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Hard Times, Uncertain Future: David Underwood and David Swenson

posted on February 20, 2009

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Borg: Hard times. Uncertain future. We're discussing the economic outlook with Iowa Revenue Estimating Conference board member David Underwood and Iowa State University Economist David Swenson on this edition of Iowa Press.

Funding for Iowa Press was provided by Friends, the Iowa Public Television Foundation. The Iowa Bankers Association ... for personal, business and commercial needs Iowa banks help Iowans reach their financial goals. By Iowa's Private Colleges and Universities ... enrolling 25% of the total Iowa higher education enrollment and conferring 44% of the baccalaureate and 40% of the graduate degrees in the state. More information is available at The Iowa Hospital Association ... supporting the missions and visions of Iowa's 117 community hospitals. The Iowa Hospital Association ... we care about Iowa's health.

On statewide Iowa Public Television this is the Friday, February 20th edition of Iowa Press. Here is Dean Borg.

Borg: Financial matters are casting a huge dark shadow over policy discussions at the Iowa Statehouse and the U.S. Capitol. The bruised U.S. economy -- make that the worldwide economy -- is putting nearly everyone and everything from families to huge corporations at risk. And as concern deepens we listened even more closely to those people with particular insight and perspective. David Underwood of Mason City serves on Iowa's Revenue Estimating Conference. That is a small group that studies economic indicators and projects expected state tax revenues. And David Swenson is an economist at Iowa State University. Gentlemen, welcome to Iowa Press, we're very, very intrigued by what is in your mind and what you have to say about the economy. And across the table two gentlemen that I think you know, Political Columnist from the Des Moines Register David Yepsen and Associated Press Senior Political Writer Mike Glover.

Glover: I'd like both of you to deal with this but Mr. Underwood let's start with you. Give me your assessment of the condition of the economy right now. More particularly I'd like to know what direction do you think it's going? Are we continuing to sink? Is it flattening? Is it beginning to turn around? What is your assessment?

Underwood: Well, I think the indicators that are out there says nobody knows and the fog that exists right now is making it very difficult. Particularly here in Iowa it appears that finally the recession has started to catch up with Iowa's economy and so we're starting to see the impact come into Iowa and December was really the first month in quite a while that we actually saw a decline in employment numbers in Iowa. So, during all of 2008 while the rest of the country was seeing maybe some increases in their layoffs a little bit quicker than we did it really didn't hit here as quick. And I think what we've always seen is that Iowa kind of lags in the decline. We quite often lag in the upside as well. So, it looks like we're going to be dropping off a little bit more.

Glover: So, your direction is down?

Underwood: Down.

Glover: Mr. Swenson, what direction do you think the economy is going?

Swenson: The economy is going down. I expect it to continue to go down and like David just said we've been in a fog, we have been waiting for the other shoe to drop as it were. What we had happen to us last year was several sectors looked okay for quite a while. We had reasonably good manufacturing, exports, we had decent prices for farm commodities and, again, the exports were reasonably strong and so we had good income growth for a big portion of last year. And it looks like that has carried us through 2008 but, again, the ability of that to carry us through much further has eroded and the direction now seems to be pointing down. And the pressures, the kinds of pressures that are pouring down are widespread, it's not just unemployment or employment, it's what is going on in particular different industries as well.

Glover: So, it'll last a while?

Swenson: I believe it will last a while, yes.

Yepsen: How long?

Swenson: Well, we don't know how far down we're going to go but it looks right now that we're not as affected as sharply and as strongly and here's what I say -- we didn't have the rise, the bubble, the speculative rise. That means we're not going to have as much of a drop. But the how long of it -- the consensus from most of the economists now they were just last month talking about us starting to turn around nationally around the middle of this year. That has started to move farther down the line into the third and fourth quarters.

Yepsen: How is Iowa similar to or different from the rest of the country? Mr. Underwood has suggested that we're slow going in and then slower than the country coming out.

Swenson: What we did since the 1980s when we had that big restructuring of the Iowa economy during the last great recession that we had to work our way through plus the farm crisis Iowa's economy worked on diversifying and in so doing what it did is it became much more like the rest of the United States' economy. We lost some of our manufacturing potency, our farm sector contracted and we started to add more jobs in areas like finance, insurance and service and as we become more like the national economy then as it changes so will we.

