Tuesday, February 19, 2019

Ottawa's Economy on the Upswing

by Levi A. Russell

Last week, John Hawks wrote a very interesting piece (“Area business on upward trend”) on business growth here in Ottawa. Hawks does a great job going through the on-the-ground specifics of recent business growth. I thought I’d dig into some government data on Franklin county to expand on his article. First I’ll talk a little bit about the employment situation in the county, then move to poverty rates and food stamps. Finally, I’ll talk about Franklin county residents’ credit ratings and home prices in the county. If you’d like to see the graphs I refer to below, please check out http://bit.ly/ottawaeconomy

I’ve addressed Ottawa’s employment situation fairly recently, and things are still humming along quite well. The unemployment rate is still at historic lows and the labor force continues the growth it has had the last couple of years. Growth in the labor force has tracked pretty consistently with overall population growth in the county. This, combined with the low unemployment rate, indicates that most people who are looking for a job are able to find one. Certainly this is a good thing and is consistent with Hawks’ informative piece from last week.

Two reliable indicators of poverty are poverty line statistics and the number of people enrolled in the Supplemental Nutrition Assistance Program (formerly called food stamps). I could only find data on the percentage of the population below the poverty line since 2012, so I can’t say much about the 2009 Recession’s effect on this statistic. In 2017, roughly 12.4 percent of Franklin county residents earned income below the federal poverty line. This is relatively low compared with the percentage of the population below the poverty line in recent years. Roughly 13.5 percent of the population was below the poverty line in 2014 and 2016.

The food stamp data is much more informative. I found food stamp data going back to the 1990s, which allows me to talk about the aftermath of the recession, 2012, and where we are today relative to that. From 2003 to 2006, roughly 7.5 percent of Franklin county residents received food stamps. This number began to tick up after 2006 and by the official end of the Great Recession in 2009, roughly 12 percent of the population received food stamps. It continued to rise until 2012, peaking at nearly 15 percent. Since then, things have improved dramatically and, as of 2016 (the latest data I could find) roughly 9 percent of Franklin residents receive food stamp benefits. Given the improvement in the local economy since then, especially the continued decline of the unemployment rate since 2016, it is likely that this number is even lower now.

So far I’ve discussed factors that contribute to short-term financial security. Income and employment are important, but they fluctuate over time. Families can receive food stamp benefits for a time and then leave the program when their financial situation improves. Home values are more significant indicators of longer-term financial security. For Franklin county residents an appreciation in their home value does several things: decrease their risk of bankruptcy, improve access to credit for times of financial stress, improve their financial situation after retirement, and other benefits.

Before the recession, home values in Franklin county peaked around the year 2007. As the recession drew near, home values fell, ultimately bottoming out about 15% below the 2007 peak in 2014. Since then, home values have been rising and have surpassed the previous 2007 peak. While some economic commentators are worried about rising interest rates quashing home value growth, continued increases in business formation and a stable job market will likely keep Franklin county in a good place to continue the growth we’ve enjoyed the last few years!

Please join Gwartney Institute and Ottawa University faculty for an engaging discussion on important issues at “Ottawa Minds and Wine!” Our first event is Thursday, February 7th at 5:15 PM at UnWined. We will have a brief 20 minute talk and will be around for discussion afterward.

Tuesday, February 12, 2019

Economics of the Federal Government Shutdown

by Levi A. Russell


As of this writing, the current federal government shutdown is one of the longest on record. This shutdown is directly the result of the Senate’s unwillingness to take up a budget passed last month in the House of Representatives. Indirectly, it is the result of an impasse between President Trump and congressional Democrats on the issue of $5 billion for the wall on the southern border.


What does the shutdown cost us? Is there irreversible damage to the economy? Is it worth it to create a shutdown to get the funding President Trump wants for the border wall or, from the other perspective, to keep the wall from being built?


The most recent estimate I could find of economic losses from a government shutdown is from a 2013 Office of Management and Budget report. The report indicates that the 16-day shutdown in October of 2013 reduced fourth quarter 2013 GDP growth by $2 to $6 billion. In the private and government sectors combined, 120,000 fewer jobs were created during the first two weeks of that October as a result. These sound like very large numbers, but the reduced GDP growth only amounted to 0.2% to 0.6% lost growth. In December of 2018, 312,000 jobs were created in the U.S. economy, which easily makes up for any lost job growth the shutdown may have caused. This suggests that there is not much in the way of irreversible damage to the U.S. economy as a result of even a long government shutdown.


The term “government shutdown” is bandied about in the media regularly, but it’s difficult to justify this term in my opinion. Most of the largest agencies in the federal government are still humming along, including social security, medicaid, medicare, food aid, food inspection, law enforcement, investigations, and veterans’ benefits. Some government employees in these agencies are currently working without pay, but they will receive back pay when the shutdown ends.


Other functions have partially or fully closed operations for the duration of the shutdown and furloughed employees. Those employees may or may not receive back pay. Agencies that have closed are the IRS (no tax refunds will be processed during the shutdown, but you still have to pay taxes), national parks and museums, the US Department of Agriculture’s rural home loan approval system, and other “non-essential” services that aren’t currently funded.


