Friday, January 27, 2012

WEST VIRGINIA'S COAL TATTOO (for publication 2/11/12)


A lyric from Johnny Staats’s song, “Coal Tattoo” goes like this --“Somebody said, ‘That’s a strange tattoo you have on the side of your head.’ I said, ‘That’s the marking of the number nine coal. A little bit more ‘n I’d be dead.’”

The tattoo mentioned in the song title is the indelible mark left when coal shards penetrate skin, injecting a black so pure that it appears blue against flesh. It’s a mark shared by West Virginia miners and figuratively by all of us who live in this state where coal isn’t just a commodity and a source of jobs, but a social, cultural, and psychological phenomenon. In large measure, coal is our identity.

To an economist unfamiliar with coal’s cultural and social significance this would come as a surprise because coal is neither West Virginia’s largest industry – healthcare, manufacturing and trade are bigger – nor its largest employer.

Coal mining accounts for just 6% of West Virginia’s gross domestic product, 6% of wages, and 3% of jobs. Even if we squint to see coal’s impact on downstream and supplier industries, the share of jobs and wages rises to just 8.7% and 10.7% respectively.

Most people, both inside and outside of the state, assume coal’s significance to be many times that. The mistake is understandable though because we’re saturated with impressions of coal -- from politicians’ rhetoric and images of the tops blown off of mountains to industry advertising and simple legend.

In popular myth coal is synonymous with West Virginia and its stature remains undiminished from past decades when the industry employed six times the number of people it does now and accounted for 20% of GDP. But, that was long ago. So, why has the coal industry’s influence in state government remained strong, even dominant, while its economic significance has plunged?

Coal’s leverage derives first from the disproportionate share of state and local taxes the industry pays. Although coal delivers only 6% of GDP, its share of state taxes is two to three times that much making coal more important to politicians than to residents or businesses. And, although coal mining occurs in just twenty-six of West Virginia’s fifty-five counties, those counties are highly dependent on property taxes paid by the industry, which in some places amounts to a third or more of total receipts.

As congressional donor lists reveal, coal also donates heavily to politicians and causes. Even West Virginia’s congressional districts -- especially our tortured second district -- are configured so that all are anchored in coal country. And in Charleston and southern West Virginia, coal’s influence is pervasive in the legal profession and among suppliers of professional services.

Political influence is important to the industry because its economic and environmental effects on the state and communities are at best problematic. A recent report by the West Virginia Center on Budget and Policy determined that the state spends more to support coal than the industry pays in taxes. Meanwhile, the impoverished conditions of counties where the industry is most active are legendary and not merely coincidental.

Whereas most businesses prefer to operate in prosperous, growing communities, affluence and population growth pose problems for coal by driving up property values and raising demands for a clean environment and high standards of living and of public health, issues with which the industry struggles. In short, aside from a shared interest in keeping the lights on, coal mines and people do not coexist happily.

In this and in other ways the coal industry is an economic dinosaur – primitive, large, and not easily adaptable to a diverse modern society and economy. Even the marketplace in which coal companies operate is unique.

Most businesses must compete on multiple fronts – price, quality, innovation, customer service, and labor and material cost among others. But, coal is a commodity, so prices are rigidly set by the market with little or no opportunity for product innovation or differentiation. That’s a disadvantage economically because it precludes the kind of success that companies in other industries achieve by introducing breakthrough products and services. But, it’s helpful politically because the lack of multifaceted competition among coal companies produces a commonality of interest that encourages them to unite in political activism – which they do aggressively and successfully.

Strangely though, political factors – the EPA, global warming, and safety regulation – are not coal’s most immediate threats. The Wall Street Journal recently carried a story calling 2012 a “grim year” for coal, saying, “The two biggest threats facing U.S. coal companies are the low price of domestic natural gas, which is making thermal coal a less-attractive fuel for their utility-customers, and the shaky economic picture in Europe, which is damping exports of metallurgical coal.” This past week “The Economist” magazine seconded that opinion and pointed to longer term trends that signal the decline of coal.

For West Virginians who expect natural gas to be our financial savior it must be jarring to read that salvation, if it comes, will be at the expense of coal.

Still, for the reasons cited above, the coal industry’s political influence will probably remain disproportionately strong even as its economic contribution inexorably shrinks. Sadly that influence will probably divert attention and resources from other more promising and badly needed opportunities.

As Senator Robert Byrd wrote in 2009, “West Virginians can choose to anticipate change and adapt to it, or resist and be overrun by it.”
Sean O’Leary can be contacted at seanoleary@citlink.net.

