Tuesday, January 27, 2015

WEST VIRGINIA IS HEMORRHAGING JOBS

You wouldn't notice from Governor Earl Ray Tomblin's recent State of The State address, but over the last six months West Virginia has been losing jobs at a faster rate than at any time since late 1982 and early 1983. 2.1% of West Virginia jobs -- more than 16,000 in all -- have vanished since last June, which is more than we lost in any six month period during the financial crash six years ago.

This binge of job losses is particularly worrisome because it's taking place at a time of general economic recovery in the nation, whereas the the losses in 1982/3 and 2009 were occasioned by the two worst recessions the US has experienced since the Great Depression. The 1982/3 recession was precipitated by the decision of the Federal Reserve board under Paul Volcker to raise interest rates to record levels in order to bleed inflation out of the economy. And the recession of 2009 was brought about by the housing market crash and subsequent financial meltdown.

This time however, there is no overarching cause apart from the chronic weakness of West Virginia's economy. Nor do the losses follow a period of unusual job growth. In fact, West Virginia has not added a net new job since Governor Tomblin's first full month in office in December 2010. Even employment declines in the coal industry fail to account for the immensity of the problem since job losses in that industry make up no more than 20% of the number we're currently experiencing.

Also sobering is the possibility that, because of the recent plunge in the price of natural gas, drillers are reducing production, which may trigger job losses in the one industry that has generated employment growth in West Virginia in the last five years. In other words, the losses may continue to mount.

Sunday, January 25, 2015

A MASTERPIECE OF THE MADMEN

Somewhere in the region between fine art and found art there occurs incidental art -- words, images, and sounds created for a non-artistic purpose (usually to sell things) that none the less capture and reveal something in us and about us.

Such is the Marlboro Man, the creation of men who, thanks to a TV show, we now revile (and in some ways envy) for their cravenness and crassness. But, in their pursuit of the almighty buck, this particular group of men created a character who embodied not just our aspirations for freedom, vigor, virility, self-reliance, and invulnerability, but also and importantly, anonymity.

Until this past week when he died, neither I nor most other people knew the Marlboro Man's name and frankly, we didn't even wonder. In a way, that's surprising because we live in a culture driven by frenzies of all-consuming interest in a succession of temporary celebrities who, except for the few capable of constantly reinventing themselves, we suck dry of all mystery and discard in a matter of months if not days.

But, the Marlboro Man's anonymity was central to his appeal, which was immense as demonstrated by the rise of Marlboro to become America's best-selling cigarette. And the reason his anonymity was important was because it was our anonymity too.

We wanted the Marlboro Man to be manly, self-reliant, and self-assured because that's what we wanted to be. But, we wanted him to be anonymous because that's what we were. And the fact that he could, in his anonymity, embody all those qualities to which we aspired, meant they were attainable for us as well.

It can be said that the Marlboro Man never made us question or examine in the way that Michaelangelo's "David" causes us to question the nature of courage and our own capacity for it or in the way El Greco's Christ
causes us to contemplate faith. And, because he doesn't cause us to question, the Marlboro Man can never be considered great art.

But, he is none the less revelatory and that is no small accomplishment.

WEST VIRGINIA'S ECONOMY IN FREEFALL

We already knew that almost none of the benefits of the natural gas boom are accruing to West Virginia workers and communities -- a fact attested to by an analysis that shows that Total Wages in West Virginia have actually declined over the last five years while GDP expanded by $11 Billion. But, amidst that ongoing fiasco, we're also witnessing a decline in Total Employment that has left us with fewer jobs than at any time since 2010. At the same time, the crash in natural gas prices portends further declines in income, tax revenue, and employment.

Here are the sobering facts.

-- This week Workforce West Virginia reported that Total Employment declined to its lowest point since February 2010.