Yepsen: Mr. Underwood, how much of this is psychological? It just seems like we're all in a giant funk when you talk to people on the street. You see businesses laying off people, cutting back not because business is bad but because they expect it to get bad. How much of this is driven by the numbers and how much is driven just by our psychology here?

Underwood: As it relates to Iowa's general fund I don't think very much of it is driven by the emotions. It is driven by reality. One thing that I've tried to do as I talk to a lot of different businesses is to know what's going on and how are their sales. Most of them tried to keep their workforce together as long as they could but beginning in the fourth quarter almost universally they started to see a fall off in orders and that fall off in orders is really happening. So, the reality is they are reacting to that reality now of trying to hold the business together as best they can. And associated with that then is there has been the rise in the value of the dollar which has cut off our opportunities for export within Iowa.

Borg: Mr. Swenson, I've heard two things here this morning. Mr. Underwood said a moment ago the recession is starting to catch up with Iowa's economy and then I heard later that Iowa's economy is becoming more like the nation. So, is that old thing, that old saga that Iowa lags going in and is slow to recover, is that still true? Or how has Iowa's economy changed? And what, if we're starting to catch up with the recession then, what can you expect in Iowa? What do you expect to see?

Swenson: Well, the notion that we used to lag or we lagged a bit tended to be true and it really blew itself out in the 1980s because we did not recover for a long time afterwards and in the last recession in 2000, the early part of this decade it took us a long time to regain the levels of employment that we had before the recession. We didn't recover that employment until early in 2005. So, our recession lasted a long time. We have become more like the nation insofar as we have added finance and insurance and much more concentrated in services. We still have a specialization in manufacturing and it is a strong, competitive advantage and because of that we also are very vulnerable to the downturns that are now occurring nationally because our manufacturing serves national demand and national manufacturing buys from Iowa manufacturing.

Borg: So, Mr. Underwood, with what he said what do you expect to see in the coming months in Iowa?

Underwood: Boy, that's a good one. I think that what we're looking at right now is continuing to see a decline in the number of people employed. And associated with that as it comes down to our general funds, that's primarily what I watch closely, is that we will see that impact and the withholding coming in. And how far is that going to go down? I don't think anybody really has a good handle on it because even John Deere, they're not going to do quarterly estimates anymore, they just said we're not going to forecast any more.

Borg: Is it exacerbated by the storms and the floods?

Underwood: It is a little bit in certain sectors of our economy. I was talking to people in Mason City and yes there were some businesses that were hurt and are still struggling to recover from that and I'm sure that is the same in Cedar Rapids.

Glover: Mr. Underwood, we'll get to those revenue estimating numbers in a moment. But Mr. Swenson, I'd like to get you to take another look at what's going on in the nation. You've seen the stimulus package that has worked its way through Congress and now has the President's signature. What will that do? Will that work? Will that stimulate the economy?

Swenson: It's going to help some. The consensus is among most folks who have looked at this is it's going to help some. There are three parts of this that we need to pay attention to. The first part is the true stimulus and that is the infrastructure type of spending where we're borrowing from future productivity, future spending and we're bringing it into the present and trying to stimulate jobs. The second part of it is the one that is very popular among other circles, there's a lot of tax cuts, selective tax cuts and that is supposed to put more money in the household's pockets and let them be able to spend more. And then the third one, of course, is sort of the general spending to help ensure government operations to make sure the safety net is secure. And that's basically designed to maintain the status quo and so those first two, the stimulus, the infrastructure investment is designed to bolster the economy, bolster job growth, bolster income growth in the current period and the tax cuts are supposed to bolster consumption. Those two things should be beneficial to the economy.

Glover: Mr. Underwood, the same question to you, you know what is in the stimulus package, will it help? If so, how much will it help?

Underwood: 1100 pages of bill at this point in time and Iowa has got a certain number of dollars that will flow in. I've been trying to figure out exactly where it's going to impact our economy directly. I'm still not sure. We know that it will help construction on the infrastructure side of it and it will put a little bit more money into people's pockets so there's going to be a blowing up effect but how quickly that's going to hit is very difficult.

