A Silver Lining
With little relief from the looming high oil prices over this past year, pocketbooks across the nation have felt the effects at the gas pump and in the cost of many other things we buy. The nation has seen an 86% increase in oil prices so far this year (mid-January to mid-October). After the recent run-up to almost $100 per barrel, there has been some moderation but little expectation that a drop to even last year’s level will occur any time soon.
In general, lower oil prices stimulate economic growth and higher prices hinder economic performance. However, the effects across regions and states can be considerably different. Texas is fortunate to have an upside to the current high-oil-price environment.
Looking around the US, some states are feeling far more of a pinch than Texas. A report by the Natural Resources Defense Council ranked Mississippi, South Carolina, and Georgia as the top three states most vulnerable to fallout from high oil prices (based on each state’s vulnerability and implementations of solutions). Northern states also feel more of a squeeze from high oil prices in the form of heating costs as they move into the winter months.
In Texas, we spend an average of almost 5% of our incomes on gasoline, which places us in eleventh place on the vulnerability ranking. The state leads the nation in total petroleum consumption as well. Clearly, many industries in the state are negatively affected by high fuel prices.
There is, however, “the rest of the story.” Because of the established presence of the oil industry in Texas, higher oil prices are not the grim circumstance they are in states without production and refining capacity. In contrast, the Texas economy benefits from increased activity in the energy sector, which lessens the detrimental effects of high oil prices to other parts of the economy.
The Texas economy has been tied to oil prices since the 1880s, and especially after the “Spindletop” gusher more than a century ago. Historically, the Lone Star State actually faced economic losses with low oil prices and economic benefits with high oil prices. The price of oil had a tremendous impact on the economy in the 1970s and early 1980s when Texas’ economy quickly expanded adding both employment and income growth as the national outlook sputtered. (The “Energy Crisis” in the rest of the US was an “Oil Boom” in Texas.)
The Texas economy is now far more diversified than it was 20 years ago, but oil continues to play a large role. A study by the Federal Reserve Bank of Dallas found that while our economy has become less sensitive to oil price fluctuations, it still responds favorably overall to higher energy prices. I have been modeling the Lone Star State almost 30 years and have consistently found a similar phenomenon even though we have changed from a sizable exporter to a sizable importer of petroleum.
We aren’t the only state to benefit from high oil prices. Trends reveal that unemployment rates in coastal Gulf States such as Louisiana, Mississippi, and Alabama decrease in response to increases in oil prices. Personal income also tends to rise with oil prices.
While the size of Texas and its diversified economy have dampened these effects, they remain and represent a silver lining in the face of rising oil prices. The energy sector is still alive and well.
Texas remains the top oil and gas producer in the nation (excluding production from federally administered offshore areas), accounting for almost 21% of national crude oil production. The state has more than one-fourth of the US oil refining capacity and almost one-fourth of the total US oil reserves.
While not the oil boom of the 1970s and 1980s, the production increase has led to a slowing of the inevitable geological decline of production throughout the state and added to the state’s economy. Record high oil prices have initiated exploration and drilling particularly in the Permian Basin area and the Barnett Shale region in North Texas, and the energy services industry is seeing job creation at levels not seen in decades. The Texas rotary rig count equaled 692 in fiscal 2006, a height not seen since 1985. In recent weeks, the total has topped 850. In addition, mining employment increased 6% last year.
Furthermore, while oil and gas related industries account for less than 3% of total employment in Texas, they are high-wage, high-productivity jobs that represent a much larger fraction of output. Energy remains an important industry, particularly in areas such as the Permian Basin and Gulf Coast.
Texas and other states with a significant oil industry presence receive some economic benefits from high oil prices. While these benefits may not outweigh the costs of such a rapid upward trend in prices for the typical consumer, they certainly lessen the blow to the overall economy.
posted @ 08:01 AM CST [link]
Friday, November 23, 2007
Thankful to be a Texan
We are seemingly bombarded almost constantly with news reports about how bad things are today. Iraq, Afghanistan, recession fears, market fluctuations, oil prices, and housing difficulties are among the major topics of conversation.
There are also myriad suggestions being made by some business leaders and politicians regarding ways to resolve these situations as well as the inevitable finger pointing as to who is to blame. It’s almost enough to make us weary of our existence.
