US and Texas Economies to “See the Elephant” During the California gold rush, the universal hope of prospectors was to “see the elephant,” a common expression in those days for finding the shiny ore that would put them on “easy street.” Unfortunately, many of those seeking fortunes some hundred and fifty years ago never saw even the tail of the pachyderm.
Having recently completed a thorough analysis of the US and Texas economies in preparation for the publication of The Perryman Economic Forecast for the period from 2002 to 2030, I am convinced that in the long term, we most assuredly will see the elephant.
Over the past couple of years, our economy has experienced a roller-coaster ride. The slowdown, which officially started in March 2001, was exacerbated by the various events following the September 11 terrorist attacks.
There was a drop in consumer confidence, and numerous industries faced a variety of short-term difficulties. Subsequent activities associated with homeland security, the fight against terrorism, corporate scandals, and a war in Iraq, as well as financial difficulties faced by various countries in other parts of the world also caused our economy to fluctuate. Despite these facts, however, output has expanded consistently. Unfortunately, job growth has not accompanied this progress.
Even so, consumer confidence is now rising, the housing market continues on its upward path, investors are growing increasingly hopeful, and the health of the stock market has stabilized. The third-largest tax cut in the nation’s history that President Bush signed this week will provide many people with opportunities to improve earnings and to spend more, factors that can influence our economy positively and provide an impetus for continued expansion in the future. This picture is by no means perfect, but it will offer some near term stimulus and important long-range investments incentives.
There are numerous unknowns regarding what the US and Texas economies will face during the next three decades. However, based on my extensive research and more than a quarter century of economy modeling, I believe the key economic forces are in place to allow our economy to experience significant growth over this period.
During the 29 years from 2002 to 2030, the nation’s population is forecast to expand 24.7% to reach approximately 359.8 million. The number of residents in the Lone Star State is projected to rise by 53.9% and exceed 33.4 million in 2030.
The number of wage and salary workers in the US over the forecast horizon is predicted to grow by some 40.6%, reflecting a compound annual growth rate (CAGR) of 1.23%. The total number of jobs in Texas is projected to rise by 1.76% per annum, adding more than 6.3 million workers from 2002 to 2030.
The national Industrial Production Index is expected to achieve a compound annual growth rate of 3.15% over these years. Additionally, the Consumer Price Index (CPI) is anticipated to climb 2.30% annually, while the Producer Price Index (PPI) will likely increase at a CAGR of 1.88% in the long term.
Real Personal Income (RPI) in the US should rise in excess of 126% over the forecast horizon, with RPI in Texas experiencing a 147% hike from 2002 to 2030. State retail sales are projected to quadruple during this period and exceed $1.49 trillion in 2030.
US Real Gross Domestic Product (inflation adjusted) will likely expand by approximately 2.89% per annum, more than doubling the 2002 total of $9.44 trillion to reach $20.97 trillion in 2030. Real Gross Product in Texas is expected to triple during the 2002-2030 period, climbing to nearly $2.30 trillion.
All industries in Texas should see growth through the long term, with trade; services; and transportation, communications, and utilities as the three leading sectors in RGP and trade, services, and government as the top three employers.
While the interconnected nature of the economies of the nations around the world will remain important factors in the level of business activity in the US and Texas, the American capacity to innovate will enable our economy to achieve full recovery and substantial advancement over the next three decades.
posted @ 08:01 AM CST [link]
Friday, May 23, 2003
Deflation In the past week or so, the Producer Price Index (PPI), a measure of the cost of making things, was reported to have fallen by a whopping 1.9% in a single month. A few days later, our fearless Fed chairman stated that deflation (a general decline in prices across the economy) was more likely than inflation at present. These two news items combined to rekindle fears of deflation. And, to think, I am old enough to remember when inflation was regarded as far and away our worst enemy.
With all of this talk, I thought a little perspective might be in order. You may initially wonder, “What’s so bad about falling prices?” After all, we have been raised to dread rising prices since World War II, and upward movements have been the grand obsession of the Greenspan era. If you take a bit larger view of things, however, you quickly discover that (1) there has been much more deflation than inflation across the annals of history and (2) it is with certainty the greater problem.
Deflation is essentially bad because it can grind business and consumer activity to a halt. If we fret over inflation, we tend to “buy now” and potentially overheat the economy. While not particularly pleasant, that is an outcome we can deal with. If we expect deflation, on the other hand, we tend to “buy later,” or perhaps “buy never.” If you think something will be less expensive in six months, it is often rational to postpone the purchase. In another six months, the same situation applies. Thus, we tend to curtail our spending dramatically.
