Category Archives: Economy

Virginia Economic Growth Still a Struggle

New home of Phone2Action -- celebrating small victories.

New home of Phone2Action — celebrating small victories.

Straws in the wind regarding Northern Virginia’s business climate:

Budget sequestration may be a thing of the past, but the federal budget squeeze is not. In her latest Richmond Times-Dispatch column, economist Chris Chmura notes that in the fiscal year ending Sept. 30, 2015, federal spending on contracts fell 4.4% — some $2.4 billion — in Virginia. About two-thirds of that was defense spending. With slow economic growth and Baby Boomer retirements driving Medicare spending ever higher, there is likely no relief in sight. Short of another big war, it seems to me, it is difficult to imagine a strong rebound in federal contracting.

Meanwhile, Washington, D.C., continues to gain competitive advantage over outlying jurisdictions in the metropolitan region. Even Arlington County, which is highly urbanized, close to the urban core, and blessed by mass transit and walkable neighborhoods, is feeling the challenge. “The county is … facing heavy competition from Alexandria and D.C., both of which are aggressively recruiting the same pool of talent,” writes Daniel J. Sernovitz with the Washington Business Journal.

The competition has gotten so fierce that Governor Terry McAuliffe made a trip to Arlington last week to celebrate the leasing of 3,586 square feet on Wilson Blvd. by Phone2Action, a 25-employee startup that had recently landed $4.7 million in venture funding. The governor provided $127,800 in state assistance. According to Sernowitz, Opower, an energy conservation company, has wangled money out of the state and Arlington County, to stay in Arlington rather than move to the district. Meanwhile, Arlington and Alexandria, he reported in February, felt compelled to set aside more funds for business recruitment.

To mangle an old phrase, if Northern Virginia sneezes, Virginia catches a cold. The commonwealth finished the 2016 fiscal year $266 million in the red, as revenues increased only 1.7%, short of the projected 3.2%.

— JAB

The Hidden Risk in Money Market Funds, and What It Means for Virginia

Cranky old man... or seer of the future?

Cranky old man… or seer of the future?

by James A. Bacon

I’m sure many readers are tired of hearing my jeremiads about excess debt, fiscal unsustainability, and the necessity of re-engineering Virginia institutions to survive the inevitable reckoning. Well, too bad. The global economy is severely out of balance, Virginia is part of that economy, and we will suffer the consequences when the world’s 21st century experiment with fiscal and monetary perpetual motion machines collapses. State and local polities that prepare for the inevitable storm will be in a better position to ride it out.

Bacon’s Rebellion has explored the unintended consequences of the Federal Reserve Bank’s policy of monetary easing, which has been magnified by comparable policies of monetary easing and reckless credit creation in the European Union, China and Japan. While near-zero interest rates benefit the world’s largest debtor, the United States federal government, it punishes savers and the institutions that serve them. Thus, the Social Security and Medicare trust funds are generating lower income from their surpluses, leading to premature depletion. Insurance companies are earning less on their capital, causing them to increase premiums. The rate of return for pension funds are earning less money, compelling corporations and governments to bolster their contributions.

Even money market fund are affected. A new study published by the National Bureau of Economic Research, “The Unintended Consequences of the Zero Lower Bound Policy,” has found that zero-interest rate policies create problems for savers who park their cash in seemingly safe money market funds. In an effort to deliver non-negative net returns to their investors, portfolio managers have not only reduced expenses charged to investors but chased higher yields by taking bigger risks.

That money market fund you think is a safe and stable repository for your cash? It may not be as safe and stable as you think. Not only is the yield approaching zero, but you may be shouldering risks you didn’t know existed. What’s worse:

Although our empirical results speak mostly to one part of financial markets, we want to emphasize that the effects we document are not necessarily limited to [the] money fund industry only. The reaching-for-yield phenomenon has been observed in other markets: for example, an average insurance company has shifted its assets toward riskier equity holdings, reaching the level of equity exposure of almost 20% in 2014. Similarly, pension funds expanded their holdings into more than 60% equity, away from typically held bonds. More work is needed to better understand the transmission mechanisms underlying the effects of the zero lower bound monetary policy on the stability of financial markets.