Certainly the shutdown has a negative impact on a segment of the population. Tens of thousands of federal employees have to work without pay for a period of time and others are laid off and won’t receive pay. As a former state employee, I have a little different point of view on this. Federal government jobs are typically well-paid and very secure. The richest counties in terms of household income surround our nation’s capital. In effect, federal employees trade higher pay and lower risk of being laid off or fired in general for higher political risk. Most of our jobs are dependent on our ability to add value to the company, owners’ and managers’ ability to keep the company in business, and our customers’ preferences; federal employees’ jobs avoid a lot of that risk but have to deal with political risk.


Ultimately, this shutdown is political in nature. It isn’t about large segments of the budget, the maximum allowable amount of debt the federal government can incur (debt ceiling), or a big piece of legislation like Obamacare (the cause of the 2013 shutdown). The $5 billion price tag on the border wall is a drop in the bucket when compared with the proposed $4+ trillion budget. Put another way, the fight over the border wall funding is less than 0.12% of the proposed budget. I won’t pretend to know the benefits or drawbacks of the existence of a stronger border wall, but the shutdown itself will only have lasting impact on a relatively small group of federal employees. Most of us won’t even notice it.

Thursday, February 7, 2019

Bitcoin 101

by Jacob Maichel

Bitcoin can be as confusing as it is fascinating. I thought it may be beneficial to those interested in Bitcoin to write an introduction to the technology to alleviate some confusion you might have.

Although Bitcoin is neither the first nor last crypto-currency it is without a doubt the most well known, while still being shrouded in secrets. Bitcoin was launched a few weeks after the Lehman Brothers collapse in 2008 by Satoshi Nakamoto, but no one is even sure who that is. Banking on Bitcoin, a documentary available on Netflix, expose the possible identities of Nakamoto.
Bitcoin came about during the Great Recession and responds to a call for decentralized banking. Online commerce relies so heavily on a trusted third party acting as a financial intermediary and that is absolved with the use of crypto.

Put simply, Bitcoin is an online accounting system that records the value of assets (coins) in an open ledger. The benefit of using a non-localized ledger is that it cannot be hacked. All transactions are kept on the “Blockchain”, which some think is the most transformative technology Bitcoin brought about. The Blockchain is the ledger itself and every transaction is saved to everyone’s computer on the network instantaneously. To help envision this imagine a spreadsheet that is duplicated on everyone’s computer on the network and is updated regularly. This technology has a number of advantages over traditional ledgers that are held only in one place, inside the company. Satoshi Nakamoto in Bitcoin: A Peer-to-Peer Electronic Cash System (often referred to as The White Paper)  describes his ingenious incentive strategy to reward Bitcoin “miners” for continually maintaining the servers and issuing new coins.

New coins are released into the blockchain every 10 minutes to be “mined” with a fixed amount of coins to ever be released. As time goes on coins will be released less frequently until the last coin released around 2140. The fixed amount of coins guarantee that there is no artificial inflation because no more currency can be put into the blockchain.

Bitcoin miners are paramount in the process as they set up computers to solve the complicated math problems required to unlock a coin. These miners are not college kids in dorms they are typically large scale operations, and many companies are setting up just to mine coins. After a certain number of coins are out the incentives for miners changes due to scarcity of new coins. They then transition to being rewarded by collecting processing fees on the Blockchain- which continually updates the ledger. The White Paper breaks this process down very clearly as the creator intended.

So what gives Bitcoin any value? A major reason it is so valuable is the peace of mind that comes along with the technology. The safety and anonymity it gives users is held in very high regard. With Bitcoin’s decentralized approach it ensures that your money is safe from the traditional downfalls of institutionalized banking.

I think cryptocurrency is a logical step in the future, and what it can be adapted to is limitless. Whether or not Bitcoin stays relevant is yet to be seen, but the power of the Blockchain technology is something that should not be overlooked!

Tuesday, February 5, 2019

2018 Farm Bill and Franklin County

by Levi A. Russell
 

On December 11, Congress released the 807-page Agriculture Improvement Act of 2018 from its conference committee, which passed with veto-proof majorities in both houses. The Act is the latest of a long line of legislation going back to the Great Depression commonly called the Farm Bill. This Farm Bill will define the U.S. Department of Agriculture’s activities from now until 2023 when it will expire and a new law will replace it. It replaces a law passed in 2014 that made major changes to agricultural policy. How does the 2018 Farm Bill affect Franklin county?


To answer this, we first need to ask: What does agriculture in Franklin county look like? For those of you who drive around our gravel roads regularly, it won’t surprise you that roughly one third of the land area of Franklin county is planted to corn and soybeans. These are the two major crops in this county and in much of eastern Kansas. Last year, over $54 million of corn and soybeans were planted in the county. While corn and soybeans are the primary crops in the county, farmers here also plant wheat and sorghum. Animal agriculture is also important in Franklin county. There are 44,500 cattle in the county, which means there are 1.7 cows, bulls, heifers, and steers for every person!


The 2018 Farm Bill and others like it in the past provide funding for three general program areas: agriculture, conservation, and nutrition assistance. Agricultural funding is primarily used to provide subsidies for crop insurance and income assistance to farmers when prices or yields are low, commonly referred to as the commodity title. Crop insurance for the primary crops in Franklin County hasn’t changed much in over a decade, but the 2014 Farm Bill made significant changes to the commodity title. These changes included a major shift in the program away from direct payments to farmers which occurred regardless of production conditions or prices to a risk-based commodity assistance program. Farmers were given the choice between two programs, one that focused on prices and the other that focused on total revenue for the crop. When prices or revenue fell below a certain level, payments were triggered.


