Category Archives: Economy

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

The Truth Is Out There (To Be Revealed Friday)

So it’s going to be politics, not economics. Perhaps it was inevitable.

On Friday Governor Ralph Northam and Secretary of Finance Aubrey Layne will be presenting to the House and Senate money committees, part of their report looking back (at the completed fiscal year), but the key parts of their message looking forward. Both are expected to put some flesh on the bare-bones announcement made last Friday about how the Governor wants Virginia to respond to the opportunities created by federal tax reform.

The announcement was telegraphed by the left-leaning Commonwealth Institute for Fiscal Analysis, which endorsed converting Virginia’s Earned Income Tax Credit into a fully refundable version, putting cash in people’s pockets, discussed in a previous Bacon’s Rebellion post.  The political angle was described well this morning by the Democrats’ Virginia media strategist Jeff Schapiro, also of the Richmond Times-Dispatch, who tagged the EITC proposal as aimed at the 2019 legislative elections.

Finally you can see the strategy in the Governor’s own guest column today, this from the Roanoke Times.

“The recent federal tax changes have benefited mainly higher earner. These tax policy changes from Washington will result in additional revenues to Virginia. We can use this opportunity to invest in those who need it most— hard working Virginians. We can do this by making Virginia’s existing earned income tax credit refundable, ensuring that 600,000 working Virginians, including thousands of veteran and military families, can get the full tax benefit for which they qualify.”

What the Governor and Secretary Layne know that we don’t yet is, well, everything. The state commissioned a detailed study of the state-level financial impact of the various federal tax rules changes. That was the apparent basis for the Governor’s announcement Friday that about $500 million plus in new state revenue will result, half of which he wants to use to finance the EITC refunds and half of which he wants to keep in the General Fund.

Secretary Layne assured Bacon’s Rebellion after that press conference that the full report from the consultant will be released and available online Friday after the Governor speaks. Until that report is picked apart, anybody who hasn’t read it is just speculating. I won’t join in that yet.

Probably the best analysis of the issues – written without access to the new report on the numbers – was released this week by Jared Walczak of the Tax Foundation. Come Friday it should be clear where that $500 million estimate came from, which tax provisions produced additional revenue and which taxpayers may pay more in the long run.  And it may be clear whether that windfall results from full conformity to the myriad federal changes, no conformity to the federal changes, or from cherry-picking which provisions to accept or reject – meaning a different combination produces a different revenue result.

There has been no mention so far, but expect news on Friday, about the potential state revenue boost from requiring more out-of-state retailers to collect and remit sales tax on goods they ship to Virginia customers.  And until Friday we really won’t know the size of any surplus from fiscal year 2018, or the status of the reserve funds. Those are also key parts of this coming tax debate.

This is the best opportunity in a generation Virginia has seen for some intelligent tax reform, something positioning our economy for this century. And tax reform does not mean cut my taxes and raise somebody else’s. As previously noted the EITC is an effective anti-poverty program, and Virginia’s income tax is arguably regressive, hitting lower income workers harder than it should. But that is just one element of what needs to be a long conversation that ranges over the whole tax code, one that has been stymied for decades because of the various political risks.

The Tax on the Mathematically Challenged

Pick 3 Game Frequency

Untold thousands of Virginians just poured their money into the recent multi-state Mega Millions drawing won by someone in California.  Governor Jerry Brown sends his thanks for his cut.  But based on a recent news release our own governor is also very pleased with the performance of the Virginia Lottery as it approaches its 30th anniversary.

As with any other game of chance, the house has many ways to win.

Years of debate in the General Assembly led to a November 1987 lottery referendum, which passed with about 57 percent in favor.  The games started less than a year later.  According to information on the Virginia Lottery website, and plugging in the unaudited totals from fiscal year 2018, over 30 years the lottery has:

  • Received from players $37 billion in cash (sales).
  • Returned about $21 billion of that back to players in prizes. The net after taxes is not reported, so that might really be about $16 or 17 billion.
  • Transferred about $12.5 billion to the state earmarked for education (but there is no proof local schools are better funded than they would otherwise be.)
  • Spent about $2 billion on its own overhead and advertising and  another $2 billion on compensation to retailers. (State and local taxes gets a cut of that, too.)