Just as generals are said to fight the last war, economic policy makers fight the last recession. Just as the masters of the universe in Washington, D.C. pursue policies to prevent a repeat of what they failed to foresee in 2007, they are blind to the extraordinary leverage built into the global economy, the linkages between sectors, and the mechanisms by which defaults in one corner of the globe will spread panic and chaos to other parts of the globe.

The best way for state and local lawmakers to insulate Virginia and its communities is (a) to curtail borrowing and (b) stop creating new long-term obligations that cannot be readily pared back. That’s not to say that we should cease borrowing altogether or refuse to launch any new programs, but it is to say that we live in times of great volatility and unpredictability and we should set higher standards for incurring any new liability.

The New Map of Economic Growth

Jobs growth during the recovery from EIG

by James A. Bacon

Not only has job creation and new business formation been weak in the current business cycle, it has been more concentrated geographically than in the past. Unfortunately for the Old Dominion, between 2010 and 2014 that concentration did not occur here.

This analysis points to very different futures for American communities, suggesting that the gains from growth have and will continue to consolidate in the largest and most dynamic counties and leave other areas searching for their place in the new economy,” writes the Economic Innovation Group in a new publication, “The New Map of Economic Growth and Recovery.”

The report buttresses an argument familiar to Bacon’s Rebellion readers: that larger metropolitan areas enjoy a significant competitive advantage in the Knowledge Economy. Skilled and educated employees seek large labor markets that provide a diversity of employment opportunities, while corporations seek larger, deeper labor markets that provide access to a diversity of skilled and educated employees. The dynamics of labor markets outweigh factors that confer competitive advantage in the old industrial economy such as access to transportation and natural resources, lower labor costs, low taxes and a low cost of doing business.

In summary: Large metros enjoy a major competitive advantage, smaller metros are teetering on a knife’s edge, and rural areas and small towns are hosed.

“The U.S. economy is becoming far more reliant on a small number of super-performing counties to generate new businesses,” EIG says. “A mere 20 counties accounting for only 17 percent of the U.S. population were responsible for half of the net national increase in business establishments from 2010 to 2014.”

The report does not speculate whether the trend is the result of temporary economic or political factors or is an irreversible long-term trend.

Graphic credit: EGI

Graphic credit: EGI

Two trends contribute to the sharp decline in the number of businesses: a higher rate of firm deaths (more companies getting acquired or going out of business) and a collapse in new business formation, as can be seen below.

births_deaths

What could account for these trends? One logical possibility: In a blast of creative destruction associated with the digital economy, a relatively small number of new companies are displacing many established businesses. Another possibility: A wave of economic regulation in recent years has hobbled large swaths of the economy — the banking industry, the Internet, health care, energy, and so on — and has created new economies of scale that favor large, established corporations, encourages mergers and consolidations, and throws up barriers to entry to new firms. Most likely, both are at work.

Weakness in the national economy means that everyone is swimming upstream. Only a small number of metropolitan areas are strong enough to make any progress swimming against the current. Mega-trends favor the mega-metros.

But mega-trends won’t tell the whole story. Some large metros bungle their opportunities though corruption, business-hostile policies and mal-investment of public resources. Some smaller communities buck the broader trends by building defensible economic niches. The news from the EIG report is discouraging, but short-term trends need not dictate our long-term destiny.

