Finally, I should mention that Ryan's plan also addresses additional issues such as education funding, job training, and regulatory reform -- all significant issues that I'll address at another time.

Monday, July 21, 2014

THE GEOSTELLAR PRESENTATION ON SOLAR POWER OPPORTUNITIES IN WEST VIRGINIA

On Thursday July 17 Geostellar CEO David Levine addressed a community forum in Shepherdstown, WV that was sponsored by the West Virginia Sierra Club to discuss the implications and opportunities presented by the Environmental Protection Agency's new carbon emissions standards.

At a time when opponents of actions to reduce the threat posed by global warming argue that we face a trade-off between economic growth and jobs on the one hand and environmental regulation on the other, Levine's presentation, which can be seen here, makes three key points:
-- Solar offers major opportunities for job growth both nationally and in West Virginia.
-- Solar is already cost-competitive with carbon-based energy sources in some parts of the country and the price is still dropping, which will make it cost-competitive throughout the US quite soon.
-- Solar is a private-sector phenomenon in which there's money to be made.

Indeed, some studies show that solar already supports more jobs in the US than does coal. Levine explains why it can support more.

The complete presentation can be seen here. David Levine can be contacted at 304-596-0206 or at david.levine@geostellar.com.

Saturday, July 19, 2014

JOE MANCHIN FOR . . . SERIOUSLY?

In what were surely entirely coincidental acts of spontaneous political combustion, the second week in June found Joe Manchin enthusiasts in at least 28 states starting "@statename4Manchin" Twitter accounts using the same profile and header photos and retweeting the same messages from the apparent mothership, "@DraftJoeManchin".

They apparently forgot or never saw my 2012 blog post that began this way.

"Some people believe Senator Joe Manchin will run for president someday. If he does, Manchin will almost certainly tout his term as West Virginia governor during which he cut taxes and balanced budgets in one of the most economically depressed states in the union. And, if Manchin’s candidacy gains traction, his opponents will respond.

"They’ll say, 'Joe, anyone can balance a budget if you’re willing to settle for the worst schools, the worst healthcare, and the worst infrastructure in the nation. West Virginia is the poorest, least educated, and unhealthiest state in America. Is that what we want for the country?'

"The accusation won’t be entirely fair. West Virginia isn’t the worst state in every category. In some, we rank as high as 47th or 48th. But, for political purposes, the claim will be true enough. West Virginians will be humiliated and Manchin’s candidacy will come to an ignominious end."


Since I evidently failed to make the point that Joe Manchin's record suggests he would be a bad candidate and an even worse president, let me try again. First, let's look at "pocketbook issues".

In recent weeks Kansas'Republican governor Sam Brownback has taken a pummeling in left-wing media for leading his state into a budget deficit crisis by cutting business and personal income taxes in the naive and now demonstrably misguided belief that the tax cuts would be self-financing. Brownback fell victim to the "supply side" fantasy that tax cuts will stimulate so much incremental economic activity that government revenues will actually increase despite lower rates.

But, media needn't have waited for a conservative Republican governor to impale his state on the cross of an ideological orthodoxy that's promoted variously by the Koch Brothers, the American Legislative Exchange Council (ALEC), The Weekly Standard, The CATO Institute, and other conservative and libertarian organs. Joe Manchin, as Governor, took West Virginia there years earlier . . . and with exactly the same result. In fact, West Virginia is still grappling with the deficits spawned by Manchin's corporate tax cuts, which this year caused the state to raid its rainy day fund, freeze hiring, and raise college tuitions in a place that already suffers from the lowest level of educational attainment and the highest level of delinquency on college student loans in the country.

Oh, and job growth? West Virginia has actually experienced a net job loss since Manchin's corporate tax cuts were enacted in 2007 -- this despite West Virginia being among the states experiencing a boom in natural gas production due to fracking.

That Manchin, a Democrat, should have blazed the trail for Republican economic orthodoxy shouldn't surprise anyone. He was after all ALEC's leading member in West Virginia and is at present the only Democrat in the United States Senate who is listed as a member on ALEC's web site. That fact points to another problem with which Manchin presents us -- he has apparently learned nothing from the failure of austerity economics in his home state.

For the last six years, as the nation's economy has doggedly crawled its way back from the worst economic crisis since the Great Depression, Joe Manchin has been one of the leading voices for greater budgetary austerity and slashing government spending in pursuit of every conservative's putative silver bullet for fixing all economic problems -- balancing the federal budget.

Why Manchin and his allies believe in these policies is not entirely clear since every bit of empirical evidence since the crash in 2008 shows that, both in the United States and in Europe, wherever austerity measures have been enacted, they have crippled recovery and left nations such as the UK, Ireland, Spain, and Portugal far behind the United States. Still, Joe Manchin can be found regularly shilling for the Bowles-Simpson budget plan whose most noteworthy features include deep cuts to the social safety net, including Social Security, and an arbitrary cap on federal government spending as a percent of GDP.

All of these measures are necessary we are told by Manchin and the plan's authors, former Wyoming Senator Alan Simpson and former Clinton Administration Chief of Staff Erskine Bowles, because without them inflation and interest rates will skyrocket bringing the economy to its knees. The problem is that those predictions were made four years ago and we have long since left behind the putative date of armageddon which Messrs. Manchin, Simpson, and Bowles assured us was nigh.

