Category Archives: Economy

Virginia’s economy continues to sputter

Blue state blues.  The Associated Press is summarizing Virginia’s latest Comprehensive Annual Financial Report regarding the economic health of The Old Dominion.  The news is bleak.

“Personal income grew 4.1 percent in Virginia compared to 4.5 percent in the U.S. Housing prices in Virginia rose 5 percent compared to 6.8 percent nationally. Virginia also lagged behind the national average in employment growth and the number of new building permits for privately owned housing.”

It sees that as Virginia continues to turn from red to blue politically it is also turning from red hot to icy blue economically.  Coincidence?  Perhaps.  However, to the victors go both the spoils and accountability for results.  Democrats have won every state wide race in Virginia since 2009.  Perhaps it’s time to start asking the Democratic politicians some hard economic questions. Continue reading

Amazon Deal Could Create 59,000 Virginia Jobs

Amazon, Inc.’s $2.5 billion investment in major new East Coast headquarters in Arlington/Alexandria will generate $14.2 billion in economic activity over the next 12 years, projects a new study by Richmond-based Chmura Economics & Analytics. While Amazon has committed to hiring 25,000 employees, indirect effects of the investment will create more than 59,000 jobs.

“The entire state of Virginia will benefit from Amazon’s decision to locate part of its second headquarters in Northern Virginia,” said Christine Chmura, the firm’s CEO and chief economist. The Richmond Times-Dispatch has the story here. Continue reading

2019 General Assembly Session – Sports Betting Legislation Prefiled

Republican General Assembly Member

I’ll take the Giants by 2.  Sports betting was made illegal in the United States through the federal Professional and Amateur Sports Protection Act of 1992 (PASPA). The legislation was signed into law by George H.W. Bush.

I’ll bet the Supreme Court overturns PASPA. Had you made that bet you would have won. In May, 2018 the US Supreme Court ruled PASPA unconstitutional. The high court decided that individual states should be able to decide for themselves whether to allow sports betting.

What’s the line on the Virginia game? Del Mark Sickles, D-Fairfax County, has pre-filed HB1638 to make sports betting legal in Virginia. However, the line on Virginia would not be applicable since all Virginia collegiate and professional teams would excluded from legalized sports betting. Sickles legislation would only authorize online betting and would allow for a maximum of five licensees with a revenue tax of 15%.

Party Boy Petersen. On the Senate side Chap Petersen, D-Fairfax, has publicly stated that he will also introduce legislation making sports betting legal in Virginia. Petersen’s promised 2019 sports betting legislation would add public places as legal betting sites in addition to Sickle’s online venues.  As Petersen told the Virginia Mercury, “I’m not interested in people sitting in their parents’ basement with their pajamas on betting on a ‘Monday Night Football’ game, I want this to be part of a social entertainment package where people get out and spend money.” Party on, Chap!

What’s the vig? Oxford Economics estimates an annual $5.2 billion betting handle with $380 million in net revenue.  The state’s 15% would come to $60 million per year. Since the Virginia State Lottery would administer the sports betting, the lotto gang would also take a cut of the action. The rest would go to research projects at state universities under the Sickles approach but would become aid to Virginia community colleges under the Petersen plan.

The odds of passage  I’m going to go with 3-1 against passage of this legislation in 2019. I predict that the usual gang of ossified, conservative, downstate Republican legislators who wax poetic about the importance of liberty will block Virginians from having the liberty to make sports bets.

— Don Rippert.

Do They Want a Low Tariff? Or A Higher One?

Three bottles from the private stock – and the price difference was not the tariff. (The Virginia wine goes with tomorrow’s turkey.)

Unlike most we met, the wine salesman in the shop in St. Emilion did not speak English well, but as he poured samples it began to matter less.  When he heard we were from Virginia, though, his response was quick: “Oh, good wines!”  We had to agree, but the case we shipped home was pure Bordeaux.

When President Trump made his recent threat to impose higher tariffs on French wine, that got my attention, and then I read in this morning’s Richmond Times-Dispatch the argument put forward in support by a Virginia wine producer.  He provided some details that Trump omitted, such as what the tariffs now are.

On a case of wine imported from France, 60 cents.  On a case of wine exported to France, up to $3.48.

According to data from the International Trade Center, the United States imported $1.8 billion worth of French wine in 2017, while France bought just $71 million worth of American wine. That makes the United States the largest market for French wine, accounting for 17 percent of the country’s exports.

 “This is largely because the tariff disparity makes it nearly impossible for wineries here in America to compete,” wrote Al Schornberg of Keswick, just a short trip away from El Presidente’s family operation.

