Tuesday, September 5, 2017

The ENDOW Report: Part 1

Apologies in advance if this week's articles get a bit tedious, but I need to spend a fair amount of time and effort on the Socio-Economic Assessment report from Governor Mead's ENDOW group. There is little doubt in my mind that this group is going to have strong influence on the coming legislative session; without a critical, independent analysis, there is a considerable risk that the legislature will adopt the ENDOW group's recommendations without much thinking. 

What the ENDOW group has published so far suggests that it has made some significant errors in its assessment of our state's economic situation. This means, in turn, that the solutions they are going to propose will be based on erroneous analysis - and could have significantly negative consequences for our state's economy. Quite the opposite of what they want. 

Today's article will analyze how the ENDOW group assesses our state's economic problems. It will also point to what legislative reforms this assessment implies. There is a coherent line of thinking behind the ENDOW group's first report, a line of thinking that I will analyze and explain in detail. However, that will take a separate article; for now, let us focus on what the ENDOW group thinks is the big problem with our state's economy. 

First off, though, I want to recognize Governor Mead for having taken seriously the problem with Wyoming's lopsided industrial structure. While the problem is not nearly as serious as is often said - Alaska has a bigger problem with its dependency on oil, and in many ways Florida's dependency on tourism matches our dependency on minerals - it is nevertheless a problem we need to address. The biggest reason is not our large minerals industry per se, but that the rest of the private sector is comparatively weak. This, in turn, results in a dominance of low-paying jobs.

It is not difficult to explain the lack of a strong secondary private industry in our state. Past legislatures and governors have made government our secondary industry. By paying artificially high salaries and providing artificially generous benefits, and by building the largest government sector in the country, our lawmakers have effectively monopolized jobs creation in many of our state's communities. 

Furthermore, the structure of economic regulations, from federal bureaucratic dictates down to local ordinances and zoning, in many ways get in the way of a thriving private sector. This is more than a problem with red tape; although nobody has yet researched this in detail (I'd like to, as soon as I get time) it is very likely that our state's regulatory burden gets in the way of the supply of venture capital. I have been pointing to this problem since 2012, and I am pleased to note that the ENDOW report at least mentions it. That said, in its recommendations of solutions, the report makes no mention of the venture capital problem - with one, rather odd, exception that we will get back to later.

Now, let us turn to the ENDOW group's Socio-Economic Assessment report, and its idea of why Wyoming is one of the worst-performing economies in the country. 

1. We have a good workforce but it needs improvement

On page ii, the report claims that our state's workforce is the "single greatest inhibitor" of growth. It is also, the report explains, the "single greatest opportunity" for growth, and the moves on to suggest that we must encourage "reasonable population growth". On page 5 they list "limited workforce in numbers and skills" as a barrier to business success. 

Fair enough, but this is by no means anything new. One of my distant relatives, a tall, red-headed man from a small Swedish farming-and-logging village north of the Arctic Circle, migrated to Dearborn, Mich., some 80 years ago. He had never set his foot inside a factory, yet he was hired and trained and spent 43 years building cars for Ford. Granted, it was easier to go from the street into manufacturing back then, but it was not easy, especially not for a man who barely knew a word of English and whose schooling stopped at sixth grade (in a school where teachers spoke an odd Finnish dialect...). Yet Ford Motor Company took him in and gave him the proper skills and training - without a dime's worth of taxpayer money to help.

There are, literally, hundreds of millions of similar stories throughout the history of this country. Businesses being started by, built by, filled with workers, whose only basic skill was unrelenting work ethic and a desire to build a future for themselves and their families. Under the free-market economy, the private sector as a whole has always been successful in responding to changing circumstances and to adapt its workforce training to its own evolving needs.

With this in mind, there is no doubt that today's manufacturing requires considerably more of the workforce than it did in the 1930s. Again, though, this does by no means suggest that government has to inject itself into the supply-and-demand process. While many businesses today need skills that can take a year or two to acquire, nothing says that government must be the provider of those skills. I am in no way suggesting that our community colleges do not fill a labor market need - they do - but to move from there to the conclusion that government must involve itself more is to draw an entirely unwarranted conclusion. 