The 2018 Farm Bill continues these commodity assistance programs with some notable exceptions. With the 2014 Farm Bill, farmers had to choose between the price program and the revenue program once and for all when they signed up in 2014. The new Bill allows farmers to choose again in 2019 for 2019 and 2020 and then choose annually between the two from 2021 to 2023. This change gives farmers more choice in the program and will allow them to choose the program that they believe will best mitigate the risks they will face that year. Farmers will also be able to update their yields on which the program payments are calculated. Both of these changes will likely result in more flexible support for agriculture in Franklin County over the next 5 years.


Another program within the commodity title is the commodity loan program. This is a very old component of the Farm Bill designed to provide additional assistance when prices are very, very low. The 2018 Farm Bill includes the first update to this program in 16 years, increasing loan rates (the base level of price support) by 12.8% for corn and 24% for soybeans.


There are two major changes to environmentally-focused programs in the 2018 Farm Bill. First, crop insurance has been changed to accommodate the use of cover crops. Cover crops are beneficial to soil health and help reduce erosion after the primary crops are harvested. Legislators hope that changing crop insurance to accommodate the use of cover crops will increase farmers’ adoption of this environmentally-beneficial practice.


The Conservation Reserve Program (CRP) is another long-standing component of the Farm Bill. This program allows farmers to take land out of crop production and receive “rental” payments from the government. These rental payments designed to incentivize the maintenance of habitat for wildlife. CRP contracts typically last 10 years.  The 2014 Farm Bill allowed up to 24 million acres to be put into CRP, but the 2018 Bill increases this to 27 million by 2023. I couldn’t find detailed data for Franklin County, but, currently, there are somewhere between 10,000 and 25,000 acres in CRP in the county.


Nutrition assistance is always a contentious subject in Farm Bill debates among legislators. This component of the Bill typically represents about 75% of the total funding in the Bill and goes to support the Supplemental Nutrition Assistance Program (SNAP), formerly called food stamps. Though several controversial changes were proposed — for example, expanding and enhancing work requirements for participation in the program — none of them made it into the final bill. Funding for SNAP is expected to increase $98 million total over the 5 year life of this Bill.


Overall, the 2018 Farm Bill did not make dramatic changes to agricultural policy for 2019-2023. However, the changes that were made will likely improve the safety net for farmers, incentivize better environmental stewardship, and increase funding for one of the more efficient government food assistance programs.

Thursday, January 31, 2019

Free Range Parenting

by Jacyn Dawes

Kids today can find information about any subject at the touch of a button.  In some ways, this is freedom that previous generations could only dream of.  Due to the upswing in how much kids are using technology, people have begun to question whether that amount is healthy both mentally and physically for them.  But how much freedom do kids today actually have to put down their mobile devices and go out and play?

Lenore Skenazy, proudly labelled ‘America’s Worst Mom,’ has been asking this question since 2008 when she wrote a column called “Why I Let My 9-Year-Old Ride the Subway Alone.”  She received a lot of backlash from different new sources saying this was irresponsible for a parent to do.  The trend in helicopter parenting has only grown since the early 2000s.  This is largely due to the perception that crime is running rampant in the United States.

In fact, the Pew Research Center completed a study in 2016 showing that 57% of registered voters believed that crime had increased since 2008.  The FBI and BJS showed that the percentages in violent and property crimes have declined by double-digit percentages in that timeframe and have decreased by over 50% since the 1990s.  This raises the question: if crime has been decreasing consistently over the last few decades, why are parents more worried than ever?

Media has played an important role in the fear mongering.  Skenazy can attest to this.  After the story about her son riding the subway alone hit the news stand, it wasn’t long before Law and Order: Special Victims Unit put out an episode where two parents let their son ride the subway… alone.  He made it to school, but he didn’t make it home.

At first, one might think that this doesn’t necessarily mean it came from the worst-case scenario of Skenazy’s story.  But then she will show you the picture of the young actor who played the boy in the episode compared to the photo of her own son, and they are nearly identical.  While crime rates may have taken a dive, media has only increased stories of crime in the news and fictional portrayals as well.

It is no surprise that parents have become more protective over the years.  Skenazy puts this situation best when she states, “We have begun kidnapping our own kids.”  Not only have we become overprotective with our own children, but we are intruding more on what other parents decide is safe for their own kids.

Danielle Meitiv and her husband were charged three years ago with child neglect for letting their two kids walk home from a park without parental supervision.  This is just one of many examples for the necessity in Free-Range Parenting laws.  Utah was the first state to pass this law.  It defines what constitutes as child neglect, giving the parents back some of their rights over how to parent their own kids.  In turn, this will hopefully give more kids freedom to get off their phone and go out and play.

References:
De la Cruz, D. (2018, Mar 29). Utah Passes ‘Free-Range’ Parenting Law. New York Times. Retrieved from https://www.nytimes.com/2018/03/29/well/family/utah-passes-free-range-parenting-law.html
Gramlich, J. (2019, Jan 3). 5 Facts about Crime in the US. Pew Research Center. Retrieved from http://www.pewresearch.org/fact-tank/2019/01/03/5-facts-about-crime-in-the-u-s/
Skenazy, L. (2018, Sept 23). The Case for Free Range Parenting.

Tuesday, January 29, 2019

Ottawa's Employment Situation

by Levi Russell
This article originally appeared in the Ottawa Herald.