That isn’t it, guys. A difference of 24 cents per bottle?  Equalizing or eliminating those tariffs will not markedly change your appeal to European markets.   My wife and I gave up most other forms of alcohol about two decades ago, and we started visiting Virginia wineries and were pleased as the quality improved.   We visited another one up in Albemarle two weeks ago, White Hall, and brought home three bottles.

But the small wine fridge we have is also stocked with product from California, Argentina and Germany, and usually the most expensive bottles we have are those from Virginia.  The volume and efficiency of Virginia’s operations cannot produce quality at the same price. Not yet.  But that should be the goal.

Schornberg mentions the real problem: “For years, I’ve been searching for a distributor to carry our wines onto the shelves of stores around the country. Instead, time and time again, I am told that our wines are too expensive to compete with the wine portfolios of French distributors.”  But wait, on those transactions there is no domestic tariff.

What Virginia’s wineries can do is provide a lovely setting for an outing and continuing to heavily market that should also be a key strategy.  Another key part of the picture is to look at the barriers to shipping cases across state lines or internationally.   Years ago, I did some work for the Virginia Wine Wholesalers on that front, but I don’t know the current state of the law.  Removing any remaining barriers to direct shipment might help more than an equalized tariff.

Shipping that case from St. Emilion proved to be a challenge, far more complicated than a similar effort to ship wines back from Monterey or Sonoma, California.  I ended up getting a bill for import duties.  Truly free trade would remove both tariffs and direct shipment barriers.

When I see this argument start, on any product, I’m always wondering if a level playing field is not the real goal, if the proponents are really after a protective tariff.  It is going to have to be a whopper to remove the price differential on French and Virginia wines of similar quality.  Better to keep the competition going, because that is what will bring Virginia’s industry to world class level.

Unprecedented Details Available on Amazon Deal

The most unprecedented thing about the state and local incentive package for Amazon announced yesterday is its transparency.  Never has this much detailed information been provided to the general public immediately upon announcement, outside the protection of a non-disclosure agreement, and apparently the details will continue to flow.

Virginia Economic Development Partnership President Steve Moret had a long set of slides for the House Appropriations Committee meeting in Harrisonburg yesterday, and presumably will offer the same presentation to Senate Finance tomorrow in Williamsburg.  Please take some time to flip through it, along with the highlights on Governor Ralph Northam’s website.

No question, everybody involved knows there is a sales job ahead before the General Assembly votes on the elements it must approve.

The cash flow chart, reproduced above, shows the benefit of working with a company that is so wealthy, so confident of its economic future, that delayed gratification is fine.  Too often the C-Suite Occupants cannot wait beyond two or three quarters to collect the incentives, and really want them up front so the net present value of their own investment is reduced.

Secretary of Finance Aubrey Layne was quoted in the Richmond Times-Dispatch this morning saying there would be only a minor cost to the state in this current budget cycle, and the chart bears that out.  This is a deal for the long haul.  Which may add to the impression that Amazon really was coming to be close to the Capital Region all along and the incentives were not the driving force here.

Not that a company like Amazon in this corporate environment was going to come without incentives.  But the initial impression is New York had to fork over far more, an indication that location was the one truly in play for economic magnets.  For us the competition was Maryland.  The second location in New York also adds credence to earlier doubts that Virginia could really host and support the full proposed operation.

What the state and localities have promised to do for Amazon and its supply chain closely mirrors the specifications the company laid out in its request for proposals.  There are to be major investments in transportation assets, of obvious value to others in the region, and in higher education.  A similar, if smaller, investment in higher education was made to lure Rolls Royce to Petersburg, and while that plant has not met expectation, I suspect the high-value engineering programs created persist.

There is a somewhat symbolic promise of money to K-12 education, but that’s going to be the rub:   Can Virginia’s network of public and private K-12 schools produce the thousands of additional college-ready computer science applicants? Clearly Amazon is interested in building that supply chain locally, as well, and watch Maryland match Virginia’s efforts.   But right now more 7th and 8th graders need to buckle down in math.  Will the lure of working for Amazon focus them?

While the major cash incentive of $22,000 per job (and the company has said it might be hiring 37,850 eventually) is paid only after the jobs and tax flow are in place, it is still a massive precedent.  The next deal discussion will start there.  This package and the earlier Micron incentive package blow away previous examples, and while Virginia can continue to brag it is cautious, and the taxpayers have some protection, the word “conservative” is out of the discussion.

An interesting footnote in the outline of the proposed memorandum of understanding:  Jobs paying in excess of $850,000 will not count toward the promised average salary of $150,000.  Having negotiated deals on behalf of a shipyard paying hourly wages, that rarefied discussion is mind-bending to me.