What makes Manchin's continued adherence to these policies, which have failed both in theory and in fact, doubly mysterious is that they would be truly awful for his home state. West Virginia residents are among the most dependent in the nation on federal programs for a large portion of their incomes. Meanwhile, the state's economy offers few jobs and those that exist pay wages that are almost 20% lower than the national average. Consequently, West Virginia would be among the states hardest hit by the spending cuts contained in Bowles-Simpson and would benefit less than nearly every other state from the plan's tax cuts. The combined effect would be a significant reductions in personal incomes and economic activity in the state.

In that regard, even Manchin's preferences for which taxes to cut and which to maintain are strange. A couple of years ago the nation was facing the the nearly simultaneous termination of the now famous Bush income tax cuts and the payroll tax holiday that had been implemented by the Obama administration in response to the economic crisis. As it happened, the the cessation of the Bush tax cuts and the sunsetting of the 3% reduction in payroll taxes would both have removed about $750 million a year from West Virginia's economy. But, while Joe Manchin supported extending the Bush tax cuts on the grounds that "you don't raise taxes during a recession", he opposed extending the payroll tax holiday, which benefitted far more West Virginia families, on the grounds that "we can't afford another dime of debt". The problem with Manchin's argument was that the extension of the Bush tax cuts actually increased the federal deficit by about 50% more than an extension of the payroll tax holiday would have.

That's why it's perfectly reasonable to ask of Manchin, should he ever run for president, why he preferred a plan that would have disproportionately benefitted the wealthiest of taxpayers, of which West Virginia has few, over one whose benefits would have been spread far more broadly and would have done less damage to his state and the federal budget.

Manchin's views on the environment are, if anything, even more worrying than his economic policies. When during his 2010 Senate race he famously ran a TV commercial in which he put a bullet through an effigy of the "Cap and Trade" bill that had been tacked to a tree, Manchin signaled two things. First, that he is one of the great proponents of the most powerful and enduring myth of West Virginia politics -- that in defending the coal industry he is defending the jobs and incomes of West Virginians. And second, that he is willing, when his funders call the tune, to become absolutely intransigent and unwilling to compromise.

Unfortunately for Manchin, the facts, with respect to both the economic value of the coal industry and the existence and likely impact of man-made global warming, are undermining his positions quickly and incontrovertibly. The data clearly show that:

-- The loss of coal mining jobs, which has been epidemic in West Virginia since the 1940's, has little if anything to do with environmental regulation.
-- In the last 60 years there has been no correlation between growth in coal production and growth in local commerce and jobs.
-- Increases in GDP, especially those stemming from increased coal and natural gas production, have not generated increases in jobs and income for West Virginians.
-- The health consequences of coal mining can be dire for local residents.

And then, of course, there are the global consequences of climate change, which is a subject that Joe Manchin, like most West Virginia politicians, studiously avoids discussing. He focuses instead on the "war on coal" and reflexively opposes all EPA policies that seek to stem water pollution, air pollution, and greenhouse gases even though his own constituents are among those who are most severely afflicted by these scourges.

These and other policy choices have allowed Manchin to portray himself as a maverick within the Democratic Party and, in this day of rabid partisanship, as a "moderate" who tries to make Washington work. In fact, Manchin and former Republican presidential candidate, John Huntsman, have branded the concept by forming the online group, No Labels, which describes itself as "a growing citizens’ movement of Democrats, Republicans and independents dedicated to promoting a new politics of problem solving".

This and other initiatives have helped Manchin forge a reputation for being politically astute, which is a bit peculiar considering his own electoral performance and that of the West Virginia Democratic Party, which he largely reshaped in his own image during his two terms as governor.

Both before and after becoming West Virginia's governor in 2004, Joe Manchin was a disciple of Bill Clinton and an enthusiastic practitioner of "triangulation" -- Clinton's strategy of co-opting his political opponents' more popular proposals by adopting them usually in a form modified just enough to allow Clinton to claim to have improved on the original idea while also trumpeting his bipartisanship.

The problem is that, in Manchin's hands, triangulation sometimes became a wholesale abandonment of principle and identity for West Virginia's Democratic Party. As a result, West Virginia, whose House of Delegates and state Senate have for decades been controlled by Democrats, turned sharply to the right on tax and budgetary policy during Manchin's tenure as governor virtually extinguishing any differences with Republicans and plunging the state into even deeper economic anemia than it had known previously.

Democrats have been rewarded in recent elections with declining majorities in both the house and senate, putting the party on the precipice of losing in the upcoming election one or both majorities that it has maintained since 1930. And, although Manchin has won by double digit margins in his last two elections, he has been opposed by a Republican, John Raese, who is an almost cartoonishly bad Tea Party dogmatist.

Raese distinguished himself by joining Texas governor Rick Perry in suggesting that Social Security is unconstitutional and spoke wistfully about the way capitalism was before it was corrupted by socialist policies such as the minimum wage, child labor laws, and worker safety laws. Raese's ideological handicaps were compounded by the fact that for all purposes other than getting elected to the US Senate he isn't even a West Virginian. He, his wife, and children live in Florida, an issue that became problematic when it was discovered that he took a tax deduction on his house in Florida that is available only to taxpayers whose primary residence is in that state. Raese finessed the issue by claiming that it was his wife and not himself who owned the house.

In summary, under Manchin's leadership West Virginia Democrats have nearly squandered decades-long majorities in state government. And he is yet to be tested at the ballot box by an opponent other than what boxing announcers would describe as a tomato can.

In politics, Joe Manchin has taken his party to the brink of disaster and, on policy, he has taken his constituents over the edge.

Draft Joe Manchin for president . . . seriously?




 
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