Midwestern Economic Conditions and Tax Reform Impact

Dec 13, 2013 | 00:28:47 | Podcast


Borg: The nation's November unemployment rate, 7%, is the lowest in five years and some say that is encouraging.  We won't know Iowa's November rate for another week but in October it was 4.6% unemployed.  Iowa's strong farm economy, profitable grain and livestock prices, is keeping tax revenues strong in Iowa, giving the state a comfortable budget surplus right now.  But there are predictions that the booming farm economy may be plateauing.  We're asking two Midwest economists what they're seeing.  Iowa State University's David Swenson teaches there and also at the University of Iowa's Urban Planning Graduate Program. Creighton University's Ernie Goss surveys Midwest Bankers Monthly and he also directs the Goss Research Institute in Denver, Colorado.  Gentlemen, welcome back to Iowa Press. 

Thanks, good to be here.

Borg: I know it's the wrong time of the year to be talking about a possible rainy day but that's what we're interested in if there may be one ahead.  And across the table, Des Moines Register Political Columnist Kathie Obradovich and Radio Iowa News Director Kay Henderson.

Henderson: Gentlemen, the Environmental Protection Agency has proposed a reduction in the amount of ethanol that must be produced in the country in 2014.  There are a lot of ethanol plants in Iowa.  Mr. Goss, what would be the economic impact in Iowa were that RFS standard, so to speak, be enforced?

Goss: You're going back to 2012 levels so doing that it's going to have, it's hitting at a time when agricultural income, farm income was already under some downward pressure, not negative but the growth is certainly coming down according to our surveys.  We do two surveys of ten states, Iowa is in both of them.  So both surveys are pointing to the same thing, that anything connected to agriculture is slowing down a bit.  Those would be the durable goods manufacturers such as ag equipment manufacturers, the non-durables such as ethanol and, of course, you've already -- on their side, of course, corn prices have come down for the ethanol producer.  But overall it's going to be, it's not going to be a bad thing.  In other words, we're seeing some of the air coming out of the agricultural bubble and we did have a bubble beginning in January of 2009 and our surveys indicate just the air is coming out of that bubble.  Ethanol is going to weather this, they're going to continue to do -- there will be some job losses, there's no doubt about that, but I don’t' think they're going to be as significant as some are saying.

Henderson: Mr. Swenson, do you agree with that analysis?

Swenson: Yes I do.  You're not going to have much of an impact on the production side of ethanol.  Iowa has a tremendous competitive advantage.  We have an ability to produce ethanol efficiently and effectively and competitively and so we're rolling it back to last year's levels and that means maybe at risk within the Iowa economy literally just a few dozen jobs on the production side.  Now, the impacts out into the farm sector, into the grain prices, that is negative.  But, again, the economists at Iowa State are saying, well, it's not as much as people maybe think it's going to be.  Plus we're anticipating, they are anticipating reasonably healthy worldwide demand for exports that should prop up prices.

Henderson: So what percentage impact will it have on the corn prices in your estimation?

Swenson: I can't answer that.  But not large has generally been reported.

Goss: But, you know, Kay, we've already seen corn prices come down to almost a bit of what our bankers, bank CEO is saying a break even.

Borg: Well, half of what they were at the beginning of this year.

Goss: Oh absolutely.

Borg: $8.00 to $4.00.

Goss: Absolutely, Dean.  And, again, when we're -- I'm jumping ahead now, QE1, quantitative easing 1 by the Federal Reserve, which was in 2008, late 2008, we saw that begin to affect farm income almost immediately.  What it did, of course, is brought down the value of the dollar and pushed agricultural commodity prices up.  Now we're having the flip of that.  In other words, the Federal Reserve is now indicating they're going to take some of that stimulus out and it is going to have some negative impacts on farm income.  When I say negative, now, I'm talking about negative, taking some of the growth out of farm income.

Obradovich: Mr. Swenson, our friends in Washington did pass a two year budget deal, or at least it has been through the House and likely to pass the Senate.  Do you think that will help make consumers feel a little bit more confident?  Or does it have any effect at all?

Swenson: Well, first of all, government spending does have an effect on the economy and interfering with the normal functioning of government does shake the market up negatively.