Virginia is now right in there with everybody else, buying the business.  Yes, New York paid more and yes, many of the things being bought by Virginia taxpayers will have overall value to the region and the Commonwealth.  But the tail is wagging the dog.

Those who watch the business channels know that one of the lingering stories this week has been the slow death spiral of the Amazon of an earlier age, General Electric.  There are cycles to these things, and the excitement of the moment must be tempered with the truth that the disruptive innovation that built Amazon will take it down one day, or shatter it.  But if the 37,850 jobs, or even the 25,000, do not come to pass or do not linger, perhaps the roads and Metro enhancements and the higher education campus will.

Moody’s: Virginia Local Government Credit Quality Healthy despite High Debt Burdens

Moody’s bond ratings for 28 cities and 38 counties in Virginia. Source: Moody’s. (Click for larger image.)

Moody’s, the bond-rating firm, has disseminated a new report on the credit quality of Virginia local governments — answering many of the questions we have been posing on this blog.

The good news is that Moody’s rates Virginia’s business climate highly and says that local governments have “wide latitude” to protect their bond ratings by raising taxes and cutting expenses.

The bad news is that local-government flexibility to raise property tax rates might reassure bond holders but is not a prospect that taxpayers will relish. Which raises the question: How likely are local governments to raise property tax rates? Moody’s does not get into that, but it does observe that that Virginia local governments have high debt burdens, big pension obligations, and aging infrastructure to contend with.

For your reading pleasure, I have extracted verbatim the high-level conclusions from the Moody’s report:

  • High debt burdens can constrain local governments’ financial flexibility. In general, Virginia local governments have debt burdens that exceed national medians, largely due to debt issued for schools. High debt burdens lead to higher-than-average fixed costs, including debt service, the annual required contribution for pensions, and the “pay-as-you-go” portion of retiree health benefits. In turn, local governments’ flexibility to raise funds to address capital needs faces limits.
  • The federal government’s major role in Virginia’s economy is a strength but carries some risk of cutbacks. The state is home to the world’s largest naval base and the Pentagon as well as a number of non-military operations. In 2016, it ranked first in the US in military spending as a share of gross state product (11.8%). While the Hampton Roads and Northern Virginia economies benefit from the large federal government presence, both face exposure to federal budget reductions, though massive cuts are unlikely.
  • Continued private-sector investment will boost revenues and provide stability. A highly education workforce, weak union protections and significant population growth will continue to generate private-sector expansion. The expanding private sector will fuel tax base growth and provide a stabilizing factor in case of cuts in military and other federal government spending. Virginia has experienced a substantial bump in Eds and Meds with the higher education and healthcare industries consuming a greater share of employment.
  • Legal framework helps local governments maintain solid reserves. Cities and counties can raise property taxes, their largest revenue source, without state-imposed caps or voter approval. The ability to control the tax rate, along with flexibility to reduce personnel costs, has contributed to strong financial positions. However, operating funds include school operators, so reserves generally trail national medians.

I’ll provide details in future blog posts.

Virginia is for Lovers of Tax Cuts

by John Sims

After years of sluggish post-recession growth, our state’s recent history shows that Virginia is for lovers of pro-growth policies—at the foundation of which is the Tax Cuts and Jobs Act.

Efforts to pursue these pro-growth policies have led to a red-hot economy. According to the latest report from the Bureau of Labor Statistics, the nationwide unemployment rate dropped to the lowest level in 49 years: 3.7 percent. For Virginia, the rate is even lower, at 3 percent.

Moreover, job creation is competing with wage growth in a race to the top. Wages are growing at their fastest rate in a decade, and Virginians from Fairfax to Halifax are feeling the love. From the first quarter of 2017 to 2018, 11 of the 12 largest counties in Virginia saw increased wages, while Richmond’s average wage growth was among the top performing cities in the country.

These vibrant economic indicators are just the beginning. Projections show that over a four year period, the 2017 Tax Cuts and Jobs Act will be credited for creating almost 25,000 jobs in Virginia, while the average Virginia worker will realize a take-home pay increase of almost $25,000 over the next 10 years.

Recent polling conducted by the Job Creators Network and ScottRasmussen.com shows that Americans, regardless of political persuasion, are generally supportive of tax cuts and other less restrictive fiscal policies. Sixty-three percent of Democrats, 84 percent of Republicans, and nearly three out of every four independents support free markets and individual liberty.

Embracing individual freedom helps create a level playing field between Wall Street and Main Street. Virginia is home to over 700,000 small businesses, which employ almost half the state’s workforce. By cutting red tape and supporting job creation, tax cuts keep hard-earned revenues in the communities that created them.

