Economists (2019-09-20)

Iowa Press | Episode

Sep 20, 2019 | 27 min

2019 has been a year of Midwestern floods, international trade wars and shifts in American ethanol policy. It all culminates in rural economic uncertainty. But what does the data show? We dive deeper with a pair of rural economists on this edition of Iowa Press.

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For decades Iowa Press has brought you politicians and newsmakers from across Iowa and beyond. Now celebrating more than 40 years of broadcast excellence on statewide Iowa PBS, this is the Friday, September 20 edition of Iowa Press. Here is David Yepsen.

Yepsen: Parts of rural America have taken negative economic news on the chin throughout 2019. Widespread flooding throughout states like Iowa and Nebraska wreaked havoc on communities. The Trump administration has waged a prolonged trade war with the leading agricultural export market of China. And shifting administration policy has led to uncertainty in the American ethanol sector. Two men following the data are Iowa State University Associate Professor of Economics Chad Hart and Creighton University Economics Professor Ernie Goss. Both of them join us now at the Iowa Press table. Gentlemen, welcome.

Hart: Thank you.

Goss: Thank you.

Yepsen: Thanks for being with us again.

Goss: Good to be here.

Yepsen: Journalists joining us across the table are Erin Murphy, Des Moines Bureau Chief for Lee Enterprises and Radio Iowa News Director Kay Henderson.

Henderson: Professor Goss, this week you released an analysis of sort of an economic picture. Give us sort of a snapshot of what you found.

Goss: Well, as long as you're not an area that has significant manufacturing and agriculture or energy you're just fine. In other words, it's tough out there in rural areas because that's exactly what you've got is agriculture, manufacturing and energy. And all three of those sectors have been taking it on the chin. Manufacturing in our survey of -- all the surveys include Iowa that we do and include the other states that this show is broadcast to -- and it's tough out there. And one of the real tough things is the volatility, the uncertainty and I would argue that's where it is. And if you're talking about agriculture you're dealing with uncertainty anyway with weather and you're piling on uncertainties of the global trade, you're piling on uncertainties with interest rates, you're piling on uncertainty with what is happening in the global economy. So all that and you wonder why folks are a little, feeling fearful out there and concerned, and that's what we're getting in our surveys.

Henderson: Professor Hart, what is your quick read on the ag economy?

Hart: The ag economy, well first of all it has been struggling for about five years now. And so it wasn't just the trade war that brought this on, the trade war sort of exacerbated the problems that we're seeing out there. And when we're looking at net farm income across the country it has been fairly stable the past three or four years. The only thing that is making it possibly grow, government support.

Murphy: So then question then is that we've all been asking, are these negative influences leading us towards a recession? Professor Goss?

Goss: Well, Erin, our surveys would say yes, it is moving in that direction, the trend is definitely down and the models, most economists have these models that include the yield curve, that's a strong factor, an important factor I should say and Moody's just came out with their model this week and saying the probability of a recession now is 66%. I'm like, wow. Our model, Creighton's model, would say something above 50% and that is double what it was this time last year. Now what are we using, what is the primary factor there? Well, it's just the yield curve, when short-term rates get higher than long-term rates, and that has been a very good predictor of recessions. Now, again, we're talking about the probabilities are above 50% for the first half of 2020 based upon the numbers that we're seeing, that would be the employment numbers which are coming down, the manufacturing numbers which are coming down, and the ag numbers which are, as Cha said, stable but still coming down there. So I would say that's what we're seeing right now.

Yepsen: Professor Hart, what is your answer to Erin's question?

Hart: Well, when we're looking at the general economy I think yeah, the idea is that most economists are looking at this situation and going, as we look into 2020 it's looking like the year of recession. It's the question of does it come early in the year or later in the year? And what sort of policy moves do we make in between to try to hold that off for a while?

Murphy: Speaking of policy makers, Senator Chuck Grassley on this show recently said that his concern is that we're talking ourselves into a recession and we've heard that from the White House as well. Is that a legitimate concern? Is that a fair concern?