Monday, January 16, 2012

WEST VIRGINIA UNDER THE KNIFE (for publication 1/28/12)


In December 2006 Curtis Dubay, Senior Economist for the Tax Foundation, delivered a briefing from the floor of the West Virginia House of Delegates in which he admired Ireland’s Celtic Tiger economy and announced, “West Virginia should aim to be to the United States what Ireland is to Europe.”

A year later the Irish real estate bubble burst and Ireland became the first of the anvils that still threaten to drag the European Union under. But, we shouldn’t pick on Mr. Dubay because we were all insane that autumn.

In September of that year the Federal Reserve Board held a rollicking meeting at which Dallas Fed president Richard Fisher dismissed rumors of a housing bubble gleefully proclaiming, “ the only subject that has been more analyzed than the housing situation is the birth of Brad Pitt’s baby. (Laughter)”.

The parenthetical “laughter” is in the actual transcript reminding us that we didn’t just drive the economy off a cliff, but we did so with our foot on the accelerator and our eyes wide shut.

Ever since we’ve been trying to choose between two strategies for picking up the pieces -- the Keynesian approach, championed by President Obama, which prescribes fiscal stimulus to reignite the economy, or the Austrian approach, championed by Republicans, which prescribes austerity and a reduction in the size of government.

So far Obama’s strategy has generally held sway, but with major compromises forced on him when Republicans gained control of the House of Representatives in 2010. The result is a tepid recovery that pleases no one.

But, this election year gives us an opportunity to change as Republicans have realistic hopes of winning the presidency and the Senate while holding the House. Should that happen, something close to Wisconsin Congressman Paul Ryan’s austerity-focused alternative federal budget, called the “Path to Prosperity”, will probably be enacted. The question is, what would it mean for West Virginia?

On the spending side, the centerpiece of Ryan’s plan is entitlement reform, which would change Medicare into a voucher program and reduce Medicaid. On the revenue side, Ryan would end the payroll tax cut and return those rates to previous levels while preserving the income tax cuts first enacted under President George W. Bush.

Before calculating the cost of these changes to West Virginia and to appreciate their significance, consider that a few weeks ago it was front-page news when the state announced $56 million in tax cuts for 2012. So, it’s sobering to realize that, of the measures listed above, the one that would have the smallest impact – terminating the payroll tax cut -- would take more than $500 million out of West Virginians’ pockets – a loss almost ten times more than we saved with the state tax cut.

Cuts to Medicaid would cost West Virginia another $690 million annually. Finally, because changing Medicare to a voucher program would force recipients to pay market prices for medical care, beneficiaries would see an average cost increase of $6,250 annually. With more than 20% of West Virginians on Medicare, the cost to our state would be $2.4 billion.

The Ryan proposal contains other cuts as well, but these three items are sufficient to make a point. Taken together, they would remove more than $3.6 billion in discretionary income from West Virginians – more money than our entire coal industry pays in wages and severance taxes combined, $2,000 for every man, woman, and child in the state.

In short, it’s huge and it would take immense economic growth to offset so large a hit. So, how much growth are places that have pursued government austerity achieving?

Back to Mr. Dubay’s romantic Ireland. In the aftermath of the crash Ireland imposed huge government layoffs and pay cuts in a maniacal effort to reduce public debt and shrink government, hoping to reassure investors and spark growth. It hasn’t happened.

Before the collapse, Ireland’s unemployment rate like that of the US was about 4.5%. But, while our unemployment rate doubled before declining in recent months, Ireland’s rate more than tripled. And rather than spike and fall like the US rate, Irish unemployment has stayed above 13% for two years and currently sits at 14.3%. Similarly, whereas American gross domestic demand (GDD) for goods and services returned to pre-crisis levels last year, Irish GDD has fallen for 14 consecutive quarters and the economy is expected to shrink further in 2012.

In fact, all of the countries where austerity policies have been implemented -- Ireland, Greece, Spain, Italy, and Portugal -- are listed among "The Economist" magazine's ten fastest shrinking economies of 2012.

In other words, the notion that cutting government will trigger economic expansion is at best a wish and, from all available evidence, not a likely one. What is certain and frightening are the reductions to West Virginia incomes and the increase in out-of pocket-costs that the Ryan budget would impose.

None the less, when the Ryan budget was considered in congress last year, Representative Shelley Moore Capito voted “yea”. On the other hand, first district congressman David McKinley was one of just four House Republicans voting against the bill and specifically cited its impact on Medicare as the reason.

Hopefully this year Capito and other members of our congressional delegation, including Senator Joe Manchin who is a wild card on this issue, will put dogma and political expediency aside long enough to look at the numbers, see the amount of money that an austerity budget would cost West Virginia, and realize the false promise and threat that austerity poses.
Sean O’Leary can be contacted at seanoleary@citlink.net.
 
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