In a similar vein, inflation allows us to repay past debts with “cheaper” dollars. The opposite occurs with deflation, thus making it more difficult for companies and households alike to deal with existing loans and creating a disincentive for future acquisitions through financing.
I could go on and on, but the simple fact is that deflation is bad. Period. Having said that, I must quickly add that I see very little possibility of a downward spiral in prices. Such reductions are only ultimately harmful if they reflect a structural drop in aggregate demand—an economist’s weird way of saying that, as a global village, we all decide to permanently spend less. I don’t see that happening.
The recent price declines are largely the result of the direct and indirect consequences of petroleum prices returning to “normal” following the lead up to the War in Iraq. Prices in prior months were higher than they otherwise would have been as a speculative bubble developed in response to perceived risks to the oil supply chain. As the perceived risk diminished, so did the prices. This pattern is part of the typical ebb and flow of the economy and poses no cause for particular concern.
There is also an ongoing decrease in prices for some goods due to gains in productivity and efficiency. Computers, cellular phones, DVD players, and many other things cost less than they once did. Again, that is a good thing. It permits higher wages and purchasing power without fueling inflation.
The actual demand-driven part of recent pricing patterns can be almost exclusively attributed to reluctance on the part of businesses to invest in the face of the uncertainties associated with September 11, corporate accounting scandals, and the threat of war. This triple whammy is unfortunate, but it is also temporary and not structural. Consumers have continued to purchase cars, houses, and other durable goods, and US companies will quickly begin to spend as the uncertainty diminishes (orders are already on the rise in several key sectors) in a very attractive interest rate environment. In short, there is no indication of any permanent shutdown of entrepreneurship and ingenuity.
Deflation. Is it a problem? You bet it is! A really big one! Is it likely to happen? Nope!!
posted @ 08:28 AM CST [link]
Friday, May 16, 2003
It’s Broke! Let’s Fix It! Despite the sideshow of recent days, I’ve been around long enough to know that the essential business of State government will ultimately get done. It may take a bit longer than expected and have more than its share of the kind of theatrics that give us character, but the schools will open, roads will get built, and bureaucracy will flourish. The quality and quantity of everything (except bureaucracy) may be less than we desire, but the basics will happen.
Hard as it may seem in these days of “Map-Making Rs” and “Killer Ds,” it is useful to take a step back and examine our budget situation from a long-term perspective. To solve the dilemma and keep it from perpetually recurring, we have to accomplish two things. First, we must grow the economy; second, we have to devise a tax system that will be responsive to the expanding needs of the state. I have written ad infinitum about the road to economic development and sustainable prosperity. Let’s plunge into the thorny thicket of taxes.
What’s wrong with our tax system? The answer is quite simple—it doesn’t match the way we produce and spend! We get a big chunk of our state and local revenues from a sales tax that is levied primarily on goods purchased in stores. That was all well and good when it was enacted in the 1960s, but doesn’t reflect today’s world where we buy a much larger percentage of services and are increasingly acquiring our merchandise from non-traditional sources.
It doesn’t stop there. We tax property to fund local schools and, in large measure, cities and counties. Property values fluctuate for reasons unrelated to overall economic growth, such as real estate cycles and mineral values. This tax also falls disproportionately on manufacturers with expensive physical plants (such as high-tech firms), and hits them even in years when they are struggling financially.
Our principle state tax on business is a franchise tax which is levied either on corporate income or capital stock. This tax again falls on large-scale plants even when they are losing money. Combined with the property tax, it gives us very low marks from site selection professionals as we compete for new activity. Moreover, the franchise tax can be avoided through several loopholes to the point that tax specialists often call it “voluntary.”
Added to this milieu is the fact that the major contribution once made by the severance tax on oil and gas is now only a small source of revenue, with the sheer geology of aging fields pretty much assuring that its relative share will decline further in the future. Simply stated, the entire set of major sources of fiscal revenues is inherently incapable of expanding in line with the economy and puts Texas at a disadvantage with the very sectors we need to attract.
It is a virtual demographic certainty that Texas is going to have a rapidly growing population. The axiomatic result is the need for additional governmental revenue for education (at all levels), roads and other infrastructure, health and safety, environmental quality, and other legitimate public goods. Thus, we need a core tax system that is sufficiently flexible to accommodate these fundamental realities. We can get there a number of ways—a broader sales tax, a business activity (value-added) tax, a gross receipts tax, or even the dreaded income tax (I’m not advocating it, but it is one of many options we should at least talk about).