Goss: Well, I think it hits consumers primarily and hat has been the strength of our economy has been consumption, the consumer. And there is some concern about that, what happens to consumer expectations, how the consumer sees things and the consumer still is seeing things pretty well. Employment is still growing. Unemployment is still very low. And so you can't argue with that. But when you look at the global economy, when you look out at manufacturing, when you look at agriculture, when you look at energy there are so many concerns that you can't be that optimistic.

Henderson: Professor Hart, one of the reasons that the Farm Crisis happened is that farmers were highly leveraged, they had a lot of loan debt. Is that the case now?

Hart: We are more highly leveraged than we have been in the past but we're not as highly leveraged as we saw in the 1980s. So we did learn some lessons from the 1980s Farm Crisis. The ag community was tightening its belt over the past four or five years trying to hold off some of those problems. But we are seeing debt levels rise, we are starting to see bankruptcies rise that general melees in the ag economy over the last five years has taken its toll and there's not as much cushion for farmers as there was in the past.

Yepsen: Professor Hart, what about your answer to the question are we going to talk ourselves into a recession? As Erin points out the White House is saying we're going to do that. The White House will always say we don't want -- things are better, they don't want us to believe things are going in a downward direction. What is your take. Will we talk ourselves into this?

Hart: We can talk ourselves into it and as Ernie sort of pointed out the idea is when you look it's up to the U.S. consumer. The consumer side of the equation here, consumer spending is about two-thirds of our general economy. And so as the consumer goes so does our economy. But when we're looking at the other pieces outside the U.S. consumer we do see a lot of weakness there and I think that's why you've got a lot of economists sitting here looking going yeah, it looks like we're headed that way, the last piece to move will be the U.S. consumer.

Yepsen: I want you both to talk a little bit about the rural economy compared to the whole national economy. In the past, I'm thinking in the 1920s, for example, rural America was hurting and the rest of the country was enjoying a golden age. Are we in a similar place, Professor Hart? Are things getting tougher here but nationally it looks better?

Hart: I would definitely argue we're already there. The idea is that we started to see the ag economy really take its lumps, 2014, 2015, 2016. And we've been down, basically staying down since then. The general economy is starting to reflect what the ag economy has already been going through for the past five years. So it is eerily similar to what we saw in the '20s and '30s in that sense.

Goss: But our surveys indicate there's some real concern. We asked the bankers, we survey bank CEO's in rural areas in 10 states and 43% said the number one concern they had looking out was bankruptcies and delinquencies and slow payments of loans. But even so, as Chad said, it hasn't shown up yet. In other words, we may have some more to go in that regard. But back to the growth in rural versus urban. It's about twice the growth in urban areas that we're seeing in the rural areas. Now what does that mean? 1.4% growth for the urban areas, about 0.7% for rural areas. So it's still positive but it's growing in those industries without tight linkage to manufacturing, without tight linkage to agriculture. And you say, well what does that leave? Well, there are some retail establishments, which depend on the consumer, there are other consumer driven businesses that are still doing well even in rural areas.

Henderson: Professor Hart, David mentioned at the top of the show the Renewable Fuel Standard, the ethanol production mandate. How is what is happening affecting the industry and the countryside? Because 40% of corn that is grown in Iowa is turned into ethanol.

Hart: Yeah, so we have seen the ethanol industry slowdown. We've been watching sort of week by week, a few plants slowing down, a couple of plants closing. So we're seeing production drop. That indefinitely having a negative impact. We're looking at the corn market, we're seeing the same thing as we look at the biodiesel as well. That uncertainty is leading to, policy uncertainty is leading to a lot of let's call it missed opportunities in marketing as we look at not only the biofuel side but for the agricultural products that go to feed that industry.

Henderson: Professor Goss, if the Trump administration makes an announcement, and we're taping this program on a Friday morning, we may have an announcement this afternoon, how quickly can the biodiesel and ethanol industries rebound?

Goss: I think they can rebound fairly quickly. But the real problem that I would argue is the uncertainty. I hate to keep hammering about that but we've got the 81 small refinery exemptions that have been okayed by the Trump administration. I don't argue against, for or against those, but you've got to have more certainty. What is going to happen? Your Senator, our Senators, all the Senators in this part of the country and Representatives are arguing give us certainty, tell us what's going to happen. You can't continue giving these exemptions without providing some certainty, some pathway. Farmers need to know, ethanol producers need to know and right now with what we're seeing in Saudi Arabia, for example, that is an opportunity for ethanol but it's only an opportunity if you're still in business. We are seeing some closures and at least ethanol plants going idle. And we're talking about the number one area of the country that is ethanol producers whether it's Minnesota, Iowa, Nebraska, South Dakota, those states.

