Economists David Swenson and Ernie Goss

Dec 30, 2016 | 29 min | Podcast | Transcript


Economic hiccups. Sagging farm commodity prices sending monetary shock waves. Economists Ernie Goss and David Swenson providing insights on this edition of Iowa Press.

Funding for Iowa Press was provided by Friends, the Iowa PBS Foundation. I'm a dad. I am a mom. I'm a kid. I'm a kid at heart. I'm a banker. I'm an Iowa banker. No matter who you are there is an Iowa banker who is ready to help you get where you want to go. Iowa Bankers, allowing you to discover the genuine difference of Iowa banks. Iowa Communications Network. The availability of high speed broadband service is essential to fulfilling the promise of a connected Iowa. ICN's Broadband Matters campaign showcases the importance of delivering broadband to all corners of Iowa. Information is available at Iowa Community Foundations, an initiative of the Iowa Council of Foundations, connecting donors to the causes and communities they care about for good, for Iowa, for ever. Details at The Associated General Contractors of Iowa, the public's partner in building Iowa's highway, bridge and municipal utility infrastructure. The Arlene McKeever Endowment Fund at the Iowa PBS Foundation, a fund established to support local programming on Iowa PBS. 


For decades Iowa Press has brought you politicians and newsmakers from across Iowa and beyond. Now celebrating more than 40 years of broadcast excellence on statewide Iowa PBS, this is the Friday, December 30 edition of Iowa Press. Here is Dean Borg.

Borg: Iowa's unemployment rate reported last month at 3.8% is the lowest since this time a year ago. The labor force is largest and more people have jobs, yet sagging tax revenues are forcing a $100 million state budget cut. It's the farm economy, corn and soybean prices barely above production costs, same for pork and beef producers. That's money that isn't buying new tractors or farm improvements, prompting manufacturing layoffs. David Swenson teaches at Iowa State University and the University of Iowa, also researches rural development. Ernie Goss chairs Creighton University's Economics Department, also monthly surveys banks and other economic indicators in 10 Midwest states. Well, gentlemen, you're back to give us another economic overview, welcome back.

Thank you.


Borg: Am I right, David, that the farm economy is a major factor?

Swenson: It's an important factor. It is creating a drag on overall, as you mentioned, tax collections in the state of Iowa. I think there are other issues going on in the state of Iowa. The economy expanded okay last year by about 10,000 but in recent months it hasn't been doing so well.

Borg: We're going to get into those indicators. Thank you for that overview. Across the table, James Lynch writing for the Gazette published in Cedar Rapids and Radio Iowa's News Director Kay Henderson.

Henderson: Gentlemen, the Trump era has begun. There was a prediction that the stock markets would absolutely crumble if Trump were elected. Mr. Goss, that didn't happen. What are you anticipating, put your predictor hat on, on January 21st?

Goss: Well, the Federal Reserve, they have not been doing very well with predicting the economy. This year, last time this year they projected four rate hikes, this year we had one. So now they're predicting three next year. I think it might be three. But looking ahead, Kay, I think the market is looking at the Dow and other indices, it's a little ahead of itself right now. In other words, the price of the stocks versus the earnings of the companies that are in the indices, a little ahead of things --

Borg: Is it a euphoria?

Goss: I think it's a little, just getting a little ahead. In our surveys, as you said, Dean, we survey bank CEOs and the common theme, they comment, they put their comment in the surveys and it said, thank goodness it's over. Now they weren't saying great we elected Trump or we didn't elect Clinton, they just said, thank goodness it's over, let’s move ahead, let's get going and I think that was the message. I think that's a lot of it. And I think for the mid-section of the country I think it has a lot to do at least with the corporate tax cut potentially and less regulation. That has been understated. I think there's a lot to be said, a lot of anticipation of cutting regulations.

Henderson: Mr. Swenson?

Swenson: Well, a happy stock market doesn't necessarily mean a happy economy, they're two different things. And so you pay attention, people's expectation for the stock market, it's really a measure of expectations for profits in the near-term, medium-term, how the economy performs over time. President-elect Trump is inheriting a quite healthy economy right now, at least one that is continuing to expand and wages are improving. And so it's a completely different picture than we had eight years ago when we were still sliding into the abyss.

Henderson: This weekend a report on GDP 3.5 I think.

Goss: For the third quarter.

Swenson: For the third quarter year over year.

