Taking a pulse. Iowa's economic heartbeat slowly recovering. But many are wondering how fast and how strong. We're asking two prominent Midwest academic economists, Creighton University's Ernie Goss and Iowa State's David Swenson on this edition of Iowa Press.
Borg: Iowa's unemployment rate, 5.7% latest reported, about 3% lower than the nation's 8.6%. That is for November. Even so the deep recession's effects are lingering in Iowa. Just like families, Iowa schools, cities, state government have been cutting spending because tax revenues aren't back to where they were just after the turn of the century. Iowa's agricultural economy, good prices for corn, soybeans, pork and beef, is being credited with cushioning the economic hit in Iowa. But Main Street Iowa, small businesses including banks, are apprehensively evaluating economic indicators. We're asking two academic economists for their insights -- Creighton University's Ernie Goss and Iowa State University's David Swenson. Welcome to Iowa Press.
Goss: Thanks, good to be here.
Swenson: Thank you.
Borg: And across the Iowa Press table Associated Press Senior Political Writer Mike Glover and Radio Iowa News Director Kay Henderson.
Glover: Mr. Goss, let's start with you. The state's budget is predicated on what the Governor and legislative fiscal staffers see as a 4.5% growth in state tax collections which would reflect a roughly 4.5% growth in the state's economy. Is that realistic?
Goss: It probably is, it might be a little on the optimistic side meaning that the comparison numbers, that is from 2011-2012 are going to be somewhat weaker than going from 2010-2011 so I think it is probably a bit on the optimistic side given the numbers that we're seeing. We do two surveys of Iowa each month, rural areas and urban areas, and both are telling us somewhat the same story, that the Iowa economy, the growth is likely to be a bit slower. So, I think, again, it's probably on the optimistic side.
Glover: Mr. Swenson, same question to you. The state's budget is predicated on a 4.5% growth in the state's economy. Is that realistic?
Swenson: Well, I do think it's realistic. The reports from just the last fiscal report seem to show that the revenues have picked up in December, that the pace and pattern of growth has picked up of late. Now, just a few months ago it had flattened out so it very well could be that they are on track to reach that target.
Glover: Mr. Goss, what is driving this economy? Dean talked in the intro about the recession that has settled across the country. What is driving growth in Iowa?
Goss: A lot to do with farm income. Agriculture is very healthy and that's one of the reasons I'm expecting a little bit of the growth to come down for 2012. I just don't think farm income is going to be quite, the growth rate is not going to be as strong. Secondly, you've got growth in the global economy has been expanding fairly briskly, particularly in Asian and even in Europe. Now, both of those areas growth is coming down as well. And finally you've got a cheap dollar and the dollar is rebounding. It has grown by about 5.3% over the last two months. With the growth and the value of the dollar that tends to push agricultural commodity prices down. We're likely to see that and likewise, of course in my judgment, Europe is in a recession right now and obviously when you're in a recession you buy fewer goods and a lot of those goods come from us in America.
Glover: Same question to you, what is driving this economy and the growth here as opposed to what you're seeing in Europe with the recession?
Swenson: We have the ag economy -- one of the things I want to emphasize, the ag economy is really important to the Iowa economy but it is doing all it can right now. The remainder of the growth that is going to happen in the Iowa economy is dependent on what is going on in the rest of the world and the rest of the United States. What we make we sell to them. How well they are doing is going to be how well we're doing. We don't have anything magical or insular that is going to drive more growth, significantly more growth. So, we're very, very dependent on the health of the rest of the world.
Glover: It used to be said that Iowa was insulated from the world, that we were our own kind of economy. That's not the case?
Swenson: No, it's not the case and it has really never been the case. We have always followed the nation in recessions, in the '80 recession, in the '81 recession we got just as, it was just as bad in Iowa. What happened in the '90 recession it didn't happen here and a lot of people said, oh, we dodged that bullet, there's something magic about Iowa. But in the 2001 recession we went into it a year longer, we stayed in it just as long as the nation did, it was a five-year recovery and in this recession we went into it later but we're staying down and flat, we're not recovering quite as fast as we thought we might.
Henderson: Let's focus a bit on some of the storm clouds that may be looming for the ag economy in particular. Land prices through the roof and also you have tax credits for the renewable fuels industry that are in doubt. What is to say that there won't be a farm crisis on the Iowa landscape similar to what happened in the 1980s?
Goss: It won't be like the 1980s but some of the area will come out of the bubble as I'm expecting this year as what goes on in Europe, again, the decline in demand there for agricultural commodities but also just with the increase in the value of the dollar which pushes down ag commodity prices and likewise the increase in energy costs which is likely to continue. All that is going to tend to moderate the growth, moderate the growth in farmland prices. I remember when I was a kid we talked about dirt poor. Dirt is not poor anymore. Dirt is, in fact, farmland is the new gold, it has been. These growth rates are unsustainable, there is air in the bubble, the question is when the air is going to come out of the bubble. I expect some of it to come out in 2012 but not much.