At the end of each month, the Bureau of Labor Statistics releases a report detailing the number of jobs added to the U.S. economy during the previous month. The November report, released on the 7th of this month, was a bit of a disappointment. Economists had expected 198,000 additional jobs to be added in November, but the report indicated only 155,000 were added. One bright spot, the transportation sector, added 25,000 jobs nationwide.

The relatively good performance of the transportation sector made me think of all the new intermodal jobs being added in our area. This prompted me to look at Franklin County’s employment situation over the last few years. Franklin County’s labor force participation rate has been increasing steadily since the recovery from the 2009 recession. Labor force participation is the number of people in the labor force divided by the population aged 16 to 64. What does it mean to be “in the labor force?” Isn’t that just everyone with a job?


Not really. The labor force is defined as people who are working or actively seeking work. My wife Lana, who spends the majority of her waking hours as the primary caregiver of our children, is not in the labor force. Don’t get me wrong, she works very hard, but she would not part of the labor force. She just isn’t interested in working outside the home right now and so isn’t actively seeking work. Other people between the ages of 16 and 64 might leave the labor force when, after seeking work for a long time, simply give up and find another arrangement to provide for themselves.


So it’s good to see that, along with several years of population growth (with the exception of 2015), Franklin County’s labor force participation rate has increased. More people call Franklin County home, and a higher percentage of the total population of the county have been entering the labor force over the last several years. Another good sign for Franklin County’s economy is a very low unemployment rate. Currently, the unemployment here is at 3%, which is the lowest it has been since 2003. From the recession in 2009 to 2017, unemployment steadily declined here in Franklin County. Once the unemployment rate started approaching 3% in late 2017, unemployment has been relatively flat.

This isn’t necessarily a bad sign. There will always be some unemployment in a dynamic economy. People change jobs and might be unemployed for a short period between them. Some people’s skill sets become obsolete and they have to find training to get them into a new job. Looking at data on the unemployment history of Franklin County, it makes sense that unemployment leveled off here around 3%. This seems to be Franklin’s natural rate of unemployment.

But, similar to the labor force participation rate, the unemployment rate is complicated. People might enter or leave the labor force for good or bad reasons, and the unemployment rate may go up or down for good or bad reasons. The unemployment rate can go down — which sounds like a good thing in general — because some people give up looking for work and, by definition, leave the labor force! This may be a good thing, my wife is certainly happy being outside the labor force, but it may also represent people in very bad situations.


The takeaway point here is that you should always look beyond the headline unemployment number. Has the population grown? Has the labor force grown or shrunk? Has anyone looked into the reasons some people are either leaving or entering the labor force in greater numbers than before? Answers to these questions help us understand what is driving that headline unemployment number.

For example, if the population is growing and the labor force participation rate is growing because investors are creating many new jobs and people are able to get the skills to fill those jobs, the unemployment rate might actually tick up for a short period of time while people leave their current jobs, get trained, and move into better-paying jobs! We might think an increase in the unemployment rate is bad, but in this case it’s a small price to pay for a long-run benefit.


We might also see what appear to be negative effects on employment data when good things are happening. If innovation is driving the cost of the goods we buy every day lower — relative to the wages we earn — we may see people leave the labor force because their spouses can earn adequate income for the family. A decrease in labor force participation from a lack of opportunity over a long period of time is a bad thing, but people might also leave the labor force by choice.


In terms of overall employment, Ottawa is doing well and has been steadily improving since the end of the most recent recession. A larger percentage of the population are in the labor force and fewer people in the labor force are having trouble finding work. Next time I will discuss the economics of federal policy changes coming soon for agriculture, one of the county’s most important industries.

Wednesday, January 23, 2019

Sweatshops - Sometimes the Least Bad Option

by Jacob Maichel

It is no secret that exploitation has run rampant in the world since the fall of man. People exploit each other everyday for one reason or another but some things seem exponentially more evil than others, right? One thing I have noticed while discussing capitalism with friends is a well intentioned distaste for sweatshops and child labor in third world countries. Though it sounds backwards,should we re-evaluate our views on sweatshop?

It is easy here in the United States to reflect on these jobs, often in the garment industry, and feel pity for those who work them. Unfortunately this sympathy replaces rational thought and leads to activists calling for an end to sweatshops. What actually happens when those sweatshops are closed?

If you are working in a sweatshop it is likely because it is your best opportunity. In these developing countries like Vietnam, Nicaragua, Indonesia, Honduras, El Salvador, etc. many of the workers are moving from poor agricultural farm lives with no skills to industrial cities. Likely this sweatshop labor is better than farm life and many people in the country desire these jobs. Though the pay may be low by our standards it is often double or triple the national average. The labor may be hard but the workers are often much better off than their fellow countrymen. As long as the exchange of work is voluntary (not abhorrent slave labor) than we should enable people to make choices regarding their financial stability.

We have even seen the negative effects of domestic legislation that targets sweatshops in developing countries and have not learned our lesson. A particularly convincing example of this is in 1993 Senator Tom Harkin banned imports from countries using child labor in response factories in Bangladesh fired 50,000 children. The children’s best alternative for work? According to a study by Oxfam, a British charity, the majority went into child prostitution or starved to death.

To further illustrate this Ben Powell and David Skarbek, both of whom have written extensively on this subject, published an article in the Journal of Labor research and were the first to quantify alternatives for sweatshop laborers. In 11 countries where there are active accusations of exploitation, the typical factory worker makes significantly more than the average working age adult. When we force improvements on these factories such as a mandatory minimum wage or safety standards, it may end up worse overall for workers. Higher wages or workplace improvements will likely cause profit-maximizing firms to lay people off or reduce wages where they can - again hurting the people we seek to help. Instead, allowing for competition is likely the best way out of impoverished conditions. If competing factories move into the same market people with skills applicable in those factories will be able to choose where to work. This will drive wages and quality up as companies attempt to capture the best workforce.