Obradovich: So having the shutdown --

Swenson: Having no shutdown in and of itself is good.  We're still living with large fractions of the sequestration so what we have is a hampered and artificially manufactured budgetary process that people are patting themselves on the back for having moved forward but there really hasn't been budget, neither budgetary reform nor straight forward addressing of the range of issues that separates the two.  We're really getting into a place where we have agreed not to disagree for a small period of time.

Obradovich: Mr. Goss, are we just kicking the can down the road a longer distance than they were kicking it before?

Goss: Absolutely, Kathie.  And what we're seeing, of course, is baby boomers, and I'm one of them, so is President Obama.  We have -- we're letting the baby boomers, we're not holding them -- we made promises to baby boomers that probably can't be fulfilled and that would be in terms of health care, in terms of Medicare and also in terms of Social Security.  So we are kicking it down the road in the sense of not addressing the deficit and the debt which is continuing to grow about 102% of the overall GDP if you include all the debt.  So it is kicking it down the road.  But in support of kicking it down the road this is, as Dave said, it's going to I think increase consumer confidence.  We were sorely lacking that.  This is the first budget passed, at least by the House, in the last four years.  It will be passed by the Senate next year, next week I should say, and then the President will sign it.  So that is good but it is kicking --

Obradovich: So it's stability -- it's stability in the short-term but in the long-term you're saying there are still, the systemic problems are still going to be there.

Goss: Oh absolutely and at state level, municipalities, making promises economically speaking that we can't keep.  Your pensions are already under pressure.  One of your neighbors, I've said this before, people say is the U.S. the next Greece and I say no, Illinois is in terms of financial pressures.

Borg: I'd like to build on that Professor Swenson.  He is talking about the dichotomy here that impresses me and that is a booming stock market right now and yet pension funds restructuring and people who are depending on those pensions really worried about their futures.  You could go on and on about some troubling signs in the economy.  But is this the new norm for the U.S. economy as we compete with more international economies that aren't as strong as the U.S.?

Swenson: Well, first of all, I don't know what the new normal is because we're still a long ways from recovering from the depths of the recession, we're still clawing our way back.  And we've had lackluster growth currently and we also have lackluster growth previous to the recession.  So if the new norm means that we're not going to enjoy the heavy growth rates that we had over different periods of time, since World War II, then the answer is yes.  Are we going to have to live with higher rates of unemployment that is considered the natural unemployment rate?  That could very well be true as well.  And then third, with regard to some of the things that Ernie is talking about, these long-term commitments, there's a combination of the market having undermined those pensions and/or yours and my security as well as mismanagement and so we've got two different things that have to be dealt with there.

Henderson: There have been protests outside fast food restaurants across the country.  And politicians in Washington, D.C. are suggesting that it is time to raise the national minimum wage.  Mr. Goss, what effect would raising the minimum wage have in your opinion as an economist?

Goss: Well, you know, Kay, I think in some way it would have negative employment impacts.  In other words, there would be some job losses.  But the real problem in my view is the gap between the incentive to work and the incentive not to work.  In other words, CATO Institute just did a study saying if you're unemployed with benefits you're making essentially $12.00 an hour for not working.  Well if you're only making $7.25 for working if you're a minimum wage worker then we need to close that gap either by bringing down the incentive for not working or bring up the incentive for working.  And one of those would be the minimum wage and that would have some impacts, negative job impacts, particularly for young persons and that is a huge concern of mine is we have young men and women, boys and girls in high school and college who graduate and have never had a job.  This is a remarkable time.  To your point about do we have to accept this new normal?  I say we said the same thing back in the 70s when Jimmy Carter, President Jimmy Carter was in charge and we thought yes, it is a new normal of low growth.  It doesn't have to be.  It does not have to be.  Unfortunately if we don't see some changes it will be.

Borg: I intended to ask about the youth unemployment, the young adult unemployment later but I'll do it right now since you brought it up.  What effect does this have, Professor Swenson, on the -- maybe it's a sociology question but you're an economist -- what effect does this have on the U.S. economy and all of the things such as future Social Security, pensions, things like that?

