A Bold Step for the Future For nearly two hundred years, the desire to improve transportation has been of major interest to those who have lived in Texas. With substantial increases in the population of the Lone Star State predicted in the coming years, this matter is taking on even greater importance today.
The Trans Texas Corridor initiative announced recently by Governor Rick Perry is an innovative way to draw Texas’ wide open spaces closer together. His goal is to change the nature of transportation in Texas over the next several decades by creating a multi-use, statewide corridor that will move people, products, and information safely, efficiently, and effectively.
The Governor’s plan to improve the state’s aging and jam-packed transportation network is definitely a bold and visionary move to improve the way we travel and how we transport products in and around Texas. This novel transportation infrastructure program will provide substantial economic benefits and create a notable competitive advantage for our state.
The proposed Corridor calls for the construction of some 4,000 miles of new highways, high-speed railways, and underground pipelines, electric lines, and telecommunication linkages. This infrastructure will be developed in close proximity along the same routes from Brownsville to Amarillo and El Paso to Texarkana, plus all the pertinent in-between places. Outlying areas and border communities, as well as major cities across the state, will be uniquely linked together.
The project is expected to cost about $175 billion and span several decades. About $100 billion will be for road construction; the remainder will be in other new projects. There are numerous possibilities regarding funding options for the Corridor, but a cornerstone will be a public-private partnership combined with private sector initiatives. The new flexibility in transportation funding offered by the recent passage of Proposition 15 makes it possible to envision such an approach.
Of course, there are still many matters to consider as the details of the plan are reviewed, but overall it is a win-win situation. The Corridor will provide huge benefits to the state through construction and enhancement of efficiencies in mobility and access to the infrastructure, as well as the economic gains associated with attracting or retaining business activity.
I recently completed an intensive study of the Governor’s plan and have concluded that the average benefit per year from the construction activity alone over the first 25 years of the project will be (in constant 2001 dollars): $20.6 billion in annual total expenditures, $10.1 billion in annual gross state product, $6.7 billion in annual personal income, and 176,900 person-years of employment.
In addition, my study shows that the enhanced efficiency associated with the notable infrastructure impacts will, at project maturity, yield net gains of: $79.5 billion in annual total expenditures, $41.7 billion in annual gross state product, $25.2 billion in annual personal income, and 433,800 permanent jobs.
Furthermore, the potential development gains accruing at project maturity include: $505.0 billion in annual total expenditures, $231.7 billion in annual gross state product, $135.3 billion in annual personal income, and nearly 2.2 million jobs. The project will generate in excess of $13 billion per year (upon complete implementation) in state revenues on an inflation-adjusted (constant 2001 dollars) basis.
The Trans Texas Corridor is a whole new approach to transportation, the type of out-of-the-box thinking that can spawn long-term economic vitality. Although this bold plan is not without its obstacles, the same could be said in days past for D/FW International Airport, the Port of Houston, or, for that matter, the Goodnight-Loving Trail. We are at our best as a state when we strive to go beyond the structures of the past and chart a new course. The Trans Texas Corridor offers such an opportunity.
In Defense of Trading The economic and political news these days is dominated by the recent events surrounding Enron. The story has all the elements of a good novel—billions of dollars vanishing, lives tragically impacted, alleged chicanery and secrets, prominent names from all sides on the political contribution list, high-profile attorneys and accountants, and a company whose success became in many ways synonymous with the economic renaissance of major, legendary city.
I have no doubt the saga will spawn numerous books, movies, and documentaries. It will be played out in Congressional hearing rooms, courts, radio talk shows, and both network and cable news outlets. It will attract an ever widening cast of colorful characters, be closely scrutinized by financial markets, be an issue in the mid-term elections, and ultimately impact public policy on several fronts. We will be treated to an endless stream of impassioned rhetoric and, then, the inexhaustible supply of expert commentary on each day’s happenings. Like Elian, Monica, and O.J., we will be graced with “All Enron, all the time!”
