The State of the Economy

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How is Iowa's economy doing and what impact could tax policies and the struggling ag economy have in the coming months? We'll crunch the numbers with two economists on this edition of Iowa Press.

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Funding for Iowa Press was provided by Friends, the Iowa PBS Foundation.

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The Associated General Contractors of Iowa, the public's partner in building Iowa's highway, bridge and municipal utility infrastructure.

Elite Casino Resorts is rooted in Iowa. Elite's 1,600 employees are our company's greatest asset. A family run business, Elite supports volunteerism, encourages promotions from within and shares profits with our employees.

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Across Iowa, hundreds of neighborhood banks strive to serve their communities, provide jobs and help local businesses. Iowa banks are proud to back the life you build. Learn more at iowabankers.com.

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For decades, Iowa Press has brought you political leaders and newsmakers from across Iowa and beyond. Celebrating more than 50 years on statewide Iowa PBS, this is the Friday, December 20th edition of Iowa Press. Here is Kay Henderson.

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[Henderson] Are there economic headwinds or tailwinds in the Iowa economy and the national economy? Our guests today may have some thoughts, some research to share and maybe some opinions. They are Mark Montgomery, he is the Donald L. Wilson Professor of Enterprise and Leadership and a Professor of Economics at Grinnell College. Welcome to the program.

[Montgomery] Thank you.

[Henderson] And a familiar guest, Ernie Goss. He is the Jack MacAllister Chair in Regional Economics at Creighton University. He is also the principal of the Goss Institute in Denver, Colorado and produces a monthly regional economic report. Welcome back.

[Goss] Thanks, Kay. Good to be here.

[Henderson] Also joining the conversation, Dave Price of the Gray Television stations in Iowa and Erin Murphy of the Gazette in Cedar Rapids.

[Murphy] So, gentlemen, I'm curious to get both of your thoughts on this. Ernie, we'll talk with you first. President-elect Trump has made some pledges to institute tariffs on imports and there's concerns about how that could impact the economy. I'm curious if you've seen anything, is that already just the discussion of those having any kind of measurable impact out there?

[Goss] I think the discussions are having an impact, yes. We've seen Trudeau go down to Mar-a-Lago and we've seen Shambaugh in Mexico, two chief, well antagonists is too strong, but nonetheless they have reacted. Now, the question is in my view, will he follow through? And if I knew the answer to that then his discussions would be ineffective. In other words, even the incoming First Lady doesn't know what does he really think about tariffs because from an economist standpoint we don't want to see retaliation and that is the major -- if you have a trade war and that's no good for anybody and I think the President knows that.

[Henderson] Mark, you're shaking your head.

[Montgomery] The markets have reacted to some extent to the threat of things that will impede trade. So, the business community is aware of this. As Ernie said, what economists always worry about is retaliation. During the Depression there was a disastrous imposition of the Smoot Hawley tariffs and trade all around the world started stopping and it was a horrible outcome for employment and trade and things. So, we're naturally suspicious. And I think he's now projecting a sort of worse tariff position than he was eight years ago.

[Price] Are there good tariffs? I think one thing that we heard Joe Biden when he was running against Donald Trump the first time decrying some of the tariffs but then he kept some of Trump's tariffs. Let's talk specifically about China. Now, Trump offset those by bailing out farmers who lost a bunch of money. But why didn't Biden get rid of everything? Did that force China to buy more of our stuff? Are there good sides to this?

[Montgomery] I don't know. I mean, usually tariffs under 10% don't do much to trade. The idea that this was going to take away a lot of trade from China I think was a bit exaggerated. And are there good tariffs? Are there good tariffs? There are tariffs that do things you want them to do.

[Price] But it depends on your definition of good.

[Henderson] So, what is a good tariff?

[Montgomery] I would be hard pressed. A tariff can protect some segment --

[Goss] Infinite industries.

[Montgomery] There is the infinite industry argument, which was used for growth in what we used to call the third world, that you're protecting industries from competition from the west and the argument about those was, from economists at least, that they don't go away, the infinite industry tariffs. There's no birthday party for the maturing industry that says okay, no more tariffs for you.

[Price] So, if I'm a consumer, how freaked out should I be? Or is it tough with him because you don't know what's a bluff and what's real?

[Goss] I think that's it. You don't know what is -- and again, there is some reason to bring down the tariffs from China. But here's -- I don't know if this is interesting, but for an economist it's very interesting, he could raise tariffs on Chinese imported goods and they could depreciate their currency by 10%, it would offset it. And you get into these other factors that really it could be a wash. But the real concern for a lot of folks is what it might do to inflation. But it would be, hopefully it would be a one-time event, but it could continue on and on.