Neighboring lotteries were rare initially, but now all surrounding states have joined in taxing people who don’t understand probability. Maryland has taken the additional plunge into casino gambling.  Strip away the masquerade and Virginia is right behind with the new “historical horse racing” which will allow 3,000 slot machines.

This has become a big business, more than twice the size of Virginia’s liquor sales through the ABC.  The bare-bones cash flow summary on the Virginia Lottery website is supplemented by details in the annual reports and survey information provided to Bacon’s Rebellion upon request.

With all the attention given to the large national lotto games, the bulk of Virginia’s revenue comes from the scratch-off games and the daily Pick 3, 4 or 5 games intended to mimic the illegal numbers racket.  Last year’s annual report stated the scratch-off revenue represented 56 percent of sales and the simple numbers games 30 percent.

Regular market surveys are based on a rolling 100 interviews per week or 1,300 per quarter, a very strong methodology, and you can see a recent report here.  If indeed 70 percent of adult Virginians have played in the past year, that’s about 4.6 million individuals.  That puts the annual average revenue per player at $465, but of course most of players spend far less.

Which means quite a few Virginians are spending far more.  Who are they?  How much do they spend? The data shared does not include that, but there are some hints. Continue reading

Tax Act Impact on Virginia: 5,782 Jobs

The Tax Cuts and Jobs Act of 2018 will create 218,000 full-time equivalent jobs across the United States this year, asserts the center-right Tax Foundation, which specializes in analyzing the impact of tax policy on the U.S. economy.

Using its Taxes and Growth econometric model, the Tax Foundation provided a job-creation estimate for each of the 50 states and Washington, D.C. In Virginia, predicts the model, the economic stimulus of corporate and personal income tax reform will create 5,782 jobs.

That number compares to 20,100 total jobs created between Dec. 2017 and May 2018, according to U.S. Bureau of Labor Statistics data. Annualized, Virginia was on track for creating 48,200 jobs in 2018, suggesting that the tax cuts are accounting for about 12% of the state’s job growth.

The tax cuts’ impact on Virginia falls in the middling range compared to other states. The 5,872 jobs created in Virginia amounts to 678 jobs per 1 million population, according to Bacon’s Rebellion calculations. On a jobs-per-population basis, the impact ranges from 1,640 in Washington, D.C. to a mere 110 in Oklahoma, both of which appear to be anomalies. Excluding those two, the impact ranges from 564 jobs per million population in Mississippi to 824 in North Dakota.

 

Back In Top 5, The Challenge Is To Stay There

Corks are popping all over Richmond as the business network CNBC announced this morning that Virginia is back in the top five of its annual survey of best states for business, ranking number 4.  It is the only state in the top five east of the Mississippi. The full Virginia report is here.

The photo on the CNBC page shows a Huntington Ingalls-built warship, but one of the amphibious ships built in Pascagoula, Mississippi.  Perhaps the web designers remember that the first time Virginia topped this list as number one the announcement was made from pier 3 at Newport News Shipbuilding with the future U.S.S. George Bush in the background as Governor Robert McDonnell took the bow.

Governor Ralph Northam will get to enjoy the spotlight this time, and should, but the credit needs to be spread widely. The person doing handsprings should be Stephen Moret, president of the Virginia Economic Development Partnership, who has been focused on improving these rankings since coming to Virginia to fix a broken agency its reputation.

Speaker Bill Howell and the others who joined with McDonnell in pushing forward the transportation tax package years ago deserve a nod, as those projects are starting to come on line. Virginia’s rank for infrastructure improved from number 25 in 2017 to number 20 for 2018, and may continue to rise now.

Also improved over last year was the ranking for education. Despite growing costs Virginia’s higher education system, public and private, remains the envy of many other states, but the focus now extends beyond degrees to work-related certifications.

This ranking is a marketing coup with no immediate value to the average Virginian. Staying in the top five over time will have value, however, as more business location or investment decisions start with Virginia on the short list.

