Bump in the road. Political unrest, earthquakes and radiation challenges spiking oil prices, disrupting trade, impeding the world’s climb back to economic stability. We’re discussing the effects of Iowa with economist Neil Harl on this edition of Iowa Press.
Borg: There’s general agreement that the nation’s economy and Iowa’s are better than a couple of years ago but the climb back to economic good health is much slower than had been hoped, and impatience is apparent. And that was before the Middle East political unrest boosted oil prices and before a massive earthquake struck Japan. Now, as the world helps Japan with the human tragedy, economists are speculating on the effects on money flowing back to Japan and the rapid rise of the Yen’s value against the U.S. dollar. We’re asking Iowa State University emeritus economist Neil Harl to put perspective on what’s already being called a jobless recovery, even without the challenges hitting just within the past couple of weeks. Dr. Harl, welcome back to Iowa Press.
Harl: Thank you. Good to be back.
Borg: And across the Iowa Press table, Associated Press Senior Political Writer Mike Glover and Iowa Public Radio Statehouse Reporter Jeneane Beck.
Glover: Dr. Harl, let’s start with the edge of the news that Dean mentioned in his introduction, and that’s Japan. Japan was hit by a massive earthquake, a tsunami and then, as if they couldn’t catch a break, a blizzard. How will the average Iowan notice what’s going on in Japan?
Harl: I think they’ll notice it because of the interruption of the supply chains. We’re already seeing that. General Motors has closed down one of its plants producing pickups because of parts. We’ll notice it because much exports too. My sources tell me that the tsunami caused a lot more damage to the unloading facilities – the earthquake didn’t, it was the tsunami – and that we will see some impact there. We’ll also see their resources reallocated and reallocated to construction. Now, that will be helpful for the Caterpillars and those kinds of companies. We know that in general when you have a disaster, the construction activity provides a big boost to the economy. However, in this case, I’m not concerned so much about that. I’m concerned about the negatives, and those negatives could be quite substantial. Also, the tremendous devastation that the radiation problems are going to cause there.
Glover: Is there an opportunity here? I mean, a lot of these manufacturing facilities in Japan were damaged, put out of business. Is this an opportunity for the U.S. to step up and start doing some of this stuff?
Harl: I think it is. I think it is. I think it’s a question of whether we can be competitive. There will be others looking at the same opportunity. We’re in an economic revolution. Everything is being produced at the lowest cost point in the world. So, if we can compete with that quality wise and cost wise, then we can be a major player and gain from that. However, there are other countries that are looking with a lot of interest at the same opportunity.
Borg: Is there a threat too for Iowa? We’re looking – without being insensitive here in talking about opportunity in this disaster and heartache, is there also some down side for Iowa?
Harl: Well, I think there could be. We are linked so tightly in trade with them that anything that affects them negatively is going to have some impact on us as well. And they’re one of our major customers for farm products. They’re also a big player in a number of other products, farm equipment, for example, and others. So, we are not an isolated unit of the globe.
Borg: Well, I mentioned Iowa – money flowing back to Japan rapidly. Now, what’s the effect of that, because that’s being drowned out of the U.S. economy, isn’t it?
Harl: Well, it will to some extent. The bulk is this is going to be financed by Japan itself. However, this is another problem, Japan has been burdened by a huge debt load. That goes back quite a number of years. So, this is coming not at a time when they’re best prepared to deal with it. It comes at a time when they’re probably least prepared to deal with it because of their very heavy debt load, which goes back to early 1990s when they had a severe downturn and they just didn’t recover very well from that. One of the things that economists do is study that kind of a situation – why didn’t they come back as strongly?
Borg: They’re financing some of our debt. That’s what I’m getting at.
Harl: They are financing some of our debt, not as big as China, but they’re financing quite a bit of it, yes.
Beck: One of the other headlines obviously has been unrest in the Middle East, starting with Tunisia, Egypt, now Libya, the no fly zone, and there have been concerns that this is going to increase gas prices. Some have predicted as high as $5 a gallon in some parts of the country. Though not even close to that now, that would have an impact in Iowa, correct?
