Economists

May 31, 2019  | 27 min  | Ep 4638 | Podcast

Podcast

Farmers are heading into uncharted and still rising waters as flooded fields and ongoing trade wars create extended uncertainty. We check the economic pulse of the Midwest with Ernie Goss and Chad Hart on this edition of Iowa Press.

Funding for Iowa Press was provided by Friends, the Iowa Public Television Foundation. The Associated General Contractors of Iowa, the public's partner in building Iowa's highway, bridge and municipal utility infrastructure. I'm a dad. I am a mom. I'm a kid. I'm a kid at heart. I'm a banker. I'm an Iowa banker. No matter who you are, there is an Iowa banker who is ready to help you get where you want to go. Iowa bankers, allowing you to discover the genuine difference of Iowa banks.     

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For decades Iowa Press has brought you politicians and newsmakers from across Iowa and beyond. Now celebrating more than 40 years of broadcast excellence on statewide Iowa Public Television, this is the Friday, May 31 edition of Iowa Press. Here is David Yepsen.

Yepsen: When the calendar flips to June, many farmers are ready to look in the rearview mirror at the planting season. But this year heavy rains and flooded fields have severely delayed planting. Adding to the uncertainty in Rural America is a multipronged trade war from President Trump directed at China. And now there is new tariff talk against Mexico. To check the economic impact of it all we've gathered a pair of experts, Creighton University Economics Professor Ernie Goss and Iowa State University's Associate Professor of Economics Chad Hart. Gentlemen, welcome back to the show. It's good to see you again.

Goss: Nice to be here.

Hart: Pleasure to be here.

Yepsen: Across the table today are Katarina Sostaric who covers politics for Iowa Public Radio and Kay Henderson is News Director at Radio Iowa.

Henderson: Mr. Goss, on Thursday evening the President announced that he intends to put new tariffs in force on Mexico. What would be the impact of those on Iowa?

Goss: Negative, of course. Iowa is obviously heavily dependent on agriculture and in terms of punishment, agriculture is usually the first casualty of a trade war. And of course here you've got he's adding 5% tariffs at least according to his Twitter. And the idea is of course to incentivize the Mexican government to cease or slow down immigration. It's not going to happen. It's not going to work. And unfortunately a lot of consumers, U.S. consumers and producers, agricultural producers and manufacturing, we do two surveys a month at Creighton University and in both surveys it is very clear that there is punishment out there for these trade wars, trade skirmishes and it is these communities, rural communities that are getting hit very hard. It's the consumers that haven't really felt it yet but they're going to. So when politics and economics collide, economics loses and politics is winning. And when politics wins I'm not sure it's so good for the consumer and for the producer.

Henderson: Mr. Hart, there is a debate in the political atmosphere about who pays for tariffs. Who pays for tariffs?

Hart: Almost everybody. As Ernie sort of alluded to, the idea is that when you're looking at a tariff put in place, for example, our new tariffs that we would be putting on Mexico, the tariffs would impact our consumers and their producers. But the idea is that they are likely to retaliate, often times with tariffs themselves, and that means it's hitting their consumers and our producers. So in the end everybody shares a little bit of the cost of a trade war.

Sostaric: Mr. Goss, you mentioned there's a bit of a delay in when people feel the effects of tariffs. What impacts have existing tariffs had in Iowa so far?

Goss: It has mostly been, of course, I said delay, but for the agricultural producers sometimes it's quite immediate and this of course has been for pork and for soybeans, two products that are important to Iowa and for that matter this part of the nation. And of course it has hit them already and you've seen it until recently, until very recently because of floods and other issues, agricultural commodity prices were down significantly. Well now they have begun to rise but not because of any trade issues. It's more of course flooding, floods and other supply issues. So it has been, it hasn't hit the consumer though, it's more the producer of course and that's what we're going to see. When we ask this month, we ask our manufacturers how it is affecting them, almost two-thirds said this is having some real impacts. And some of them are having to switch nations where they buy their supplies, their inputs, for example, we're seeing that. And it has been, I think the worst is yet to come and I'm sure we'll maybe talk about that, what is the probability of a recession, I don't want to give away everything right away. So everybody can hold on, what is the probability of a recession, well we'll wait on that one, I'll give my hopefully not opinion but what it's looking like.