I have always been one to look for the silver lining in every situation, and if you’re a Texan—either native born like I am or one who made it here as soon as you could—you don’t have to search very hard to realize that doomsday is not approaching. Far from it! And Thanksgiving is a highly appropriate time to recognize and appreciate what we do have.
When we think of the traditional Thanksgiving celebration, our minds often go back to what we learned in grade school about the Pilgrims. Of course, we also frequently equate the observation of the fourth Thursday of November with feasts and football, as well as a time for family get-togethers.
Although we usually trace the beginning of Thanksgiving to the time when colonists and Indians first dined together, the celebration did not really begin in America. Most European nations had observed it annually to mark the completion of harvest time long before the Niña, Pinta, and Santa Maria arrived in North America.
During much of US history, Thanksgiving days were used to designate or commemorate special occasions, such as the Battle of Saratoga in 1777, the ratification of the nation’s Constitution in 1789, etc. In 1863 during the Civil War, President Lincoln proclaimed the last Thursday of November as Thanksgiving Day to bolster the Union’s morale. Gradually, Thanksgiving became a time of appreciation, especially of home and family.
With the urbanization of the nation in the 20th century, Thanksgiving became a day that indicated the Christmas shopping season had arrived. In fact, in an effort to appease retailers, President Roosevelt in 1939 shifted Thanksgiving Day from the traditional last Thursday in November to a week earlier to kick off Christmas shopping sooner. After much opposition to the change, two years later he signed a bill establishing the fourth Thursday of November as the official time to celebrate Thanksgiving.
Through all its historic machinations, Thanksgiving has remained in the minds of most people as a day to be thankful and to count one’s blessings. So, in spite of various naysayers’ proclamations about what’s ahead for us economically, I like to consider the positives. Today for Texans, there are many.
Our state economy continues to be a dominant force in moving the nation’s economy forward. Even though difficulties confront us, Texas remains on solid footing. Based on gross domestic product, the Lone Star State ranks among the top 16 economies in the world.
Texas has been the nation’s export leader since 2002, and current reports indicate the success we enjoyed in 2006 will be significantly eclipsed this year. In addition, Texas is among the top states in terms of investments and business relocations and expansions.
Furthermore, the strength of our economy is reflected in the ongoing creation of new jobs. Over the past two months, approximately 47,300 people have been added to the payrolls, bringing the total increase in employment to 206,400 over the past 12 months. Notable expansion has occurred in the number of jobs in 10 of the 11 industry sectors.
Much of this growth is attributed to the state’s dynamic economy and the manner it has embraced globalization. Other contributing factors include the amount of available land and low construction costs, as well as limited regulations and taxes. Of course, the friendly business atmosphere so prevalent across the state also plays a vital role in our success.
Although the economic fortunes of the nation are sometimes marked with slides, shifts, and shortcomings, the US economy continues to move forward, albeit at a more modest pace than in the recent past. For Texas, the picture is even brighter.
Truly, Thanksgiving 2007 is a time of recognition and appreciation and an appropriate occasion to count our blessings. Keep the day (and the season) for what it should be.
posted @ 08:05 AM CST [link]
Friday, November 16, 2007
On the Right Road
If you’ve ever taken a trip with children, you know that one of the many questions they often ask is, “Are we there yet?”
A similar question could be posed in regard to the “Closing the Gaps” initiative established by the Texas Higher Education Coordinating Board, which has a goal of substantially increasing the number of students enrolled in higher education institutions by 2015—630,000 more than in 2000. The answer to that question would be, “Not yet, but we’re getting a little closer.”
Because of the ongoing demand for highly skilled and trained workers, meeting the Closing the Gaps objectives is very important and will certainly enhance the performance of the overall Texas economy. Therefore, progress in these directions is worth noting.
The fall preliminary data recently released by the Texas Higher Education Coordinating Board indicates that aggregate enrollment in the various institutions of higher education in Texas expanded from 1,201,396 in the fall of 2006 to 1,225,817 this year, a 2.03% gain.
The number of students in State universities increased 1.50% over 2006, an addition of 7,345. Enrollment in community and State colleges expanded 2.40% or 13,582 new students. Texas State Technical Colleges enrolled 1,073 more students than last year, which represents a 9.99% hike.
