Category Archives: Economy

The Good Old Days? White House Fights the Free Market

The current occupant of the Oval Office would have me believe he’s The Champion of Small Business In The Face Of The Evil Empire of….Amazon.  Spare me.  (And, NO, the USPS isn’t going broke because of the shipping contract the company has with Amazon. It has much more to do with the Republican supported and enacted restrictions on its pension plan, which require inordinate prepayments into the plan. [IG Report]) So, returning to the topic at hand, let’s start with the proposition that nostalgia isn’t conducive to successful retail marketing.

A Little History 

Extrapolated into the realm of the ridiculous, there was a time before Macy’s and Bloomingdales (1858, 1861) when shoppers roamed among small retailers along commercial corridors.  Add the installations of elevators and escalators and the retailers could further “departmentalize” their offerings.  Surely there were objections from smaller retailers at the time, and there were probably others who decried the Memphis Piggly-Wiggly grocery store’s 1916 decision to let customers get their own items from the shelves rather than have a clerk do the accumulation.  However, it’s unimaginable to give any credence to the notion that innovations in retailing are necessarily nefarious.

The department stores faced competition beginning in 1872 from Aaron Montgomery Ward whose catalog advertised shipping via Express rail services, and from Richard Sears. Their catalog sales were boosted by the decision in 1913 to have the Post Office deliver domestic packages. [AtlasObs]  Again,  to assert that companies like Amazon, which depend on Internet ordering systems are somehow essentially different from the innovations adopted by Ward and Sears is risible.  What we might be hearing from the White House is the lament for brick and mortar retailers who rent property?

Another Change in Retail Habits

We’ve moved from shopping along Main Street, to shopping from catalogs, to shopping from online catalogs.  And, yes, Amazon is now a big presence in the retail system:

“The simplest explanation for the demise of brick-and-mortar shops is that Amazon is eating retail. Between 2010 and last year, Amazon’s sales in North America quintupled from $16 billion to $80 billion. Sears’ revenue last year was about $22 billion, so you could say Amazon has grown by three Sears in six years. Even more remarkable, according to several reports, half of all U.S. households are now Amazon Prime subscribers.” [Atlantic]

However, this is an over-simplification which goes nowhere toward explaining how a chain store founded in 1962 in Arkansas has grown into a 2,000,000+ employer, or why Target seems to be holding its own in the Big Box Store category.  Notably, both Walmart and Target have an Internet operation.

We can lament the demise of the brick and mortar retailers, but as the Atlantic article points out, part of the hard, sad, truth is that we simply built too many of them.

“The number of malls in the U.S. grew more than twice as fast as the population between 1970 and 2015, according to Cowen and Company’s research analysts. By one measure of consumerist plentitude—shopping center “gross leasable area”—the U.S. has 40 percent more shopping space per capita than Canada, five times more the the U.K., and 10 times more than Germany. So it’s no surprise that the Great Recession provided such a devastating blow: Mall visits declined 50 percent between 2010 and 2013, according to the real-estate research firm Cushman and Wakefield, and they’ve kept falling every year since.” [Atlantic]

Toss in a measure of stagnating wages and decreased levels of discretionary spending and it’s little wonder the mall traffic is declining.

“After adjusting for inflation, wages are only 10 percent higher in 2017 than they were in 1973, with annual real wage growth just below 0.2 percent.[1] The U.S. economy has experienced long-term real wage stagnation and a persistent lack of economic progress for many workers.” [Brookings]

Those “many workers” are deciding the Big Box, and online bargain offers, are preferable to mall browsing.   We overbuilt malls, organized them around “anchors” which are looking at declining sales from Big Box, discounters, and online shopping, and thus shouldn’t be surprised when the free market works.

That the current president is upset with the reportage of the Washington Post, owned by the same man who founded Amazon, is no surprise either.  However, that doesn’t fully explain his antagonism which may also be a function of being a real estate developer, and a real estate developer who seems to be freighted with altogether too much nostalgia for those “Good Old Days” when we’d take the transit or pile into the family wagon to shop on site.   There have been major innovations in retailing since the first butcher opened his first shop and accepted payment in cowrie shells.