Conversely, tax hikes allow for the federal government to expand, which in turn causes bureaucracy and bloat. Only 27 percent of all Americans want a larger role for the federal government. Even Democratic Governor Terry McAuliffe has admitted that Virginia needed to diversify its economic portfolio to decrease our reliance on the federal government, and has credited lower tax rates for attracting businesses.

Congress is working hard to lock in long-term economic growth. Last month the House passed what’s been dubbed “Tax Cuts 2.0” which would make the individual tax cuts (set to expire in 2025) permanent, and would expand tax breaks for start-ups.

These savings give folks freedom to choose how to create a better future for themselves and their families. The formula is simple: whatever it is you do, work hard, and you’ll be rewarded. That’s it. It was always your money; use it as you see fit.

Virginia is an incredibly diverse state, with diverse needs. Whether you’re a veteran in Hampton Roads, a doctor in Richmond, or a farmer in Roanoke, pro-growth policies will let you decide how best to spend your money.

John Sims is the owner of LeafSpring School which is based in Richmond, Virginia.

The case for legalizing recreational marijuana use in Virginia

Caveat.  While I have no moral objection to the possession of marijuana I do not espouse breaking the laws of the Commonwealth of Virginia.  I believe the marijuana laws in Virginia should be changed but, until they are changed, I encourage everybody to obey the laws as they are presently written.

Strive for five.  I believe the five key reasons for legalizing recreational marijuana use in Virginia for adults are liberty, the failure of the current approach, costs of enforcement – both financially and in terms of racial bias, the economic benefits to the state and the inevitability of legalization.  Each will be discussed in turn.

Democracy, liberty and freedom.  The first and most important reason to legalize recreational marijuana use in Virginia is philosophical.  Our political leaders in Richmond speak in hushed, reverential voices about “Mister Jefferson”.  They then turn around and ignore the fact that a significant majority of Virginians favor legalizing marijuana.  Somehow, our political leaders seem to think that banning a plant against the wishes of a majority of the electorate is commensurate with Thomas Jefferson’s ideals of democracy, liberty and freedom.  Perhaps our General Assembly should start referring to Thomas Jefferson as “ole what’s his name” until they can demonstrate some willingness to adhere to Jefferson’s actual views on liberty, etc.

Pot prohibition has failed.  Federal, state and local efforts to make and keep marijuana use illegal have not curtailed its use.  Our government has been busily trying to ban marijuana since 1937 and raised the stakes considerably with the Controlled Substances Act (which became effective in 1971).   Nearly 50 years after the federal government made marijuana a Schedule 1 “narcotic” its use continues to rise.

Enforcement and racial bias.  The enforcement costs needed to continue the ineffective prohibition of pot are very high.  In Virginia authorities have made 133,000 arrests for marijuana possession over the past 10 years.  10,000 Virginians are convicted of a first time marijuana possession offense every year. In fact, marijuana arrests in Virginia increased over the past year.  Worse yet, the arrests are heavily weighted against African-Americans.  VCU studied the data in 2015.  As NORML calls out, “That study concluded that blacks account for nearly half of all marijuana possession arrests, but comprise only 20 percent of the state population.”  Some parts of Virginia are far worse than that.  “In some counties and towns, such as in Hanover County and in Arlington, Virginia, the black arrest rate was six to eight times that of whites.”  These arrest ratios completely diverge from studies showing that marijuana use is roughly the same between backs and whites.

Economics.  The Kansas City Federal Reserve studied the economic impact of marijuana legalization on the state of Colorado … “In 2017, the state of Colorado collected more than $247 million from the marijuana industry, including state sales taxes on recreational and medical, special sales taxes on recreational, excise taxes on recreational and application and licenses fees.”  Given that Virginia’s population is 42% bigger than Colorado’s a straight line interpolation would suggest $353m in annual taxes in Virginia.  That total does not count the savings from reduced law enforcement nor does it include the potential profit generated for the state if the legal marijuana were sold through Virginia ABC stores.

Inevitability.  Nine states and DC have legalized marijuana.  Michigan and North Dakota will vote on adult use marijuana legalization this November.  This week the entire country of Canada legalized the recreational use of marijuana.  Once again Virginia is being surrounded by progress and once again Virginia is standing slack jawed and rheumy eyed as a philosophical island of obstinate resistance to inevitable change.

– Don Rippert.

The Real Reason Why Amazon Is the Future

I’ve finally figured out what people can do when robots and AI wipe out half the occupations in the economy — they can get jobs fixing all the #$*& that doesn’t work!