-- Natural gas prices are, down by more than a third from 2014. And, according to the Energy Information Administration's latest prediction, they are expected to stay below $4/MMBTU until 2017. This unexpected decline from prices that averaged $4.52 in 2014 will diminish royalties received by West Virginia property owners as well as severance tax revenues.

-- Meanwhile, chronically low natural gas prices are also causing drillers to scale back production, which will further reduce royalties, tax collections, and employment.

Why are politicians and editorial writers not all over this story?


Friday, January 16, 2015

GROWTH WITHOUT PROSPERITY and HOW WEST VIRGINIA EXPORTS WEALTH

The two presentation decks that follow discuss, first, the disconnect between overall economic growth in West Virginia as measured by GDP and actual prosperity as measured by job creation, household income growth, and the alleviation of poverty. The second presentation focuses on the problem of policies that export money from West Virginia to nonresidents and out-of-state interests. Particular attention is given to West Virginia's now years-long policy of business tax cuts that, in addition to plunging the state into annual deficits, has also exported hundreds of millions of dollars out of the state's economy thereby reducing incentives for businesses to expand and hire.

To see an enlarged version of any slide, just click on it. (NOTE: a couple of slides from the first presentation are repeated in the second.)

Friday, January 9, 2015

THE ECONOMIC NON-IMPACT OF COAL & NATURAL GAS IN WEST VIRGINIA

They are assumptions bordering on articles of faith in West Virginia. "As coal goes so goes West Virginia's economy." And "West Virginia's best hope for future economic growth is its natural gas industry."

Those who make these claims regularly brush off objections that neither industry employs more than about 3% of West Virginia workers by suggesting that those meager figures fail to take into account the full impact coal and natural gas have on West Virginia's economy. They argue that coal indirectly creates tens of thousands of additional jobs in supplier industries and induces tens of thousands more in the broader economy.

Coal mine operator Robert Murray of Murray Energy says that for every coal mining job eleven others are created, which, if true, would mean that more than 40% of all private sector jobs in West Virginia would be attributable to the coal industry alone.

That being the case, one would expect that significant growth in employment in coal and natural gas would have a powerful knock-on effect in the form of increased employment in the rest of West Virginia's economy. That's why it will probably come as a surprise to many that, according to Workforce West Virginia, even as employment in the coal and natural gas industries has expanded by more than 22% in the last seven years, all other private sector employment in West Virginia has actually declined by two percent.


In fact, going back to the year 2006 at the dawn of West Virginia's natural gas boom, there appears to be almost no correlation between employment change in the coal and natural gas industries and private sector employment in West Virginia's broader economy. Some may suggest that the absence of any visible correlation is attributable to declines in coal jobs offsetting gains in natural gas.

But, when employment data for the two industries is unbundled, we see that employment in coal, although decreasing now, has none the less increased overall since 2006.


Even in 2008, when coal mining employment grew by 10% and natural gas employment by more than 13%, the rest of West Virginia's private sector actually lost jobs.

This disconnect between coal and natural gas job growth and overall private sector employment could mean that the coal and natural gas industries don't generate the numbers of indirect and induced jobs that many people presume. On the other hand, it could be the case that the indirect and induced jobs are being generated, but that the gains are being offset by job losses in the rest of the economy. The latter explanation would be particularly disappointing since, in an effort to spur private sector job growth, the state has implemented a steady diet of corporate tax cuts during this time period.

Consequently, boosters of the coal and natural gas industries who are also proponents of cutting of corporate taxes (a group that includes the leadership of both political parties) face the unhappy prospect of having to acknowledge that either the coal and natural gas industries aren't nearly as important to West Virginia's economy as they have long insisted or the corporate tax cuts they enacted and which have plunged West Virginia into a series of budget deficits have utterly failed to produce the results they predicted and hoped for.

Of course, it's also possible (and I would say likely) that both are true.