Virginia Sleeps through the Blockchain Revolution

Blockchain - 2A bitcoin for your thoughts? Approximately eight years ago Satoshi Nakamoto published a white paper entitled, “Bitcoin: A Peer-to-Peer Electronic Cash System.”  CoinDesk, a company dedicated to reporting on bitcoin, defines bitcoin thus: “Bitcoin is a form of digital currency, created and held electronically. No one controls it. Bitcoins aren’t printed, like dollars or euros – they’re produced by people, and increasingly businesses, running computers all around the world, using software that solves mathematical problems. It’s the first example of a growing category of money known as cryptocurrency.” Bitcoin attained some mainstream media infamy when the FBI shut down the website named Silk Road which was accepting it as payment for the sale of illegal drugs. Silk Road and the man who founded Silk Road, Ross Ulbricht, had bitcoins worth approximately $100 million at the time of his arrest. Over the next two years the U.S. Marshal’s Services auctioned off the seized bitcoins for about $80 million.  As it turned out Mr. Ulbricht would have no use for those bitcoins since he was convicted on a host of charges and sentenced to life in prison without the possibility of parole. Today, over 100,000 merchants worldwide accept bitcoin payments.

Ian Drury and the Blockchains. At the heart of the bitcoin system was a brilliant bit of software design called a blockchain. Technically, the blockchain is a form of distributed database. Functionally, it serves as the public ledger of all bitcoin transactions. It’s the blockchain that gives bitcoin owners faith in the value and provenance of their bitcoins. That might have been an interesting footnote to the 15 minutes of fame enjoyed by bitcoin. However, as so often happens in technology, people began to see blockchain as much more than a foundation for a cryptocurrency. Blockchain-based systems are now seen as revolutionary changes to industries from banking to shipping to rental cars. Just as dirty dishes gave rise to penicillin, bitcoin has given rise to blockchain.

The Swiss Army knife of software. Blockchain-based systems are now seen as revolutionizing functions as diverse as stock settlements, diamond insurance, medical records management and government record keeping.

Asleep in River City.  Given the potential magnitude of the blockchain revolution one would think that the business development geniuses in our state government would be awash in blockchain ideas. It could make Virginia ports more competitive, add transparency to government record keeping, reduce the costs of government and the headaches of complying with regulations. Vermont has an active program in place to enable self-service government. Delaware is pioneering the use of blockchain-based smart contracts to help public and private enterprises lower transaction costs.  Virginia?  ** sound of crickets chirping **.

Not dead yet.  While the Virginia General Assembly slumbers through modernity a small group of Virginians hailing from Blacksburg see the future and are acting on it. Follow My Vote is a start-up trying to use blockchain technology to implement “a secure and transparent voting system for the modern age.” Excellent work!  Perhaps, one day, we can use blockchain voting software from Virginia-based Follow My Vote to finally throw the bums out!

— D.J. Rippert

Has Virginia’s Economy Turned the Corner?

employment_growthGood news on the Virginia employment front. After two years of sequestration-related stagnation, employment in Virginia grew faster than the national rate year-to-year through February 2016 — 2.5% compared to 1.9% — according to figures released by the Virginia Employment Commission. Growth was strongest in the Winchester and Richmond MSAs but it was solid where it counts the most, Northern Virginia, the state’s largest metro. Hampton Roads and Lynchburg continue to lag the state and national economies.

As a resident of the Richmond region, I am particularly heartened by the Richmond numbers. Northern Virginia and Hampton Roads had an excuse for their lagging performance in recent years — their military-dependent economies were hammered by sequestration-related budget cuts. Richmond had no such excuse; federal spending is modest here. As memory serves, this past year is the first in the current business cycle that Richmond has significantly outperformed the national economy.

Not only do the overall employment numbers look good, the strongest growth in the Richmond region took place in the professional and business services sector, a highly compensated occupational category. Growth was up 9.6% of the period, the Richmond Times-Dispatch quotes economist Chris Chmura as saying. State government employment, down 0.4%, was not a factor.

Since getting hammered during the recession, Richmond has been reinventing itself. Dramatic change has taken place not reflected by the overall employment numbers. The economy is less dependent today upon a handful of large employers like Infineon, Circuit City and LandAmerica, all of which disappeared in the recession. A new generation of entrepreneurs is rising to the fore. The region is more vibrant than it has ever been in the 30 years I have lived here.