It took the United States over 150 years to industrialize and one of the wealthiest countries in the world, Hong Kong, had sweatshops just 30 years ago. Factory work makes employees more skilled and creates a competitive market place critical for healthy economies and living lives of fulfillment. The good news for sweatshops today is the abundance of new technology and high amount human capital. If we do not undermine these countries right to develop then they will industrialize much faster than the United States or Hong Kong. As long as exchanges are voluntary, you don’t make someone better off by taking their best solution to a serious problem.

Should Individuals Direct Government Poverty Relief Efforts?

by Jacob Maichel, Graduate Assistant, Gwartney Institute

“No Taxation without representation.” This phrase has been forever ingrained into the history of the United States, a call to be able to influence where early Americas tax dollars went. Today we still lose the majority of our tax dollars to transfer payments made by the government - about which individuals have no say. Forced giving is not my biggest concern; rather, it is the inability to dictate where the money will go.

In economics, a Pareto improvement occurs when one party is made better off without making anyone else worse off. Government redistribution of wealth through transfer payments as they exist now will never be a Pareto improvement because governments do not have enough information to make the best decisions with people's tax dollars regarding transfer payments. Do you know who has more information? Individuals, and acting in their own self interest they could provide more efficient outcomes than in the status quo.

It may sound counter-intuitive that people acting in their self-interest would be better for society, but really it makes sense. If we accept that central planners fail (e.g. communism) because they lack information to adequately distribute resources where do we look? The answer as always is to give control to individuals. Armed with better information about the specific problems those in need face, giving individual “donors” a choice as where to send their tax dollars allows for the use of decentralized knowledge to direct those funds.

If I wanted to go help the homeless in my community I would likely go out and volunteer at the homeless shelter closest to home rather than send my money off a shelter in another state. The same principle should apply to transfer payments taken from individuals via the federal income tax. If the government took these dollars and instead created an environment of “forced giving” and let people choose which charities or programs money went to, we would experience an increase in society’s utility.

People in Texas could give to programs that benefit them while I could give to programs in Kansas that I and others around me benefit from the most, rather than someone in D.C. deciding what everyone gets. The government shifting from the position of sole arbiter of transfer payments to allowing individuals to pursue their own interests would be a massive win for quality of life in the United States. 

Intro Column: A look into Ottawa's economy

by Levi Russell
Originally published in the Ottawa Herald, 11/29/2018
 
Since joining Ottawa University this August, I have heard a lot about the connection between the University and the Ottawa and Franklin County communities. I hope that this column will be a positive contribution to that relationship. In this first installment, I will introduce myself, my role at Ottawa University, and give a brief preview of the issues I hope to discuss every other week in this column.

I was born and raised in southeast Kansas and graduated from Chanute High School in 2005. My father’s family had been farmers in the area since the 1800s and my mother’s father was a country preacher. In the fall of 2005 I entered Kansas State University and graduated in 2009 with a bachelor’s degree in finance. The market for finance grads was pretty thin on the heels of the housing market crash and financial crisis going on at the time, so I considered other options.

Graduate school was my choice and I began my second 4-year term at Kansas State in 2009 as an economics student. During this time I met my wife (who is a native of Ottawa), got married, and had our first child. I completed the PhD in 2013 and we moved to Corpus Christi, Texas. My 4 years as a student in K-State’s Agricultural Economics department had prepared me well to combine my love for rural life and my interest and education in economics to Texas A&M’s Agricultural Economics programs. In Corpus Christi, I served as a professor and Extension economist working primarily with farmers and other agribusinesses along the Texas coast.

After a few years in Texas, during which time our second child was born, we took an opportunity to move back to a college town. I joined the Department of Agricultural and Applied Economics at the University of Georgia in 2016, again serving as an Extension economist and professor. We enjoyed our time there and I gained valuable experience that I continue to use today.

In the summer of 2018 I ran across an ad for a job at Ottawa University. The Gwartney Institute had been recently established earlier in the year by economics professor Dr. Russ McCullough. The Institute is named after a Kansas native and Ottawa University graduate, James Gwartney who is an economics professor at Florida State University. Dr. Gwartney has built a reputation in the profession as an innovator, best known for creating the Economic Freedom of the World Index. This Index uses publicly-available data to rank countries around the world based on things like the ease of starting a business, the stability of the currency, and other economic indicators.
The Gwartney Institute’s motto is Freedom, Justice, Human Flourishing. Dr. McCullough and I believe that economic freedom informed by Christian principles of justice can lead to human flourishing. Our primary theme right now is poverty and our programs are centered around that. Our program offerings are split into three groups: OU student outreach, high school student education and recruiting, and outreach to the Ottawa and Franklin County communities. This semester we hosted three events and provided free travel for OU students to several area events related to our mission. We also started a podcast entitled Faith and Economics and screened a documentary for community members. We have a lot more planned for OU students, high schoolers around the state, and the Ottawa community in 2019! For more information about our mission, programs, events, podcast, blog, and research, check out GwartneyInstitute.org.