Glover: The governor estimates about $1.9 billion will come flowing into the state. That seems to be a big infusion.

Underwood: Yes, it does. But over what period of time? It's not going to come tomorrow and it's really going to be an impact over the next probably two fiscal years.

Yepsen: But are we making too much of this stimulus package? The gross state product in Iowa is something over $100 billion I think. So, what is a lousy billion dollar check in Iowa going to do? Is that really going to mean a whole lot?

Underwood: It will mainly from employment in certain areas and to keep us from dropping too low in employment. That drives a lot within Iowa's economy is the number of people working.

Yepsen: Is there any good news to be seen, Mr. Underwood? Those of us in the media we always get accused of being gloom and doom and so I want to make sure we don't overlook any good news.

Underwood: Well, yes there probably is some good news out there. I read a couple of reports relative to at what point do we really start like the stock market starting to return and the lags there. I think even though we're seeing very low numbers right now I think people are starting to see that maybe we've seen close to the bottom and can't get much worse.

Yepsen: Mr. Swenson, any optimism?

Swenson: I'm going to have to work real hard here but we have a lower unemployment rate than the national average meaning we have a lower population of people who are in need. That is good news. There are areas of the economy that look a little bit better. One is we've had a recently good agricultural year and that is good news for the rural areas. We have a few metropolitan areas in Iowa that are looking vibrant and like they are in much better shape than the rest of the nation. Plains states, metropolitan areas seem to be looking okay. And if that's not good news it's not as bad, bad news.

Glover: Mr. Underwood, one of the hats you wear is one of the members of the Revenue Estimating Conference. You have cut your projection of how much the state is going to collect in tax returns in December. You're going to meet again next month. Isn't it inevitable you're going to have to cut further in what you're going to project the state collection is? Hasn't the economy gotten worse since December?

Underwood: Well, possibly not having to cut it further.

Glover: Explain it.

Underwood: Well, I think the goal was in December was to come up -- and I think at that point everybody pretty well knew that things were going pretty bad -- so that estimate in December was down from what the September, October estimates were and hopefully we got down pretty close to what is going to be reality. So, there haven't been anything happened within the state that would significantly change the assumptions. One thing that we've got to take a close look at and what might impact it is what impact the stimulus act might have on next year's budget.

Glover: And a lot of legislative leaders at the statehouse have been telling their budget chairs assume further cuts. You have a chance to send a message. Maybe they don't have to assume further cuts?

Underwood: Part of my role is to get the other two to agree on a number. And they have a lot of the detailed numbers that I don't have that they use to make their estimates. So, unless they see something really different happening and I think one of the uncertainties that I had going into this last budget estimate is on individual income tax returns. Capital gains had played a huge part of Iowa's increase in individual income tax payments the last couple of years. That has gone away to a large extent and there was a lot of loss mining at the end of the year. So, if that number actually comes in very low and we'll maybe start to see some tax returns coming in so we can gauge that was the only thing that I saw that had a lot of uncertainty in it at that point in time.

Glover: Mr. Swenson, if you're advising legislators how would you advise them on what this is going to do and the amount of money they're going to have?

Swenson: I think the way they have been responding to it is reasonably prudent. They are trimming their expectations pretty sharply but they're looking a little bit farther than just this year. They are looking at the next year, the sense that this is going to carry through a while longer and when we talk about lags the fiscal impacts on a recession come after the recession for state and local governments and we learned our lesson in the early part of this decade with the last recession where the budget got itself into trouble.

Glover: Is this as bad as the 80s?

Swenson: I believe it is. I believe in many ways it is a different economic situation, we don't have the high inflation rates and we don't have the broad based job loss that we had here in Iowa but nationally this is as bad as the 80s.

Yepsen: I want you both to write me some prescriptions. We talk about the 1980s and during the 1980s Iowa, individual businesses, government, we did some things differently. We knew that we had to diversify our economy, for example, there was emphasis on financial services and other things. What do we have to do in this state now, the legislature, business, to have a stronger economy when this is over with, not only to get this problem behind us more quickly, but to have a better economy when we come out at the other end? Do you have any thoughts about that?