Fed Theft Update: $749 Billion from Bank Depositors

silent_theftFederal Reserve Bank suppression of interest rates has cost bank depositors $749 billion in interest income on savings accounts, CDs, and money market accounts over the past six years, according to Richard Barrington with MoneyRates.com.

Quantitative Easing has made possible one of the greatest redistributions of wealth in United States history. Unlike with taxes, which tend to be highly visible, most people don’t understand how interest rate suppression affects them. Low interest rates have devastated not only bank account savings but public and private pension funds and savings vehicles such as insurance policies. Beneficiaries are borrowers, including house buyers, car owners, college students, credit card owners, corporations leveraging their balance sheets, and, of course, the U.S. government. Every percentage point in interest rate suppression across the yield curve benefits Uncle Sam to the tune of $180 billion a year.

So, how did Barrington calculate the cost to bank depositors?

MoneyRates.com starts with the total amount on deposit at U.S. banks as of March 31, per the FDIC. That total is then increased by average money market rates over the subsequent year … and then adjusted for the inflation rate over the same period. The difference between the resulting figure and the original amount on deposit at U.S. banks represents the hidden cost of the Federal Reserve’s low-rate policy.

The little guy knows the system is stacked against him. He just doesn’t know how. Pass this blog post around.

— JAB

The Decimation of Coal Production and Alienation of the Working Class

coal_production

In rejecting the extension of coal tax credits Friday, Governor Terry McAuliffe noted that the number of coal miners employed in Virginia has tumbled from 11,100 in 1988 to less than 3,000 in 2015.

At one time — the late 70s and early 80s, as I recall — coal mining employed more than 20,000. Since then, many jobs have been lost to automation, and more to declining production. Coal has been mined in Virginia for more than 100 years, and all the thick, easily accessible seams have been tapped out; it’s not easy extracting coal profitably from three-foot-thick coal seams. In the past decade came the fracking boom, which allowed natural gas to displace coal in the utility market, as well as the Environmental Protection Agency crackdown on mercury and other toxic byproducts of coal combustion. The Clean Air Act, assuming it moves forward, likely will be the death knell of steam coal in Virginia, leaving only a handful of mines producing metallurgical coal for steel making.

From 1988 until 2015, McAuliffe said, coal mine operators, electricity generators and other coal-related companies claimed more than $610 million in tax credits. “It would be unwise to spend additional taxpayer dollars on a tax credit that has fallen so short of its intended effectiveness,” stated McAuliffe in a press release.

It seems cruel to kick the coal mining industry when it’s down, but McAuliffe has a point. A 2012 report by the Joint Legislative Audit and Review Commission (JLARC) found that while the credits had slowed the decline of coal production and employment, both declined at the same or even faster rates than were predicted before the credits were created.

If we want to help the economy of far southwestern Virginia, there are probably better ways to do it. If there are only 3,000 coal mining jobs left, there’s nothing much to save anyway!

Not surprisingly, inhabitants of Southwest Virginia are among the most disaffected and alienated in the state, as can be seen by these two maps from the Stat Chat blog showing the percentage of votes that went for Donald Trump in the Republican primary, and, less lopsidedly, to Bernie Bernie Sanders in the Democratic primary.

trump_voters

sanders_voters

Buchanan County, in the heart of Virginia’s coalfields gave 70% its votes to Trump in the Republican primary.

Clearly, alienation is not limited to coal miners — it permeates the southern tier of counties across Virginia where local economies traditionally were built around tobacco, textiles, apparel and light manufacturing. Trump voters have been the losers in the world of globalization and the knowledge economy.

I wish I had an answer for what it takes to salvage Southwest Virginia, but I don’t. The Tobacco Indemnification and Community Revitalization Commission has been throwing money at the problem — workforce development and incentives for light manufacturing, mostly — but doesn’t have much to show for it. The region is just too rugged, too isolated, too hard to get around, and too bereft of workers with skills valued in the knowledge economy to attract much investment.

Sadly, the only long-term solution may be the emigration of young people in search of job opportunities elsewhere.

— JAB