The desire to eliminate the “Robin Hood” school finance plan gives us a real opportunity to scrap the whole system and build a better one. It is a tough job, as any change brings major winners and losers (and, hence, major lobbyists and money). If we don’t do it, however, we are doomed to decades of budget woes. We can’t grow enough to fix a tax structure that is broken.
posted @ 09:25 AM CST [link]
Friday, May 23, 2003
Deflation In the past week or so, the Producer Price Index (PPI), a measure of the cost of making things, was reported to have fallen by a whopping 1.9% in a single month. A few days later, our fearless Fed chairman stated that deflation (a general decline in prices across the economy) was more likely than inflation at present. These two news items combined to rekindle fears of deflation. And, to think, I am old enough to remember when inflation was regarded as far and away our worst enemy.
With all of this talk, I thought a little perspective might be in order. You may initially wonder, “What’s so bad about falling prices?” After all, we have been raised to dread rising prices since World War II, and upward movements have been the grand obsession of the Greenspan era. If you take a bit larger view of things, however, you quickly discover that (1) there has been much more deflation than inflation across the annals of history and (2) it is with certainty the greater problem.
Deflation is essentially bad because it can grind business and consumer activity to a halt. If we fret over inflation, we tend to “buy now” and potentially overheat the economy. While not particularly pleasant, that is an outcome we can deal with. If we expect deflation, on the other hand, we tend to “buy later,” or perhaps “buy never.” If you think something will be less expensive in six months, it is often rational to postpone the purchase. In another six months, the same situation applies. Thus, we tend to curtail our spending dramatically.
In a similar vein, inflation allows us to repay past debts with “cheaper” dollars. The opposite occurs with deflation, thus making it more difficult for companies and households alike to deal with existing loans and creating a disincentive for future acquisitions through financing.
I could go on and on, but the simple fact is that deflation is bad. Period. Having said that, I must quickly add that I see very little possibility of a downward spiral in prices. Such reductions are only ultimately harmful if they reflect a structural drop in aggregate demand—an economist’s weird way of saying that, as a global village, we all decide to permanently spend less. I don’t see that happening.
The recent price declines are largely the result of the direct and indirect consequences of petroleum prices returning to “normal” following the lead up to the War in Iraq. Prices in prior months were higher than they otherwise would have been as a speculative bubble developed in response to perceived risks to the oil supply chain. As the perceived risk diminished, so did the prices. This pattern is part of the typical ebb and flow of the economy and poses no cause for particular concern.
There is also an ongoing decrease in prices for some goods due to gains in productivity and efficiency. Computers, cellular phones, DVD players, and many other things cost less than they once did. Again, that is a good thing. It permits higher wages and purchasing power without fueling inflation.
The actual demand-driven part of recent pricing patterns can be almost exclusively attributed to reluctance on the part of businesses to invest in the face of the uncertainties associated with September 11, corporate accounting scandals, and the threat of war. This triple whammy is unfortunate, but it is also temporary and not structural. Consumers have continued to purchase cars, houses, and other durable goods, and US companies will quickly begin to spend as the uncertainty diminishes (orders are already on the rise in several key sectors) in a very attractive interest rate environment. In short, there is no indication of any permanent shutdown of entrepreneurship and ingenuity.
Deflation. Is it a problem? You bet it is! A really big one! Is it likely to happen? Nope!!
posted @ 07:24 AM CST [link]
Friday, May 9, 2003
A Lone Star Scribbler In the final paragraph of The General Theory of Employment, Interest, and Money, the most influential economics book of the past century, John Maynard Keynes wrote that “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.” I lost a great friend last week—and Texas lost a great academic scribbler—with the passing of Dr. George Kozmetsky.
George was another of the great men in the generation before me who showed exceptional kindness and patience to a budding youngster from the outset. Our friendship began more than 20 years ago, and we have collaborated on numerous projects since that time. In fact, when I received word of his quiet death, a copy of one of his recent monographs he had sent to me was on the table just in front of me. He was prolific and thoughtful to the end.
George Kozmetsky was certainly not your typical academic scribbler. He was highly successful in business, one of the founders of Teledyne. He served as Dean of the University of Texas Business School for many years, started and directed the IC2 Institute (of which I am honored to be a Senior Fellow), and was instrumental in establishing the Austin Technology Incubator. He has won more prestigious awards than anyone can count. His was truly a life of achievement in many arenas. In the midst of all of that, however, I don’t want us to forget that he was indeed a scribbler, a pioneer of great ideas that others would later adopt as their own.