The Nevada Situation

Obviously, the largest factor in the Nevada is “Accommodations and Food Service,” read: Casinos and restaurants; but the second largest employment category is good old fashioned retailing.  As of the SBA’s 2017 report, there are 140,879 people employed by retailers; of this figure 39,947  are employed by small businesses, or about 28%. [SBA pdf]

There’s reason for cautious optimism in southern Nevada with regard to wages and spending, but …

“The Las Vegas MSA’s 12MMA of average weekly earnings (not inflation-adjusted) went up by another $3 in November. This was the 4th month in a row nominal average weekly earnings rose by $3, continuing a steady streak of growth started just over 3 years ago in September 2014. On a YOY basis, the 12MMA was up $37 (5.0%) from November 2016.

When considered on an inflation-adjusted, YOY basis, earnings rose by 2.8% in November 2017 compared to November 2016, reaching $669 (in 2007 dollars). This was an increase of $1 from October. Las Vegas’ average weekly real wage is now $82 (10.9%) below the most recent inflation-adjusted peak of $751 that occurred over 10 years ago in August 2007. The trough occurred in February 2012 at just over $616, so Las Vegas remains much closer to the trough than the peak.” [StatPak]

If we’re looking for significantly increased demand to boost the southern Nevada retail sector further, something is going to have to happen to those average weekly wages.  The picture for northern Nevada is slightly more optimistic:

“While Washoe County’s economy continues to benefit from rising taxable retail sales, the YOY growth rate has fallen considerably from a year ago. In November 2017, the rate of growth was 6.2% YOY, or 3.2 points lower than the year period ending in November 2016. However, when compared to the month prior, it is down 0.2 points. Taxable retail sales reached $686.8 million in November, having already surpassed, in March 2016, the previous peak on a nominal basis (not inflation-adjusted). As the chart shows, Washoe’s taxable sales growth is very near the state average at just 0.4 points below.

Success in business attraction and retention is driving the region’s economy and is the primary cause of growth in taxable retail sales, though increasing visitation has also contributed.”  [Statpak]

One other factor to be considered before pronouncing Amazon as the harbinger of demise for retail malls is good old fashioned demographics. Neighborhoods change, people move, and the “centrality” of a mall constructed in the late 1960’s or 1970’s may not reflect the residential and traffic patterns 40-50 years later.

And yes, I remember shopping for vinyl records in Park Lane Mall ages ago… when I was still playing vinyl records… before I shifted to CDs … before I downloaded … anyone who expects (or wants) retail endeavors to remain constant in the tides of time will have about as much success as King Canute attempting to command the liquid form of tides.

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Filed under Economy, Nevada economy, Nevada politics, Politics

Dear Mr. President: You Flunk (Sophomore General Business)

One can only imagine Mrs. Barnberner, imaginary teacher of high school sophomore level General Business grading the Oval Office Occupant’s essay — all 280 characters of it — on international trade.  “F.”

What’s worse is that he thinks he’s on to some great thing … a trade war… a war to rectify the “advantages” taken by foreign countries in our trading relations.  Dear Mr. President, you obviously don’t have a clue about what a trade deficit means, and that it can mean different things in different contexts.  Let me make this simple for you:

Example, after purchasing a small mending plate with screws from my local hardware store I have a $3.49 trade deficit with the enterprise.  I bought the little package, paid for it, and did not sell a single thing to them.  Therefore, I have a 100% trade deficit with them.  This is NOT a bad thing.  I do not wish to manufacture my own metal mending plates.  I do not wish to manufacture my own screws.  I wish to buy these from a reliable, legitimate, source.  I will pay them in coin of the realm and go home to my “wreck it and run” project.

Therefore, one cannot assert, with any level of economic competency, that trade deficits are a negative in all contexts.   That said, there are other reasons you, POTUS*, have flunked this exam.

When discussing sales it’s important to remember that we measure both Goods and Services.

“Trump said we have an $800 billion deficit. It sounds like he was actually alluding to how we bought “$810 billion more in foreign goods than other countries bought from the U.S.” as the AP cites from the Census Bureau. That leaves out our $244 billion trade surplus in services.” [jal]

Please recall, sir, commercial enterprises encompass both goods and services.  Goods are those things which are mined or harvested (primary industries) or things that are made from raw materials (secondary industries), AND there are tertiary (wait strike that, to keep it easy for you Mr. POTUS* let’s call them ‘thirdish’) industries and sectors –> financial, legal, transport, consultancy…etc.