Instead of investing more taxpayers' money in workforce training, why not open up our K-12 education system to the freedom and diversity that a free market offers? Instead of applying a government template for what a good school is, to all kids, why not allow schools with more specialized educational profiles? Why not let schools develop industry apprenticeships during high school? Why not let local businesses contribute to the formation of a school system where kids have a high chance of a job at a local business, right after graduation? 

Why not let the free market develop solutions to problems it has itself detected? 

Today, this is not possible. Our state does not allow educational freedom. Parents are not allowed to choose private education choices on a level playing field with government-run schools. Today, it is very difficult for businesses in Wyoming to set up their own high schools or even scholarships, through which they can cultivate a relationship with students during their formative years. With the proper educational freedom reforms, our state lawmakers would allow the real experts in workforce development - our businesses - to be actively involved in forming our state's future workforce. 

As for the points in the ENDOW report about "reasonable migration" and how our workforce is limited in numbers, it is unclear why this is even a problem. People migrate to where there is work, and away from where there is none. There is no need for government to involve itself in people's decisions here; if Wyoming has an attractive economic environment, businesses will come, and so will people. If not, businesses will leave, and so will people.

2. Our K-12 education system is costly and delivers insufficient results

Yes, the ENDOW report actually makes this point (p. ii), although they fail to spell out that we have the highest per-student spending in the country. Nevertheless, it is a welcome conclusion that "educational achievement need improvement", as the report somewhat cryptically puts it. Unfortunately, there is no mention whatsoever in the report of suggested solutions to this problem; even though this "socio-economic assessment" is supposed to paint a picture of the Wyoming economy, it does also point at solutions. Therefore, it is noteworthy that the report makes no further mention of our costly education system.

In fact, the only mention of our schools in any policy context is, according to the report, that (p. 28):
the most compelling concern for the state of Wyoming moving forward is how to fund K-12 education. Wyoming’s K-12 system is facing a budget shortfall of an estimated $250 million per year, or $500 million for the 2019-2020 biennium.
In other words, we have a high-cost education system in need of improvement, so we are just going to throw more taxpayers' dollars after it, and everything will be hunky dory.

3. Not enough commercial air service

Explains the ENDOW report (p. ii):
The Aeronautics Division of the Wyoming Department of Transportation has assembled a workgroup, which includes representation by Council members, to address commercial air service. Commercial air service is a significant limiting factor in expanding and diversifying Wyoming’s economy. Without it, we will be unable to effectively recruit or retain entrepreneurs and businesses that need quick access to markets and customers. An ENDOW Advisory Board member refers to it as “the billion-dollar problem” affecting all rural America. There appears to be no nationwide fix and states will be competing for a limited number of opportunities to solve this problem. Wyoming must be more aggressive in finding solutions to air service.
This point is repeated throughout the report. As I explained yesterday, the ENDOW group and the majority of the members of the legislative Economic Development Committee appear to be in agreement on the need for more air service around Wyoming. That does not make this idea any better - on the contrary. The solution discussed at the Economic Development Committee last week is, quite frankly, a fiscal disaster in the making. 

I do not mean to rehash my arguments from yesterday against the creation of a state-run airline (which actually is the proposed solution). Let me just point out that when the ENDOW report moves into this territory, and starts discussing the lack of air service in the context of economic development, they need to have a very solid analytical ground for anything they propose. This report makes no effort in that direction, which again is understandable. It is, after all, an assessment of the problems more than a package of solutions. That said, Mr. Rieman from the governor's office has put forward a state-run airline as a solution, which probably means that Governor Mead has already accepted that idea. 

The above quote from the ENDOW report reinforces the impression that our state's executive branch already considers a state-run airline as an implementable solution to one of the problems the ENDOW report identifies. 

Taken together, these three problems reveal a certain line of thinking - a set of premises - behind the report that have narrowed their scope and guided them to specific conclusions and policy recommendations. In my next article, I will analyze this line of thinking in detail, explain where it goes wrong and what the consequences could be if we implement their erroneously derived recommendations. I will also explain what approach they should have taken. 

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