Goss: That's annualized.

Lynch: Donald Trump has indicated that he's going to be the negotiator-in-chief and so far what we've seen is he's the negotiator-in-chief via social media, sort of badgering Boeing on the cost of Air Force One and more recently on a fighter jet. He has tweeted out comments about trade and China. David, is this a good approach to handling the economy? Is business comfortable with that sort of almost public shaming or is this going to backfire on the President?

Swenson: I don't know if it's going to backfire. So far he continues to do it and it seems to satisfy him. Is it useful? I don't know that it's sustainable. It's the kind of thing that does have an effect but over the long run, the longer run. You and I buy things, governments buy things, we just have this set of interactions day in and day out. So these are more episodic and not necessarily important to the overall economy. What you're going to pay attention to is the overall economy, not whether Boeing or Grumman or anybody else's stocks are going up or down because of the last thing the President said. And even though he may have said something they have a drop, it comes back up. I don't know that you can negotiate major government deals outside of normal government channels.

Lynch: Ernie, when you apply that to sort of international channels, if the President is tweeting out things about trade with China or their currency, is that likely to produce the desired results or is that going to cause more problem in those markets?

Goss: Well, I think most economists I think would agree with me and perhaps David, we haven't talked about this. But this zero sum game sort of -- this is sweeping the global right now, from Brexit on June 23rd to the election of Mr. Trump to the French elections and other elections in Europe that are coming up, this is this uber nationalism, this zero sum game is not good for the economy.

Borg: What is zero sum game?

Goss: Well, it means that, for me it means when we gain there's a loser there. Actually trade there's a winner, win-win and that's my real concern is if you start -- it's not that inconceivable to think that we could, you could in a tweet -- maybe I'm overstating it -- but you could push tariffs, increase in tariffs on China. That would not be a good thing.

Borg: Bring that down to the Iowa economy. We're talking globally but we're concentrating, we live in Iowa. Are any of those trends that you have mentioned, zero sum game, tariffs, what is the effect and potential risk for Iowa?

Goss: Huge, huge. The U.S. depends heavily on agriculture, agricultural exports and agriculture depends heavily on trade. And when we talk about that you're talking about five states around that are most dependent on agriculture and agriculture is an industry most dependent on trade. You're talking about Idaho, Nebraska, Iowa, South Dakota and North Dakota, those states most dependent on trade, on agriculture and trade. So the idea that you could push yourself into, when your bite gets as bad as our bark that's a problem. And the bark, for an economist, has not been good.

Borg: David, you had something to add on that.

Swenson: We export a large fraction of what we grow here in Iowa to China. We sell a lot of our manufactured goods to other countries. All of that is beneficial to the state of Iowa. If we start having trade wars or trade restrictions we either increase the cost of buying stuff from Iowa or decrease our access to goods and services from other places. Ernie said this before, the whole idea of trade is that both sides are satisfied, not zero sum game, that both sides think they're getting a good deal out of this. That is the nature of trade, not one side wins and another side loses. Right now the language and the rhetoric is who are going to be the winners versus who are going to be the satisfied negotiators.

Henderson: Many of the voters who voted for Trump think they were getting a raw deal. They're anti-globalism, they're concerned about immigration and they look to people who defend the status quo in trade relationships, as you know sort of elites. Mr. Goss, how do you address, how do you address that situation? People feel as if they're stuck in the doldrums while the elites are not.

Goss: A good college economics class is what I would recommend. And there is some justification. I'm not minimizing that. China has played loose with trade in some cases. But the idea that they're manipulating their currency down right now is just not accurate. That's being stated, Chinese currency, which gives them an advantage in selling their products in Iowa and gives Iowa companies and agricultural producers the disadvantage in selling in China. That's not going on right now. They're not manipulating the currency. That has to do with private currency flows.

Henderson: Mr. Swenson, would you want to be Terry Branstad and be Ambassador to China given the - very important position but given the agenda that President-elect Trump has laid out in relationship to changing that relationship.

Swenson: I think about that in relationship to what I know of Terry Branstad having watched him for these many 30 years that I've watched him. There's no ribbons to cut in China, which is what Terry Branstad loves to do as a promoter and he's a hand-shaker and he likes to work out arrangements with people. I think that he is in for, Governor Branstad is in for a very, very hard job, a very, very hard job with probably much lower profile than he is used to.