[Henderson] We've heard some people in Trump world say the government could run on tariffs. Right?

[Goss] No.

[Montgomery] As a source of income?

[Price] And get rid of income taxes.

[Montgomery] No, no, no.

[Goss) No. That's sort of like the 19th century, the American view, and if you want to reduce the trade deficit there is one guaranteed way of reducing the trade deficit is going into a recession and we don't want to do that. A deficit usually is an outcome of a vibrant economy where you're buying from abroad and French wine and when things really depreciate or whatever you wish then you get Mount Ayr wine perhaps or a substitute, no disrespect to Mount Ayr.

[Henderson] Exactly.

[Price] Nice cover.

[Murphy] Dave mentioned earlier Trump's first administration and the trade negotiations that upset the ag economy here and the federal government helped out Iowa farmers in that time. Are these tariffs an example of what -- are we facing a similar disruption if that goes through in the ag economy specifically? And we're already in a tenuous position in the Iowa ag economy. Mark, we'll start with you on this one.

[Montgomery] I would expect so. And first of all, in terms of consumers, a lot of our produce comes from Mexico. And you would expect that there will be pressure from the government to do something about that as there was last time. Will it do it? With Trump in command of a very conservative Congress I don't know. But you would certainly expect that these are -- if they trigger a retaliation against agricultural goods, well yeah, there's going to be a lot of harm, a lot of hurt.

[Goss] But there is one big difference, the deficit and the debt are significantly higher now than they were in 2017 and '18, so the ability to assist those industries that are negatively affected is much, much reduced. So, that is the difference this time than the last time. We're now in an era when fiscal policy is very limited but it is continuing to be exercised despite its limitations.

[Price] DOGE, we'll see what DOGE thinks of this, right? Could you gents talk about these thousands of Iowans who had worked directly in agriculture and have been laid off in 2024. They saw the good times in '21 and '22, started to go down in '23, go down in '24, by all accounts '25 is not going to be the good old days either. What happens to these folks? Will they be -- can they make it until they can be rehired? Or realistically are they going to spread out and leave ag and find some other gig to support themselves because you can't hang around on unemployment for very long in this state anymore?

[Montgomery] I would expect that people would leave, try to find -- we do observe during -- when industries start to close and we have long-term unemployment and real hardship, often people will not take jobs that were lower than their original job. Sometimes if it's a man, the wife will take the job, as opposed to the man. So, it is hard and there's a lot of stickiness in labor. So, migration is hard. But I don't see -- there must be a lot of outmigration if this gets to be extreme. I don't see how it could go another way. Do we have enough industry to absorb workers like that?

[Henderson] Like the Tyson workers, like the John Deere workers, like Cargill, Smithfield, Maytag?

[Goss] We do a monthly survey of bank CEOs in rural areas of 10 states and it has not been good. It has been a tough 17 straight months of declining ag equipment sales, which goes back to John Deere and then onto the metal producers and so on. But I'm looking forward, we're talking about the most productive farmers on the face of the Earth, we will do well in the long run and those industries will come back. And there will be some outmigration, but I'm pretty positive on the outlook. As you said, Erin, 2025 the first portion is going to be a little tougher. But I'm pretty positive about the second portion. I'm hoping that President Trump negotiates some good trade agreements with China where we sell more pork, more soybeans, Iowa soybeans, Iowa pork to China. And so, I'm more positive in that regard.

[Montgomery] I would agree with that, yeah. It would be a real help if the administration did something to increase agricultural exports besides just giving farmers a boost. Trump's trade agenda is so sort of focused on tariffs, I don't know whether that would happen. The idea of using tariffs sometimes is to force your opponent, I put that in quotes, to do something like maybe you put a tariff and then you say, now buy more of our goods, which sort of happened the first time. So, there is a strategic use of tariffs. But in the Trump rhetoric, you don't hear a lot that sounds like a strategic use of tariffs. Am I wrong about that, Ernie?

[Goss] But again, I would say that if we saw that then it would be ineffective. In other words, it's just like President Reagan when President Reagan was in, gosh this crazy guy could actually do that. And so, it generated some positive outcomes. So, there could be some positive outcomes. But one of the things we're talking about, President Sheinbaum, Xi Jinping and then outgoing Trudeau, three of the principals involved. And they're not capitalists. We're talking about what happens to, what does President Sheinbaum do? What does Xi Jinping do? We economists thought if they only got a taste of this capitalist economy, market-based economy, they would do it our way. But they haven't yet, they haven't yet.