Sostaric: That was my next question. Where is this recession that everyone says is coming eventually? And if these tariffs go forward on Mexico will that speed things up?

Goss: It will speed up the probability of a recession. In my back of the envelope calculations the probability of a recession, that's first quarter of 2020, has doubled over the last year and a half. Now, doubled is still probably less than 50% but this is moving up. And what most people keep, the reason we're talking about a recession is because of the yield curve, the difference between long-term and short-term rates that is getting squeeze and getting negative in some cases. And as I sometimes say that has predicted nine out of the last five recessions. So we're seeing that.

Yepsen: Mr. Hart, same question to you.

Hart: Yeah, the idea is it definitely does increase the threat of a recession coming very soon. And the idea is that when you're looking here it is not just the yield curve that has been changing, but you're talking about these tariffs actually having a slowdown on the global economy. So it's not just our economy that we need to worry about here, it is everybody that we trade with as well. And when you see the global slowdown happen it increases the probability that you're going to have a recession.

Henderson: Mr. Hart, what is the impact if Congress and if Canada and Mexico do not ratify the USMCA?

Hart: It definitely increases it even more. When we're looking here you're talking about three trade partners that make up a gigantic portion of global trade and basically throwing those trade rules up in the air, creating a lot of uncertainty in the market, creating a lot of volatility and let's call it the need for investors to search for safe havens. And again, that's another sign that you see money pulled back increasing the probability of a recession.

Yepsen: Mr. Hart, what do we do about China? You talk to farmers and producers and they say boy, we're getting hit, but we've got to do something about China. They've been eating our lunch for a long time. So what about that question? Even though we don't like tariffs, they're hurting agriculture, if you don't want to do tariffs how do you get China from, keep China from stealing our intellectual property?

Hart: And I think that's the wrestling match here is how do you do that? As we've seen we put tariffs in place. Has that necessarily stopped that event? No it has not. I think you have to look at a multipronged approach here in dealing with this issue. But I also think it's one that is fundamentally hard to address. When you're looking at the U.S. versus China in terms of the way that we approach intellectual property rights I think it goes back to what is the basis of our government and business, if you will, philosophy. When you look at the U.S. we are a capitalist democracy which means that when we look at intellectual property we look at it as the creator, the inventor owns that product and then benefits from that invention. China fundamentally Communist society, the idea is that something is created by that inventor. Who owns it though? Well, it ends up being shared with the government, with the state. And that is the way that fundamental system has worked. We're asking for, if you will, those two things are colliding right now. How do they come together into sort of one form for global trade?

Yepsen: Mr. Goss, what's your answer to that question? What tools are in the toolbox that we can use to get the Chinese to quit stealing?

Goss: Well, I think we're, for my money TPP should have been passed. We should have joined TPP, Transpacific Partnership. The President threw it out right away, that's the agreement with Japan and many other nations, to thwart some of the influence of China. It was thrown out but it would have been thrown out by President Clinton had she become President. But I think one of the two big, big wrongs and myths that we're starting to hear across the nation and across the globe is that somehow a deficit, a trade deficit is a bad signal. A trade deficit normally grows during an economic expansion and that's what we're seeing. In other words, if you really want to go, you want to eliminate the trade deficit go into a recession. Of course we don't want to do that. The second one is in trade there is a winner and a loser. No there's a winner and another winner and one is just a little bit larger than the other potentially.

Yepsen: So don't the Chinese ultimately win this argument? They are an authoritarian society, they can inflict a lot of pain on their people, a lot more than an American President can inflict on a bunch of farmers.

Goss: That's right. We have elections and of course we know that here in Iowa with the Iowa Caucuses coming up. But there's no comparable in China. And politically speaking there is a lot more pressure. Most folks focus on the economics, our economics looks better right now. But politically, no, there's a lot more pressure on us.

Yepsen: Even our republican senators are out this week criticizing the President on this latest thing with Mexico.

Goss: And that's right and your senator, Senator Grassley, has been very important in getting USMCA, that's the new NAFTA, passed or moving it forward. And unfortunately that may not happen.

Henderson: Mr. Hart, let's talk about a different kind of expansion, the expansion of the Missouri River and the Mississippi River, which have really decimated parts of this state. What in your view is the economic impact on the state's economy thus far?