The last couple of months have been a succession of extraordinarily frustrating experiences in the Bacon family — from trying to find tradesmen to complete a gutter job at my mother’s house that the original contractor left unfinished for three months… to badgering our home-warranty company to get our broken microwave repaired, and, after waiting two months for useless parts from China to arrive, to get it replaced… to calling back Comcast technicians three times to get our Internet-cable-telephone service to function properly… to complaining about a two-week-old Microsoft Surface Go tablet whose network adapter stopped working. It’s just astonishing.

If other people are having the same kinds of experiences, our consumer economy is going straight down the toilet no matter what the GDP figures say. I’ll wager that the lost productivity of 340 million Americans navigating phone trees and waiting on hold is a bigger drag on the economy than climate change, hurricanes, cyber sabotage, and telephone marketers rolled into one!

I’ll spare you the gory details but I’m spending more time than ever before dealing with problems created by other peoples’ screw-ups and crappy products. I’m normally a fairly even-tempered guy but I’ve found myself hurling profanities at the wall on one more than one occasion. Other members of my family have been reduced to literal tears.

Some people believe that the progress of AI and robotics is rushing upon us so rapidly that it will obliterate half the jobs in the economy in the next 20 years. I’ll believe it when I see it. Sure, AI might be getting smarter, but everything is getting more complex — IT systems interacting with other systems, nested within yet other systems. Lines of code are multiplying exponentially, far faster than the ability of AI to keep up. Conflicts and failures crop up with increasing frequency. Who’s winning the race — AI or complexity? Right now, I’d say complexity is sprinting ahead of the pack like Usain Bolt.

While the systems are getting more complex, people aren’t getting any smarter. Indeed, given the quality of our educational system, I suspect people are getting stupider. Either that or more people are on drugs. And in a full-employment economy, even stupid, addle-minded people can get jobs. They are wreaking havoc on our lives!

Some people say that Amazon is taking over the world. I, for one, welcome my new corporate overlord. When I bought an inexpensive glare-free Kindle e-reader, the darn thing crashed about one week after the year-long warranty expired. I left a nasty comment on Amazon’s website. A week later, someone from Amazon contacted me and wound up sending me a free replacement.

I now see Amazon as the new model for the U.S. economy. Sure, its products fall apart just like everybody else’s, but its customer follow-up is amazing. Amazon hires people whose job is to clean up other peoples’ messes. The way things are heading, we’ll all be working for Amazon in twenty years.

Hampton Roads Crawls Out of Recession Hole

Source: “State of the Region: 2018 Hampton Roads”

After shrinking 1.1% in 2016 and growing only 0.9% in 2017, the economy of the Hampton Roads metropolitan area is on track for a 2.2% expansion this year, and employment has surpassed the peak reached before the 2007-2008 recession, reports the new State of the Region report by Old Dominion University’s Strome College of Business. Summarizes the report:

Hampton Roads finally appears to be putting the Great Recession in the rearview mirror. By mid-2018, we had about 0.3 percent more jobs than at the prerecessionary peak of July 2007. … By 2010, Hampton Roads lost more than 38,000 jobs from its previous peak level of employment, in 2007. In 2017, our region had about 4,000 more jobs on an annual basis than in 2007, making 2017 the first year our annual level of employment exceeded the prerecessionary peak.

However, the report sounded a cautionary note for Virginia’s second-largest population center:

Compared to our neighbors, we have fared poorly in generating jobs. While Virginia added almost 212,000 new jobs by May 2018 compared to the prerecession peak, only a few of these jobs have been in Hampton Roads. Most have been in Northern Virginia (149,400) and Richmond (54,800).

Defense spending. The rebound this year is driven by an increase in defense spending. The region remains captive to the fortunes of the defense industry, which is dictated not by market fundamentals but the ebb and flow of politics in Washington, D.C.

From 2013 to 2016, defense spending in our region remained around $19 billion. In 2017, direct defense spending approached $20 billion and we forecast that it will be $21.5 billion in 2018, subject to how much of the increased spending is for multiyear procurement contracts (ships, for example) and how much is for operations and maintenance.

In 2011 defense spending accounted for 46.1% of the region’s economic activity. The percentage declined to 40.8% in 2017 and has inched back up to 42.0% this year. Compounding the impact of defense spending on regional prosperity, the average compensation of a military service member was on average 2.2 times that of the average compensation of someone working in the private sector.

The authors take a sober view of how long the burst in military spending can continue. Interest expenditures on the national debt are projected to climb from $316 billion in FY 2018 to $992 billion in FY 2028, crowding out discretionary funding, including that for defense. “The optimism for the next two years is due in large measure to the lack of fiscal restraint by lawmakers in Washington,” the authors write.

