Monday, October 31, 2016

Don't Bet Budget On A Coal Rally

As we get closer to the 2017 legislative session, the budget-deficit discussion rapidly intensifies. So far, though, it has not focused squarely on the deficit itself, but rather various variables that perhaps, maybe, hopefully could catapult the state's finances across the deficit dungeon and onto solid revenue ground again. 

One of the variables that seems to attract the most interest is a rebound in coal production. This is entirely understandable: coal has for a very long time been a very important product in the Wyoming economy, and a critical revenue producer for the state government. 

Today the Casper Star Tribune throws more coal into the engine that drives the rebound hope, boldly reporting that coal is "determined ro rally":

Friday, October 28, 2016

Be Careful with the Rainy Day Fund

With the latest CREG report in mind our governor and some legislators seem open to using the Rainy Day Fund to bridge over the state's revenue shortfall. This is a natural reaction, and using the money now is a good idea - but only under strict conditions. If the legislature does not recognize those conditions, the use of Rainy Day cash will actually make matters worse for our state. 

To understand the proper use of a Rainy Day Fund, let us start with the basics. The theory behind a government cash reserve is that:

a) revenue is cyclical, fluctuating with the ups and downs in the business cycle; but
b) spending is not cyclical.

Right here, we have a problem. 

Thursday, October 27, 2016

A Review of CREG Forecasting

Given how important the Consensus Revenue Estimating Group's (CREG) reports are for the state's lawmakers and for our governor, and given the problems in the latest report that I pointed to the other day, it would be a good idea to take a closer look at how CREG's forecasts evolve over time.

Let me first of all, again, stress that economic forecasting is among the toughest things an economist can get involved in. Contrary to what conventional wisdom would suggest, there are no good methods for predicting where the economy is heading at any given point in time. The most common forecasting techniques, which are based on econometrics, can very well predict the future of the economy so long as nothing of any significance happens. Once the economy hits a recession, econometricians are notorious for their failed forecasts.

The main reason why econometrics is unable to predict disruptions in stable economic activity is that its models must produce "rigorous" solutions; roughly, this means that forecasts where all the relations between the variables are statistically significant. If there is no rigorous solution, the econometrician typically backs away from making a forecast. 

Tuesday, October 25, 2016

Biennium Revenue Down $466 million

(Updated. Kudos to Brad who caught a clerical error.)
The much-anticipated October CREG report was released on Monday. The story is that the state has to deal with a $156 million revenue shortfall. Here is what the Casper Star Tribune said:
Wyoming lawmakers are short $156.6 million for the current two-year funding cycle, according to a report released Monday morning. That means when legislators convene in January in Cheyenne, they will have to make up the difference through program cuts, tax increases or spending the rainy day fund. The current revenue shortfall is the result of a decrease in revenue in recent memory.
I thought it was a decrease in revenue in the minerals industry. But be that as it may. Governor Mead's comment

Monday, October 24, 2016

Right and Wrong About Economic Freedom in Wyoming

In a newly released video, the Wyoming Republican Party encourages people to "vote Wyoming". The video presents life in Wyoming as being free and unrestrained by government. It also says that liberty is inseparable from economic freedom and that every man has the right to the proceeds of his own work.

It is very easy to get the impression that under Republican stewardship, Wyoming has become a powerhouse of economic freedom. But if that were the case, should not our economy be doing better than it actually is? Should not the free-market forces by now have diversified our economy? Should we not have liberated the mining industry of the burden of being the sole motivator of the Wyoming economy?

Friday, October 21, 2016

Are We Really Better Than Texas?

Wyoming is a great state to live, and in many ways that freedom we so often associate with the American Way of Life is still a reality out here. 

In some ways, though, that freedom has gradually become more of an illusion than facts. We may not have an income tax, but in almost every other way imaginable we are a big-government state. The figure below reports one of the many numbers that give a meaning to that notion: state and local government revenue as share of the Wyoming GDP. With total state and local government revenue at $10.4 billion (including all federal funds), our state and local governments are almost 25 percent of the state's GDP. 

Thursday, October 20, 2016

Right and Wrong About the Wyoming Crisis

The Economic Analysis Division of the Department of Administration and Information has published its Economic Summary for the second quarter of 2016.  It is a gloomy picture, though presented in the usual dry econo-speak. Two highlights:

Wyoming experienced a decline of 2.8 percent (or 8,050 jobs) in total employment in the second quarter of 2016 compared to one year earlier, a smaller decrease than the previous quarter. Wyoming’s unemployment rate, [sic] climbed to 5.6 percent in the quarter, the highest since the fourth quarter of 2011, while in the U.S., it remained at 4.9 percent. Most industrial sectors in the state experienced job decreases during the period.

Wyoming’s total personal income declined 1.5 percent in the second quarter of 2016 from the previous year. U.S. personal income increased 3.2 percent during the same period. [Emphasis added]