Independent senior colleges and universities added 1,656 students for the fall term, reflecting a 1.44% expansion over the fall of 2006. During this period, the number of students in public and private medical, dental, and health related schools grew by 808 (4.28%). The only group of higher education institutions that experienced a drop in enrollment was independent junior colleges, which lost 43 students.
Of significant note is that approximately 60% of the overall 24,421 enrollment growth across the state occurred in public community colleges. Hispanic students comprised 52.5% of new students in all higher education institutions.
While the Lone Star State is a leader in many areas, it ranks below the US average when it comes to the percentage of its residents 25 years of age or older who have earned bachelor’s degrees. For the nation, the percentage is 24.4%; for Texas, it’s 23.2%. When the state is compared with the national average of individuals over 25 who have earned high school diplomas, the difference is more telling—US–80.5%; Texas–75.7%.
Higher education has never been as important to potential success in the workforce as it is in our modern technological economy. The mean income and the potential for lifetime earnings increase substantially for those with degrees. In many cases, even entry-level positions in major career fields require college degrees.
Approximately 52.6% of students who enroll as freshmen in Texas public higher education institutions graduate within six years. Last year, some 100,202 students were awarded baccalaureate degrees by public four-year schools. An additional 25,643 bachelor’s degrees were awarded by independent colleges and universities.
A well educated workforce is essential to the future prosperity of Texas as it would greatly enhance the performance of the economy. A recent study by my firm found that if all the objectives of the Closing the Gaps plan are met, more than a million more jobs would be generated than if current patterns held.
While there is still a long way to go before we attain the 1.6 million-student Closing the Gaps goal for 2015, we can at least celebrate a positive trend.
posted @ 08:09 AM CST [link]
Friday, November 9, 2007
Making Things Work Better
This time of the year is one of my favorites. The weather is generally pleasant, the leaves provide us a glimpse of nature’s unique pallet of colors, Thanksgiving is fast approaching, and there are still six weeks before the last-minute Christmas shopping rush. It is an all-around pleasant experience.
But there’s another reason why I especially like this time of year. It is one of those rare times when the subject of economics receives worldwide attention for something other than dry statistics or political rhetoric due to the announcement of the Nobel Prize recipients. Although Al Gore and the United Nations’ Intergovernmental Panel on Climate Change have garnered the lion’s share of media attention for winning the Peace Prize, ten other individuals have also been recognized for their nonpareil efforts—three in economics, three in medicine, two in physics, one in chemistry, and one in literature.
Since 1901, the Nobel Prize has been awarded in the fields of physics, chemistry, medicine, literature, and for work in peace. However, no award was given in economic sciences until 1969. In that year, the Sveriges Riksbank (Bank of Sweden) established an award in memory of Alfred Nobel, whose estate had originally provided for the earlier awards. The Norwegian bank’s award is now commonly known as the Nobel Memorial Prize in Economics and is awarded along with the others (the Peace Prize is given in a separate ceremony).
On December 10, the economics prize will be presented in Stockholm, Sweden to US citizens Leonid Hurwicz, Eric S. Maskin, and Roger B. Myerson “for having laid the foundations of mechanism design theory.” The 90-year-old Hurwicz, who was born in Moscow, is the Regents Professor Emeritus of Economics at the University of Minnesota. He is credited with initiating the mechanism design theory in 1960. His fellow recipients, Eric S. Maskin (the Albert O. Hirschman Professor of Social Science, Institute for Advanced Study, Princeton University) and Roger B. Myerson (the Glen A. Lloyd Distinguished Service Professor at the University of Chicago) further developed it.
Their initial studies dealt with how game theory could help determine the most efficient procedures for allocating resources based on available information and the incentives of those individuals or groups involved. Their work basically involved investigating how information is used in society to allocate resources. Prior to the efforts of these men in mechanism design theory, the search for answers related to decision-making procedures was much less coherent and incomplete. In many respects, it built on the work of John Nash (of “A Beautiful Mind” fame) and helped bring it into all sorts of arenas to make our lives better.