Now that you know my history and my current work, you’re probably wondering what I’ll be addressing in this column. As the title suggests, I hope to use my training in economics to shed light on economic and government policy issues that matter to the residents of Ottawa and Franklin County. These will include, but not be limited to, taxation, agriculture, transportation, education, and many other economic and policy issues at the state and national levels that affect life in Franklin County.

Though I have lived far from home the past five years, I have been watching a lot of the economic issues going on in Kansas such as the tax debate and the health of Kansas’ major industries. This will inform my perspective on current economic issues and enrich my commentary. I hope you find this column interesting and thought-provoking. I look forward to your feedback on my column as well; you can email me at levi.russell@ottawa.edu. Ottawa is a great community and I’m proud to be a part of it.

Fertility in Decline

by Jacob Maichel

In my first blog post I discussed why growing populations are something to celebrate, but fertility rates are showing that people across the globe are opting for smaller families. Productive citizens are the linchpin of a functional society. Cities are now cleaner and more prosperous than ever before. Post-industrial cities around the world, London, New York, Dubai, etc. are symbols of human progress in part because they have grown in size. Before modern sanitation, cities were often breeding grounds of disease and despair.

The explosion in population made possible by this sanitation revolution did not make cities worse off, as they are now leaps and bounds ahead of their dark, dirty pasts. People did not start breeding like rabbits, but rather stopped dying like flies, and this is what allowed populations to expand.

It is important to distinguish here the differences between birth rates and fertility rates. The birth rate is the number of live births per 1,000 women in the population. The fertility rate is the average number of births women have during their productive years. Fertility rates are increasingly important as they help forecast regional resource needs. We saw a need for this forecasting in the United States when we experienced the baby boom after WW2 peaking our fertility rate at 3.8. This high fertility rate put a strain on resources at the time. On the other hand, a low fertility rate indicates an aging population that can put economic strains on social services and health care.

Given that the fertility rate can be too high or too low, what fertility rate achieves a balance between the two? The answer is right about 2.1. A rate higher than this will expand the population and a lower rate can cause a shrinking population. Fertility rates under 2.1 can sometimes be masked by population growth via an influx of immigrants, or by improvements in healthcare (especially in developing nations).

The increase in the average lifespan has improved fertility rates in developing countries. Western and Eastern Africa are the only two places that have not seen a decline in total fertility.  From 1960-2010, the world's total fertility dropped by more than half. We have seen advanced countries begin to suffer from dropping fertility at an alarming rate, with the United States dropping to a fertility rate of 1.8. In 1950 Luxembourg had the lowest fertility rate in the world at 2.0, but in late 2010 Hong Kong reported a fertility rate of 0.9. This means that in Hong Kong, each generation will be half the size of the previous generation!

In many developed places depopulation is a reality. There are two main factors that appear to be causing this. First and foremost is that families are choosing not to have as many kids, even in rural areas where we typically see larger families. Next is that marriage seems to be declining in value to the majority of people. Fortunately in Kansas that is not the case, with only 2.6 divorces per 1000 people. This is the lowest it has been in a half a century and is the opposite of the worldwide trend. Nevertheless, we are seeing decreasing birth rates, with 2013 being the lowest since records began.

The fertility rate is an important indicator of countries' futures. Here in the United States, only time will tell if we will have to rely on immigration from abroad to continue to be innovative and competitive.


References
Eberstadt, Nicholas. Population, Poverty, Policy. American Enterprise Institute, 2016.

Ryan, Kelsey. “Kansas Birth Rate Lowest in Recorded History.” Kansas.com, The Wichita Eagle, 2013, www.kansas.com/news/local/article5926425.html.

Smoak, Natalie. “Fertility Rate.” Encyclop√¶dia Britannica, Encyclop√¶dia Britannica, Inc., 12 May 2016, www.britannica.com/topic/fertility-rate.

Wenzl, Roy. “Divorce Rate Declines to All-Time Low in Kansas.” Kansas, The Wichita Eagle, 2017, www.kansas.com/living/family/article158199169.html.

Deregulatory Capture

by Levi A. Russell

A recent post over at the Pro Market blog by Berkeley economist Steven Vogel makes some interesting points about regulatory capture and firms' preference for deregulation or additional regulation.

Vogel summarizes a few developments in the theory of regulatory capture since Stigler's 1971 article and suggests that we need to add deregulation to our regulatory capture models. That is, firms certainly lobby or attempt to influence political campaigns/parties/etc to reduce regulation. Stigler's theory is confined to firms' attempts to increase regulation to reduce competition. Vogel notes that this theory is tied to economic rather than social regulation. Economic regulation deals primarily with licensure, rules for firm entry, and pricing. Social regulation deals with external costs/benefits that firms impose on society. Vogel then argues that, while firms might prefer to increase some anti-competitive economic regulations (a-la Stigler 1971), they might also prefer to eliminate or reduce restrictions on social regulations that hamper their profits.

This makes sense to me as long as the social regulations firms seek to eliminate are actually pro-competitive or hamper firms' profits. Purely in terms of compliance costs, any additional rules impose some cost on potential entrants.

Which leads me to what I think is the crucial distinction: variable vs fixed costs. That is, whether a regulation is classed as economic or social matters far less than whether the regulation imposes fixed costs or variable costs on firms in the industry. Regulations that primarily impose fixed costs on firms are likely to be anti-competitive and beneficial to incumbents. Regulations that primarily impose variable costs on firms don't limit competition as much and instead reduce profits for incumbents and new entrants equally. I think there's a case to be made that variable-cost-imposing regulations are still tilted against new entrants due to intangible factors such as experience and distributed local knowledge, but I'm open to correction on that (and on anything else in this post, obviously).