Harl: Absolutely. Absolutely. I made some notes to myself as to what you might be asking today, and one of them was energy. Energy is the heart of so many of our problems now and one is the price of petroleum, the price of oil, heavily attributable to the Middle East difficulties. It’s also because we’re reassessing our position with respect to nuclear. And there have been very few voices raised in opposition until this calamity occurred in Japan. And now everyone is raising the question are we really well advised to move ahead aggressively because the NRC, the Nuclear Regulatory Commission, has started receiving applications for new plants, and they were up to a fairly significant level. And I’m sure that now investors and people in the country are going to raise questions about safety.
Beck: Well, if Iowa …
Borg: How much of income – go ahead.
Beck: Well, if Iowa doesn’t move forward with nuclear power – as you said, there are new concerns about that. MidAmerican has said this is an issue that we are going to have generation – electricity generation problems in five, ten, fifteen, twenty years and that we have to have new capacity. That’s an economic driver, is it not?
Harl: It is an economic driver. However, if it doesn’t have the support of the people, that becomes the big question. And they want to impose this as a cost on their customers before they begin construction even so they can have the funds. It’s very expensive but yet when you look at the lack of externalities – which we thought was a lack of externalities until this big problem in Japan – the cost per kilowatt hour is more reasonable when you factor in all of the extra dollars with respect to coal, for example, in terms of impact on global warming.
Borg: And the price increases that we’re seeing because of the Middle East and now the disaster in Japan, how much of that is really substantive? How much is speculation?
Harl: Well, I think quite a bit is speculation. We live in a world where we’re trying to offload risk onto someone else. We do this through various means. We go through a futures market. And so, as a result, these tend to get exaggerated. We see it in commodities. We see it in petroleum because everyone is trying to anticipate what’s coming. And as a result, you have what doesn’t appear to be a justifiable increase or decrease, as the case may be.
Glover: Let’s come back a little closer to home. We’re in the middle of a legislative session. We have a new old governor back in office again. He has proposed as sort of the bedrock solution to the state’s recession, economic problems, that the legislature approve a large cut in corporate income taxes and a large cut in corporate property taxes. Will that work?
Harl: Well, when you say will it work, I guess that becomes a political question immediately – will it get passed?
Glover: No, if the legislature passes it –
Harl: Is it a good idea, that’s the other thing. Quite frankly, I don’t think it is.
Glover: Tell me why.
Harl: Iowa isn’t as bad off as many states are right now. It’s being painted that way, but Iowa is among the five or six best off states in terms of the gap in their budget, 5.6 percent. Illinois, our neighboring state, at least 44 percent gap in their budget. California, 29 percent. Every surrounding state is much higher than we are. So, I start off from the premise that we’re not really as bad off as I think is being painted. Secondly, we are needing revenue in the state, without too much question. You can see proposed cuts in every – in almost every realm. And the question is what is in the best interests of this state in terms of long-term economic growth. What attracts companies to come to Iowa? I don’t think it is pot holes in streets. I don’t think it’s a third-rate school system. I don’t think it’s a situation of starved universities. I think it’s a state that is viewed as forward looking, offers a great environment for a company. So, this is being really sold on the grounds that we’re going to attract more companies here. I really doubt that. I doubt that very seriously. So, I would like to see us close some loopholes. Corporate revenue has been dropping since about 1950 fairly consistently, both at the federal level and at the state level, and that is troubling. Even though there are, some would argue, well, corporations don’t pay taxes, the purchasers of the commodities, products produced pay taxes. But in a system where we want a diversified system, that does not put all of its proverbial eggs into one basket in terms of raising taxes, I think we need a fair and balanced corporate tax. And I’m quite concerned about dropping as much as is proposed.
Glover: What would the impact of those cuts be?