Murphy: Speaking of policy uncertainty, Professor Goss, there is also a new potential trade deal, international trade deal between the U.S., Canada and Mexico that is on the table but not signed yet. How much does that impact? And what is the danger if that does not get approved, the longer that is drawn out?

Goss: We talk a lot about China but USMCA, that's NAFTA 2.0 or whatever you wish to call it, is much more important and it's languishing in Congress. That is unforgivable in my judgment. That should be pushed through and passed but it's not. Again, uncertainty. How do farmers, how do those connected to agriculture, the businesses tied to agriculture, how do you plan? Because you've got the plan for next year, farmers are always looking ahead, they can't look past, they can't even look at current, they've got to look forward. And how do they know what's going to happen? And USMCA is very important, that's much bigger, the trade with Canada and Mexico, than China. But even with that it's a big deal.

Murphy: Professor Hart?

Hart: It's a gigantic deal. But at the same time too I think you're seeing the agricultural industry sort of go on as though it will get passed. We're basically behaving as if NAFTA has continued, the USMCA dresses it up around the edges, but we're going forward. And I'll agree with Ernie, it is the most important trade deal that we've got. When you think about China and the dispute there it was $20 to $25 billion of agricultural trade. USMCA, over $40 billion. The idea is Canada and Mexico are the two very consistent, largest trading partners not just in agriculture, but in all the products we have across the entire economy.

Yepsen: Professor Hart, a lot of democrats, democratic members of Congress are upset that the labor standards in this are not high enough. What is wrong with asking other countries to have higher labor standards? Don't we care about workers from Mexico? If they have higher labor standards maybe they won't be trying to migrate to the United States. What do you make of this argument we've got to have better labor standards?

Hart: Well, I see this is the Democratic Party looking for okay, what are the positive changes we can make to the USMCA? I think it was Speaker Pelosi earlier this week that said she is in favor of the agreement but wants to see a little bit stronger standards there on the enforcement mechanisms. And so I think we're approaching let's call it the end zone here in terms of getting this across to where we can get to a vote but we're still not quite there yet.

Goss: I just think you have to take what we've got there, go with it and maybe refine it sometime later. But you start nipping in this with everybody, 435 congressional representatives, each of them having a shot at that, we'll never get that thing passed and throwing it off the table is very dangerous to all of us and that's not just those of us who live in this part of the country but the nation. That's very important to this nation.

Hart: If I may, I want to go back and if you think about when NAFTA was ratified we saw these same sorts of arguments. We really literally just went up to the end line, when is the deadline of where we have to have this. We're doing the same thing with the USMCA.

Henderson: Professor Goss, what is the economic impact of the impasse in trade negotiations between the U.S. and China?

Goss: Significant. It's significant in the sense of certain products of course. But in my judgment the real significance is changing supply chain arrangements. In other words, once you lose a customer do you get the customer back again? And of course in terms of soybeans and pork, two industries, two products very important to this part of the country, that's bigtime money and right now China we're seeing them blink. Xi Jinping doesn't have to get re-elected but President Trump does. I don't know if he has to get re-elected but he wants to get re-elected. And a lot of it depends we're talking about one of the big things, one of the favorable things is the Iowa Caucuses. Find me some presidential candidate that is going to talk against ethanol. I don't know, we had one last time that talked against it, he did not end up winning the nomination. I think that's a good thing, at least from my judgment. And so it's very important.

Henderson: Professor Hart, do you think that American farmers have permanently lost markets in China?

Hart: We haven't permanently lost the markets but we've lost some market share. Whenever we have disputes like this we do tend to see that market share is permanently reduced. As Ernie said, global supply chains have changed and they're going to remain evolved, if you will, over time.

Henderson: Because they're buying soybeans from Brazil.