Your automobile example is fraught with inconsistencies:

“TRUMP: “If the E.U. wants to further increase their already massive tariffs and barriers on U.S. companies doing business there, we will simply apply a Tax on their Cars which freely pour into the U.S. They make it impossible for our cars (and more) to sell there. Big trade imbalance!” — tweet Saturday.”

Where to begin?   Let’s start with the fact that Americans bought about 17.2 million motor vehicles last year.  The top selling item (15% of all sales) was the Ford F-series pickup truck line.  Europeans are not as enamored of gas guzzling V-8 engine, half and three-quarter ton pickups.   The price for a gallon of gas in Paris, France right now is about $5.54 per gallon.  [Money.cnn] A person can buy gasoline for $2.21 per gallon at the EZ Mart in Paris, Texas at last report. [Gasbuddy]  Getting the picture yet Sir?

For someone who makes much noise about being an international business tycoon, you Sire, are demonstrating an alarming lack of cognizance of  the structure of retail markets.  Europeans are beginning to purchase items in the Ford Ranger series [MFool] because the smaller, lighter, vehicles are more practical in their home markets. Lesson?  If we are not manufacturing products people want to buy in their home countries, it doesn’t have to be about taxes and tariffs — it could just as easily be a function of retail market interests.  You cannot make a Chevy Silverado or Ford F-150 as popular in down town Paris, France as it is in Paris, TX, just because the tariffs are lower — because you cannot make some “rues” wider in Paris and the price of petrol cheaper.

Not only is the automobile argument risible, but the general idea that trade wars are fun things to play with is equally ludicrous.

The president’s argument, in essence, is that high tariffs will force other countries to relent quickly on what he sees as unfair trading practices, and that will wipe out the trade gap and create factory jobs. But the record shows that tariffs, while they may help certain domestic manufacturers, can come at a broad cost. They can raise prices for consumers and businesses because companies pass on at least some of the higher costs of imports and imported materials to their customers. A trade war is also bound to mean that other countries will erect higher barriers of their own against U.S. goods and services, thereby punishing American exporters. [YahFin]

Since the POTUS* is talking about manufacturing, let’s stay there for a moment.  The US exports approximately $533 billion in capital goods annually.  These include aircraft (think Boeing), $57 billion in industrial machinery, $48 billion in semi-conductors, $43 billion in electrical apparatus (think GE), and $38 billion in telecommunication equipment. [Bal]  Now, since by their very definition, trade “wars” involve retaliation, imagine the retaliation impact on GE and Boeing?

A far better, but obviously more complex, response would be for the US to develop a MANUFACTURING POLICY.  What a concept!

And, back to my soybeans again, not all American exports are manufacturing.  There’s no rule in a trade war that tit has to be for tat.  Or, that tariffs on cars and trucks are matched with tariffs on our cars and trucks; the reaction could just as easily be on major American agricultural exports. Download and take a gander at the USDA yoy and monthly export spreadsheet located here.  There are some major amounts which should be noted. Look at grains and feeds, soybeans, red meats and products, and animal feeds.  There’s NO rule that says an increased tariff on steel and aluminum can’t be matched by increased tariffs on sorghum, soybeans, and animal feeds. This is not a difficult concept. It is, however, a segment in the overall lesson that no, trade wars are not easy to win. There really are no winners.

And we haven’t even explored some of the more complex elements in international trade policy — just the basics. The basics someone who actually stayed awake for 50% of the time in sophomore General Business class should understand.

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Not One More Word About the GOP Is Good For Business

No, I don’t want to hear one more word about how Republicans are “good for business.”  Not after this week.  First, we got that Tax Scam, the benefits of which went to corporations and the top 1% of income earners.  That is only superficially good for business — it did precious little for consumers, the ones who actually make the US economy run.  Corporations (we learned in high school General Business classes) make a profit when people buy their products or use their services.  The Tax Scam benefited the Investors, not necessarily the “business” in totality.   A system in which we continually cut corporate taxes in order to protect corporate revenue/profits and put the burden on consumers is a recipe for disaster.