Borg: What would be your advice to him, Mr. Swenson? What would be your advice to, you say cutting ribbons and so on, I understand what you're saying there, sort of divisively, but what would be your advice in the approach to China? What should he be doing?

Swenson: Oh, I think that he needs to be an honest broker of information back and forth between China and the United States. I think that his job is, people write about this because he's a friend of the President of China, of Xi, but the point is, is that's not the relationship that historically ambassadors have with other countries. And so the Governor is going to have to learn to be an ambassador and all that entails broadly with regard to traditional State Department activities and representing the United States to the Chinese government.

Borg: Ernie, if you're writing a note to Terry Branstad what would you advise him?

Goss: Well, I couldn't advise him really because he already understands it I think clearly. Our agriculture producers are the most productive on the face of the Earth. Our manufacturers are the most productive on the face of the Earth. We will in the long run outcompete them all. So what we need to see is what Governor Branstad has done for many, many years is export Iowa products. Iowa has been a huge beneficiary, until 2015, of trade, selling abroad. That has been a real driver of the Iowa economy. And you look at it, it's very important, so he's already done it.

Swenson: But an ambassador isn't a trade representative and so the role is significantly different than being the chief trade representative of the state of Iowa or the Midwest.

Goss: But I think things could be done by Governor Branstad and there's a lot of expectations. We talked about stepping in when you have low versus high expectations. I'd like to take over the Cleveland Browns next year as a coach. I want it when it's low, I don't want -- I want to take over something where the only way to go is up. Well, the Cleveland Browns, sorry for all the fans of the Cleveland Browns.

Borg: Is that analogous then to China? Are you saying we're at a low point with China?

Goss: I think the rhetoric is definitely a low point and what I'm hearing from some is President-elect Trump starts over here and he gets back to here. Let's hope so because I don't want to start here and then get even further away. That is not good for the Iowa economy, not good for the regional economy that we survey and I think most economists would agree with that.

Lynch: Professor Goss, you mentioned this earlier, the Federal Reserve raising those interest rates. In Iowa and the Midwest, who benefits from that? Who gets hurt by that? Overall is it good to see them moving in that direction?

Goss: First, it is good to see them moving in the direction, they should have already been doing that in 2016. And who gets hurt, of course, it tends to push up the value of the dollar and unfortunately it's a headwind for agriculture. Again, we're talking about in this window, I'm really looking at the first part of 2017, we're still seeing an economic headwind for agriculture. It does tend to push up the price of agricultural goods sold abroad, makes them less competitive, manufactured goods as well. So the strength of Iowa's economy gets hurt by these rising interest rates, but long-term it's going to serve the state well. As savers get more money, as individuals say well maybe I need to build that house, buy that house, interest rates may not remain low. We've got, since 2008 we've had ultra-low, historically low, crisis level interest rates. It's not a crisis level economy.

Henderson: Mr. Swenson?

Swenson: Well, the interest rates are important. I was thinking about the ag economy, its problems right now are less to do with the interest rates and much more to do with just oversupply and low commodity prices. The idea that the dollar value has gone up, we talk a lot about China, we trade with everybody and our major trading partners are to the north, to the south and across the Atlantic and you put them together it's our ability to also interact with them on a beneficial basis. And the relationship of the dollar to the euro, for example, is also quite strained and that limits our exports in that direction.

Borg: David, I want to take you to Iowa right now, that is in my introduction I said the Iowa farm economy is hurting, and yet there's a whole lot of money being poured into and interest poured into developing rural Iowa. Is that a win? Is it a winnable game? Is it a goal that can be attained given where rural Iowa is right now with a labor force that manufacturers are begging for and they can't get laborers?

Swenson: Right, it's really complicated. The more over time, modern agriculture, modern manufacturing has been shedding labor. We've known this all of our lifetimes. They need less labor to produce more goods and services. That’s just the nature of manufacturing and agriculture in Iowa, the two main industries out in those areas. Two-thirds of our counties are losing population. They're not losing population because the manufacturers or the farmers in that area were doing something wrong, it's just simply the nature of that regional economy is such that it is shifting, people are moving towards trade centers or to metropolitan areas to work and it is slowly, very slowly but inevitably leaving, that labor is leaving those rural areas. In terms of rural development dollars we are pumping rural development dollars and we call it rural development and if you measure rural development by virtue of population stability it's a failure. If you measure rural development by pumping money in to maintain quality of life, to maintain environmental conditions, to assist people effectively in their communities, then it is rural development. Thinking you're going to turn around though this rural out migration because of federal or state spending or some magic market consequence isn't going to happen.