Hart: They're buying from Brazil, they're buying from the Ukraine. When we're looking at the sort of the double barrel combination of the trade war plus African swine fever that is changing the dynamics of the whole global pork industry.

Yepsen: The swine fever has decimated Chinese pork production. Prices in China at 40%. The Chinese government is really feeling the heat. Isn't that an opportunity for pork producers?

Goss: Absolutely. And you've seen the Chinese, I would argue, blinking. Now the President has blinked as well, our President. And we both are moving toward I won't say a deal but they're certainly moving and you're seeing some action there. But in my judgment the real problem from an economist's standpoint, I'm not a politician nor could I be, but nonetheless you're talking about three sectors. You're talking about manufacturing, agriculture, energy. No one can compete with our nation, this part of the country in terms of -- we have this fear, this fear of competition it seems. Let's bring back all of the jobs to the U.S. We've got them.

Yepsen: Professor Hart, one of the reasons we're in this trade war with China is that President Trump said they're stealing our secrets and we've got to get tough and we've got to do something about it. The rural ag community has essentially said politically, yeah he's right, we've got to play hardball. What can be done to keep the Chinese from stealing U.S. intellectual property?

Hart: Well, I think what we're looking for is to move Chinese law closer to what we would consider typical international law when it comes to intellectual property rights which they do not uphold. And I think it comes down to when you look at the fundamentals of the two governments, the idea is that we're here in a capitalist democracy where we believe if you develop something you own the property rights, they're still at heart a Communist country where if you create something it's there for the good of the state.

Yepsen: Same question.

Goss: What is concerning to me is everything, non-trade issues, non-economic issues, although it is economic to a large degree, we're using the economic pressure to get our outcomes. For example, now in Saudi Arabia, the issue there. As an economist I'm concerned that everything turns and runs on well we're going to hit you with sanctions, we're going to do this, we're going to do that and it's all about economics. And when economics and politics collide economics loses every time. And it's very concerning that this U.S. economy is slowing down and potentially moving into a recession. So I think we need a deal. Now, we do need those non-economic issues settled, no doubt about it. But I'm concerned that we're focusing too much on them, as an economist.

Murphy: Gentlemen, we wanted to ask you about climate issues relative to the economy. We had obviously some devastating flooding in Iowa this year, especially in the western side. How much has that impacted Iowa's economy with the fallout from the destruction of roads and people having to be uprooted from their homes? How much has that been a drag on the state economy?

Hart: Well, as you mentioned, what we've taken is a big hit on our rural infrastructure due to all these natural disasters occurring. It has either been too wet or too dry, we can't find the Goldilocks spot. And especially in agriculture when you're looking here it's the combination of okay, we lost some crops due to the flooding, especially along the Missouri River, we were delayed in the planting of those crops, those crops are slow to mature now, we're going to look at more cost to get the crop to the marketplace. And so you're seeing all these little, for lack of a better term, drag shoots, lining up against the rural economy as we move forward because there are all these additional costs due to the weather problems that we've had.

Murphy: Professor Goss, how much of a drag does that cause? What is the impact of all that?

Goss: Oh, significant, but I'm not an ag economist. I'll defer to Chad on this. But what we've seen now I think, I'll again defer to Chad, is the prices right now aren't reflecting what we may see later. I expect these commodity prices, particularly corn and soybean and wheat even, to be rising because of some of this destruction of crops out there and I'm just not sure it's reflected in prices right now. As we speak today, right now the Missouri is rising again, we're seeing flooding down I-29, Interstate 29 between western Iowa and eastern Nebraska and we're talking about flooding fields again. Now this is a small part but I think it's also we saw that in Illinois, we've seen it in Ohio. So there is some of that. But nonetheless I'm not qualified to comment on climate change, I'm a little skeptical sometimes of everybody becomes a climate expert and I'm certainly not one of those and I won't claim any. But the destruction, we had some of the ethanol plants reporting in Nebraska, for example, that the roads to the ethanol plant were washed out, they could not get input in or output out so it has been significant this year.

Murphy: Speaking of those experts, there was some science, Professor Hart, there were some scientists this week that produced a report that talked about, among the things in the report was talking about increased temperatures and the impact that could have on raising and producing livestock. Just as we see whatever the causes of them are, these extreme weather events and these changes in climate, how much of a concern is that and the way it's impacting the ag economy in this state?