Then the occupant of the Oval Office throws a tantrum and announced he is about to put 25% tariffs on imported steel and 10% on aluminum.  If this is about a trade war with China, he’s got it exactly backwards — we get more aluminum from China than we do steel.  And, now he’s finding out his steely blast will hurt Canada, “The top supplier to the U.S. in 2017 was Canada, followed by Brazil, South Korea, Mexico and Russia. Other notables include Turkey, Japan and Taiwan.” [MrktWtch]   The reaction to the announcement is/was predictable:

“Trump has declared that the U.S. will impose steep tariffs on steel and aluminum imports, escalating tensions with China and other trading partners and raising the prospect of higher prices for American consumers and companies. With tensions rising over international trade, stocks closed sharply lower on Wall Street. China on Friday expressed “grave concern.” [WAPT]

While the tariffs may have an effect on aluminum importation, the damage will be downstream:

“But industries that use aluminum say there’s an ugly trade-off: Manufacturing jobs in the auto and aerospace industries might go away if the cost of aluminum rises too much. The aluminum smelting jobs that Trump wants to save account for 3 percent of the total aluminum industry jobs in the United States, according to the Aluminum Association. The other 97 percent of jobs (about 156,000) are in downstream industries that take the raw metal and make something new with it.” [WaPo]

When former President George W. Bush slapped tariffs on foreign steel (2002) we lost approximately 200,000 jobs.

“A study funded by steel producers that supported the tariffs found that the tariffs brought back 16,000 steel jobs. A study funded by steel-consuming companies that opposed the tariff found that rising prices caused 200,000 job losses, concentrated in the metal manufacturing, machinery and transportation equipment sectors, though it noted that it was not clear how much of the price increases were caused by he tariffs.” [Star.com]

The job loss numbers are disputed, ranging from about 43,000 to 200,000, but no one appears to be arguing there won’t be some downstream (and midstream) damage from the imposition of tariffs.  Nor are major economic voices saying the Bush tariffs did all that much good.  The Bush tariffs were removed after 21 months.  And then there’s that “it’ll be easy” part.

Trade wars aren’t good for anyone.  One pithy summary asserts prices will go up, American businesses will lose sales, and American trading partners are also among our biggest lenders [CNN] and thus may be less willing to purchase our bonds — remember that budget busting tax scam passed by the GOP controlled Congress and signed by an enthusiastic executive?  Lovely, now that we’re racking up a mountain of indebtedness as a result of the Tax Scam, we’re ticking off our biggest lenders?  In what world does this make any sense?

So, we have a Tax Scam that benefits a small investor class and backhands 99% of American income earners, a tariff plan that could easily cost more jobs than it saves.  It’ll be jeans, bourbon, and motorcycles … more a signal to Congressional and Republican leadership I’d think… but I’ll cling to my opinion that the real damage will be to American agriculture.

“The tariffs announced by the administration will put the interests of other domestic industries over farmers,” American Soybean Association President John Heisdorffer, an Iowa soy grower, said in a news release.  “Prior to today’s (March 1) announcement, China has indicated that it may retaliate against U.S. soybean imports, which would be devastating to U.S. soy growers. Our competitors in Brazil and Argentina are all too happy to pick up supplying the Chinese market.” [Fence Post]

But wait, we’re not finished.  There’s S. 2155 coming up in the US Senate — a bill to roll back some of the reforms included in the Dodd Frank Act, enacted in the wake of the Housing Bubble Debacle.  That’s right — the current mis-administration wants to reopen the Wall Street Casino and let the “investors” play the banking games which caused the last economic collapse.

Considering these three examples of incompetency and ineptitude, please — oh please — spare me any more renditions of “Republicans are Good for Business.”

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Guess What The Senate Thinks Is More Important Than Children Killed By Semiautomatic Weapons?

And the answer is …. <drumroll please> … S. 2155, for March 5, 2018 on the Senate Calendar. (pdf)  By the way, the title of the bill sponsored by Senator Mike Crapo (R-ID) is the Economic Growth, Regulatory Relief, and Consumer Protection Act.  Put the emphasis on the “regulatory relief” part of that title, because it certainly isn’t on the consumer protection phrase in that title.  So, what is the Senate doing instead of taking on issues related to gun violence and weapons of war on our streets?

The bill amends the Bank Holding Company Act of 1956 to exempt banks with assets valued at less than $10 billion from the “Volcker Rule,” which prohibits banking agencies from engaging in proprietary trading or entering into certain relationships with hedge funds and private-equity funds. Certain banks are also exempted by the bill from specified capital and leverage ratios, with federal banking agencies directed to promulgate new requirements.

The bill amends the United States Housing Act of 1937 to reduce inspection requirements and environmental-review requirements for certain smaller, rural public-housing agencies.

