A Discussion About the Economy

Kay Henderson

From grocery bills to gas and fertilizer prices, Iowans are feeling the pinch. We'll talk about the economy with two Iowa State professors on this edition of Iowa Press.

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For decades, Iowa Press has brought you political leaders and newsmakers from across Iowa and beyond. Celebrating more than 50 years on statewide Iowa PBS, this is the Friday, March 27th edition of Iowa Press. Here is Kay Henderson.

Kay Henderson

Economics is sort of like the weather. It's everywhere. So we periodically invite economists on this program so that they can give us their forecast of Iowa's economy. We have two fan favorites with us today. Let me introduce them. Chad Hart is a professor of economics at Iowa State University, and Peter Orazem is Iowa State University professor and interim chair of the economics department up in Ames. Welcome back to both of you. And for the benefit of our viewers, because economics changes hourly. We are taping this program on Friday morning. Joining our conversation is Erin Murphy of the Gazette in Cedar Rapids.

Erin Murphy

Well, and speaking of keeping in mind the timing of questions, we're going to start with some current events happening in foreign policy and its impact on the American economy with the Iraq war ongoing. We wanted to just get a sense of what kind of economic impacts we're seeing out of that. Just very broadly. And Chad, I'll start with you. What kind of things are we seeing as a result of what's happening in Iran right now?

Chad Hart

Well, sure. Well, we've definitely seen is a definite increase in energy prices as we're looking at oil, gas and diesel prices. It's translating in the ag community and higher fertilizer prices as well. So, you know, yesterday, you know, the inflation report came out. We're seeing not only inflation in the energy products, but we're seeing it starting in the food space as well. And in the core CPI. So we are definitely seeing that pricing pressure from the war translating here into the US economy.

Erin Murphy

Peter, did that cover it all or what else are we seeing.

Peter Orazem

Well, I think that all commodity prices have increased, including I think corn and soybeans actually went up a little bit. So in some sense, if you had stored grains, you might be getting a little bit of a benefit from that. But they just announced the March consumer price index this morning. And so we had the largest year on year increase in two years. So clearly energy prices have already been factored in and they're expected to increase again in the when the April numbers come in.

Erin Murphy

And Peter, the one thing that, and Chad mentioned this in his, but the one thing that people see most is the gas prices when they go fill up their tanks. What does the data tell us on when we see increases in gas prices this drastic, in this short of time. What other impact? Obviously it costs more to fill up your car. But beyond that, what happens?

Peter Orazem

Well, because gas prices are so volatile, it's something that you always notice. So if prices are increasing 3.3% on average, you may not really notice that, but you really notice it every two weeks when you fill up your tank. And so you're going to start seeing those things also showing up in these surveys of consumer sentiment. And so when gas prices rise, you get a sudden plummet in these measures of consumer confidence. And those are the sorts of things where perhaps even though gas may be 3% of our budget on average, gas price increases have a disproportionate effect on consumer behavior.

Kay Henderson

So if the gas price goes up, the diesel price obviously goes up. When does that impact what I buy in the grocery store or a department store? Because that stuff has been there for a while.

Peter Orazem

Well, diesel is obviously big for transporting items to your grocery store, and so it'll get factored into those prices as well. But if these energy prices continue to stay up, I'm old enough to remember the stagflation incidents that were related to oil price increases in the 1970s. This is looking a whole lot like the start of one of those oil price shock effects on the US economy. And you may start seeing that because energy is a not small share of the cost of doing business across the board. That's when you really start to worry is that it's going to cause an across the board reduction in profitability and a cutback in the economy as a whole.

Kay Henderson

So just in case stagflation is on the test, just give us a short definition.

Peter Orazem

Stagflation is reduction in economic activity. So potentially moving either to an economic slowdown or a recession at the same time that you have inflationary pressures. So you get the worst of both worlds. You get higher prices and lower employment demand.

Kay Henderson

So, Chad, thanks for being here and talking about fertilizer, the kind that is applied on farm fields. First, what has been the impact on the farming community? Because a lot of farmers preorder, right? Were more farmers not pre-ordering this year for some reason?

Chad Hart

No, it's not that they weren't pre-ordering more. Okay. In this case, you can just think of it as those that did preorder have avoided some of this at this point, but they know they're going to be back in the market again sometime soon. So even for those folks that did preorder and sort of avoid the initial price rush, what they are worried about is as they look forward, can we expect to see these higher fertilizer prices persist over time? So some, they're facing this cost crunch now. Others know the cost crunch is coming. And it's also the case here of I'll take us back to diesel again as well. There's again another case where some farmers would have preordered their diesel for the year, others have not. So we're catching some farmers, but not all, like I say, in this cost squeeze right now. But all of them know that this thing is likely going to last into their planning for not only this year's crop, but next year's crop.