Hart: It's definitely a concern but it's something that, give farmers some time they will evolve. And arguably what you've seen the agriculture community doing is evolving to the different conditions we've been facing.

Yepsen: Is the market evolving? There's a whole lot of people out there who are saying we should quit eating so much beef and meat because it creates a methane problem and that creates a climate problem. Do you expect the market to change to undercut producers?

Hart: I'm going to argue that the market is always evolving. When you think about it we've seen movements towards hormone free, organic, local, natural. You see this all the time and we continue to see this.

Yepsen: Professor Goss, you shook your head.

Goss: Yeah, it's just a lot of hucksters out there making a lot of money off this. And I'm not saying it's not a fact or it's not an issue. But the fact is that we had a Vice President about 12 years ago that said the world was going to come to an end in 10 or 12 years, which is now. Now we have those who say it's going to end in another 10 or 12 years. I'm a little skeptical, just call me a little skeptical. And a lot of folks are making a lot of money off of that and I'm a little cynical. I'm not saying climate change is not occurring but let's talk about it. But think about this, you've got men and women across the globe that are putting Botox in their heads, silicone in their lips and they don't want to eat GMO corn. I mean, come on.

Hart: But I'll turn this around and go okay, if the consumer wants to buy that attribute they have the right to do that. And what we have seen are consumers are willing to spend that money to get that on the label.

Goss: But how long have we heard about eating natural and all of a sudden now we're going to eat a chemically produced piece of meat? I for one, I'm going to continue to eat --

Hart: I'm going to say you're with the majority of consumers out there.

Henderson: We don't have much time left. But there is an evolution happening in technology, especially with farmers. As you have robots farming how is that going to impact the population and the economy in rural America?

Hart: Well, I'm going to argue it's the same type of transition as we move from horse drawn to machinery. The idea is you're talking about a large structural change to how agriculture interacts with the rural economy because it used to be that half the population was involved in agriculture, now it's well less than 1%. Let's face it, we'll make it even smaller as we can mechanize even more of the agricultural moves that have to be made.

Goss: And how the heck is it that we're losing so many jobs to AI, artificial intelligence, machine learning, when our unemployment rate is 3.7%, a 50 year low, we're adding 150,000 to 200,000 jobs a month, that we have to fear these changes. It's nothing to be feared. It has been our friend for many, many decades.

Yepsen: Professor Hart, we've got about a minute left. We're going into a recession, people look to the government to do something. That happened in the 1930s coming out of the '20s. What can government do when we've got this huge debt? Can they borrow money to prime the pump? What can we expect our federal government to do?

Hart: Well, I think that is going to be the challenge as we're looking forward here. One of the concerns I know Ernie and I were talking about earlier is as we look at the moves, for example, of the Federal Reserve, how they're already making moves that typically you would see as you're going into the recession, now we're doing that beforehand. Will we run out of our possible moves, solutions, before we can get there?

Yepsen: What about that? Are there no tools in the toolbox?

Goss: With global interest rates as low as they are, negative in Japan, zero in Europe, that interest rate bullet is not there. So it's going to have to go, we're going to have to see some fiscal policy and that would be the government. And there are a lot of economists out there and politicians that believe that the deficit, the debt does not matter anymore. So we're going to borrow and spend.

Yepsen: What matters to me is time and we're out of it.

Goss: Infrastructure spending.

Yepsen: Thanks for being here.

Hart: Thank you.

Goss: Thanks for having us.

Yepsen: And we'll be back next week for another edition of Iowa Press when we sit down with Colorado Senator Michael Bennet as he pursues the democratic presidential nomination. That's Iowa Press with Senator Bennet at our regular times, 7:30 Friday night and Noon on Sunday. And also stay tuned next Friday night at 8:30 p.m. for our latest edition of Iowa PBS's Conversations with Presidential Candidates. It's a series we're doing at Des Moines Area Community College. We sit down with former Texas Congressman Beto O'Rourke for an hour-long town hall style conversation. So for all of us here at Iowa PBS, I'm David Yepsen. Thanks for joining us today.

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