Port of Virginia. Outside the military, the major driver of economic activity in Hampton Roads is the port. After suffering from a brutal contraction in seaborne trade during the 2007 recession, volume has recovered smartly. In the past two years general cargo tonnage and container traffic have leaped ahead by 5.3% and 7%. The state budget included $350 million this year to start the process of dredging shipping lanes to a depth of 55 feet and widening the channel to 1,400 feet, maintaining the Virginia’s ports competitive advantage of accommodating cargo ships of ever-increasing size.

The biggest uncertainty is the prospect of trade war with China, which is the No. 1 country of origin and destination for shipping in and out of the Virginia ports.

Affordable housing. One benefit of Hampton Roads’ slow-growth economy is that housing remains more affordable than the national average — as it has for many years. While the monthly payment for a median-price resale house comprises 24.4% of median household monthly income nationally, it’s takes up only 20.2% in Hampton Roads. If the region can get its economy cranked back up, there isn’t much danger that high housing prices will discourage in-migration.

Virginia’s High-Employment Economy

Something remarkable happened while we weren’t paying attention — the unemployment rate in Virginia’s smaller metropolitan areas has dropped dramatically. Indeed, the unemployment rate in five of the state’s smaller metros — Charlottesville, Staunton, Winchester, Harrisonburg and Roanoke — is lower than that of all three of Virginia’s large, Golden Crescent metros. Every Virginia metro is below the 4.0% threshold normally considered to be full employment, and below the 3.9% unemployment rate for the United States as a whole.

There is still an urban-rural divide. Unemployment remains high in non-metropolitan localities, especially in Southside and the far Southwest. But it’s encouraging to see that the smaller metros appear to be thriving. For many years since the 2008 recession, the smaller metros had lagged the larger metros in critical indicators of prosperity. Now, according to the August 2018 labor-market data, Virginia’s smaller metros are experiencing labor shortages.

The following chart compares the number of unemployed in Virginia’s metro areas with the number of advertised job openings. The labor shortage is the most acute in Northern Virginia where there is only one unemployed worker for every four open positions. (Technical note: My data source is the Bureau of Labor Statistics. There may be issues comparing data sets for the Virginia portions of the Washington and Winchester MSAs.) But even in Danville, long the poster child of a depressed Virginia mill town, there are more job openings than unemployed workers.

One critical issue now is the job-skill mismatch. In an ideal world, unemployed workers would fill the open jobs. In all likelihood, only a few possess the skills that would allow them to do so. But that’s a good problem to have. Virginia has plenty of community colleges and career schools that help with the transition.

Another issue is labor force participation. While unemployment may be low in Virginia’s smaller metros, a larger percentage of the potential workforce may be sitting on the sidelines and not actively seeking work than in the big metros. But the booming economy seems to be changing the attitude of millions of Americans, and we may well see more discouraged workers entering the workforce.

When Virginians get jobs, they not only earn wages and pay state, federal and payroll taxes, in some instances they drop off disability rolls, stop drawing food stamps, and get medical insurance — thus reducing payouts for the social safety net. It won’t last forever, but it is a good news story. Let’s relish it while it lasts.

Legalized Medical and Recreational Marijuana Use Appear to Hurt Alcohol Sales

High times.  In a recent Bacon’s Rebellion column … Will Virginia Legalize Recreational Marijuana Use … I noted that well over 20% of Americans now live in states that have legalized the recreational use of marijuana.  In the column I wondered whether our General Assembly’s reluctance to address the question in a meaningful way might be attributable to Virginia’s unholy trinity of political corruption:

  1. Unlimited campaign contributions
  2. Opposition by well heeled vested interests (i.e., the alcohol manufacturing, distribution and retail industry)
  3. Essentially non-existent rules on the use of, or reporting on, campaign contributions

My hypothesis was that a river of money flows from Virginia’s alcohol industry into the pockets of our elected officials.  The alcohol industry is opposed to legalizing marijuana since legalization hurts alcohol sales.  Meanwhile, our elected officials want to keep the money flow going since it funds not only their re-election plans but also dinners at Bookbinders, golf outings, private clubs and all sorts of other goodies.  Therefore, legalization of marijuana is intentionally stalled in Virginia.  Virginia’s reputation as America’s Most Corrupt State is, in my opinion, well established.  However, the question of whether legalized marijuana use hurts alcohol sales needs to be further examined.

Paging Doctor Weed.  The best information about the impact of marijuana legalization on alcohol sales comes from studies of medical marijuana legalization.  Medical marijuana has been legalized for longer and in more states than recreational marijuana.  Some would say that medical marijuana is a poor proxy for recreational marijuana because medical marijuana is only used to combat disease and therefore is not a substitute for booze.  Yeah, right.  A university study using retail scanner data from 2006 – 2015 found that alcohol sales fell 15% in jurisdictions that legalized medical marijuana.  For the sake of emphasis – this was a study of legal medical marijuana on alcohol sales, not legalized recreational use of marijuana.