Hart: Well, as you've seen thus far, what we've seen is sort of we know that we're going to see a substantial amount of land that is not going to get planted to crops this year. We have seen damage to our farm infrastructure through the lost grain bins and things such as that. And we've also seen within the last week, if you will, the market reaction to that. We have finally begun to see crop prices moving higher because of this flooding. In the net scheme of things though this is going to be a negative for the state because of that lost production that we've got here. While there is a higher price, if you're not producing you cannot capture that higher price, and that is the weak spot here. And so that is why when you're looking at what is going to be the, let's call it the net positive or negative to the state, it may depend upon what government supports are being put in place in order to help farmers deal with the financial disasters that they're facing.

Henderson: Well, the aid package that was announced because of the trade war requires farmers to have planted a crop. So the people who are affected by the flooding therefore are ineligible for that assistance.

Hart: They are ineligible for that assistance but part of the disaster package that Congress is considering is talking about adding additional money to the prevent plant option within crop insurance so that those that cannot plant may get additional funds as well.

Henderson: Mr. Goss, what is the compare and contrast here? 2008 parts of the state were flooded and in 1993 the entire state was flooded. Some of those areas had an economic boom because of rebuilding. Is a flood a downer or an upper for the economy?

Goss: Oh, it's a downer and our survey of bank CEO's in rural areas of 10 states, including Iowa, shows a negative thus far and it is spilling over in the sense of what about you said don't plant, that's another issue. Do you not plant? If you don't plant you don't buy seeds and you're less likely to buy new equipment, that spills over into the rural communities, a big issue, net negative. And we've seen since 2013 ag income has been coming down, down, down and this is a $16 billion package, $16 to $18 billion package. That is about 5% to 8% of farm revenues and 8% of grain, if you include livestock in there it's 5%. So it's not going to save agriculture.

Yepsen: Mr. Hart, explain to our non-farm viewers, these federal farm payments, do they make a producer whole? What percentage of their income is made up by these payments?

Hart: The idea of these payments is not to make the producer whole, but it is to try and, if you will, fill in enough of the gap that they, again, farm for the next year. And so when we're looking at this package that we're talking about here it's a combination of things that the government is looking at. For those that cannot plant we have crop insurance. Their crop insurance from the year before still applies right now and so they would have what is called prevent planting coverage. If I cannot plant I get paid a certain amount of the guarantee in order to help, if you will, meet my cash flow needs. But then we've got the trade aid packages on top of that and the traditional Farm Bill programs on top of that. But the combination of the three is not supposed to make a farmer whole financially.

Sostaric: Mr. Goss, as farmers and communities are rebuilding from these floods what economic lessons should the state take away from that?

Goss: Well, I think that Iowa, despite the idea that diversification, that agriculture is very important and you're looking forward, the outlook is pretty strong long-term but we all live in the short-term and right now we've got some issues in terms of state revenues, tax collections. That is going to get hit. And as we see this impact spill over, again, what we've seen thus far hasn’t hit yet because what producers, for example, manufacturers have done is bought and sold in advance of any tariffs. So what we're going to see, and we saw that in the GDP numbers for the first quarter, 3.2%, but it was a lot to do with inventories because the producers had bought from China, they had bought from Mexico, they bought from Canada in anticipation of higher tariffs. So we're seeing that. We need to get ready, get braced for lower and potentially a recession and that is going to hit state and local tax collections and you're going to see some of that and I don't see the legislatures preparing for that because we all say, well the economy is going great guns, which it has done. But get prepared.

Yepsen: What should the legislature and city governments and local officials do, Mr. Hart, about this problem?

Hart: Well, when you're looking here there are multiple problems going on at the same time. We're talking about the trade issues, the flooding issues, things like that. And so what you're seeing I think the state government do is saying okay, where can we invest our funds in order to try to create some economic continuity out there, especially for our rural communities? As we look at the flooding situation I think one of the things that the Governor and her task force are looking at is we're going to inject some funds into these communities, how do we do that in such a way that it does minimize the economic impact that the flooding has already had?

Yepsen: Mr. Goss said that this is going to have some impact on state and local tax revenues.

Hart: It will.