Harl: Well, it would be reduced revenue, of course. And depending upon how those cuts are imposed, one of the arguments – one of the focal points has been that we’ve shifted to a system of corporate organization called subchapter S that doesn’t pay taxes. And there are some issues there relative to companies that cross state lines as to how they contribute to Iowa revenue. The LLC, the limited liability company, doesn’t pay tax either, and it’s become one of the most popular ways to structure a business. So, we’ve seen a shift, a wholesale shift in the last forty, fifty years as to how we structure businesses, and we need to develop a system that matches that, raises the revenue, and does it fairly so that we don’t discourage companies from coming to Iowa and we don’t encourage companies to leave Iowa, but we also create an environment that they want to bring their employees into, because no one wants to live – just as an aside here – I worked for the last fifteen years before I retired a great deal in central Eastern Europe and the Former Soviet Union. And we had 79 schools teaching free market economics, legal systems and banking, credit and finance. I came to one major conclusion – the Russians were as smart as we were, as well educated as we were, they worked as hard as we did, but they hadn’t a pittance to show for it. And traveling in that country was an awesome experience because they didn’t put money into infrastructure. I don’t think anybody really wants to live in that kind of environment. So, I think we want to be cautious here in terms of what we cut. And we don’t want to cut our tax revenue unless we can see a compensating benefit coming from them.
Beck: One of the – a couple other tax cuts that are on the table – and I want to just ask you if your concerns apply to them as well – would be a 20-percent income tax cut, which would get to some of those corporations you’re talking about now, the subchapter S, these kinds. Also democrats propose increasing the earned income tax credit for working poor. Are those more beneficial for the state’s economy or, again, a problem in the sense that they remove investment in other things?
Harl: Well, the earned income credit is a question of how we deal with low income taxpayers, low income people in the state, and it’s worked quite well. It was pioneered at the federal level some years ago, and I think it’s viewed as a fairly efficient way to deliver some benefits to low income people. The issue of the income tax, again, at a time when the state is really I think hurting for revenue, even though we don’t have the gap as large as other states do, I think we still are feeling the effects. And education especially is feeling the effects. I’m troubled by reducing income tax that much at a time when the needs are so great.
Beck: Let me throw out another idea that’s on the table by senate democrats, those are boosting the promotion tax credit for ethanol from E10, moving it to E15, installing a biodiesel incentive for producers and retailers. They think those are the kinds of things that will stimulate Iowa’s economy. Will those work?
Harl: Well, you have to take each of those in turn. The future of ethanol really depends on government policy heavily. Government policy has been very friendly to ethanol for at least thirty years. The corn growers got behind it. They convinced Congress. Investors decided it was a good thing – if government was involved, how could you lose? And so it became not a market issue so much, it was a political issue. Now we’re facing in Washington some very different sets of forces, and those other – those forces are taking aim at ethanol’s favored position. And although there’s a lot of support for ethanol in Washington, I think the future of ethanol really rests with Congress. If they pull the band-aids and they pull the subsidies and they pull the barrier to the imported ethanol from Brazil primarily, then it’s going to mean that what we do here in Iowa is going to be pretty modest. So, I think we need to be sensitive to the fact that ethanol is going to be in the crosshairs, simply because of cost cutting. Now, in defense of ethanol, it’s a time when we’re worried about nuclear, we’re worried about the high cost of petroleum from the Middle East and elsewhere. I think we need to look at the fact that it does substitute and provide a means of – a source of power and energy that we really need and need rather badly. So, it’s a delicate issue. But I think we can’t lose site of the fact that Washington is going to call the shots.
Glover: Dr. Harl, I’d like to get you to put your assessment hat back on again and take another assessment. President Obama took office a couple years ago. He inherited a deep and lingering recession, and he’s acted fairly swiftly to deal with that. How’s he done?
Harl: I was not very impressed early in the process. That was under the prior administration. And I was not supportive of a bailout until we got to September of 2008, and then I became convinced that we were in a spiral down. They had not done enough, in my view. I worked from, let’s see, it was February of 2008, on a bill that was designed to help stabilize the housing market, what’s known as the cram down. And I sent a letter to every senator supporting that and gave experience with agriculture in the 1980s as an example of where that worked and I think worked very well. But by September, having done nothing essentially, even though the danger flags were flying, I became thoroughly convinced we had to do something. And yet I was not supportive of the wholesale way in which they went about it. I thought it was not handled terribly well. But still, I was convinced it had to be done, because had we not done it, we would have had something that would have rivaled the 1930s. We were spiraling down almost out of control. So, having done nothing up until then, it really set the stage for we had to do something and something dramatic, and I think what was done was correct. And I think if you look at it after that, I think it’s been handled really fairly and responsibly.