Looking at the details there are only a handful of individual categories where the state ranked extremely well (workforce, education, business friendliness) and only two where Virginia was below the median – the related categories of cost of living and cost of doing business.  First or second quintile scores in several categories resulted in the good overall score.

Those outliers deserve some attention. A huge component of the cost of living and cost of doing business is the cost of electricity and other forms of energy, and the trend lines there are bad despite the energetic public relations efforts of a certain large utility. Another huge component of both is state and local taxes, which are under growing pressure to rise and where Virginia has a chance to be creative thanks to federal tax reform.

Not a time for any resting on any laurels. But some martinis at lunch are indicated.

Florida Mounts New Raid on Virginia Carrier Fleet

U.S.S. George Washington arrives in Virginia for almost-cancelled overhaul (Huntington Ingalls Photo)

Here we go again.  Florida wants one of Virginia’s aircraft carriers. U.S. Sen. Mark Rubio, R-Fla., and others are apparently trying once again to authorize the Mayport naval base to make the improvements it would need to become home port for one of the eleven jewels of the fleet. Virginia’s congressional delegation is gearing up to fight off the idea for the third time in a decade.

In a recent joint letter they wrote that limited defense funds shouldn’t be spent on “a non-existent requirement and duplicative capability that will cost the Navy nearly $1 billion over 15 years.” Right now five carriers sail out of Norfolk and one is being overhauled in Newport News.

The official position of Huntington Ingalls Industries, parent company of Newport News Shipbuilding, will probably be no position. The line has been that the company builds and maintains the ships and where the customer chooses to park them is none of the company’s business. But expect the rest of Virginia and Hampton Roads to care deeply, because along with the personnel who serve on the ship there are hundreds more support jobs ashore, and all of the economic benefit created by those many thousands of sailors and dependents.

It is a little dance the Florida and Virginia politicians do, burnishing their images with the home folks. We are probably seeing another attempt because the White House has changed hands. You might think these are weapons systems vital to the world’s stability, but we all know they are also political boodle of the highest order. Michael Dukakis sank his chances in Virginia in 1988 by proposing to cancel two carriers.

The total cost of the upgrade to the Florida base to host a carrier full time would approach $600 million, given the special facilities tied to its nuclear reactors. This apparently would defend us against the dangerous naval threat posed by, what, Venezuela? Brazil? Cuba is within easy reach of land based squadrons. There is no strong argument for moving a carrier to Florida except to boost Florida.

Norfolk likely will lose a carrier one day but it will go to the Pacific. And when the Pentagon is ready to make that move, adding to the five carriers now based in California, Washington and Japan, Virginia’s political class needs to drop its objections. That will be based on sound strategic requirements, unless of course President Trump makes a Glorious Peace with Dear Leaders Kim and Xi.

There also remains a chance Norfolk will lose a carrier because the Navy stops building them or chooses not to overhaul one and puts it in mothballs instead, as almost happened to the U.S.S. George Washington (CNV 73, pictured above). Given the total cost of ownership of a carrier strike group, that threat will not go away.

Make The Next Round A Double

USS Gerald R Ford CVN 78 Christening 2013

Virginia leaders like to get up on their soapboxes and worry that Virginia is too dependent on defense spending and promise elaborate strategies to diversify the economy.  Be grateful in some places the focus remains on building more combat ships at Newport News Shipbuilding, keeping its 20,000 plus employees and thousands of suppliers and contractors fully engaged well into the future.

As the House and Senate in Washington inch toward a fiscal year 2019 defense budget, the House has offered a version that expands on the Trump Administration’s proposal by setting up a single order for two nuclear aircraft carriers.

USS New Mexico Crossing Hampton Roads

The Senate isn’t there yet.  CVN 80, the future U.S.S. Enterprise, is already in the early stages of construction but the main construction contract has not been signed.  The proposal is to contract for the unnamed CVN 81 at the same time.