Yepsen: What should local officials be doing now? Cutting budgets?

Hart: Well, they should be looking hard at okay, what have we been spending our money on? Are there places that we can, if you will, begin to build a rainy day fund knowing that things are going to get tighter very soon?

Henderson: Mr. Goss, you survey bankers and find out about cash flow loans and those sorts of things. Is it your estimation that farm bankruptcies will be going up in the coming months?

Goss: They are going to be going up. And we asked that question, what is the biggest challenge for your area going forward? This was bankers, and they said, the number one challenge was defaults, loan defaults, foreclosures in agricultural loans. Now, what's going to happen? In my judgment we're going to see the larger, more profitable farms buy up the smaller, less profitable farms. And one of the issues that we have to, back to Katrina's question about what we have to be on guard for, is once you're, like Hamburg, for example, Iowa, the whole town was under water. Well, do you build back? Or do you move to Arizona? Do you move to South Dakota? Do you move to Florida? And that's one of the keys. We face brain drain. Well this only encourages that brain drain and somehow we have to deal with that outmigration ensuring that these individuals and families continue to make their home here.

Yepsen: I want to quickly follow up on something we were talking about a moment ago and that is this effect on tax revenues. Mr. Goss, what do state and local officials, what should they be doing that you're not seeing them do here?

Goss: Increase the reserves, for example. Some states are spending, in the survey, in the region we survey, are actually spending reserves. You should be increasing those reserves. That would be number one. Nebraska, for example, just passed a budget of 2.9% growth. That's a bit on the rosy side in my judgment. I think you need to limit those. What farmers are facing here and that is in Iowa and Nebraska is while their income is down significantly their property taxes are up and what we've seen is local spending in Iowa and Nebraska and other states we survey, local spending has been dramatically, growing at a dramatic rate and completely outstripping the ability to pay going forward. And that is going to be a real problem because farmers are sitting there with less income and their property taxes are growing. Fully 33% in some states, areas are going to property taxes. That's 33% of income of the farmer.

Henderson: Mr. Hart, there is discussion about hardening assets. Number one, levees. The levee system along the Missouri is ancient. How hard do you have to make it in the new reality of our current weather situation?

Hart: Well, I think that's the big challenge that the Corps faces now is trying to figure out what used to be the 500 year flood is no longer. Things have changed in terms of our climatology there. But it's also a case of looking at do we have the money to pay for that infrastructure improvement? And I think that's a debate that is not only at the local and state level, but also at the federal level as we look. And we've not only got an aging levee system but we're looking at when you look at the lock and dam system down our river system that is roughly 100 years old and is needing some improvement there as well, even our Interstate highway system is showing its age these days. And so we've had this discussion about infrastructure improvements over the past five years, it has been a nice talk, but we haven't walked that walk yet.

Henderson: So what do you use to finance it? Do you have to figure out a different way to tax the people who use the Interstate system since cars are starting to run on electricity and hydrogen and not gasoline and the cars that are out there are using far less gasoline than they did 10 years ago?

Hart: I do think we do have to look at something like a use tax, a use permit because the idea is that you want to, if you will, to tax the tax where there is the potential for the revenue that is driven by that sort of infrastructure improvement. When you think about the Interstate highway system, for example, it was a great boon to the U.S. economy, had we built our tax structure in order to support it, it would have been much easier to make the improvements that we have needed to over time.

Sostaric: Mr. Goss, we've talked a lot about the farm sector of Iowa's economy. What percentage of Iowa's economy does that actually make up?

Goss: Well, it depends on how you count it. I would let Chad answer that, he'd know more about that than I. But when you extend it out to food, for example, processed food, when you include the backward linkages of seed production, when you look at fertilizer production, you're talking about a very large percentage. I'm not sure what that percentage is. But I'll tell you in terms of exports of products I know that number and Iowa's food exports are about 35% of food, of the exports, are about 35%. So you see how important it is in terms of trade. So I think that is one of the huge issues going forward. But back to the infrastructure, I don't mean to jump back to that, $2.1 trillion is being proposed. But we talk about roads and bridges. Well, what about levees? What about moving down the Mississippi, moving down the Missouri? What about the flow of agriculture through barges and barge traffic. Don't hear much about ports and so on. That is very important. But also I think the Corps of Engineers, in my judgment, needs to revisit some of their goals. What is the goal? It is to protect the snail darter, for example, or is it to protect human beings? Well it has been focused on environmental, the environment, which is a good, solid goal. But what about people? What about families? What about Hamburg, Iowa under water?