Sunday, November 30, 2014

DEATH SPIRAL -- HOW DEMOCRATS MAKE BAD WORSE

Vicious circles are a well-known phenomenon in economics. A rise in costs for manufacturers can trigger a rise in prices that leads to workers demanding higher wages, which again increases manufacturers’ costs, leading to yet another rise in prices. It's an inflationary spiral that ends either in a controlled crash, as when the Fed raises interest rates, or an uncontrolled crash as in the case of Weimar Germany in the 1920’s.

The German crash then fishtailed into a second vicious circle, this time of deflation in which prices and wages plunged as people and businesses hoarded assets. And, as in the case of the earlier inflationary spiral, individual Germans were acting rationally and in their own self-interest, but the collective effect of their actions was devastating.

That is the essence of a vicious circle – the emergence of a feedback loop that rewards individual behaviors that are collectively destructive. But, vicious circles aren't limited to economics. They also arise in politics and a vicious circle is pretty much what the Democratic party has created for itself in West Virginia and in much of the country.

Last month's electoral catastrophe for Democrats was merely the capstone of a long-term trend that has seen Republican gains in congress, state legislatures, and governors’ offices nearly everywhere except for New England and on the coasts. While many commentators attribute the trend to issues of demographics, voter turnout, gerrymandering, and uncontrolled political spending, there is another contributing factor, which is in truth a self-inflicted wound that produced a death spiral for West Virginia Democrats in the last election.

In much of middle America public discourse about politics and public policy has narrowed considerably in the last couple of decades and, with that narrowing, the presence of the progressive narrative on issues of economics, the environment, education, and healthcare has diminished markedly. In some places such as West Virginia it has nearly vanished altogether. Many factors contribute to this withering including the consolidation and nationalization of media. But, there’s another contributing trend that needs to be considered because it’s within the power of the Democratic party to reverse it.

In recent election cycles both parties have become much “smarter” about how they spend money. They funnel funds almost exclusively to races that are competitive and they concentrate that spending during the periods when voter interest is at a peak, which usually means just prior to elections.

As with the actions of German businesses and consumers when their nation was in the grips of hyperinflation and later deflation, the concentration of effort in just a few places and only during peak periods might make sense in the short term for particular races, but it comes at the expense of general failure. And as the failure deepens, the parties, especially the Democrats, respond by doubling-down on their strategy, which compounds the problem.

A fundamental function of any political party should be to promote the party's message and a narrative and keep it constantly present in the public mind so that, when it comes time for individual candidates to pick up the flag and carry it into battle, they’re carrying a flag that has meaning, one that voters recognize and that clearly differentiates its bearers in a positive way. In short, candidates are able to carry a flag that confers credibility and legitimacy upon them so that, rather than having to win the majority of voters to their side on the issues, they have the much easier task of merely demonstrating to voters that they are reliable champions for the message and the policies associated with it.

Of course, the current mania for highly concentrated, tactical campaign spending runs exactly counter to what is required to maintain a sustained presence of messaging that is constantly refreshed and reinforced. In the current environment no one, except perhaps for special interests that focus on particular issues, wants to spend campaign money in off-years and in places where races aren’t likely to be competitive. Yet, it’s in part because Democrats don’t do so that those races aren’t competitive and have no prospect of becoming so. Moreover, these bleak prospects also cripple the party’s ability to recruit able and appealing candidates (which sadly is now often a euphemism for self-financing candidates) who have no wish to spend gobs of their own time and money in a futile exercise.

It will inevitably be objected that, as good as the idea of “maintaining an ongoing messaging presence” sounds, there’s no money to do so. The proper reply is that (1) there is never enough money, (2) unless money is spent on this, the money that’s spent on other things will be wasted anyway – a point proven by recent history – and (3) what’s being proposed need not be expensive.

We are in the heyday of owned and earned media and of tools that can be used to influence the influencers. The greatest barriers to establishing and maintaining an ongoing presence in the minds of voters is finding advocates who will do the hard work of developing a compelling narrative and accompanying policies that are sound, politically appealing, and that effectively distinguish Democrats from Republicans.