This theory has enabled economists, governments, and businesses to better distinguish situations where markets work well from instances when they do not. In general, their theory describes motivations for individuals involved in markets to work together to allocate resources. A major emphasis of their work is planning and helps explain why some approaches work better than others.
The theory has changed the kinds of tools and language used by economists to analyze particular matters. It has also enabled economists to identify efficient trading mechanisms and regulation schemes as well as procedures related to voting. It has yielded better capacity to provide the institutional framework for markets to work better and the political and legal systems necessary to supplement markets when they don’t work in the traditional way. As the world economy becomes ever more competitive and integrated, evolving such structures becomes increasingly critical.
The contributions of all 797 men, women, and organizations receiving the Nobel prizes over the past 106 years have had and continue to have significant impact on individual lives and society in general. While the efforts of Hurwicz, Maskin, and Myerson may not be as visible or as easy to understand as the work of some other recipients, their theory has had a profound influence in myriad areas of economics, as well as political science, law, and everyday life. They are most worthy of joining this exalted pantheon.
The Shrinking Dollar
Playing on the movie title, “Honey, I shrunk the kids,” Americans today might well say, “Honey, they shrunk the dollar.” The physical size is still the same, of course, but the value has diminished, especially when compared to some of the world’s other leading currencies, particularly the euro, the dollar’s main competitor for the attention of the world these days.
For most of the 20th century, the American dollar was “king of the hill” and, in fact, the US was the only major country that was economically stronger at the end of World War II than at the beginning. The US dollar became the standard by which everything else was measured. Until the early 1970s, most exchange rates were pegged to the dollar and any reduction in a currency’s value relative to others was known as a “devaluation” and could be an enormous blow to national pride. Today, currency prices change second-by-second, resulting in more focus on market trends.
Other things have changed over the past generation as well. While the US is still a military super power, it is no longer the only key economic power. The downward trend of the dollar’s value is not news to economists or Wall Street, but it is often a shock to the average American, especially for those who venture outside our borders. In many parts of the world, a dollar buys less than it did this time last year and much less than four years ago.
In November 2005, the exchange rate for one euro was $1.17; today, it is around $1.44. This rate is discouraging Americans to travel to Europe because of the rising costs. The loss in the value of the dollar is not all negative, however, as it is encouraging more Europeans to journey to the US where they can purchase American services and products.
The shrinking value of the dollar also benefits US manufacturers because trading partners are more willing to buy greater amounts of American products. In other words, a weak dollar does not necessarily mean a weak economy. Such a situation encourages US exports and helps narrow our trade imbalance.
On the flip side, however, products from the 13 nations whose currency is the euro are costing US consumers a bit more which, in turn, forces the Federal Reserve to work smarter to maintain stable prices while at the same time attempting to promote economic growth. Situations like the recent mortgage debacle can really complicate matters.
The US has been running huge budget and trade deficits for some time. As a result, we are heavily dependent on foreign investment in US Treasury bonds to cover the deficit. Last year, our nation had to attract about $3 billion every working day in order to bridge its deficits, which were about 6.5% of the gross domestic product.
The drop in the value of the dollar has the potential to create less demand for US Treasury bonds, the result of which could cause a rise in long-term interest rates. In such a case, borrowing costs would increase for our government and probably result in higher mortgage payments for many American homeowners. Although it is highly unlikely, if foreign businesses sense a significant rout of the dollar, they could decrease their purchases of US bonds or dump their holdings and thereby cause a significant crisis. Because we remain the world’s model for political stability in very uncertain times, the odds of that happening are about the same as those of the Cubs winning the next ten World Series.
As Americans, we spend way more than we save, and we love to shop. This inclination to live beyond our means has exacerbated the nation’s borrowing binge over the past 20 years or so. The Bush administration, like its predecessors, believes the strength of the dollar is highly important to the ongoing growth of the economy, but they differ in believing that the marketplace should determine the worth of the currency. The lessening of the value of the dollar is the market’s way of trying to stem the tide and slow borrowing trends. As noted above, it is also somewhat self correcting in that it tends to encourage exports and discourage imports.
The responses we make to these market stimuli could well determine just how far the dollar is going to shrink. Moreover, our actions will help define whether the weaker dollar is good news or bad news in the long run.
posted @ 07:59 AM CST [link]