Still, it's hard for me to completely agree with Vogel. As Bryan Caplan pointed out back in 2015, a firm can't act like a monopoly if it wants to become a monopoly. That is, for a firm to grow large enough to dominate a market, it must increase production and lower prices. The only reliable way to gain monopoly status is to use the political process to erect barriers to competition. Pushing for lower regulations risks lowering costs on competitors which could potentially give them a competitive edge. Ultimately it's all an empirical question.

Banning Benjamins

by Jacob Maichel

As someone who just started using mobile banking at 24 I may be biased, but I think we will remove large bills from circulation in the near future. I was amazed to learn that in 1976 $100 bills made up only 25% of the money in circulation, rising to about 80% today. Though inflation may be able to explain some if this phenomenon, it still is an astonishing statistic. To account for all these $100s every person would have to possess about thirty-six $100s. This is not thirty-six for each working age adult, but also children, seniors, and every single one of the 325,000,000 people in the United States.

Physical cash encourages crimes that would be difficult if not non-existent without it. The two main types of crime cash enables are profit-motivated crime and tax evasion. Profit-motivated crime is crime in which cash allows people to escape detection by authorities. Some examples of these are human trafficking, drug dealing, and illegal gambling.

For profit-motivated crime, criminals need to be able to convert smaller bills they receive illicitly into large bills for easy storage and transportation. Thus, it is interesting to see where the Federal Reserve sends the majority of its large denomination bills. There is practically no demand for them here in the Midwest but border states, in which much of the illegal drug trade operates, hold almost all demand for large bills. Large-denomination bills allow for massive cash transactions. One million dollars in $100 bills can fit in one briefcase and weighs only twenty-two pounds, removing the largest bill would dramatically increase the difficulty to move large quantities of cash.

Sure, other items such as diamonds, can be a way to store criminal assets but they are much less liquid than traditional cash. Cryptocurrency provides a possible alternative but is much more traceable. Perhaps an all-digital economy would help keep transactions honest and deter criminal activity, but there are other options.

There are, of course, merits to the use of physical cash. Keeping smaller denominations is important for a few big reasons. Chiefly it allows consumers to retain some level of anonymity by “staying off the grid”, making untraceable purchases of a few hundred dollars. It also financially includes the homeless, some of which who survive on small donations from the public.

Perhaps we could even replace paper money with coins. Removing large bills and using coins for smaller purchases certainly makes it much more difficult to transport large amounts of money. The coins also last significantly longer then their paper counterparts, helping the government maintain a stable money supply.

Although the transition would have to take place over an extended period of time, a less cash-dependent society may not be as far off as we believe. Singapore’s central bank is pushing commercial banks to do away with any cash and South Korea plans to be cashless by 2020. South Korea has a program already in place that allows people to pay cash and the change is deposited to your bank account. A similar program could help us phase out big bills and deter cash-reliant crimes.

The Rise of Digital Trade

by Jacob Maichel

The use of the internet in recent years has grown exponentially. The number of people with internet access has increased from 738 million in 2000 to a staggering 3.2 billion in 2015. The internet has brought with it myriad innovations and conveniences to our lives. This transformation molds every aspect of society, including the redefinition of international trade.

The internet’s ability to transcend borders to connect people has changed how we do business. Digital trade can be thought of as the transfer of goods and services either completely online or via electronically managed physical deliveries. Purely electronic services are companies such as Netflix while electronic middle men such as Amazon connect sellers and buyers across the globe.

Internet traffic increased 500 fold from 2000 to 2015. This has led to an expansion of competition.  Digital trade encourages the exchange of ideas and offers collaborative opportunities not seen before.

The rise of the internet has also reduced the cost of exchange, bringing massive financial benefits to everyone in society. The exchange of data has reduced information asymmetries and enables consumers to make find new products they would not have had access to in the past, while also teaching producers how to create better products. Transaction costs have been slashed due to the easy access to the global market. Tracking systems have completely revised global supply chains, helping reduce expenditures on replacing lost items. Particularly exciting for smaller businesses is the fact search costs are minimal now as they can use a trusted middleman such as Amazon to bring their goods to consumers.The U.S. Trade Commission estimates that the internet reduces trade costs by an average of 26%.

Small and Medium enterprises (SMEs) have the greatest chance to benefit from digital trade barring future regulation. Businesses that do not have the capability to have a physical presence in foreign countries can now access new revenue through intermediaries at exceptionally low prices.

In the United States we should celebrate the rise of digital trade. The United States has traditionally been a technological leader, having a comparative advantage in both tech platforms and electronic devices. American companies have also done well to capitalize on the global market as it emerges. For example 40% of Amazon’s shipments and ⅓ of Netflix’s streamers are outside of the country. This healthy involvement contributed to a $158.9 billion digital trade surplus in 2014. We should rejoice in the increasing efficiencies as the internet is not simply a one time leap forward, but a opportunity for permanent long term growth.

Unintended Consequences: Cigarette Regulations

by Levi A. Russell

One of the biggest challenges with regulation is avoiding unintended consequences. Regulators are human and are thus limited in their ability to determine all the effects of the regulations they impose on the public. While some regulations are likely necessary, we should be careful about calling for additional regulations, especially in cases where it is difficult to forecast their effects.