Swenson: Well, the standard answer is your play to your strengths. Then the question is what are our strengths? The state of Iowa has emerged over the last fifteen years especially with a much better position in financial services, that's one area. We've had much more diversified production and processing in several manufacturing sectors and we've consolidated a lot more of our economic activity within our metropolitan areas. They are truly engines of growth. They become much more important on a regional basis. Low cost, high quality public services -- how do you do that? That's what we want and that is what we need to be competitive and we need an educated workforce and you put those two things together and you're at least competitive with the rest of the region.

Yepsen: Mr. Underwood, same question. What do we do to come out on the other end in better shape?

Underwood: I agree with David.

Glover: Mr. Underwood, I'd like you to put on your prescriptive hat. You're emperor of Iowa and there are some proposals out there that have been made to help turn things around. What do you think of them? One of them is the governor wants to borrow $700 million to infuse money into infrastructure, to repair flood damage and all that. Is this a good time for the state to be borrowing a lot of money?

Underwood: I'd have to say I don't have an opinion on that at this point.

Glover: Mr. Swenson?

Swenson: I am of the opinion that the state of Iowa got itself behind on many of its critical infrastructure investments and needs and that we're paying for that by not taking care of it properly and perhaps we're paying for some of the other areas of infrastructure development that should have been done. We're learning, unfortunately, after the fact like the flood problems. I think it's a reasonably good idea in the current situation. The money that would have been dedicated for that, however, was already in the general fund, you're just using that as debt service so I don't know that that changes our financial situation differently.

Yepsen: We're going to be coming into a period of great inflation, are we not? We're printing all this money and in a few more years we're going to have more inflation, right?

Swenson: You would expect somewhere down the road we're going to have more inflation. We have the Federal Reserves saying they have set their target at not letting it get out of control, 2% ...

Yepsen: But does that not make it a better time now to be borrowing money at relatively low interest rates than we wait three or four years when the interest rates are going to be higher?

Swenson: Yes, the answer is yes.

Borg: Mr. Underwood, you didn't have an opinion on that last question on bonding but do you on tax increases, particularly is it an opportune time for Iowa and should they be raising the gas tax?

Underwood: Well, here again that is totally outside of anything that I'm involved in from the revenue estimating standpoint.

Glover: But as an economist one of the things we hear is that in a recession it's a bad time to raise taxes. As a general rule do you agree with that theory?

Underwood: As a general rule I agree with that theory.

Glover: What about you, Mr. Swenson?

Swenson: Well, I'm on record as having made a presentation not necessarily in support of the tax but describing what it might ...

Borg: And that was generally favorable to the tax.

Swenson: It was generally favorable to the tax. And back to the point I made before -- if we had been under investing in critical infrastructure, if we had been underpaying for it then basically we're consuming it without replacing it and that is costing us whether our cars are wearing out, whether it's our business competitiveness, whether it's longer travel times to work. So, I would argue that this is a perfectly good example of a tax that needs to be passed at this time.

Borg: But the question on that is should people pay it at a time like this?

Swenson: The energy prices are very, very low right now and it's not going to be that much per gallon, per consumer of a tax and one would expect that the benefits to be received, even though it's a tough time right now, the benefits to be received promise to be much greater than the short-term costs.

Yepsen: Mr. Underwood, I understand you can't speak for the Revenue Estimating Conference on some of these policy issues but we want to ask you about them nevertheless because you do follow public policy in Iowa. What about this notion of repealing federal deductibility on the state income tax. There is a proposal that has been floated again by democrats that we get rid of the ability to deduct the federal income taxes you pay before you calculate your state income tax. This would have the effect of raising more tax revenue unless the legislature lowers the rate. Good idea? Bad idea? Helpful for economic development? Tax on a tax? How do you come down on that question?

Underwood: I think that issue is one where what's your objective in eliminating the federal deductibility. From an economic development standpoint it's always been one thing that is hard to explain to people that care about that if they're looking at Iowa as a place to move to. So, could it be eliminated and really not impact anybody's amount of tax that they pay? Well, I believe it could. So, what is the benefit right now? We have some timing benefits that individuals can utilize the federal deductibility on a timely basis but other than that as long as it's not under the guise of a tax increase or a tax decrease we can do a revenue neutral.