Kay Henderson

So how often do farmers apply fertilizer?

Chad Hart

It varies quite a bit, if you think about it. For the most part, we're probably talking about they go for one big application. But we do see folks that do try to sidedress when they're seeing needs within the crop showing up, that we know that we can sense that, okay, the crops are short a little nitrogen right now. We try to run out there and do that. This year, that may be more costly than ever before. So we're waiting to see how do they adjust their farming practices given these higher costs.

Kay Henderson

So fertilizer has often been discussed as a cost for farming operations. Peter, will people be paying higher greens fees at the at the golf course? Are there other areas of the economy where the fertilizer cost is going to have an impact?

Peter Orazem

Well, I think you'll see it in food prices. And it's not just going to be cash grains. I mean, those are going to be increases in in the cost of production for vegetable and fruit farmers in California as well. And so, how much of an increase I think depends. I mean, we can produce a good share of our fertilizer here in the US, but it's still going to be rising at world prices for particularly natural gas. In some sense, we're somewhat insulated from that because we are the world's largest supplier of natural gas. But you're still going to see upward pressure.

Erin Murphy

Speaking of a fast moving news cycle, Peter, I'll start with you on this. I'm old enough to remember when tariffs were a big issue and something that we were all talking about. That doesn't seem to be the case anymore. I'm just curious, is that a, and maybe it's just a perception issue on my end, but get your thoughts. Have we achieved some sort of equilibrium on that, for better or worse? Or is it just that there's bigger fires to put out right now and tariff uncertainties…?

Peter Orazem

It's amazing that you can think a year ago and you go, oh, that was horrible, because we had a sudden 10% increase across the board in tariffs. Well in some sense we had a Supreme Court case that said that that particular move was invalid. And so the Trump administration immediately shifted to a short run emergency tariff that increased the across the board tariffs 15%. So I don't think, I mean, it takes a while for firms to completely adjust to the increasing costs of inputs. And we're still seeing the same sorts of problems with higher prices of steel, higher prices of aluminum, and all that goes into the production of durable goods. And so the automobile industry is not doing any better than they did when they had that initial surge a year ago. So it's just that we have some, it seems like every month there's a new thing for us to worry about. And, and so it's not that the tariffs have gone away. At least yet. It's that there's, there's other things that are top of mind concerns.

Chat Hart

And I'll throw a little bit on to that as well. Not only are we not sort of settled here within the US, but I would argue we're all still also waiting to see the international response over time that as these tariffs have gone in, sort of the shock is now wearing off. Will we see them make a let's call it a more systematic move, maybe hitting the US back with tariffs over time? That shoe has still, you know, hanging out there to drop.

Peter Orazem

I mean let's face it, we've lost some substantial markets that are important to Iowa farmers, particularly in soybeans particularly, but also in pork sector and in corn. And maybe we're able to reestablish other markets for that product. But at least short term, that's still weighing down on commodity prices. And that problem has not gone away, other than the fact that the trouble in the Middle East has led to a short term surge in in the price of corn and soybeans. But I don't think that you want to rely on war to solve our economic problems in Iowa.

Kay Henderson

There's sort of an economics discussion at the Statehouse here in Des Moines. They are discussing property tax policies. And I'll start with you, Peter. Property tax plans are different between the House and the Senate. I don't know that you've analyzed them. But just in general, what's the best approach to rightsizing, if you will, Iowa's property tax system?

Peter Orazem

Well, I think you can't just look at property taxes independent of other tax policies. And in Iowa, we have a fixed amount of sales tax that local governments can rely on. So you can have the 1% school infrastructure, local option tax. And then you have the about a 1% tax that's partially for property tax abatement and the rest can go for recreational purposes for cities. And cities are not allowed to use anything more than that in terms of sales tax, which means that literally all of the costs of running the business of government gets shifted onto the property tax. Until they actually free up cities to use other means of raising revenue, you're going to have problems with property taxes because at some point you have to run the business of the cities. One of the worries that I have is that they're trying to limit the growth of the property tax. And in essence, that starves the metropolitan areas. And if you look at where job growth has been in Iowa for the last 25 years, it's been in metropolitan areas. And in fact, over 90% of the people in towns under 5000 do not work in that town. They work in a nearby labor market center. And so if you're starving the metropolitan areas, you're also limiting the ability for those, the residents of small towns to commute to the higher wages that you can get in the cities. And so a lot of this appears to be piecemeal efforts to try to resolve a problem that really you need to think about, okay, what do we want to do in terms of allowing cities to raise the revenues that they want? We have over 450 special exemptions from the sales tax. If you just said every dollar of sales is taxed the same, which seems fair, you would resolve a lot of these problems in terms of property tax, because it would increase the amount of revenue that cities have access to.