Provisions relating to enhanced prudential regulation for financial institutions are modified, including those related to stress testing, leverage requirements, and the use of municipal bonds for purposes of meeting liquidity requirements.

The bill requires credit reporting agencies to provide credit-freeze alerts and includes consumer-credit provisions related to senior citizens, minors, and veterans. [Congress]

It’s hard enough to understand a Senate in which the answer to assault weapon violence is to require states and localities to enter information into the national database — information they are already required to submit — but it’s more important to them to let some banks get out of complying with the Volcker Rule (the bank can’t play investment games with depositors’ money.)

Instead of taking up bills to require universal background checks for the purchase of firearms in this bullet riddled country, it’s more important to the US Senate to discuss allow banks to get out from under capital and leverage ratios.

Instead of taking up bills to raise the age for firearm purchases the US Senate deems it of more importance to let some banks reduce inspection requirements and environmental-review requirements in rural areas — raising the question: Why should rural areas be less protected than urban ones?

Instead of debating bills to ban the sale of bump stocks to enhance the lethality of AR-15 and similar weapons of war, the US Senate thinks it is more important to allow some banks to skirt the demands of stress testing.

Instead of discussing how to stop the sale of weapons of war to civilians the US Senate believes it to be of more urgency to take a vote on easing the restrictions on proprietary trading….

Instead of taking action on bills to reduce the likelihood of additional carnage in our public spaces, or in the privacy of our homes, the United States Senate would far rather roll back consumer protections enacted in the wake of the Housing Bubble Debacle.

This is nothing less than the absence of national leadership and the abdication of morality.

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Donald Trump Is About To Do Something Really Stupid: Soy Bean Edition

This is a recyclable headline.  However, we need to be aware of the following item from Reuters two days ago:

“WASHINGTON (Reuters) – The U.S. Commerce Department has recommended that President Donald Trump impose steep curbs on steel and aluminum imports from China and other countries ranging from global and country-specific tarifandfs to broad import quotas, according to proposals released on Friday.”

And, of course here comes the response:

“If the United States’ final decision affects China’s interests, we will take necessary measures to defend our rights,” said Wang Hejun, a senior official at China’s Commerce Ministry, according to a report Saturday by state-run news agency Xinhua.

The short article didn’t provide further details on how Beijing might respond. Ross’ recommendations came in the middle of China’s Lunar New Year holiday when government offices and businesses largely shut down for a week.”  [CNNmoney]

The ‘final decision’ is due in April, 2018.  There’s little to analyze at the moment because the proposal isn’t firm, but consists of options presented by the Department of Commerce.

“Ross suggested three options for Trump — impose across-the-board tariffs on steel and aluminum, target select countries with even higher tariffs, or limit the total steel and aluminum coming into the United States.” [CNNmoney]

The steel portion of the proposals advise (1) an across the board 24% tariff on steel from all countries; (2) “Tariffs of at least 53% on imports from 12 countries: Brazil, China, Costa Rica, Egypt, India, Malaysia, South Korea, Russia, South Africa, Thailand, Turkey and Vietnam. These countries would not be allowed to export more steel to the United States this year than they did last year.” [CNNmoney]  (3) decrease imports of steel into the US by 37% from all countries.   In short, there are three options, and from an economic growth standpoint they are all bad. [Report here]

What the administration appears to be gambling on is that the Chinese will not round off their New Year celebrations with the beginnings of a trade war.  The happy clappy analysis would predict China will not retaliate in the semi-conductor sector because too many jobs (Apple) would be lost; and, it will not retaliate against aircraft manufacturers like Boeing because that would give Airbus a monopoly, and thus higher prices and longer wait times for delivery.   So who could be caught up in the squabble?

China imports some $15 billion worth of soybeans from the US each year. $3.4 billion worth of cotton; $3 billion in copper materials; $3 billion in small engine passenger vehicles; $2.2 billion worth of large engine passenger vehicles; then there’s $1.3 billion worth of corn and $1.2 billion in coal. [CBR]

Someone might want to tell Senator Grassley (R-IA) about this Commerce Department proposal and the possible consequences for soy bean farmers because Iowa is the largest producer in the US, followed by Illinois.  Iowa and Illinois account for about 28% of US soy bean production.  Other producing states are: Minnesota, Nebraska, Minnesota, Indiana, Ohio, North Dakota, South Dakota, Missouri, and Arkansas. [B2Lv]  This isn’t the only crop in question.