Yepsen: Which may in fact be a way to raise some revenue so it's not clear how that's going to ultimately wind up. How do you feel about this federal deductibility question?

Swenson: Well, I think there's only two states now that still have federal deductibility and I'd hate to think that we were the two smartest states in the nation. I don't believe -- I think it should be eliminated. I don't think it serves a useful purpose.

Yepsen: Should the legislature use it as a way to capture some more revenue? Or should the legislature do it to make us at a revenue neutral?

Swenson: It should be revenue neutral. If you're going to make a big change like this that people have very, very strong opinions about you should be making an assurance at this stage that it's revenue neutral and that in so doing you're not going to penalize one group or another.

Glover: Mr. Underwood, David and I have mentioned a couple of tax proposals that are on the table and I'd like to step back and have you look at Iowa's tax system. Some of these would require lawmakers to step back and look at the mix of taxes the state collects to support state government. Is that a good idea? Is this a good time to step back and look at which tax pays for what and how we're doing this? Is it time to overhaul the state's tax system because I'm told you can't do one tax in a vacuum.

Underwood: That's correct. You can't do property tax in a vacuum with sales tax with income taxes or corporate income taxes. So, is this a good time to do it? I don't know if there is a good time to do that because once you start making huge changes then there is that period of uncertainty as people are trying to figure out how that is going to impact decisions they make. So, that happens on the federal level as well.

Glover: Mr. Swenson, same question to you. Is this a good time to step back and just look at the mix of taxes that we use to support state government?

Swenson: It's always a good time to step back and look at the mix of taxes and how we tax and where we're taxing and what we're getting out of it.

Glover: Is it time to look at the mix we have now?

Swenson: It's the process of a long consensus that is moving us towards not being all that different from our surrounding neighbors, that tends to be the process and I don't know that there's anything screaming that needs to be changed radically in Iowa's revenue mix.

Yepsen: Mr. Swenson, we've only got about a minute left. Two tax questions that are facing Iowa -- one is local option sales taxes. Some communities are looking at imposing those in response to the floods. Then there is the notion that the legislature is in fact shifting tax burdens onto property tax payers. What do you think about those kind of moves?

Swenson: Well, the local option sales tax is a very expedient tax to collect for two places like Iowa City and Cedar Rapids because you can collect it quickly, it's efficient, it has got regressive characteristics that can not be ignored but are variable because they are trade centers to get other people to pay that tax for them. So, it's very beneficial to them. We've had an issue for the last 25 years of government mandates increasing imposing costs on local government and putting pressure on property taxes and the pushback from local government is pay for the mandates. And state government has over the years refused to pay for the mandates.

Glover: Mr. Underwood, only about fifteen seconds to go. What should an individual be doing right now? Getting out of the markets? Staying in the market? Wait this one out?

Underwood: I don't see any reason to get out at this standpoint. You're not going to get any gain out of getting out so if you're in there stay in.

Borg: Mr. Swenson, last word on you, are you optimistic about Iowa's economy?

Swenson: I'm optimistic about Iowa's economy in the long run but not in the short run right now.

Borg: Thanks so much. Thanks for being with us today. We'll have another edition of Iowa Press next weekend at the usual time, 7:30 Friday night. But now listen, Festival is going on next weekend so the Friday night program at 7:30 is the only one next weekend. I hope you'll watch. I'm Dean Borg. Thanks for joining us today.

Funding for Iowa Press was provided by Friends, the Iowa Public Television Foundation. The Iowa Bankers Association ... for personal, business and commercial needs Iowa banks help Iowans reach their financial goals. By Iowa's Private Colleges and Universities ... employing over 10,000 Iowans and enrolling 25% of the total Iowa higher education enrollment. More information is available at The Iowa Hospital Association ... supporting the missions and visions of Iowa's 117 community hospitals. The Iowa Hospital Association ... we care about Iowa's health.

Tags: economy future Iowa politics