Kay Henderson

Chad, I don't know that I've ever asked you about property taxes. But if you look at a farming operations balance sheet, you've got inputs, fertilizer, seeds, diesel fuel. What percentage is ag land, property tax? Is it something that has a real bearing on the profit or loss that a farmer has?

Chad Hart

It is definitely something farmers worry about. It's also something that they actively try to manage. If we think about farming operations, the reason we've set up certain legal structures on certain farms is basically to look to control the tax base that we have and control how much we're paying in taxes. The old joke within farming is there's one thing that scares a farmer more than death, and that's taxes. And so they, you know, farmers are like many folks that they actively work to avoid or minimize the tax burden that they're facing here. It's also the case of when you think about a farming operation, the vast majority of the farm assets are tied up in land. So it's tied up in that property. So they are, if you will, more sensitive to that because of that reliance upon that major asset.

Erin Murphy

Peter, as a sort of tangential discussion to this property tax debate, one of the elements in the Senate proposal is to chain the state gas tax to inflation. So it would increase on its own without legislature having to vote for increases. And the thinking behind that as just as a quick background for our viewers is that if we're going to impact local property taxes in the way you described, then increasing the gas tax would at the very least provide some resources to these local governments to be able to do roads and bridges. Right. I'm curious your perspective, and then, Chad, I'll come to you too. But Peter, I'm curious your perspective on that sort of policy, that idea.

Peter Orazem

Well, in some sense, the justification for tying the amount of gas tax to the gallons rather than the prices, is that the wear and tear on your roads is based on miles and not on the dollars that the gas costs and the other potential problem is that when the price of gas is low, you drive more. And when the price of gas is high, you drive less. And so to some extent, you would end up with a more variable source of revenue for roads, which effectively require constant maintenance, not cyclical maintenance based on the price level. And so I'm sympathetic to the notion that you would want that particular tax to follow inflation, but it's probably inconsistent with what that tax is actually dedicated for. And that's steady maintenance for the roads, which is based on the miles of travel.

Erin Murphy

Well, and speaking of that, that's perfect because, Chad, we often talk about farm to market roads in Iowa and not too, and its not too distant past had a really poor rating on its local roads, its bridges in rural areas that with the last time they increased the gas tax in 2015, that has been abated to a certain degree. Do you worry that with this whole property tax discussion that that could put these roads in danger of kind of reverting here?

Chad Hart

Well, it's this challenge, as Peter mentioned, the idea is our roads, our bridges, that transportation infrastructure requires constant maintenance. And what we have been failing to do, not only with our roads, but I could point to the lock and dam system on the rivers, is we tend to sort of set it and forget it for a while. And then by the time we think about what we need to do something to repair that, those repairs are more costly than we're expecting, and we're not having the tax dollars available for that. So especially when it comes to our Iowa bridges, we knew that back in 2015, we were seen as fairly deficient there, that we had let our bridges get functionally obsolete. We're not that far away from where we were back in 2015. It is a concern, especially as we talk about moving more and more farm products to that market. When you look back at last year's corn and soybean crops, we are talking about the biggest corn crop the country's ever seen and a top five soybean crop all trying to travel down the same roads and bridges that were a concern not that long ago.

Kay Henderson

Peter, let's talk about a couple of sectors in the Iowa economy and the effect those sectors have on the rest of the economy. So if somebody is sitting in one of these urban areas that you mentioned earlier, and they don't work on a farm, they don't have any farmland as part of their portfolio, and the ag economy goes south, why would it affect them?

Peter Orazem

Well, it may not affect somebody in finance, for example, except for the fact that insurance business in Iowa is related to the agriculture sector. And certainly land values are influencing real estate and so on. So, my guess is that those, the crossover between strength or weakness in the farm economy doesn't hit urban dwellers in Iowa equally. But if you're in the manufacturing business, a good share of the Iowa durable goods and non-durable goods manufacturing. And Iowa’s what, the fourth highest share of GDP in manufacturing, I think, among the states. A disproportionate share of our manufacturing is tied in one way, shape or form to the strength of the agricultural economy, whether it's John Deere or whether it's one of the food processing plants. And so weakness in the farm economy has immediately had impact on the strength of our manufacturing sector. And so that weakness is felt in the cities. And I think manufacturing is probably the one that you would point to first to say, here's where pain in the countryside extends to pain in the city.