Glover: And there are suggestions now that we’re in the midst of a rather shaky, fragile, slow, economic recovery.
Glover: Is there a danger of a double-dip recession, slipping back into recession?
Harl: Oh, I think it’s a possible possibility. Let me say this, I think that one of our concerns here, one of our big concerns is why is it so slow to come back. This isn’t a typical recovery. If you go back and look at the downturns we’ve had in the last fifty years, usually we have a sharp decline, a fairly sharp climb out, and three, four years later at least we have pretty well recovered back, but we’re not doing that.
Borg: Why do you think it is so slow coming?
Harl: Because we have gone through what I term a global economic revolution. We have seen as free trade has expanded, as globalization has taken hold, we have lost economic vitality in the form of jobs. I was on OTA, Office of Technology Assessment. We spent a year looking at this very issue. And we concluded the problem was basically can we maintain a premium standard of living in a country where we have totally free trade, totally mobile capital, and technology available everywhere. And there a theorem that says you probably can’t. And so we are approaching totally free trade. We’re not quite there yet, but we’re close. Capital is about as close to being fully mobile as it could possibly be. And technology is not like it used to be. We used to capture our technology, hold it, get the benefits for a while before anybody else got it. Today if somebody commercializes technology in the morning, you find it in South America in the afternoon tomorrow morning. It’s that fast. So what we’re seeing is a leveling of incomes. Now, that’s not a very nice thing to say for those who sense that this might mean some pressure on them, but that’s exactly I think what we’re going through.
Borg: And that’s why we’re seeing Wisconsin protests and across the states as this country ratchets down. Jeneane, you need to ask a question.
Beck: Well, I just wanted to – you touched on housing and the work you had done on that issue. We’re kind of coming into that season where we’re seeing more houses on the market, more people looking to try to sell or buy. What do you predict for the upcoming season?
Harl: I think we’re going to have continued problems because we’ve got too much debt and we came into this massively with too much debt. There is some hope. In the last year – during the last year, 2010, the amount of debt dropped about 5 percent. But it’s still 116 percent of disposable personal income, so we’re carrying too much debt. And the housing is not responding in terms of housing sales. Housing is continuing the decline in value.
Borg: Let me take you back to Iowa just for a second, and then I think Mike has a question here. We’re running out of time. The Regents this week will be voting on whether or not to raise tuition at the three state universities 5 percent on average. But they’re doing it just to survive because of declining state appropriations. I know you worked your way through college, so I’m eager for your assessment on what’s happening.
Harl: Well, my total tuition bill at Iowa State as a four-year student there was $1,020.
Borg: But the economy has changed a lot since that time. Should the Regents be voting to raise tuition, or is there another way?
Harl: I think there is no choice for the Regents if they’re going to maintain the quality of institutions that we’ve had. Iowa is very fortunate in having for its size three very good institutions of higher education in the public realm, and I think we want to maintain those. This is a big driver in terms – in my view, in terms of bringing companies to Iowa. I think we contribute immensely to the state.
Glover: Less than a minute to go. Put on your magic wizard’s hat and you can do whatever you want to fix the economy. What would it be? What’s your prescription?
Harl: My prescription would be – I’m assuming you mean at the federal level.
Glover: Or state level.
Harl: Or state level. I would not panic in terms of our slowness to recover. We’ve got to accept that. It’s part of the revolution. And this is going to deliver benefits around the world in the form of increased – I should put it this way, reduced disharmony. Part of our disharmony in the world is because of great differentials in income levels. They are rising fast. And Iowa is benefiting from that, ironically, because as their incomes go up, they consume more food. The income elasticity of demand is higher in those countries, dramatically so, than it is here. So, whereas we spend about 20 percent of additional income on food, in those countries, they spend 50 or 60 or 70 percent.
Borg: Dr. Harl, I have to interrupt.
Harl: I understand.
Borg: I’m sorry but we’re out of time. We could go on for another hour. Thank you for being with us.
Harl: Appreciate it.
Borg: We’ll be back with another edition of Iowa Press next weekend, returning then to our regular airtimes, 7:30 Friday night and 11:30 Sunday morning. I’m Dean Borg. Thanks for joining us today.