The Oregon Trail.  The relationship between legalized recreational marijuana and liquor sales has been studied in Oregon.  In that state, recreational marijuana use is legal at the state level but localities have the right to ban it in their jurisdictions.  A study comparing Oregon localities that allow marijuana sales vs those that don’t found the growth rate of liquor sales for the “booze only” places was faster than in the “booze and reef” areas.  Early days.  Only one year of data.

Miller Time.  A 10-K disclosure by the Molson-Coors company cites legalized cannabis sales as a potential risk to their business. “Although the ultimate impact is currently unknown, the emergence of legal cannabis in certain U.S. states and Canada may result in a shift of discretionary income away from our products or a change in consumer preferences away from beer. As a result, a shift in consumer preferences away from our products or beer or a decline in the consumption of our products could result in a material adverse effect on our business and financial results.”  Four months after citing the business risks of legalized marijuana Molson-Coors announced they are considering the sale of ganja infused beer in Canada.

Rocky Mountain High.  Earlier this year the Aspen Times reported that Aspen’s legal marijuana dispensaries outsold its liquor stores in 2017.  As far as anyone knows, this is the first time such a shift has happened.  I’ll wager it will be far from the last time.

— Don Rippert

Drill, Baby, Drill

You don’t hear much talk about “peak oil” these days. Perhaps that’s because  crude oil production has surged to the extent that the United States has now surpassed Saudi Arabia and Russia as the world’s largest producer.

Back in 2010, the fracking revolution was just a speck on a gnat’s eye. Buying into the “peak oil” paradigm when I wrote my book “Boomergeddon,” I expected the rising cost of petroleum and gasoline production would translate into sky-high prices and a long-term drag on economic growth. That’s one of the reasons why, along with an aging population and a continued rise of the regulatory state, I argued that the U.S. government spending needed to adjust to slower long-term economic growth in order to avoid exploding deficits.

It figures that the one dogma I embraced from the political left would be the one that proved to be the most demonstrably wrong. The fracking revolution has been an incredible boon to the U.S. economy. Oil and gas production, far from being a drag on the economy, has stimulated growth — and will continue to do so as fossil fuel exports surge. You may not like the environmental implications of increased oil and gas production, but the geopolitical implications are fantastic for the United States. Our economic fortunes are less tied to events in the Middle East than any time since the 1974 Arab Oil Embargo, and Russia, one of our two main strategic adversaries, is significantly weaker thanks to lower oil and gas prices.

The Oil Age won’t last forever. Eventually, the global economy will shift to cleaner, renewable energy sources like solar, wind, batteries, and, who knows, maybe even nuclear fusion. One day, electric utilities will be all green. One day, most of the nation’s automobile fleet will be all-electric and all green. One day, oil and gas will be valued only as a chemical feedstock. But that transition will take decades. In the meantime, let’s take advantage of strong global demand for oil and gas and extract our mineral wealth from the ground while it still has value.

Is Lower Pay for Federal Workers a Good Thing or Bad Thing for Virginia?

It’s no surprise that Barbara Comstock, the Republican congresswoman running a super-competitive re-election bid in Northern Virginia, has expressed her opposition to President Trump’s public ruminations that maybe he should cancel a 2.1% pay raise for federal government employees. After all, her district is chock full of federal employees, and she had distanced herself from the president already, so she had little to lose.

But when Republican Corey Stewart, who has campaigned on the gubernatorial platform that he is Trumpier than Trump, differs with the president, that is news.

At the end of the day, one can predict that political considerations will prevail. This is a policy blog, not a politics blog, so I won’t waste readers’ time delivering an inexpert opinion on the political fallout. More interesting to me are the policy implications.

For Virginians wanting what is in the parochial best interest of Virginians, the easy answer is to say that canceling the pay raise would be a bad thing. It would have a materially negative impact on incomes and economic output in Northern Virginia, the economic locomotive of Virginia’s economy.

But there are subtler considerations. The Northern Virginia unemployment rate now is 2.7%. That qualifies as a labor shortage. The Wall Street Journal recently observed that cutting pay would create a win-win for the economy if a significant percentage of federal workers decided to quit their jobs and work in the private sector. First, the pay-raise cancellation would cut deficit spending by tens of billions of dollars. Second, it would help relieve the labor shortage in places like Northern Virginia.