That is something that current leaders of West Virginia’s Democratic party have manifestly failed to do.

Tuesday, November 25, 2014

CONGRESSMAN McKINLEY MEETS CHARLIE CHAN



There aren’t many stereotypes more hoary than that of the inscrutable Chinese. But, it turns out that, for some opponents of the recent carbon reduction deal that President Obama struck with China, the Chinese really are inscrutable.

Congressman David McKinley (R-West Virginia) and other defenders of the coal industry complain that under the agreement China neither must nor will do anything to reduce carbon emissions until the year 2030 . . . and that the Chinese probably can’t be trusted to do so even then. In the meantime, they say, China will benefit from the use of cheap coal to generate electricity and fuel economic growth while the United States will be forced to rely heavily on alternative energy sources that will drive up electricity costs, cripple economic growth, and destroy jobs.

McKinley’s analysis makes two questionable assumptions. The first is that the transition to alternative fuels by the US will place a major burden on the economy. In fact, with the cost of generating electricity from natural gas and solar already at or below the cost of doing so from coal and taking into account the number of jobs those industries are creating, the transition may very well turn out to be a net plus economically.

But, as dubious and more interesting is McKinley’s second assumption that the Chinese share his belief that the transition from coal will be a loser economically and, for that reason, will resist all efforts to force reductions in coal consumption.

History is replete with examples of military commanders whose armies were destroyed because they assumed that the enemy thought as they thought and would fight as they would fight. And, if Congressman McKinley were a general, his last name would be Custer.

McKinley’s belief that renewable energy sources are significantly more costly than coal is true only if the externalities of burning coal are ignored. In the mid and long term these externalities include destructive consequences of global warming that range from the spread of disease to decreased crop yields. And, in the near term, they include a plethora of respiratory and cardiac conditions that are exacerbated by the burning of coal and which result in increased medical expenditures, a smaller labor pool, lost worker productivity, and higher death rates.

In the US these costs are externalized because they affect neither the sellers of coal nor the energy-generating industry that buys and burns the stuff. Instead, externalized costs are shouldered by the government and the rest of us and we don’t have a seat at the bargaining table where prices are set.

China is different. Whereas the sellers and buyers of coal in the United States are private parties, in China the major buyers of coal are state-owned power generating companies. And the government is deeply enmeshed in the mining of coal as well, which makes the government not just an enterprise partner in the energy market, but a dominant player whose interests supersede those of private parties. At the same time, the government is also the exclusive provider of medical services to the Chinese people, the ultimate insurer against disasters and economic dislocation, and the guarantor to industry of an available and productive labor force all of which are functions that are compromised, some seriously, by the burning of coal. So, when the Chinese government looks at the economics of coal, it sees a very different picture than the one imagined by Congressman McKinley for whom the externalities are “out of sight, out of mind”.

It should also be remembered that, even in a non-democratic state such as China, the leadership cannot completely ignore public sentiment. At some point even the most cowed workers can conclude that their living and working conditions are intolerable. And, as West Virginians well know, coal creates significant quality of life issues in both its production and consumption.

In short, the economic calculus employed by McKinley is no longer shared by Chinese leaders because they must cope with the collateral damage caused by carbon emissions and pollution that comes from the burning of coal. That’s why, quite apart from the recently negotiated agreement, the Chinese had already embarked more than a year ago on a series of unilateral measures to reduce carbon emissions and limit the consumption of coal. These include limits on overall consumption, implementation of a cap and trade system for carbon credits, and the rapid development of what has become the worlds largest solar power industry. China is now not just the world’s largest manufacturer of solar panels, it’s the largest buyer and installer as well.

None of this would make any sense if Chinese leaders viewed the economics of coal in the same way McKinley does and assumes that they do as well. But, it’s a situation McKinley should find reassuring because it means the reason the Chinese can be trusted to reduce carbon emissions is one that every believer in the free market can respect – it’s in their economic self-interest to do so.
 
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