[Henderson] This past week the latest report on Iowa unemployment came out. It ticked up a little bit in November. The labor participation rate for the first time in calendar year 2024 increased slightly. What does that tell you about the health of the workforce? Mark?

[Montgomery] Well, I mean, unemployment overall has been pretty good in this country, it's low, it's not quite historically low, but really low. And regional numbers I think are a little harder to interpret it because a regional economy is more sensitive to a change in demand or supply not just abroad but in the next state or in Nebraska where Ernie lives. So, the outlook for employment is if you think back five years ago to the crisis of COVID, everybody was expecting a big recession, a huge recession, and that didn't come and I think it was largely because they spent so much money, fiscally they just dumped a lot of money into the economy, which may have heeded inflation, but that was what prevented that sort of crisis. I don't think Biden ever gets credit for that. There might have been a huge crisis. Right now, an article in The Economist just today talks about how America's economy is more vibrant than pretty much any of our peers in the OECD.

[Price] Because of that spending?

[Montgomery] It was that spending that prevented the downturn, I think.

[Goss] But the IRA, the CHIPS Act, it goes on. That's one of the issues. We're talking about deficits running $1.8 trillion and it's not going to be any lower this year I don't think and we're seeing continuing resolution going forward in Congress as we speak. Another issue is those numbers, Kay --

[Henderson] Participation rate --

[Goss] Those numbers are a little iffy, not the ones coming out of the state agencies, I'm talking about what is coming out of Congress. For example, the surveys, the monthly surveys have overstated the hiring by gigantic numbers. The latest number is 800,000 additional jobs according to the monthly numbers that aren't the same as the ones that are done quarterly. And so which ones are correct? We've had some -- there are some big issues with the numbers. And I think in quarter two of this year, 2024, we may have had a decline in GDP. Now, we'll wait and see how it's revised. But we lost jobs according to a bigger survey where you're getting 95% of the businesses are responding, whereas in the monthly surveys you're getting 2% to 5% of the businesses responding, a real different world. So, I'm concerned about the numbers.

[Henderson] We are going to get into some proposals being made at the Statehouse.

[Murphy] Yeah, and on the subject of unemployment, Mark, you mentioned that it has been low for a decent stretch now here in Iowa. Some state lawmakers, for those of us who cover the Capitol, we've heard that there is consideration being given to reducing the payroll taxes that businesses pay to fund that state unemployment fund. Good idea from your perspective?

[Montgomery] So, the idea is what will this do to unemployment compensation? Answer that question before I make any further pronouncement. What will that do to unemployment compensation? Unemployment compensation was really critical during COVID. I don't know that -- I've already benefited from tax cuts in Iowa. I don't pay on my pension state income tax. Okay, and the idea of job creation through tax cutting is an old, is an ancient concept. And it works sometimes. So, my wife told me when I was coming on this program, she said never say this will happen, only say it tends to happen. My wife is an economist just like me. She's retired from Grinnell. So, I never, I cannot say anything will happen. But that kind of fiscal management at the state level, would you agree with this, is so much more precarious than at the national level because you're a super open economy, you're an absolutely super open economy. And people can move next door, there's no tariff, there's no trade restriction, there is nothing to prevent people from going there, no visas. And so, I think it's hard to make that work. On the other hand, lowering taxes is an advantage to industry. But I want to know how this is going to affect compensation.

[Henderson] Ernie?

[Goss] Well, I think a little off the topic, but on topic somewhat, you pay people more to work less and what do they do? Work less. And back to your point about do you increase monthly, weekly compensation for unemployed workers? How is it going to be used? But I do think that the fund, the problem you're talking about, you're talking about a state, my state as well where I live now in Nebraska, the volatility. You're talking about volatility. So those funds need to make sure you protect against the downturn, the severe downturns that could be coming forth with an economy like Iowa's based a lot on manufacturing, a lot of agriculture, both two volatile industries. So, I would be concerned about not maintaining a trust fund that is large enough to meet those downturns once they hit. And Iowa right now is in an economic downturn but not severe. It could be severe.

[Montgomery] And manufacturing and agriculture are going to be more responsive to trade things, more than services, for example. So those are, as you say, industries are naturally volatile. And the other thing is unlike Mexico, anybody can come to Iowa and anybody can leave. And so, these are super open economies. And so, I think controlling them is at a different level, a different magnitude of difficulty than it would be at the national level.

[Price] Before my question, I believe what we hear is that Kay should probably book you and your wife as guests because that could be a fascinating discussion.

