Friday, February 22, 2019

The Polar Vortex and a Broken Window

by Levi A. Russell, PhD

As I shoveled my driveway last week, I thought about all the other things I could have been doing. Winter storms can be rough and, as Greg Mast’s February 9th column points out, they require a lot of work that many of us don’t see. Lots of road salt, heavy equipment, and many hours of work late at night all come together to keep the roads as safe as possible. Still, there are worse weather events. Tornadoes, hurricanes, earthquakes, and landslides are often much worse than the cold weather we’ve experienced the last few weeks.

Our typical response to extreme weather events is a mixture of frustration at the cost of extra work and repairs and sympathy for those who are affected the most by such events. Thanks to members of my profession, we can add another: cautious joy.

If you’ve ever read Paul Krugman’s New York Times column after a natural disaster, you probably know what I’m referring to. Krugman and other Keynesian economists hold the view that, under the right circumstances, natural disasters can give a boost to the economy. As ridiculous as this should sound to us, let’s use the recent ice and snow as an example

This bitterly cold winter has certainly come with its share of expenses and costly repairs. Damaged vehicles from icy road hazards, frozen pipes, rust on cars from road salt, higher gas and electric bills, and many other possible inconveniences come with extreme weather. Though we all appreciate the providers of the crucial services that exist to fix the problems we have during cold winters, we are frustrated at the expenses associated with them. Most of us would have had other plans for that money before the storm hit.

Leave it to us economists to dream up a reason to be happy in such circumstances. According to Keynesian economics, if we were in a recession, the fact that we all have to spend more money maintaining roads and fixing our cars is a positive feature of the bitterly cold winter. It forces us to spend money, which they say gets us out of the hypothetical recession.

But this logic only considers what we actually see. In his essay “That Which is Seen, and That Which is Not Seen,” the 19th century economist Frederic Bastiat told a similar story about a boy throwing a rock through the window of a local merchant’s shop. A crowd gathers and, at first, considers punishing the boy. After thinking more, though, they decide that the boy did them all a favor. Now that the window is broken, the merchant has to pay the glazier to fix the window. The boy actually created economic activity, they think. The problem, of course, is that the merchant could have spent his money on something else and had a perfectly good window as well!

In the same way, if this winter hadn’t been so harsh, we all might have had money to spend on other things, without having to fix our cars, pay high gas bills, or salt the roads so heavily. We would have had a well-functioning car plus whatever else we might have purchased. Now that the weather turned so bad, we have to forego buying something else in order to fix the car.

This doesn’t mean that auto body professionals and heavy equipment operators are somehow bad for us or that it’s a waste of money to pay them. Things can go wrong and we need them when that happens. We shouldn’t, though, pretend that paying them is some kind of magic bullet that creates economic prosperity out of nothing. I really could have been doing something better with my time than shoveling my driveway.

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

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.