Yepsen: What is your answer to the question, Katarina's question, about how big is the farm sector?

Hart: When you're looking at our farm sector what you're talking about, for production agriculture, you're talking about 6% to 7% of the state's GDP is basically from that. But when you add in the food component, all those linkages, then you get up to close to 25%. And as Ernie correctly pointed out, that when you're looking at our exports, when you're looking at our trade with other countries it's more like 35%. So the further you, if you will, get away from Iowa, the more important agriculture becomes to the Iowa economy.

Yepsen: Most of Iowa's economy is not related to agriculture, is it?

Hart: It's not.

Yepsen: All right. So then are we worried about too much here. Unemployment is nil, a lot of people are doing well.

Hart: Yeah, I think in this case no, you've got to sit here and go, while 75% is non-agriculturally related that tells you, again 25% is and that's a massive 25% that works through some of the other sectors of our economy. For example, you look at our largest manufacturers, often times they are ag related base there. You think of manufacturing, John Deere. When you're looking at finance, crop insurance is the biggest financial part we've got there. When you look at our state government, arguably IDALS is our biggest department out there. So ag runs through all our other sectors that are vital.

Sostaric: We have record low unemployment in Iowa right now. Is that a good thing for the economy?

Hart: It's both good and bad. I'm going to argue in this case what we're looking at here, and I know especially from my perspective as an agricultural economist, we're having trouble, if you will, locating the labor that we need. It's not only just finding labor but it's finding that skilled labor that can do the job that you need in this case. And so that is a tremendous problem not only for Iowa agriculture but for national agriculture.

Goss: And when we ask what is the biggest challenge for manufacturers going forward, it's almost always finding and hiring qualified workers, but particularly in rural areas, for rural manufacturers. So that is a big issue. And the flooding, of course, back to the floods, individuals and families moving on, moving to another location that might be more tax friendly and more perhaps not as much flood prone.

Henderson: Mr. Goss, you come from the Omaha, Council Bluffs market. The state of Iowa has legalized sports betting. How do you think that will impact bars and restaurants in the Omaha side of the river when the Huskers are playing?

Goss: It will move them over to Council Bluffs, there is little doubt about that. And is it a wise move? It's an inevitable move and we're going to move more and more to where we're going to have parties at our houses where you don't even have to go to the bar, you can sit there and watch the game and bet at the same time. That's what we're going to see.

Yepsen: Mr. Hart, we've got less than a minute left. Is it time for Iowans to change their attitudes towards immigration? A lot of communities, rural communities, they don't want to see Mexican immigrants come to town. But yet where are they going to get a labor force? Don't we need to be more welcoming?

Hart: I think we do need to be more welcoming. I think we do need to have, though, a hard discussion about what does immigration mean to the state of Iowa especially when agriculture is such a big part of our economy. When you're looking for that labor base that you need or to drive the production you have to have immigration.

Yepsen: Mr. Goss, 30 seconds.

Goss: In urban communities you don't want to see the Hispanics, yet when you need to put a roof on your house that's who you exactly want to see. These individuals are providing great service to us and here we are faced with a population decline, or not growing at a very fast pace, we need men and women to work in this economy.

Yepsen: I'm out of time. Thank you both for being here today, we appreciate it.

Hart: Thank you, sir.

Yepsen: And thank you for joining us. We'll be back next week for another edition of Iowa Press at our regular times, 7:30 Friday night and Noon on Sunday. For all of us here at Iowa Public Television, I'm David Yepsen. Thanks for joining us today.

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Funding for Iowa Press was provided by Friends, the Iowa Public Television Foundation. The Associated General Contractors of Iowa, the public's partner in building Iowa's highway, bridge and municipal utility infrastructure. I'm a dad. I am a mom. I'm a kid. I'm a kid at heart. I'm a banker. I'm an Iowa banker. No matter who you are, there is an Iowa banker who is ready to help you get where you want to go. Iowa bankers, allowing you to discover the genuine difference of Iowa banks.     

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