Huntington Ingalls Industries, parent of the shipyard, claims that ordering two carriers at the same time would save the Navy $1.6 billion because it would allow more negotiating leverage with the supply chain and would keep the workforce steady state. While working there I heard it was ideal to start a new carrier every four or five years, but the gap between them recently has been more like seven years.  One result of that is a labor valley every so often.

Two carriers included in a single contract would still need to be built in sequence, since there remains only one dry dock and crane capable of accommodating the assembly process. But as Enterprise sailed out of Dry Dock 12, the pre-built sections of CVN 81 would be ready to start going in. Enterprise will be the replacement for the first-of-its-class U.S.S. Nimitz, CVN 68, aging into its 40s and nearing retirement.

The ship in the dry dock now is CVN 79, the future U.S.S. John F. Kennedy. She is about 80 percent structurally complete and her christening and launch date are coming up fast. Debate continues over the utility of the large deck nuclear carrier in this submarine and missile-infested world, but it remains one weapons platform that our rivals obviously covet but cannot yet duplicate.

There is more potential good news for Virginia in the House version of the defense plan. The Navy is now starting two Virginia Class submarines annually, splitting the work between Huntington Ingalls and General Dynamics, but the old Los Angeles Class boats are retiring fast. The House adds a third submarine start in 2022 and 2023 – which is also when construction of the first new ballistic missile submarine, the future U.S.S. Columbia, should be in full swing at both Newport News Shipbuilding and Electric Boat.

Finally in the mid-2020s the aforementioned U.S.S. Nimitz returns to the yard for decommissioning of her nuclear components. That’s a couple thousand more jobs, too. So diversify the economy, certainly, but as they say in politics: Don’t forget your base.

After watching the christening of the U.S.S. George Bush CVN 78 in October 2006 I was heading out on Warwick Boulevard and there was a protester with a sign saying the money should have been spent on jobs. That was one clueless ideologue.

Note:  Both attached images were by the excellent staff photographers at NNS.

The Tax Cuts Are Working

by Jack Hubbard

We’re barely three months into 2018 yet, and Virginia is already off to an incredible start.

The passage of the Republican tax plan in late 2017 has allowed Virginia’s more than 700,000 small businesses to breathe a sigh of financial relief.

Prior to the passage of the Tax Cuts and Jobs Act, the majority of small businesses (95%) were taxed at nearly 40% by the federal government. After state and local taxes were added in, that number often reached 50%. This astronomically high tax burden diverted valuable resources from job growth to government coffers. President Trump and Congress knew something had to be done.

Under the new tax code, small businesses whose income is less than $315,000 can now claim a 20% tax deduction, leaving more resources for investment and job creation. In Virginia, that increased deduction applies to nearly all of Virginia businesses. And these businesses now can take these tax savings, reinvest them, and expand their enterprises.

What happens when businesses expand? New hiring follows, putting more Virginians on the career ladder. And more Virginians working leads to greater investment in the Old Dominion.

Additionally, the tax plan’s lower tax rates and increased deductions have empowered businesses throughout the country to pass on tax savings and to their employees. So far, more than four million Americans have received a pay increase or bonus from their employer since the tax bill was passed. Larger companies such as Walmart, BB&T Bank, and Capital One have all increased starter wages.

Here in Virginia, the Bank of James in Lynchburg has raised starting wages to $15, added vacation days, and increased its charitable giving plans.

The list of beneficiaries of the tax bill continues to grow. Even many public utilities have announced that they will be cutting rates on their customers. Residents in nearby Washington, D.C., will see their electric rates cut after Pepco announced lower rates during the first quarter of 2018, and I can only hope that Virginia companies follow suit. These cuts are occurring only because President Trump and Congress did their jobs, and people are seeing real  money in their pockets.

Media reports notwithstanding, the Tax Cuts and Jobs Act has proven itself time and again in only one month since its passage.

While Democrats may call tax savings “crumbs,” the real-world benefits of tax cuts suggest otherwise. Job creators—and the people they serve—are more optimistic than ever. Imagine what the rest of 2018 will have to offer.

Jack Hubbard owns the The HomeMade Gin Kit in Alexandria.