Borg: Ernie Goss, you're shaking your head yes and so I need to have you weigh in on that. Is it more than just agreeing with David said? Or do you have something more to add?

Goss: I think, this is the oddity of it, we're talking about labor shortages and serious labor shortages, particularly for skill levels. So Iowa and other states who could really move ahead, if you could get those young men, older men and women, to take these, trying to do truck driving, for example, to do welding jobs, electricians, instead they're not doing that. They're not going to the community college, they're not going to Iowa State, they're not going to Creighton to retrain themselves or to educate themselves for these jobs. And so we have, in our survey, we survey, as you said Dean earlier, ten states. Businesses really need workers, skilled workers and it's a crying shame. And as David said, some of it is just the changing nature of increasing productivity. When the job mix changes you get different levels.

Borg: He used the word inevitable. Is this not a reversible trend?

Goss: No, I don't think it is reversible. In other words, if you look at what happened to agriculture beginning in 1930 you're seeing it now and it's been happening for manufacturing for a couple of decades and it's still rising productivity. In other words, people say we don't manufacture anything anymore. We manufacture more in America today than we ever did, it's just with fewer individuals.

Henderson: Let's shift to the energy sector. You have Rick Perry who will be the Energy Secretary, who doesn't like the Renewable Fuel Standard.

Goss: He doesn't like the Energy Department, I think that's right.

Henderson: You have Rex Tillerson as the Secretary of State from Exxon Mobil and you have somebody at the EPA who comes from oil rich Oklahoma. Are you guys expecting a schism? You hear from the ethanol industry, they're fine because it's President-elect Trump that will guide the policy, but Mr. Goss, what are you expecting in the energy sector given what you've heard on the campaign trail and these appointments in the Trump administration?

Goss: I'll call it the energy juggernaut and whether it's due to incentivized industries, whatever, those are there. In other words, the mix level for ethanol is going up six percent in 2017. So what's going to happen in my judgment is going to be there's going to be a huge expansion in energy and whether one agrees with it or disagrees with it, I see much less regulation and I think a lot of folks out in the rural areas in my judgment, farmers think the EPA has had their foot on their throat for some time and I think wow, this is a great opportunity as they see it, and I think things in this short to intermediate term are going to be much better.

Henderson: So are markets baking that in ahead of time anticipating that?

Goss: I think they are. I think markets do bake it in, it is baked in, that's why one of the reasons we've seen this expansion, in addition to repatriation of earnings, which we'll maybe get to later, but that's another topic.

Swenson: But quick on the ethanol, the two industries, the petroleum industry and the ethanol industry, even though they fight tooth and nail they've actually reached an accommodation right now. The petroleum industry is okay with 10% ethanol blend, they're okay with that right now. They have adapted to that and there's no reason to expect that 10% blend, that level of output that we produce with corn starch ethanol to go down. It should be able to at least grow up to the 15 billion gallons mandate and at least stay there.

Lynch: Let's stick with energy. Republicans generally say they support an all of the above energy policy, but Trump has said he doesn't really like the wind production tax credit. Is that going to give a chill to Iowa's growing wind economy?

Swenson: That's a great question. First of all, he doesn't like the windmills too because he says they kill birds. The industry is here because we have good wind. That's where our competitive advantage is and we have decent infrastructure to move that wind. We're also able to mix and move that energy in places where there's quite a lot of demand for green energy, like the new data centers and places like that. So we're able, we have a market advantage. There's good question as to whether those incentives are necessary anymore, whether that industry would be competitive or not, many people think it's perfectly competitive now because the cost of the alternative, carbon based fuels, is still high, still low but the gap is closing. So I don't believe that Iowa is at a huge disadvantage or overall the windy Midwest. I think wind energy is going to continue to expand.

Goss: But MidAmerican Energy has made a commitment of $3 to $4 billion of new wind energy and driving across Iowa you see the wind production. And, for example, another area of energy, I'm working with a company here in Des Moines, Eco Engineers, where we looked at anaerobic digestive systems, using waste product, waste from municipal systems to produce methane and other usable fuel. So that's happening as well. And I would call Iowa has really taken advantage of a lot of these incentives and, again, I'll call it the energy juggernaut. But as David said, one of the things is we have wind, that doesn't have much to do with any policy that economists can cook up or not.