Chad Hart

And I would argue we've already seen that, when you think about the downturn the ag economy took back basically through 2023 and 2024, we saw that immediately chain into John Deere. We saw the layoffs there. So you can see that direct connection with manufacturing. But I'll play off of Peter's line as well, that when we look at our big sectors within the Iowa economy, finance is a big one. But crop insurance is a big part of that. So ag is connected to finance. When it comes to real estate, as I just mentioned before, land, farm land, is especially the most valuable asset arguably that's in the state. So you can see these connections that are not necessarily direct to that, you know, taxpayer in Des Moines here. But it does have an impact on their daily ability to run their life.

Kay Henderson

For those of us who are old enough to remember the farm crisis, what's the foreclosure rates among farming operations now? And is it a concern?

Chad Hart

Right now, when you look back at the data through 2025, we did see a definite uptick in farm bankruptcies. But that said, I'll describe it this way. While farm bankruptcies have basically doubled since 2023, the level we saw in 2025 was still below the lowest level we had from 2008 to 2020. So relative to history, we're still seeing relatively low delinquencies. But we are seeing that rate increase as the I'm going to argue the ag recession continues.

Erin Murphy

Down to our last three minutes already. Wanted to ask you, Chad Hart, about a bill that we're tracking up in the legislature that's sort of fascinating. I know it's my job to be able to do this concisely, too, but I think you'll do it better. Right to repair. I'll let you kind of describe what that means. But it has to deal with farmers’ ability to repair their equipment in a more cost efficient way. But manufacturers are pushing back. Maybe expand on that description and give me your…

Kay Henderson

And farm implement dealers are pushing back.

Erin Murphy

Yeah, yeah.

Chad Hart

And I'll describe it as this. When we buy a piece of equipment, we like to think that we have the ability to, if it breaks down, that we can repair it ourselves. Right to repair basically says that when I'm buying a John Deere combine, or I'm not trying to pick on John Deere directly here, but all implement dealers, they basically have set up guidelines now to say that if you try to repair this on your own, that you're voiding the warranty on the equipment. If you want this done, done well, come see us. We will do it for you. And this has to do with not only just, let's call it the machinery of it as well, but as we think about the modernization of equipment, this also has to deal with the computer systems within the software, within the equipment that we're using there. So right to repair would give farmers that ability to get in there and try to repair this activity as. But it's going to come at likely, let's call it additional costs. If John Deere knows that they don't have that warranty sort of guarantee in there to help bring that repair system back to them, does that mean maybe they need to charge a higher price with the initial sale to make up for our loss in revenue there? So it is a, a really strong open question, because it also leads into questions of who actually owns like in the software. Is that John Deere property, but you have access to it because you bought the equipment? Or since you bought the equipment, do you own that software? At least that individual copy?

Kay Henderson

Peter, a minute left. I want to ask about a subject that probably deserves more than a minute. Artificial intelligence. How will that impact the manufacturing sector, which you've already identified as really key to Iowa's economy?

Peter Orazem

Wow. Yeah. You're going to see artificial intelligence affecting everything from design to the linkage between design to manufacture through three dimensional printing all the way down to the human resource function, where some personnel actions are going to be done automatically. And so you're going to see artificial intelligence affecting almost every division within a manufacturing firm, from the engineering to the back of office staff, to the people at the assembly stage. It's interesting. If you look at Danfoss in Ames, every single person on their assembly has a computer in front of them. And they are, when they, Danfoss opened, it was two lines. Hydraulic transmissions. They have over 300 lines. And what they're building at nine in the morning is not what they're building at two in the afternoon. This is just going to accelerate the ability for flexible manufacturing of that sort to expand. And whether or not it means that more people are going to be hired or fewer people are going to be hired, is something we're going to see.

Kay Henderson

Well, I have no flexibility at this time because we are out of time for this conversation. Thanks to both of you for coming back.

Peter Orazem

Well, thanks for having us. It's always a pleasure.

Kay Henderson

You can watch episodes of Iowa Press at iowapbs.org. For everyone here at Iowa PBS, thanks for watching today.

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Funding for Iowa Press was provided by Friends, the Iowa PBS Foundation.

The Bob and Doreen Sheppard Family. Proud supporters of educational programing seen only on Iowa PBS.

Banking in Iowa goes beyond transactions. Banks work to help people and small businesses succeed. And Iowa banks are committed to building confident banking relationships. Iowa banks, your partner through it all.