The Chinese bought an increasing amount of corn last year from the US, but also found a new source of imports — Ukraine.  Ukraine will be the winner in any trade spat, and may be  the ultimate winner anyway.  Most US corn is genetically modified and permits are required in China for the processing of GMO corn; thus Chinese processors started buying more non-modified corn from Ukraine. [Reuters]  Add the GMO issue to a tariff tit-for-tat and Ukraine will be picking up business from — here we go again — Iowa, Illinois, Indiana, the eastern portions of South Dakota and Nebraska, western Kentucky and Ohio, and the northern section of Missouri. [B2lv]

It appears the easiest target for Chinese retaliation for tariffs/import limits would be agriculture, and then there are those large and small engine passenger vehicles.

One of the factors which makes targeting the Chinese a dubious tpoin is that China’s exports of steel have declined in the last few years (although some steel is exported in some form via other nations like Vietnam) and there’s this information on steel importation from the US Trade Representative (pdf)

 Between YTD 2016 and YTD 2017, imports increased from eight of the United States’ top 10 import source countries. Imports from India showed the largest volume increase in YTD 2017, up 209  percent, followed by Russia (up 64%), Taiwan (up 36%), and Mexico (up 23%). The two countries  which the United States had decreases in imports from are Japan (down 9%) and South Korea (down 2%).

Do we see China in this list? No, China is the 11th largest exporter of steel to the US. The top ten are Canada, Brazil, South Korea, Mexico, Turkey, Japan, Russia, Germany, Taiwan, and Vietnam. [USTR pdf]  Exactly how the 11th ranked export source of steel, of which 0.3% by weight is used for military purposes, makes Chinese steel a ‘national security’ issue requires a bit of a stretch, and we’ll probably find ourselves losing the argument with the WTO.  Going the Section 232 route is creative, but not really a very strong platform from which to launch a trade dispute.

Meanwhile it might be a good thing to decide if we want more Chinese assistance with the ever thorny problem of North Korea or we want to slap tariffs on Chinese steel?  Stump speeches which sound good to a crowd of Nucor employees about protecting their industry don’t necessarily make good practical policy when it comes to the point where decisions need to be made about overall economic policy, international trade relations, and diplomatic soft power.  Or, there’s a big difference between campaigning and governing — a not-so-subtle point the current occupant of the Oval Office appears not to grasp with both small hands.

Meanwhile we can only hope the Oval Office occupant doesn’t make a really stupid blunder next April.  Stay tuned, we’re only a little over a year into this E Ticket Ride.

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The Infrastructure Scam

Leave it to the current mis-administration to get an infrastructure development and renovation program exactly backwards.

The premise: The federal government will chip in 20% (of something) and the states will be responsible for the other 80% of the funding.  And now we can ask — in what Universe do the states have the funding to contract for these projects?   Case in point — for those wishing to download and review the Nevada budget for 2017-2019 (pdf) you will note that there are some infrastructure projects and some funding for deferred maintenance. Now we can ask — where in that budget might a person find “extra” money for the Oval Office Occupant’s Grand Infrastructure scheme?

Public Private Partnerships?  PPP (P3s) is a popular suggestion these days for funding capital improvement projects.  However, there’s a catch for state and local governments.  Let’s go back to basics for the moment,  if Nevada wants to build a new bridge the legislature can fund the project from existing appropriations, or it might fund the bridge by allowing a private source to construct and collect revenue, or it might offer a Triple P form of funding in which state funds are augmented by private money.  Option 1 isn’t in the stars given the current Nevada budget. Option 2 means toll roads and bridges, not necessarily a good idea especially for those offering public transportation or those businesses which rely on employees commuting to work.  Option 3 is often presented as a compromise measure. It has some of the same problems as Option 2.

Problem One:  Private investment tends to drive the priority given to infrastructure projects.  If private expectations for a profitable investment align with priority needs all the better, but there is always the prospect those priorities will not be in alignment.  One classic example of this problem is the 63rd Street area of Chicago, a depopulated area of the central city, devoid of population, and therefore of services, retail areas, and housing.   Affordable housing would be the logical investment to repopulate and thereby rebuild the area, but this is hardly the plan to create the profits demanded by private investment.   Cities like St. Louis, MO demonstrate another issue in this category — what to do with brownfield areas, land/parcels contaminated by previous industrial use and in need of extensive clean up before redevelopment can take place?  It isn’t too hard to imagine that finding funds for a toll bridge or road would be much easier than locating investors for affordable housing and brownfield restoration.