Henderson: Let's shift to some state issues. There are counties in Iowa which have passed a minimum wage increase for businesses in their communities. The Governor has talked about having a standard statewide minimum wage, which Iowa sort of has already on the books. You come from an area where there are some differential minimum wages. What's the effect of a differential minimum wage in a small geographic area?

Goss: Well, you shouldn't have differentials. In other words, you encourage companies to move across the borders whether it's a metro area, for example, I live in Omaha, moving over to Des Moines where the minimum wage is much lower, we're talking about $9 an hour. Hasn't had much of an impact in terms of employment. Now why has that not happened? It's because the minimum wage that is set is actually below the market wage. In other words, to get an employee you can't pay in Nebraska's case $9 an hour.

Borg: So with counties in Iowa raising it to ultimately $10 or maybe even $15 in the future, that would bring that factor into play.

Goss: It would and it would reduce employment as soon as you get above the market wage. As long as you're below it, no impact. And you've got to have more uniformity. The idea that one county can set it low and one keep it where it is, that invites lots of problems.

Henderson: Mr. Swenson, do you agree?

Swenson: Ernie talked about the market wage, I just looked at those numbers. For traditional retail and service jobs like food service the market wage, the average entry wage is about $8.15 an hour this year, this year and last year.  So we're already paying people more than the minimum wage. The kinds of businesses though, these aren't the kinds of businesses that move retail and service sector jobs because they have local markets. Businesses that may be footloose over a short distance because of the minimum wage usually would be low level manufacturers, call centers, other types of things like that. They're not high wage jobs and that's not that big of an issue. Back to your argument though, should we have this fragmented system, we have a fragmented system because we have a statewide minimum wage that many believe is too low and either metropolitan areas, these people who are enacting these minimum wage hikes think the wage needs to be higher, more in line with their regional market wage and I think it's something that needs to be sorted out at the legislative level and politically it's just a hot potato nobody wants to touch.

Borg: Where should it be set do you think? Should it be a statewide minimum at say $10 or you pick the figure?

Swenson: Right, I think legislatively it should be determined and then I'm going to take it at some value, I don't know what that value is. The minimum wage when it was last set, adjusted for inflation in today's dollar, would be about $8.15 right now but we've lost ground due to inflation. I think the minimum wage should be set and then it should be indexed to inflation annually and it taken out of the political fare and just put on autopilot.

Borg: Quick question, Kay.

Henderson: Mr. Goss, do you think there should be a minimum wage? Republican say there shouldn't, some republicans do.

Goss: I think it is helpful in the sense of encouraging more capital investment. I think it does at least incentivize. The problem I have is we want the incentive for working and the incentive for not working, we want that incentive for working to be much higher and the incentive for not working to be much lower. Unfortunately there's not enough of a gap there, I think we need to create that. But it needs to be uniform across --

Borg: I have a minimum here and it's time. We've exceeded it. Thanks so much for joining us today. Next week on Iowa Press we're taking a look back at the history of Iowa Press and public affairs programming on Iowa PBS, more than 40 years and many, many memories in those 40 years. That will be at 7:30 next Friday night, noon on Sunday. I'm Dean Borg. Thanks for joining us today. And from all of us here on Iowa Press, Happy New Year!


Funding for Iowa Press was provided by Friends, the Iowa PBS Foundation. I'm a dad. I am a mom. I'm a kid. I'm a kid at heart. I'm a banker. I'm an Iowa banker. No matter who you are there is an Iowa banker who is ready to help you get where you want to go. Iowa Bankers, allowing you to discover the genuine difference of Iowa banks. Iowa Communications Network. The availability of high speed broadband service is essential to fulfilling the promise of a connected Iowa. ICN's Broadband Matters campaign showcases the importance of delivering broadband to all corners of Iowa. Information is available at Iowa Community Foundations, an initiative of the Iowa Council of Foundations, connecting donors to the causes and communities they care about for good, for Iowa, for ever. Details at The Associated General Contractors of Iowa, the public's partner in building Iowa's highway, bridge and municipal utility infrastructure. The Arlene McKeever Endowment Fund at the Iowa PBS Foundation, a fund established to support local programming on Iowa PBS.

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