Borg: Kay used the word crisis. You don't see crisis. You see a slow recession?
Goss: Dean, the ag land purchases now has a lot to do with cash. This is not overleveraged farmers who are borrowing from the bank to buy the land which is based upon a significant growth rate. That's not what we're seeing. But that said I still expect some of the air to come out of the bubble because of potentially higher interest rates and lower agricultural commodity prices.
Henderson: Mr. Swenson, I mean, what is the impact also of these declining and sometimes disappearing tax credits for renewable fuels? Because that has been driving commodity prices.
Swenson: Well, it's been driving commodity prices. I'm not an ag economist but in general, in general both the industry, the renewable fuels industry as well as the ag economists are saying the elimination of the subsidy for ethanol isn't going to have that big of an impact of both ethanol price as well as the prices received by farmers. So, because demand is maintained and because demand is maintained it provides a floor underneath of the prices of both ethanol as well as corn. So, that part is going to be sustained but there's other categories of renewable fuels. We have the wind energy industry, we have our expectations perhaps for advanced renewable fuels. Well, we're not going to make any more corn ethanol, that has maxed out. We may make some more advanced renewable fuels as in cellulosic ethanol but that is going to take a while to take off and the expiration of the production tax credits for the wind energy is something that has got some people worried that we may see less investment in that down the road.
Glover: Isn't your argument that you just made about ethanol subsidies an argument that ethanol subsidies were never really needed?
Swenson: I don't think it was an argument that they were never needed. It was a multi-pronged approach to promote this industry in that they both required subsidies and depended on subsidies at the production level, they also required mandates, it was a phased thing to try to ensure this industry and to protect those capital investments. Whether they were ever really needed or not I think we're going to have to just let history judge that and it's already too late because we had them and now they're gone.
Borg: Mr. Goss, your comment.
Goss: Yeah, a lot of it depends on the price of oil, of course and the oil, oil gets more pricey and I expect it to, the expectations are and it depends on, of course, the Middle East and who can predict that. I don't know the conflicts in the Middle East. But most of those that are more familiar with it now are predicting higher prices. Well, that does help ethanol and if you saw price, if we saw prices back to $40, $50 a barrel -- they're double that right now, more than double -- that would put pressure on the ethanol industry. Likewise we've had some, Brazil has had problems in their ethanol industry in terms of their production costs so they have become less competitive. So, right now the margins are real good in ethanol, corn-based ethanol but that could change. That changes very quickly. I mean, back to Mike's point about is Iowa insulated from the global economy, no. Iowa is more connected than most economies around the U.S.
Borg: Given that and given, Mr. Goss you have agreed, that the current agricultural boon is unsustainable. Is there something -- and given the fact that Iowa's economy is somewhat cushioned by agriculture or strengthened -- Mr. Swenson, is there something that state government should be doing or could be doing to ensure that, not that the boon continues, but that agriculture is considered also a business like we're incentivizing small businesses and commercial property? Should state government be doing something more than it is right now for agriculture?
Swenson: Well, I don't know that state government can do much more to both promote and protect agriculture. It has been agriculture's biggest cheerleader, not only within the state and state policy development but also in the development of national policy. It has got a myriad, an array of laws that help protect farm owners, family farm corporations and help protect their productivity. So, my short answer is no, I don't think there’s much more that it can do.
Goss: And I think there are some elements that Dave would probably agree with I think is encouraging trade. We've got the South Korean trade pact that was signed into law by the President this past few months, last year and that is going to be very positive. So, I think we underestimate how important say Governor Branstad going to South Korea, taking along business folks, taking along agriculture issues to seal deals and going to China, going to Indonesia particularly where we're going to see growth in the emerging nations. I think -- now that is a market-based approach and I'm more toward the market end of the economy.
Glover: Mr. Goss, let's me turn Dean's question on its ear a little bit if I could. We hear a lot of talk in politics in the state, in state government about the state ought to do this to fix the economy, the state ought to do that to fix the economy. Realistically isn't there very little the state can actually do to influence what is going on?
Goss: In the short run that is very true. But in the long run I think absolutely there are some things and what I would encourage is to have a competitive tax system, that is very important and I'm saying competitive. Now, you're lucky that you're bordering states that are pretty uncompetitive, that would be Illinois and to some degree Minnesota, Missouri is more competitive, Nebraska is somewhat more competitive. Now, that doesn't mean tax incentives, that doesn't mean tax giveaways, that means having an overall broadly-based, solid, competitive tax structure.
Glover: And you think Iowa has one?
Goss: I think Iowa has got a way to go on that. I think there's some things that Iowa should be doing to make their tax system more competitive.