Problem Two:  Private investment, like so many other human activities, too often tends toward our herd mentality. There may be great enthusiasm for certain projects (Roads!) at one point, which fades out into the next enthusiasm (Bridges!) only to fade into yet another popular type of project.  This is an extension of the Problem One alignment issue, and an opportunity for good old fashioned pork-barrel initiatives should a sufficient number of investors be enticed by the latest P3s fad.  P3s are generally associated with new construction, and rarely desirable for renewal or renovation projects even though these latter projects may be of greater urgency.

Problem Three:  The devil is in the details.  The City of Chicago adopted some P3 projects a decade ago, only to discover that it had bargained away long term revenues for short term developments.  Not to put too fine a point to it, the city entered into some projects at the expense of its long term fiscal responsibility.  (Chicago Skyway)  Similar issues arose in North Carolina, and of course in the notorious Indiana Toll Road which filed for bankruptcy in 2015. [AmProsp]

There are some other pitfalls often included in P3 agreements, such as the problems observed in California when the state wanted to expand parts of SR 91 in Orange County, only to discover that the P3 in place for the construction of express lanes forbid the state from “competing” by expanding the roadway to relieve traffic congestion.  Another tale from the Indiana Toll Road comes from the 2008 flooding when the state waived tolls in order to allow people to evacuate, and was then hit with a $447,000 bill from the operators.  Virginia used a P3 to install high occupancy vehicle lanes, but if too many car-poolers use the lanes the state loses money to the private operators.  [Gov]

Problem Four: Fuzzy Math. P3s are nearly always sold as ways to save taxpayers money.  This is not always the case.  First, the funding for a P3 may actually end up costing taxpayers more than if the city or state had gone the old fashioned way and voted to issue municipal or state bonds to secure the financing for the project.   At this point we need to return to that hoary concern for all investors: Risk.

“The decision to use a P3 approach must rest on the partnership’s ability to efficiently transfer project development, revenue, or other risk. Moreover, the estimated monetary value of the transferred risk should exceed the additional financing charges that accompany P3 equity capital. In short, the policy conversation to date has almost exclusively and wrongly promoted P3 deals as a mechanism for raising project capital, when in reality the true advantage of a P3 approach is the ability to transfer risk.” [CAP]

And this note of caution leads to a common conclusion:

Julie Roin, a University of Chicago law professor, also questions whether the “risk transfer” argument carries any weight. Ostensibly, for the private sector to turn a profit, a deal only makes sense if the government overestimates its risk and underestimates the project’s revenue potential. “It’s not as if any investor is going to accept risk without demanding compensation,” Roin says. “You’re just paying for the risk in a different way.”

Thus we end up with the Re-negotiation problem all too commonly associated with P3 projects:

“…then there’s the issue of renegotiation. Private companies have incentives to engage in opportunistic renegotiation. Such renegotiations reverse all of the benefits of ever engaging the private sector in infrastructure provision and financing. Take, for example, the case where a P3 toll-road is built, but traffic is lighter than forecast, so revenue disappoints. The private operator might try to renegotiate higher tolls or even minimum revenue guarantees from a public provider.” [EPI]

Indeed, this has been a problem in too may P3 financed projects to date.  For those wishing to get further into the weeds on the topic of P3 financing, I’d recommend the following sources:

Spending on Infrastructure Investment, CBO March 1, 2017, links to blog posts and other information.   No Free Bridge, EPI March 21, 2017. Public Private Partnerships, CAP, December 8, 2014.  Public Private Partnerships are Popular but are they Practical? Governing, November, 2013.  Public Private Partnerships in Transportation, CRS, November 7, 2017.  Federal Real Property, Limited Role of P3s, GAO (pdf) August 30, 2016.  The Perils of P3s, American Prospect, November 2013.

Problem Five: Location, Location, Location.  The administration is touting its plan for meeting the infrastructure needs of rural America, a topic of interest to those in northern Nevada.  However,  remember the admonishments and cautions listed above.  Rural America isn’t exactly a revenue driver for investment in infrastructure — toll roads can go through it, but collecting tolls on those roads isn’t likely to help those in the transportation industry — see truckers, hay haulers, etc. Other infrastructure projects are practically nowhere on the economies of scale.