It is difficult to find anyone running for any office in Texas (or elsewhere) today, from Governor to Inspector of Hides and Skins, that doesn’t have a platform which includes being a leader in technology, fostering small business startups and financing, and meeting the challenges posed by emerging demographic patterns and the global economy. These issues transcend political parties and ideologies; they are now an accepted part of our vocabulary. For that we can in no small measure thank Dr. Kozmetsky, who put forth these concepts long before others had recognized them.
In addition to everything else, George was one of only a small handful of folks who was talking about these matters in the 1970s. He wrote; he spoke; he advocated; and he was most definitely a shaping force behind many of the “practical men who believe themselves to be quite exempt from any intellectual influences.” Fortunately for all of us, he also acted on his beliefs. He put legs on his musings and bolstered them with financial muscle. George is one of the key architects of the vision that made the University of Texas a tier one university and a catalyst for a burgeoning technology industry in the state. He helped to shape Austin’s transformation from a sleepy town dominated by State government and a large university to a bustling center of innovation and entrepreneurship. In the process, he played a major role in re-engineering Texas for the better.
We will sorely miss the shrill and commanding voice that could dominate any setting with enthusiastic rhetoric. We will sorely miss the sheer energy that made things happen. Most of all, we will sorely miss the charisma and warmth of a genuinely fine and philanthropic human being. We will retain the legacy of ideas from an impressive intellect and the very real and sustainable progress and prosperity which he fostered. Through a life well lived, George Kozmetsky made Texas—and the rest of the planet—a much better place.
posted @ 06:17 AM CST [link]
Friday, May 2, 2003
No Pay, No Play As anyone who has been around economic development more than 10 minutes is well aware, Texas lacks the flexibility and funding to be competitive in attracting the type of new activity that can keep us growing and prosperous for the next few generations. This point has been made a lot lately. The “Texas, Our Texas” report that my firm prepared said it a few dozen times. The Governor’s Task Force on Economic Growth toured the state last fall and had everybody who was warm stand up and tell war stories about it. During the Toyota negotiations, our leaders discovered that it took months of wrangling and an act by both houses of the Texas Legislature to handle a simple infrastructure matter that should have taken five minutes and a “thumbs up” from the Governor. And, in case you hadn’t noticed, that was the first big one we’ve landed since 1996!
These factors, combined with a sluggish economy and not enough fiscal revenue, created a sense of urgency regarding economic development in this legislative session. Despite the budget malaise, the House passed by a 3-to1 margin a measure which centralizes economic development in the Governor’s office (where it belongs) and provides almost $300 million in funding to do what is necessary over the next biennium to bring desirable activity to Texas. Unfortunately, the Senate did not go along. The bill passed in the upper house also moves everything to the Governor’s office, but provides no money at all apart from the ability to take a few much-needed dollars from our tourism activities. The horse trading now begins.
Quite frankly, the $300 million is not enough. Moreover, it comes from the Rainy Day Fund and, thus, is only a temporary fix. Nonetheless, it is a critical start. To provide a perspective, many states that we regularly compete with have renewable war chests of $1 billion or more and frequently come up with even more if the stakes are high enough. I don’t like this process; if I could live in a philosopher’s world, it wouldn’t exist. As a practical matter, however, incentives for new jobs and investments are a fact of life.
To add yet more fuel to the fire, there are several major (and I do mean “major”) locations in play at the moment, as well as some essential investments to keep what we have. These projects have the potential to bring billions of dollars and thousands of high-paying positions to the state, not to mention cementing our ability to be a center of production for key emerging sectors (such as nanotechnology, biotechnology, and materials science). Even the House version of economic development will not allow us to win everything that comes along. We will have to be prudent, wise, and strategic, but we can accomplish much. If we are somehow expected to compete with fewer resources than we have at present, we are doomed to failure.
As we look beyond the immediate crisis in Austin, there are two things which must happen to assure that we don’t repeat this situation over and over. First, we have to fix a broken revenue system that is structurally incapable of meeting our needs on an ongoing basis. Second, we need consistent, high-quality economic growth. The former is likely to be improved at least to some extent in the coming months as the Legislature tackles the thorny issue of public school finance. The latter requires that we have an intelligent and focused program with enough funding to have an impact. We have the knowledge, experience, basic desirable characteristics, and capacity to be successful. It is imperative that we also have the last essential element to make it happen. The rules of this game are incredibly simple—No Pay, No Play!
posted @ 07:23 AM CST [link]