Glover: Such as?
Goss: Lowering the rate and broadening the base. I see too much in terms of incentives. I think you need to -- we hear a lot of complaints, obviously we all like to, as a matter of full disclosure I own property in Iowa at a vacation spot in Iowa so I pay property taxes, I don't pay Iowa income taxes and I hear lots of talk about reducing my property tax. I think that's great but let's focus more on the growth side, let's look at income taxes. I think that's where Iowa has some competitive issues, lowering the income tax, the marginal income tax rate.
Glover: Let's go to you, David. What do you see as what the state can do and can the state really have an influence on what is happening in the economy?
Swenson: Well, if I'm going to look at what the state is supposed to do -- and it's supposed to be an efficient deliverer of public goods and services and that is part of an economy, not the enemy of the economy is the production of government services. So, having an efficient, effective, well-run state government, local government system is the hallmark, it is the foundation for economic activity and so that should be a goal and I think that is a goal for everyone. That the state has an uncompetitive or a competitive tax structure we maybe come on a little bit different. I think we have a highly competitive -- when you take all taxes together as a fraction of GDP Iowa ranks quite well in the nation, we don't look bad. We might stand out on one or two particular elements but we don't look bad across the board.
Glover: Such as?
Swenson: We stand out -- we know we stand out on the commercial property tax. We also know that we stand out on the rate side both with regard to our individual income tax as well as the corporation tax because of federal deductibility. Ernie just said, we need to lower the rates, broaden the base, we get rid of some of the distortions and/or the gimmicks, we make the system more predictable and perhaps more efficient.
Henderson: Well, there's a lot of debate at the statehouse right now about specifically commercial property taxes and republicans, including our republican Governor, argue that lowering those rates will lead to job creation. Mr. Goss, is there a direct link between lowering commercial property tax rates and job creation?
Goss: I think you could make that linkage but I think the rates, the corporate tax rates are more important than property tax rates. So, I would rather see work in that direction. Back in the 19th century Henry George talked about the perfect tax. The perfect tax is a tax on land and not land improvements so there's not any distortions there as long as you administer only on the land. So, property taxes, if you can do it properly and it's very difficult to do, have less of a distortion on the economy. We all live in this part of the country and that's where the sensitivity is and one of the reasons is -- another reason, I don't say I like property taxes but I'm more supporting of that, you pay it in big blocks so people have this sensitivity. Likewise it's at the local level so if you don't like it you can go down to your county commissioner, your school board and complain. It's harder to complain when you have to come to Des Moines to complain.
Henderson: What is your view about reducing commercial property taxes?
Swenson: The whole thing has to be looked at as a package. We have very, very beneficial provisions for ag land, for residential properties, we have eliminated machinery and equipment for industries but the commercial side doesn't get the same kind, just by virtue of how commercial property changes over time doesn't end up getting the same kind of breaks. I think a comprehensive look at all pairs of property tax, all classes of property would be part of this reform, not just lowering commercial taxes but actually addressing the entire property tax structure.
Glover: Mr. Goss, one of the key elements we're hearing at the Statehouse is the Governor and legislative leaders both want to focus on overhauling the state's education system and they see that as a driver for the state's economy. Are they wrong headed about that?
Goss: No, they are absolutely right. I'm in the educational system, we rarely get scrutinized and when you call for any scrutiny of educational expenditures you're anti-education, you're anti-kids and that is K-12, that is university education. We talk about health care being a problem because we spend so much. We talk about education being very solid because we spend so much. Now, which is it? I think scrutiny is absolutely essential there and we're going to have more scrutiny at higher ed and K-12 and it needs to be done.
Glover: David, education as a focus to drive the economy? Is that a wrong headed approach?
Swenson: No, it's a very wise approach and I would argue that we've spent way too much money on trying to underwrite capital and not enough money on trying to underwrite the development of human skills, education skills, the kind of skills that we believe are going to benefit us in economic growth.
Henderson: Another tax being debated at the Statehouse is the state's gas tax which people pay at the pump. There are those who are very much opposed to this. Mr. Goss, what is the relationship between infrastructure and economic growth and the gas tax? What is that relationship and how does that function and would raising the gas tax help?
Goss: Again, to say that I love a tax, but I'm supportive of a tax where you can identify here's what you used and here's where you pay it, you see it when you pull that handle, you know what you're paying, to some degree you know what you're paying. I'm not opposed to that, where the money goes and the funds are going to support infrastructure. And the problem with using money from the general fund is it is hidden. Dave I'm sure would like to agree. We like to see if you're going to pay costs, taxes, have them up there so you can see them. So, infrastructure is vital, that would be highways, roads and that also includes university and K-12 construction.
Borg: So, you're saying that increases the gas tax would not be an economic depressant?