Problem Six:  Privatization.  Few suggestions ar.  e more likely to raise the ire of rural Nevadans than the prospect of the privatization of water systems, and yet these would be the kind of investment most attractive to outside private investment.  Investment in rural water systems could “fix” mineral contamination problems, aging pipes and equipment, and related system fixtures — at a price — giving up control of the water rights.  Not exactly a popular proposal in the Silver State outback.

One of the problems with almost all the proposals emanating from the current Oval Office Occupant is that the details are not adequately.  The money will come from “partnerships” without specifying who and what is to be partnered, and will be driven by state and local resources — good luck finding state and local governments which can afford the initial capital investment.   Unfortunately, I’m guessing this will be the last post on the subject of infrastructure for quite some time as the administration hauls out its glitzy proposals without offering the substance necessary for thorough analysis.  And then Infrastructure Week fades into the mists of distance memory.

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DIY Economic News for 2018: Some Suggestions and Sources

The gripe noting the emphasis (or narrow focus) on stock market “news” is a recurring one on this blog, but perhaps it’s high time to suggest some sources which will provide a more comprehensive picture than merely stock market numbers and unemployment figures.  Here are a few for your viewing pleasure:

Labor Information:  What we get on television broadcasts and from most print media are national numbers, however this obfuscates the point that not all parts of the country are experiencing employment (and unemployment) in the same way.   To find out more about state and local employment there’s information available from the Bureau of Labor Statistics at this page. Nevada, for example, is in the western region in the BLS categorization of various statistics, and more specifically as the national unemployment rate is 3.9% nationally (October 2017) the Clark County rate is 5.1%.(pdf)  Although employment in the construction sector is up in Clark County, NV, the rate is altogether to close to that of Cleveland, OH  which was 5.2% (pdf)  Unlike Clark County, which saw a decrease in unemployment, Cleveland actually ticked up from 2016’s 5.1% to 5.2%.   Using the handy interactive from the BLS link give will allow a person to see differences within a state, such as the 5.1% unemployment rate in Las Vegas and the 3.9% unemployment rate in the Reno area. (pdf)

A summary of state unemployment rates is available from the Bureau of Labor Statistics. As of November 2017 the lowest unemployment rate in the country is in Hawaii (2.0%) and the highest unemployment rate belongs to Alaska which has a rate of 7.2%.

The BLS also provides employment projections (for the next 10 years) complete with a graphic illustrating the fastest growing occupations.  Presidential climate change denial notwithstanding, we should observe that the two fastest growing occupations are solar photovoltaic  installers (105.3% increase) and wind turbine technicians (96.1% increase).

A few recommended bookmarks:  AFL-CIO website;  UAW website; SEIU website;  Nevadans will want to keep up with Culinary Worker’s news;  the Communications Workers of America is also highly informative.   Labor Notes is also recommended.

Income Information:  For those who don’t have FRED bookmarked — please do, you’ll be pleased with yourself for doing so.  One of the many topics covered and charted is median household income.   A person can also find information about the Income GINI Ratio for Households (by race), and Real Mean Personal Income.   It would be difficult to imagine what information Isn’t available from FRED.

Once in a blue moon the media reports on the release of the Beige Book from the Board of Governors of the Federal Reserve.  It is a compilation of anecdotal reports from each of the Federal Reserve districts, and is useful for those wanting to drill down into regional economic conditions.  It’s published eight times per year, with the next release due out on January 17, 2018.

The St. Louis Fed provides FRED, and the New York Federal Reserve is the go-to place for information about debt, from student to household.  See their Center for Microeconomic Data.  The NY Fed has its own blog, also informative on a variety of topics.   Readers might like to start with the NY Fed’s report on political polarization and consumer expectations.

There’s FRED, the Beige Book, and the NY Fed, and then there’s the Census Bureau, which tracks income inequality.

There are thousands of more sources and links which will prove helpful to those interested in economic trends, and this is by NO means a comprehensive list.  However, I do hope these links will indicate to any reader that there is a wide variety of sources describing our economy going well beyond the narrow focus on stock market numbers and unemployment statistics!

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Filed under Economy, Nevada, Nevada economy, Politics