[Montgomery] Oh now, I don't think you want to have that kind of conflict on air. This is a family show, I'm sure.

[Price] All right, let's talk about property taxes, gents, if we could. That is another thing they have talked about at the Statehouse that there could be further legislation involving that. Can you just look kind of big picture, and maybe it's outside our borders, who does property taxes right and most effectively? Is there a model that you've seen that is effective?

[Henderson] Ernie?

[Goss] I think Henry George had the perfect tax back in New York in the 1900s. It was a tax on property, property itself, not on the improvements. So, to the extent you have tax improvements, then you limit the ability to grow the economy. So, if you do have a property tax, those that really tax not the improvements but the original land itself. Now, that was Henry George's idea and it's not practiced now. Which state has -- well you see some and we were talking earlier about Mark, maybe I shouldn't out you here, from being from New Jersey, which also has a property tax problem. Much like Nebraska, Iowa's is not nearly as severe. So, it also has an impact on interstate competition between one state and the other. So, Iowa used to be a real high tax state. It's much less of a high tax state today. Nebraska has now overtaken Iowa. But I can't say anyone does it well.

[Montgomery] I would be hard pressed to think of a state that necessarily because I just don't know enough.

[Goss] Jarvis, of course Jarvis back in California I think it was in the '70s, he passed an amendment that was in California, he limited how much you can increase property taxes and that has worked pretty well. Now, it hasn't worked well for other taxes in California. But nonetheless.

[Price] So, if legislators further restrict how much the locals can, whether it has to do with assessments, whether it has to do with increasing overall taxes, is there any harm to that? Does that limit some of those smaller communities?

[Montgomery] Well, the funding supports education and small towns are in trouble in education just by the demographics of shrinkage, which many towns in Iowa do. And also, towns are up against that because if people are leaving and property values are dropping your tax revenue is going to go down necessarily. So, I think yeah, you can have a harmful effect if you impose limits on local property taxes. I'm trying to think now, is there a good place where we can say if you increase property taxes you have more money for education?

[Goss] There are consumption taxes being proposed from some states and my analysis, and I think most analysis would conclude that property taxes are more damaging to economic development than growth than say other, like a sales tax. In other words, you would be, a state would be better off economic development wise or growth by reducing property taxes and increasing the sales taxes. But I'm not -- that's not happening in most states.

[Henderson] On January 1st, Iowa's individual income tax will shrink to 3.85%. Will that have any impact on people moving to the state, Ernie? Are you going to join us?

[Goss] Well, I just left here. You know, it hasn't been that long when I had a place in Iowa and property taxes did help me make the decision to move to another state that has even higher property taxes in Nebraska. It does. You're talking about interstate competition and taxes do matter. And income taxes do matter. Property taxes do matter. And I would argue sales taxes also matter but they matter less. So, the fact is when you're talking about schools, as Mark was talking about, perhaps local option sales taxes. Now, the problem many of the rural communities have, how much sales take place in that community? But there could be some state aid to education. So, I would propose to reduce the property taxes, increase state aid to education. And also, you're saying, well where does that come from? Well, you would have a sales tax, you would boost Iowa's sales tax. I would make that recommendation and I would be driven out of the state, I'm sure.

[Henderson] Mark, you have 30 seconds to sort of weigh in on that issue.

[Montgomery] Well, again, I'm repeating myself a lot. It's a super open economy and when there are lower taxes at another state then that does have some effect on commerce in the state. I'm from New Jersey, as we've agreed --

[Henderson] What about population movement?

[Montgomery] I think population movement is more sluggish than the movement of trade and commerce. I grew up in a state where the next state over, Delaware, had no sales tax. That didn't draw people I don't think into Delaware. It did make people shop in Delaware, like my mother, considerably more.

[Henderson] Well, gentlemen, we are out of time for our conversation. I hate to tell you that. But thanks for being here today and sharing your views. You may watch any episode of Iowa Press at iowapbs.org. For everyone here at Iowa PBS, Happy Holidays.

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Funding for Iowa Press was provided by Friends, the Iowa PBS Foundation.

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The Associated General Contractors of Iowa, the public's partner in building Iowa's highway, bridge and municipal utility infrastructure.

Elite Casino Resorts a family run business rooted in Iowa. We believe our employees are part of our family and we strive to improve their quality of life and the quality of lives within the communities we serve.

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Across Iowa, hundreds of neighborhood banks strive to serve their communities, provide jobs and help local businesses. Iowa banks are proud to back the life you build. Learn more at iowabankers.com.

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