Goss: All taxes, to some degree, are economic depressants but the positive on the infrastructure side could outweigh that. In other words, having poor roads is not what you want in Iowa.
Henderson: But, Mr. Swenson, whenever folks talk about recession they talk about energy costs and how that makes consumers very wary to make purchases in other areas because they are spending more on gas.
Swenson: Right. If I just looked at the average Iowa commuter over the course of a year a ten cent increase in the gas tax would cost them a whopping about $32. So, we're really not talking about a tax that is going to have a significant impact on your average household. But not having good roads, having roads that are in disrepair, hard on your cars, increases costs but there's another part about the gas tax that needs to be talked about. Half that tax goes to local government and so what is not being funded in the state of Iowa isn't just its state highway systems but it is a very extensive and highly valuable rural highway system that is in bad shape.
Glover: Mr. Goss, let's go back to a broadening of this issue. There's a lot of talk about alternative energy and that becoming a growing and important part of the state's economy. Is there potential there for wind, other alternative energy sources to be a significant economic driver in the state? Or is that kind of around the fringes?
Goss: I'm somewhat opposed to industrial targeting. In other words, these policies of putting subsidies here, we've seen Solyndra, for example, everyone is familiar with that. Of course, that's not wind energy.
Glover: That didn't work very well.
Goss: Didn't work very well. I think some of the support is probably good and supportive of the economy but I think to deny the importance of fossil fuels and the energy from that is wrong headed. For example, natural gas, natural gas is a tremendous, tremendous, has tremendous, tremendous potential right now yet we see our own Energy Department saying no to exports, or at least they're saying no to exports of natural gas because it might raise the price in the domestic market. Now, that is just wrong, wrong headed. We don't have an energy policy, we -- by the way, we need an energy policy, that would be at the state level and more at the federal level, not an energy update. We have policy of two months now, we have, for example, the Social Security tax cut is a two month extension. Now, I don't know why everyone is not just bowling over laughing about that. That is comical. How can anybody think that is wise?
Borg: That got a smile out of Mr. Swenson.
Glover: Same question to you -- is alternative energy a potential driver of the system?
Swenson: It's going to be an important part -- we're diversifying all of Iowa's economy to include the incomes that are earned off of rural space and alternative energy opportunities are one of those areas where more incomes are going to be made but we have to recognize this -- Iowa's 40 ethanol plants employ about 1,700 workers. That is about a Maytag spread across 40 different counties. The wind energy industry, they're putting them up but it takes very few workers to maintain a lot of these. So, in terms of job creation they're not going to drive any sort of renaissance in rural areas. In terms of diversifying the income streams and helping to stabilize some of our rural space it is going to be an important part of the economy in the future.
Borg: That would be a tax generator -- those big towers are big tax generators for the counties.
Swenson: They can be. First of all, they abate those taxes usually for a schedule of about seven years and then when they come back in they are taxed at about 30% of their net acquisition value and they do become -- they do become a new source of revenue for local governments and a sorely needed source because those windmills are often placed in counties that are losing the most people, their commerce is collapsing or contracting and they are having trouble maintaining basic government services.
Henderson: Gentlemen, you have both talked about the global nature of Iowa's economy. What happens if we get into a trade war with China? We have a republican presidential candidate who has had some harsh words for the patent infringement that is going on in China. What happens to Iowa's economy if China, if the doors close to China, so to speak?
Goss: I would be shorting farm income or those companies that are linked to it because that is absolutely a huge risk. Now, I'm not saying a trade war with China, I'm just saying anything -- when you start restricting trade it doesn't necessarily stop with China, it may move to South Korea, it could move on, which China would be bad enough. You get into a trade war with China that would not be -- it would not be pretty for China or the U.S. And I've seen a couple of our candidates talking about that, presidential candidates and bashing China. Now, that may play well in the American elections, it's hard to win an election being pro-trade, it just is.
Glover: Mr. Swenson, same question to you.
Swenson: Well, China is, by virtue of our manufacturing exports, I think it is our number four trading partner but it's still important and so it would have an impact here on China. You have to believe that the larger economy, the global economy as well as those folks who really speak for business, they're not going to allow this rhetoric to get out of hand. I think that this is the kind of territory that you negotiate, you don’t' take absolute and hard stands.
Goss: But remember, the embargo, the Russian embargo in the 1990s, or 1980, the wheat embargo, it can get out of hand. I mean, I'm very concerned about that.
Borg: The thing I'm concerned with is time and we're out of it. Thanks for a stimulating discussion.
Goss: Seems like we just began. Thanks.
Borg: Thank you. Next week on Iowa Press, Iowa Senator Charles Grassley. He'll join us to discuss federal issues and the republican presidential candidates. You'll see our conversation with Senator Grassley at 7:30 Friday night and our new time on Sunday at noon. I'm Dean Borg. Thanks for joining us today.