Swenson: Well, first of all, we need a productive workforce and we need a productive young workforce.  We don't need a productive old workforce.  We need skilled, motivated, well trained, educated people to come all the way up plus people that have learned how to work.  The minimum wage, those provide opportunities for starting jobs, part-time jobs, seasonal jobs.  Our economy depends on a wide range of job holders to do a variety of things like that --

Borg: What troubles you the most then about unemployment in this demographic group?

Swenson: You know what, the worst part about the unemployment in this demographic group is that it is so severe among minorities, especially in urban areas.  We have opportunities for employment for our youth in many of our regions that just aren't attainable in many of our urban areas.  And so you end up getting two groups of the population, those with meaningful attachment to the workforce and the normal labor conditions and those that struggle to have an attachment to the workforce.

Goss: The educated and the less educated, those who are ill educated.  That's what we're talking about, the failure of American education.  That is a heck of a lot to do with it. Also immigration reform.  Not all your representatives are supportive of immigration reform.  We need to see that, get some competition in there and also as Dave said, bring in some younger men and women that are typically much younger than we citizens.  That is also needed.  But that would go a long way toward remedying it.

Obradovich: Speaking of people who are not really getting the job done, Congress is going to leave again without passing the farm bill.  The idea of a one month extension, which the House is interested in, is not likely to fly in the Senate.  It may be a while before these effects are actually seen, possible some things that will happen at USDA that will delay the effect.  But if we get to the point where you're actually cutting food assistance programs and seeing price shocks perhaps in dairy, etc, what short-term impacts might that have on the economy?  And will there be long-term impacts, Mr. Goss?

Goss: Dave is probably more equipped to answer this than I but from my end we need to see a farm bill.  Bankers tell us that this is creating uncertainty in the agricultural sector and it is spilling over into the overall economy and we do need to see it.  What I'd like to see, Dave and I talked about this earlier before we came in, talking about the crop insurance programs where it needs, in my judgment and I think Dave's and I probably shouldn’t speak for Dave, maybe I should just let you answer that question --

Swenson: Well, the point is farmers need to have their risk mitigated and we have a crop insurance program, they are moving towards that, that's in, those parts are in both of the bills that are yet to be reconciled.  That kind of certainty for farmers is important.  We know that the big disagreement is on the food stamp side, a huge cut offered up on the House of Representatives side, a smaller but still substantial $4 billion cut.  The compromise if they're moving towards anything has to be between those two.  We still have historically high rates of unemployment, we still have a lot of underemployed families and family members, we still have a very large fraction of the population that is depending on that, that assistance.  You take that away, that does contract the economy, but it also makes getting along in those households more difficult.

Obradovich: And if you have a short-term impact on the economy does that ripple, even if they get a farm bill passed, because people are suddenly, impact on consumer confidence, etc?

Swenson: I don't know so much about -- I really don't know so much about consumer confidence.  I think it can have an effect on farmer decisions and farmer behavior in the overall operations of the farm economy --

Obradovich: Decisions made now could impact through the growing season and into next year perhaps?

Goss: Right.  But also we asked the bank CEOs about the food stamp program or SNAP and SNAP, separating the two, 80% of the bankers support separating the two but of course they have been put together not because it makes a lot of economic sense, it makes political sense.  If you want to get it passed you've got to put them together.

Swenson: The only way to get urban votes for the farm bill is to have the food program.

Borg: But Mr. Goss, as you surveyed country bankers you have commented on the food stamp program, separating it from the farm bill, but what are they telling you about the possible plateauing and cooling of the farm economy?  Are they worried about mortgages that they're holding right now?  What are country bankers saying?

Goss: Not so much, Dean.  As opposed to the last farm bill, it's not going to be the crisis of the 1980s where you had a lot of borrowing to purchase land prices.  Land price growth is coming down, no doubt about it according to our surveys and the Federal Reserve surveys.  But as opposed to previous bubbles -- and we do see a bubble in land prices, farmland prices, farmers have bought with cash, a lot of cash.  So it's not going to present as much of a problem as you might think but it's going to be, we're going to see some -- again, back to the Federal Reserve, the Federal Reserve has created these asset bubbles, they say no inflation out there.  Well, look at what you're doing to asset prices, that would be stock prices, that would be farmland prices, that would be gold prices although those have come down.  All those have been created by the Federal Reserve, overly aggressive Federal Reserve.