In an effort to be a least moderately novel, I’d like to put all of that stuff aside for the moment and focus on some fundamentals. First, the demise of Enron does not spell doom for energy competition. Far from it! It has been repeatedly demonstrated that competition brings lower prices, greater innovation, and more consumer choice. While changing the way we buy and sell electricity after many decades will have its temporary bumps and glitches, the long-term effects are decidedly positive. The train has left the station, and neither a bad law in California nor the demise of a single trader is going to stop it (nor should they).
Second, energy trading is an entirely legitimate activity which makes markets more efficiently and provides needed services to consumers and producers alike. Indeed, such functions are essential to the proper operation of modern markets—and can be highly profitable as well. Even as Enron was filing for Chapter 11 protection, suitors were clamoring to acquire its trading business and competitors stood more than willing to plug any gaps that might appear. Some hats may change, but the basic process will continue and expand on a global scale. Markets routinely absorb the rise and fall of individual companies.
Third, by its very nature, trading natural gas and electricity (or just about any other commodity, for that matter) is a volatile business. It is characterized by high risk with the prospects of high return (or not), and it is not for the faint of heart. It is the lure of massive profits and the abundant risk that gives this area its excitement, but is not and never has been the place for your grocery money. While various alleged actions will be poked and prodded ad nauseam and ad infinitum, we shouldn’t lose sight of the fact that all or a substantial part of the actual losses from the enterprise could have occurred without any of the stuff which has garnered the headlines. A year ago, natural gas prices were at historic highs, California was in the midst of power outages, and gasoline prices were soaring. In such a market situation, it is easy enough to be both completely legitimate and spectacularly wrong. It happened with tulips in Holland in the 1630s and, more recently, with derivatives and dot-coms. If your tastes run toward high risk investments, you might want to again ponder the age-old wisdom of diversification. (By the way, some of the problem was with old-fashioned, traditional assets.)
Needless to say, there will be plenty of sideshows to divert our attention as this complex tapestry is unraveled thread-by-thread. In the midst of the madness, we could do well to occasionally harken back to some fundamental truths which transcend the fate of a single, albeit notable, firm.
The Stimulus Package Shortly before Christmas, as Congress was winding down the year with visions of something other than sugar plums dancing in their heads, the much-touted fiscal stimulus package didn’t happen. It will resurface when our fearless leaders return, but its fate remains uncertain. The situation raises several issues which are worthy of exploration.
When the push began in the days following September 11, there was a lot of bipartisan support. Ideas with both long-term and short-term implications that would never be allowed on the floor were getting serious consideration in light of the spirit of the times. In the first visit with economists about the issue, however, Mr. Greenspan (whose batting average has been dropping lately) urged members to wait and see. He doesn’t believe so much in fiscal policy; hence, his admonition is not surprising. It was, however, wrong, both because (1) the timing of a fiscal stimulus is important and it was needed immediately and (2) the extensive cooperation fostered by crisis could only last so long.
Once the wrangling began, it took a predictable path. Both parties agreed (more or less) on a range of $80-$120 billion or so, but had very different ideas on what to do. The Democrats wanted to help people directly; the Republicans wanted to stimulate business. A fairly decent plan emerged early which had a lot of input from economists (not always a bad thing), relatively strong bipartisan support, and the backing of President Bush. But, then, alas, several of the more conservative members met with Mr. Bush to tell him that the measure was not sufficiently Republican for their taste, and he backed off. At that point, politics completely took over the process.
By December, the cost of the package had ballooned to over $200 billion, as the “compromise” essentially threw in just about everything from both sides in an effort to troll for votes. The House passed it (with limited Democratic support); the Senate had enough votes; and the President said he would sign it. There was only one hitch—Senate Majority Leader Tom Daschle refused to allow a vote! Thus, Congress adjourned without a package.
