Category Archives: Economy

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

Assembly Punts on Airbnb

puntby James A. Bacon

Virginia could have been one of the first states in the nation to legalize the short-term rental industry, but after taking a good hard look at HB 812, the so-called Airbnb bill, the General Assembly decided to punt. The legislature will revisit the issue next year, reports the Washington Post.

Airbnb, whose web-based platform connects visitors with homeowners renting rooms, suites and entire houses, has run into opposition from the lodging industry around the country on the grounds that individual renters should be subject to the same taxes, laws and regulations as hotels. Rather than negotiate rules on a locality-by-locality basis, the San Francisco-based company has tried to hammer out laws at the state level.

Here in Virginia, Del. Christopher K. Peace, R-Hanover, took up the cause of small property owners and submitted a bill that would have legalized Airbnb while establishing a framework for collecting taxes and protecting neighbors against nuisances. He got pushback from Del. Tommy Norment, R-Williamsburg, who represents the hotel & lodging industry in the Williamsburg area.

According to the Post, legislators amended legislation to require stricter tax collection and penalties for noncompliance, but the laws must be revisited and approved again by the legislature in 2017. Meanwhile, the state will conduct a study of the short-term rental industry.

“We were making an effort to put Virginia on the map as being proactive, welcoming and embracing the new economy,” said Sen. Jill Holtzman Vogel, R-Fauquier, sponsor of a companion Senate bill.

“Airbnb is here to stay,” said Eric Terry, president of the Virginia Restaurant, Lodging & Travel Association. “It’s something the consumer is interested in and wants to do. We welcome Airbnb, but we just think they should be subject to the same requirements that a bed-and-breakfast or a hotel has to go through.”

Bacon’s bottom line: Technology is scrambling the old economic order. Established industries instinctively utilize the power of government to buttress their dominant position from incursions by newcomers — see how the taxi industry lobbied to freeze out Uber and Lyft — but they are justified in asking competitors in the lodging industry to play by basic rules regarding the collection of taxes, protection of consumers, and the regulation of nuisance. If it takes a year for Virginia lawmakers to work out a thoughtful set of rules that allow small property owners to compete on a level playing field, the delay is arguably worthwhile. If used instead to allow the lodging industry to regroup and defeat the legislation, the delay will be a shameful blow to property owners.

The greatest debate of our era is over the distribution of income and wealth. Airbnb allows small property owners to generate income from empty basements and bedrooms. It is an equalizer that does not rely upon punitive taxation to redistribute wealth. Virginia legislators should make it their business to foster the adoption of new technologies that empower Virginians in small ways.

Another Year Older and Deeper in Debt

credit4credit2

Back in January, Bacon’s Rebellion published a WalletHub ranking of Virginia communities by average credit score. Today, the consumer finance website has dug deeper into the data, compiling a ranking of communities by personal “money management.” The ranking, a composite of indebtedness ratios and related indicators, provides a snapshot of the consumer health of some 2,570 communities around the nation. I have extracted the Virginia communities in the listing.

This list does not differ greatly from the one I published in January, but it contains more data, showing the considerable variation in different types of debt — mortgage, credit card, car and student loans. (What a surprise, Blacksburg, home of Virginia Tech, is loaded up with student loan debt!) Northern Virginia consumers enjoy the least debt as a ratio of income, while Hampton Roads consumers are most deeply mired in debt overall, with Richmond-area consumers close on their heels.

The big surprise is the extent to which consumers outside the Golden Crescent (seen in blue) have refrained from piling up debt. Even down-in-the-mouth mill towns with high unemployment rates, like Danville and Martinsville, maintain a more manageable debt load than communities in Hampton Roads and metro Richmond. Whether that’s due to a rural prudence, institutional reluctance to push credit in these areas, or the prevalence of an older population that has saved more, I don’t know. But the numbers suggest an underlying resilience. As for Hampton Roads, entire region (excluding Yorktown) looks weak — a hangover from sequestration, I suppose, but not one that Northern Virginia appears to be experiencing.

— JAB