Borg: And you're calling it a bubble, those are bubbles.

Goss: Yes.  In my judgment.  We've seen prices grow on land, say $3,000 to $4,000 an acre up to $18,000 to $19,000 an acre in three and four and five years.  That's a bubble.

Henderson: Gentlemen, let's shift to a state issue.  There are some jurisdictions in Iowa that would dearly love to have a casino. Mr. Swenson, what is the economic impact in your view of adding more casinos to the state's economy?

Swenson: Historically the casinos on the borders make sense, not statistically economically and as well as for state revenues because you're able to attract visitors to spend and to leave tax dollars on this side of the river.  And so the river, the boundary casinos were a way to boost the state's economy.  Interior casinos significantly compete with all other forms of recreation and so what you end up with is a cannibalization or a shifting of entertainment locations and focuses into it can be beneficial to the hosting community but overall it's not a net gain to the regional economy.  The probability that those regions are drawing from a long ways away or especially from out of state bringing new money in is pretty low.  So you -- but the passions for them whether it is Ottumwa or Fort Dodge or Cedar Rapids or now Jefferson are extraordinary because these communities have so few ways to try to boost their economy.

Borg: But the state is increasingly thirsty for that revenue.

Goss: Oh, it's -- absolutely.  And you've got 18 commercial casinos plus the travel casinos and if you look at it as entertainment, fine.  But if you're talking about economic development I don't think it's there.  The numbers you're seeing, as you see more and more casinos in Iowa, in Illinois, in Missouri, in Kansas even where they're growing their casino business, they're competing for, we're competing for a lot of the same dollars and it's a high tax industry.  You're talking about instead of 7% of sales tax you're talking about 20% to 25% of tax on the net proceeds of a casino.  So it drains the taxpayer and it drains in terms of some of the other amusement, some of the alternatives, restaurants in the community.  It can really be a negative for them.  And as Dave said, it makes a lot more sense on the borders.  Interior, not nearly as much.

Henderson: So where's the pendulum on this?  At what point does the public say the social cost and the economic cost is not worth it?

Goss: I'm not sure the public will ever say that.  The public seems to think that we need our own casinos.  It's kind of like a nuclear weapon.  I mean, we want our own protection, we're all vying for our own nuclear weapon and in a lot of cases when you put a casino in some places -- now I'm not talking about all casinos -- like a neutron bomb it destroys a lot of what is outside the casino.  And when somebody goes to a casino they don't necessarily drop off to the local restaurant, let's eat, let's go to the zoo, let's go to the museum, they're headed for that casino and they do drop some money there.

Obradovich: Speaking of tax revenue, go ahead if you wanted to add to that.

Swenson: No, that was good enough.

Obradovich: You don't have a bomb analogy?

Swenson: I was going to say I can't follow up on a neutron bomb.

Obradovich: Well, speaking of tax revenue, the state may be hungry for more gambling but we're going to have a legislative session starting a month from now where there's going to be a lot of people anxious to give money back in some form of tax cut.  The Governor recently suggested the idea of having a sort of a two tier income system, income tax system where people could pay the income tax as it stands now or they could opt for a flat tax that does not include federal tax deduction and other deductions and have lower rates.  What do you think would be the impact of that particular plan, Mr. Swenson?

Swenson: Well, first of all, we don't know much about the Governor's plan other than he has said he's going to offer something.  So we don't know the particulars, we don't know the math, we don't quite know what it's worth.  What we know is that Iowa has a goofy income tax system.  We have federal deductibility.  That means we have high rates.  But when you look at the average rate that is paid by the average taxpayer in Iowa it's not that high.  It is 3.8% on average of net taxable income.  So there's a big disconnect between what we advertise versus what we do.  We know that the deductibility disproportionately benefits the upper incomes.  We also know that flat taxes more than the other groups also benefits the upper income levels.  And so it's more an increase in average taxes on the lower to middle class, a decrease in average taxes on the more wealthy residents.  I don't know that Iowa's taxes, individual income taxes are a big issue with anybody except a few politicians.  I don't think it's a big deal.

Obradovich: Mr. Goss, when we were here early in the year you said, cut the income tax.  Is this the way to do it?