I suspect there will be a price to pay for this decision. Unlike children, recessions manage to get by without being assigned to any one. Nevertheless, we normally insist on naming them after someone. At first, the Republicans would no doubt have wanted to call this one “Mr. Clinton’s Recession” since it came so soon after he left office. The Democrats would opt for “Mr. Bush’s Recession” since it happened on his watch. The most proper name might actually be “Mr. Bin Laden’s Recession” in that, while things were clearly slowing down earlier, it might never have reached the level of an official recession but for the terrorists’ attacks. Given his recent actions in unilaterally blocking a vote on an economic stimulus, however, you can be assured that “Mr. Daschle’s Recession” will have a lot of staying power.
After hearing from their constituents over the break, our esteemed elected officials will likely return with renewed interest. Most fiscal programs take some time to implement and take effect. Thus, while some structural changes could clearly make the economy more competitive in the future, it is doubtful that a package at this late date will have much effect on the current downturn.
If they want to have immediate impact, there is a way to do it—get money in the hands of people who will spend it immediately! Such a program could involve extended unemployment benefits and cash “refunds” for the least advantaged people in the country “those who spend every dime they can get their hands on out of shear necessity.” That could be the Democratic part. It could also include incentives (such as expensing capital purchases) to enhance the cash flow of expanding, cash-strapped small businesses. That could be the Republican part. Pass it! Make it effective immediately! And shove the money out the door! Since it is doubtful there is either the political will or bureaucratic nimbleness to get this done, it is probably best just to focus on longer-term priorities.
Obviously, there has already been quite a bit of fiscal stimulus (emergency funds, airline funds, and added defense and security outlays), and government is spending a lot more than was contemplated a few months ago. Nonetheless, history may well record this saga as an opportunity missed¾and a recession named.
A Beautiful Idea As you can imagine, there has been quite a bit of buzz of late in the economics community about “A Beautiful Mind,” the Hollywood portrayal of the life of John Nash. Nash, a mathematician of remarkable intellect, shared the 1994 Nobel Memorial Prize in Economics with two other quantoids, John C. Harsanyi and Reinhard Selten, who extended his original concept.
I heard from colleagues around the world who wanted to chat or e-chat about it, some of whom had interacted with Nash at some point in their careers. Some wanted to nit-pick the details of his life, and criticize key omissions from the movie. Others don’t like it when someone from another discipline wins our big prize, figuring it takes away one of their opportunities. (By the way, Nash would have probably won the Fields Medal, the mathematics equivalent of a Nobel, had it not been for the fact that one of his most complex discoveries, having to do with the solution to a particular group of multidimensional differential equations, was simultaneously found by Italian mathematician Ernio de Georgi; Nash is not your garden variety of genius, and this is definitely not the stuff of dinner table conversation).
Most, including me, were simply pleased to have a movie made about the life of an academic who touched our field of study. After all, economists are not the most interesting lot. If they were to make a movie about me, they could get scenes of me talking on the phone, speaking at a Rotary Club, pouring over output or other associated programs, sitting in a meeting, staring at a computer screen and . . . well, that’s about it! We won’t even get into casting.
The occasion does call for a brief description of Nash’s idea, which was somewhat misstated in the movie. In fact, if you tried to do exactly as the movie suggested, you could lose a lot of money¾or worse (and we wouldn’t want that to happen).
Specifically, the movie suggests that you should pursue your own self-interest and the interest of the group (in our case, the economy). You can probably think of hundreds of examples in your life (economic and otherwise) where that is quite impossible. What actually came to be known as “Nash equilibrium” was the notion that as you pursue your own self-interest, you need to do so with an awareness of and reaction to the fact that those around you are doing exactly the same thing. We can’t blindly pursue our self-interest and be oblivious to our surroundings. Thus, what we pursue is not our wildest dreams, but rather the most we can achieve in the world in which we live. (In the example in the movie (which was correct), nobody got the girl everybody wanted, but everybody got a girl.)
This basic concept is quite simple, although it gets buried in some really convoluted mathematical jargon related to manifolds and algebraic variables. Adam Smith was not wrong (as implied by the movie), just incomplete. We still pursue our individual self-interest; and nobody else’s; we just do it within the context of the group (the later scholars who share the Nobel Prize with Nash extended the concept still further to encompass dynamic situations and incomplete information).