That makes sense in the abstract. But here’s the trick: Do the federal employees most likely to quit have the skills in demand in NoVa’s tech-heavy private sector? Employees trained in IT probably likely would find it easiest to make the switch. But they may represent the only government employees that private-sector employees actually want. The complacent organizational culture of the federal government does not inculcate the attitudes that entrepreneurial tech companies are looking for.

Another concern: If the federal government’s IT employees depart, will the functioning of the IT infrastructure be impaired? Federal IT systems are not exactly models of efficiency and cyber-security to begin with. Are we prepared for federal IT systems to get worse?

Yet another way to frame the issue: Would the departure of a deputy assistant under Secretary of Agriculture be noticed by anyone or impair the functioning of government? Conversely, is there anyone in the private sector who would want to employ a deputy assistant under Secretary of Agriculture?

Cutting through the thicket of questions with no obvious answers, I would suggest that one issue should move to the forefront for Virginians: Will cancelling the pay raise ultimately advance the goal of diversifying Northern Virginia’s economy? Would such a move stimulate the expansion of NoVa’s private sector? Virginians should back any measure that emancipates NoVa from federal spending.

AI – Nirvana or Apocalypse (for Virginia)?

Smells like tech spirit – Artificial Intelligence may be on its way to becoming the buzziest buzz-term in the buzzword laden history of the buzz-o-sphere.  No prior trend has engendered the societal debate that AI has sparked.  Scientistsbillionairespoliticianspoetspriestsbutchersbakers and candlestick makers have all gotten into the game.  Ok, the candlestick maker reference was hogwash but give that industry time … something will come up.  Everybody has an opinion and the opinions are “all over the map”.  Artificial intelligence will either be the recreation of Eden on Earth (without the troublesome snakes and apples) or the kind of zombie apocalypse that gives zombies nightmares.  Either way. it seems clear that AI will have a profound effect on how we live, work and play in Virginia.

“I’m sorry Dave, I’m afraid I can’t do that.”   Concerns about computers getting too big for their britches go back a long way.  Generation after generation had their fears of computer overlords generally mucking things up.  The average American Baby Boomer first learned the perils of artificial intelligence in 1968 from HAL of 2001: A Space Odyssey fame.  Thirty three years later everybody laughed when 2001 came and went without any psychotic computers in evidence (give or take the Apple Newton).  But here we are 17 years later and there are some very serious people with some very serious concerns.  Why did concerns about AI go from the realm of entertainment to a serious debate about the start of nirvana vs the end of mankind?

The winter of their discontent.  AI has gone through a series of boom and bust cycles over the decades from the hype of the 1970s and 80s to the last of the so-called AI winters from about 1990 through 2011.  In some ways the public’s fascination with AI elevated the highs and made the lows all that much lower.  In 1981 Japan’s MITI funded the Fifth Generation Computer Systems project with $850M.  The ambitious program would build a new generation of computers designed for AI along with the AI software needed to make the dream come true.  An impressive list of goals was drawn up.  Ten years later the goals had not been met.  Twenty, even thirty years later many of the goals from 1981 were still elusive.  Then, in 2011, came one of those bizarre occurrences that sort of change everything.

Your answer must be in the form of a question.  In January 2011 IBM’s AI platform, named Watson, played Jeopardy! against the two best human Jeopardy! players in history and beat them soundly.  The AI winter was over.  In reality, AI research had been going on at IBM and elsewhere during the so-called AI winter but the Jeopardy! contest reawakened the public’s fascination with AI.  AI research was often called something other than AI during the AI winter because of the stigma AI had developed.  Kind of like the way liberals now call themselves progressives.  There were neural networks, expert systems, knowledge engineering, etc.  However, it was AI.  The Watson Jeopardy! match put AI back in the public’s imagination and it’s been “off to the races” ever since.

The Last Question.  Google followed IBM with a more impressive AI demonstration.  In 2016, using its Deep Mind AI platform, Google defeated the reigning human Go master.  Go is a 3,000 year old Chinese board game that has been notoriously hard for AI platforms to successfully play due to the mind-boggling number of possible moves.  These advances, and many more, explain why the debate over AI and the future of mankind has reached such a fever pitch.  It appears that this time … AI is finally real.

Come out Virginia.  Don’t let ’em wait.  You backward states start much too late.  Ok, apologies to Billy Joel but Virginia has a long history of denying the present and ignoring the future.  In a world where Russian bots already stand accused of meddling in American elections Virginia needs a frank discussion regarding the escalating capabilities of automation and AI.  Will bots affect the 2019 Virginia elections?  How will automation impact Virginia’s economy?  Was it coincidence that Steve Haner’s by-line started appearing on BaconsRebellion about the same time that AI-powered bots began posting on social media?

— Don Rippert