E-cigarettes, a relatively new product that is currently very lightly regulated, are a good example of a case where extreme caution is advised when determining new regulations. The FDA is considering regulations on e-cigarettes because they are concerned that e-cigarette companies are marketing their products to teens. E-cigarettes have been shown to function as a "gateway drug" for regular cigarettes. However, as a recent Forbes column points out, these products are also very useful in helping adults quit smoking.

The FDA must balance the costs of e-cigarettes (teens using them and moving to cigarette smoking) with the benefits (helping adults quit smoking). As the Forbes column points out, about 1.5 million smokers use e-cigarettes to quit each year. On the other hand, about 0.5 million teens start smoking each year due to e-cigarette usage. So, the raw math indicates that restricting e-cigarette usage will mean that more people in general are smoking each year because the 1.5 million who quit with the help of e-cigarettes will find it harder without them.

Time will tell whether the FDA decides to restrict e-cigarette usage. Does it make sense to keep people from using e-cigarettes to quit smoking just to prevent a relatively small group of teens from starting? Surely this is a difficult ethical issue, but keeping an eye out for unintended consequences like this is a necessary part of the regulatory process.

Healthcare Regulations That Don't Help

by Levi A. Russell

Health care policy continues to be a contentious issue at the national level, but state level policies can have important effects as well. The Mercatus Center at George Mason University has published a few studies examining the effect of Certificate of Need (CON) laws on health care provision. CON laws require new health care providers to get permission from state governments. This permission is granted on the basis of a committee's determination of the need for new facilities in an area. Currently, CON laws are on the books in 26 states primarily in the southeast, northeast, and northwest.

According to the authors, the primary concern that CON laws address in rural areas is that ambulatory surgical centers (ASCs) will engage in "cream skimming" which is the practice of refusing to treat poorer, more risky, or less well insured clients and only treating the easy cases. If new health care providers engage in this practice, rural hospitals would be swamped with all the most difficult cases and may have to close. This would reduce the quantity and quality of care in rural areas.

However, CON laws are a barrier to entry in the health care market, meaning that the committee could keep out new providers. Thus, it remains an open question whether this barrier to entry reduces the quantity of hospitals or, through some unintended consequence, increases the quantity of hospitals by preventing "cream skimming."
The authors of the paper find:

CON Programs Are Associated with Fewer Hospitals

The presence of a CON program is associated with 30 percent fewer hospitals per 100,000 residents across the entire state.

The presence of a CON program is also associated with 30 percent fewer rural hospitals per 100,000 rural residents.

And the authors conclude:

The data do not support the cream-skimming hypothesis as a justification for CON programs ... CON programs do not promote access to rural care in the form of rural hospitals. CON laws are associated with a decrease, not an increase, in the number of hospitals, rural or otherwise. Policymakers seeking to protect access to rural care should not use CON programs to achieve their goals.

Does Population Growth Make People Poor?

by Jacob Maichel

Demography is the measurement of large populations and their composition including age, sex, religion, and other characteristics. Demography allows us  to understand what drives behaviors and choices of groups of people. Governments fund demographic studies because it allows them to understand those they serve and to stay in power.  However, simply studying demographic trends may not be as effective in achieving these goals due to large shifts in local and global populations. It is more challenging than ever for governments to impose their will on the public if the preferences of the electorate are always changing. Ultimately, population shifts can have a clear impacts on governmental power.

To understand countries’ population shifts, it is important to understand what variables control the shifts: fertility, mortality, and migration. The most important of these is without doubt fertility, as mortality is somewhat stable and migration can be easily manipulated by border policies. Fertility can motivate government policies and cause power shifts throughout time. Take for example modern day Lebanon. According to the 1932 census, government leaders were split 6 Christians to 5 Muslims, based on population. Fertility levels for Muslims, however, were about 2 children per women higher than for Christians, and by 1975 Lebanon was a Muslim-majority country.

The population of the developing world is increasing rapidly. From 1950-1985 developed countries grew a sluggish 49% compared to a prolific 119% increase in developing countries over the same period. This rapid growth is often perceived as a proliferation of poverty throughout the regions or at least an increase in the number of people in poverty. Some argue that resource wars and food insecurity are an inevitable result of rapid increases in third world populations. However, this has not been the case empirically and is an unlikely to happen in the future.

From 1900-1987 global population tripled, as did production and output. This means that more people were producing more things and using more resources than ever before. If population grew but output did not, this would mean that prices would be higher than ever. However, his is not the case. Resources are less expensive now than they were at the turn of the century! This is largely due to human innovation creating new methods or using other materials we had not previously utilized. One example of this is plastic. Invented in 1907 by Leo Hendrik Baekeland, a Belgian-born American living in New York state, this cheap alternative allowed to reduce consumption in resources like wood and metals and has led to innovations in sanitation and curtailed the spread of disease.

In the case of regions such as Sub-Saharan Africa many of the socio-economic ills attributed to population growth are typically caused by another more pernicious evil: corrupt governments. Many of these countries suffer from extremely invasive governments that reach into every corner of the national economy. This centralization exacerbates extreme poverty because poor institutional quality reduces the ability of entrepreneurs and private businesses to create wealth for society. This is something that we do not experience to such degree here. Though the government does interfere somewhat in the economy and markets, the protection of property rights afforded to us through higher-quality institutions allows us many freedoms unknown to many around the world.

Read more:
Eberstadt, Nicholas. Population, Poverty, Policy. American Enterprise Institute, 2016.