The fact that Nash expanded the analysis of markets rather than destroying it in no way diminishes the brilliance of the idea. The sound byte may not be as great, but Nash’s real concept fundamentally shapes our understanding and our behavior. Those who make money in the stock market do so by making decisions which account for the actions of other investors. Those who succeed in business do so by anticipating the reactions of competitors. Beyond economics, athletes win contests not just with ability, but also with a sense of the patterns of their opponents. Indeed, species survive by their ability to adapt and respond to changes in their environment. Much of our knowledge of how things hang together is owing to the mathematical scribblings of John Nash, and his accomplishments were made in the face of incredible odds. It is appropriate that he should be celebrated.
Texas Holding Its Own As business activity across the US slowly returns to the levels enjoyed before September 11, the economy of each state comes into focus. Even if the nation is rebounding by the end of the second quarter, those states that depended heavily on tourism, financial services, and manufacturing or those that get much of their revenue from capital gains taxes will struggle to stay afloat—and many will see their budgets dip into the red.
A December analyst report from Moody’s Investors Service identified states whose economies had gone from okay to not-so-okay. Texas dodged the bullet, but Florida, Hawaii, Indiana, Massachusetts, Michigan, Nevada, and Ohio took a bad hit. New Jersey and Washington also got the nod, along with California, North Carolina, and Washington who were fingered earlier in the year.
Even states that have built up large cash reserves are not safe from the crushing aftermath of the terrorists’ attacks. Rising unemployment means expanding needs for social services (such as Medicaid) for the poor and elderly. Given the uncertainty of the next year, governors in many states are practicing belt tightening in an effort to balance their state’s budget—or at least try to get close.
In Texas, our economy is definitely feeling the effects of a slowdown in lowered output of goods and services, but the State is still bringing in enough tax revenue to balance the $114 billion budget for 2002 and 2003—at least so far. Most of Texas’ money is derived from motor vehicle tax collections and sales tax revenues—and they have both increased in the past three months.
That’s not to say we are completely out of the woods. Job losses in the airlines and transportation industries have hurt. And the expenses of the State don’t ever just go away. Texas may be fortunate in that the budget cycle is two years, arguably giving the state some time to weather the shock of the attack. If a shortfall were to arise, the 10-member Legislative Budget Board could cover shortages or a special session could be called. In a worse case scenario, the state has access to its “rainy day fund.” Meanwhile, lawmakers and laypersons alike are all trying to pick up the economy’s momentum and seeming to have some initial success.
To no one’s surprise, Texans are among those Americans who are figuring out how to keep their local economies running through these difficult times. Our newest short-term forecast gives detailed tabular data that tells the story of the state’s regions and metro areas by industry. (We’ve mentioned highlights of the state in previous columns.) Here’s a peek at how the regions will fare.
Three of the state’s 11 economic regions are projected to experience growth in output exceeding 4.0%: Central Texas (4.31%), the Metroplex (4.28%), and the Gulf Coast (4.07%). While all areas of the state are forecast to see notable output expansion, Southeast Texas, the High Plains, the Upper Rio Grande, and Northwest Texas will lag other parts of the state.
Wage and salary growth rates are expected to range from 1.72% to 2.39%. Leading the pace of job growth will be the more populous areas including the Metroplex, the Gulf Coast, and Central Texas. Population growth rates are expected to generally follow wage and salary expansion patterns, with the most rapid gains occurring in the Metroplex, Central Texas, and Gulf Coast regions.
Two smaller metropolitan areas are likely to see economic gains surpassing the state average—the border cities of Laredo and McAllen-Edinburg-Mission. All in all, the border cities are expected to perform quite well as measured by real gross area product. Odessa-Midland is forecast to experience output growth approximately equal to (slightly above) the statewide figure.
That’s good. Really good! Any which way you look at it—from a high rise or a hamlet—the Texas economy is remarkably resilient. The next year will not be without its struggles, but all things considered, should be okay.