Friday, January 20, 2017

Will Trump Be Good for Wyoming?

Recently, Bloomberg News published its 2017 Economic Evaluation of States (BEES). They placed Wyoming dead last. This ranking is based in part on the decline in minerals-industry production, but also on private-sector job creation and GDP growth.

The BEES study confirms what I have been saying all along, namely that our state has more macroeconomic problems than anyone could blame on the minerals industry.
Many people, including some legislators, apparently pin their hope of a better future for Wyoming on our new president. That is not unreasonable: 
Trump has made bold promises of deregulation, tax cuts and other policies to help our economy grow more strongly. 

Today, when Trump was sworn in, is a good day to ask what impact his policies may have on Wyoming. Earlier this week, the same question was addressed by the Wyoming Tribune Eagle:
The vice president of a Massachusetts-based economic modeling firm gave a talk [on January 17] on what impacts the incoming Trump administration could have on the U.S. economy. Billy Leung of REMI, short for Regional Economic Models Inc., spoke ... before a small group of economic and business officials, ... He suggested that President-elect Donald Trump and his cabinet’s positions on deregulation of industry may provide productivity growth that would be a key component of economic recovery. “Deregulation of labor, energy, financial services; tax reform and tax cuts; infrastructure improvements to help businesses lower their transportations costs – that all allows further growth without inflation,” Leung said. 
 Sure, but let us remember that these are changes to federal regulations, which means that in general, nothing changes between the states. The exception is when a state is highly dependent on one industry; in our case, deregulation of the production of coal, oil, natural gas and uranium would certainly be positive for our state. 

That said, it would be naive, frankly, to expect those products to rebound toward the prices and levels of production where they were a few years ago. Coal is perhaps the best example: as I explained back in October, not only has coal been in decline since the 1980s in our electricity production, but our economy has slowly grown more energy efficient. In 2015 we used 24 percent less electricity per $1 million of GDP than we did in 1995.

The trend of a decline in coal-based electricity production has been going on far longer than the Obama administration's regulatory incursions into the coal industry. The coal share of total electricity production actually peaked in 1956, when it stood at 56.1 percent. In the past 20 years alone, the coal share of our total mWh has fallen by, on average, two percent per year.

During the same time, the use of mWh per $1 million GDP has declined by 1.3 percent per year. What do these two percentages tell us about future coal demand?

Assuming that the REMI forecast is correct in predicting a one-percent extra GDP growth under Trump, the outlook is honestly not very good. In 2015 we used coal to produce 1.35 million terrawatt hours; if the trend of less electricity per $1m of GDP continues at -2.02 percent per year, and if the coal share of total electricity production continues to decline at 1.3 percent per year, then at three-percent real GDP growth, coal-based electricity production will be exactly the same: 1.35 million terrawatt hours. 

This forecast assumes that there is no substantial relative price change between coal, oil, natural gas and uranium. That is a reasonable outlook; for example, it is very unlikely that oil will rise above $50 for any sustained period of time.

We should also keep in mind that inflation may put a little bit of a damper on the expected Trump growth, as manufacturing is repatriated from low-cost countries. The inflationary tendency from that could be countered by deregulation and cuts in the federal corporate tax rate. A good rule of thumb is that regulations cost a business $1 for every $2 they owe in taxes; if Trump's pledge to cut the federal corporate-income tax rate from 35 percent to 15 percent became reality, and if he could preside over a significant regulatory rollback, much of our manufacturing industry could end up with a net gain from repatriating production. 

If so, the inflation damper on growth will probably not materialize. Even so, though, Trump's policies will most likely avoid a complete dissipation of coal production and will more than likely help it stabilize at its current levels. But unless:
  • there is a major upset of relative energy prices;
  • Europe and Japan suddenly wake up from their macroeconomic slumber; and
  • China gets a grip on its ominous financial bubble;
 there will be no long-term return to the heydays of coal production from a few years ago. 

All in all, the Trump administration is going to be better for the American economy than a Hillary Clinton administration would have been. Trump is also going to be better for our economy than Obama was. That, however, does not mean any substantial change for the better for Wyoming. Our state government's fiscal problems originate within the state, and therefore require in-state solutions.

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