Goss: Well, I think, as Dave is saying, let's have some transparency first and that would be eliminating federal deductibility and bring the rate down after --

Obradovich: Does that actually make a big difference though with business owners?  Can't they read a tax table and say oh yeah, Iowa has this big deduction --

Goss: But individuals I think can't, aren't necessarily aware of that.  We want transparency, economists do.  But back to what -- I don't mean to avoid your question -- but I do think, I'm different from Dave, I do think Iowa's income taxes are too high.  But that said, I don't know if now is the time to cut it.

Obradovich: Why?

Goss: I think we're seeing, at least the growth is nothing -- Iowa is going through a period beginning in January of 2009 through today, December of 2013 of really strong, strong growth.  In fact, of the states we surveyed, the 10 states that we survey, and Iowa is in there, has been the strongest over the last couple of years in terms of durable and non-durable manufacturing.  And now we're seeing -- I know I keep saying Federal Reserve -- but the Federal Reserve is going to be tapering and we've seen the benefits of expanding and being aggressive, keeping interest rates artificially low.  Now we're going to raise those rates, the interest rates and that is going to have the opposite impact.  So we're going to see some -- so what I would encourage is putting that money in reserves right now and seeing what the impacts are.

Obradovich: Politicians find it really hard to do that though, to have all that money sitting there because they will say, the taxpayers are paying too much.

Goss: I'm not running for office.

Swenson: We've seen receipts though, we've seen receipts in the current year exceed the revenue estimate.  We have a relatively healthy revenue estimate that just came out yesterday.  Iowa has behaved very conservatively.  We got ourselves in trouble early in this recession, we have behaved very conservatively on state spending, receipts are relatively robust.  We're building up.  We've got a healthy rainy day fund.  We have a republican Governor who is not interested in expanding government programming and yet there's probably a lot of backfilling that needs to be done.  I'm looking at very careful incremental improvements in all of our governmental operations because we still have obligations that we have neglected to --

Borg: Do you fear -- let's get back to the Federal Reserve and the tapering of the quantitative easing that is coming, we know that -- is that going to have a big effect on Iowa's economy?

Swenson: The three areas that are doing really well right now are -- and will continue to do well even though they're not doing great with crop prices right now -- the ag economy in and of itself is just infused throughout so much of the economy.  It will continue to hum.  Manufacturing is strong in Iowa.  We have a competitive advantage both in durable and non-durable categories and we're doing well.  We have not recovered the jobs nor the productivity.  We had part of the recession but we're doing pretty well.  And our financial sector has continued to expand over this recovery period.  Those are three areas where we're doing really well.  Ernie has already said that he thinks the ag economy can be adversely affected by actions at the Federal Reserve.  We have to wait and see what happens in the insurance and the finance industry, how that affects how they're doing business but I don't know that it's going to have a big effect on manufacturing.

Goss: I have a visual, I think if you take the Iowa economy and the national economy this is the Iowa.  What we're going to see is the national economy moving, I mean, the Iowa economy moving down a bit, the national economy moving up a bit so the gap between the two closes.

Obradovich: We talked earlier about young people and problems with unemployment for young people.  What about older people?  We're starting to see situations around the country where public employee pensions are under attack and in rural areas where people without pensions are starting to see problems from that.  Mr. Goss, what do you see as, really quickly, the concern for older people?

Goss: It is a huge concern and when they lose their jobs getting back into the labor market is almost virtually impossible depending on the industry.  And what we're talking about is the lowest labor force participation rate since 1978 because of retirements, moving out of the labor market.

Borg: A quick comment, Mr. Swenson.

Swenson: Yeah, that's one of the biggest issues right now in Iowa.  We're, I believe, in a period of natural labor force contraction just because of our demographics and it's going to inhibit our ability to grow for the next decade.

Goss: Immigration reform though.  Get that in.

Borg: And you did, just in time.  We are out of time.  Thanks so much for being with us today, we appreciate that.  Next week on Iowa Press, Iowa's Third District Republican Congressman Tom Latham looking back at 2013 in Washington and previewing the next congressional session.  Congressman Tom Latham, usual times, 7:30 Friday night, noon on Sunday, that's next week.  I'm Dean Borg.  Thanks for joining us today.

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