Thursday, September 7, 2017

The ENDOW Report, Part 2

One of the most important pillars of a constitutional republic is that elected officials can be held accountable by their electorate. Accountability comes in many different forms, one of which is transparency in the legislative process. Ideas for new legislation, put forward by our elected officials, should proceed through the proper channels in a predictable fashion, allowing voters due time and forums to consider, discuss and opine on the ideas. 

Strictly speaking, this applies to all legislative initiatives. In practice, it becomes more important the more impactful a legislative proposal is on people's lives; with the big government we have today, we simply do not have time to run around and keep track of every single idea our elected officials have for how to further "improve" our lives.
Therefore, it is reasonable that our elected officials - whether in the executive branch or the legislative branch - follow the simple rule that they give us more time and room to express our opinions, the more important their proposals are.

So far, I have to say, Governor Mead's the ENDOW initiative has not quite held itself to this standard. The group has had public meetings - and will continue to do so - for input from the public. I have seen how these meetings work, and if this part of the group's public interaction defined all of its work, there would be no ground for complaint. 

The problems started in Casper last week, at the meeting with the Committee on Minerals, Business and Economic Development. According to the ENDOW group's own socio-economic assessment report, it is supposed to submit its 
preliminary findings and recommendations in the development of a comprehensive economic diversification strategy
on December 31. Yet, at the Economic Development Committee meeting, Governor Mead's director of economic development strategy, Jeremiah Rieman, testified that:
I do believe it will be necessary, if not critical, to take some actions and make some investments along the path of ENDOW that we may not even realize for 20 or more years ... I do come to you with a sense that the ENDOW mission is achievable. The council indicates overwhelming optimism as it relates to the path forward
In other words, instead of sticking to its official plan, namely to release its "preliminary recommendations" at the end of the year, the ENDOW group has de facto already begun influencing the legislative process.

If Governor Mead had been transparent enough and told us that his group would start rolling out legislative ideas already now, it would have been much easier for the public to get involved and have a say in the process. The way the governor goes about this now, he is only going to pour gasoline on the fire of the cynics who will say that he disrespects voters and is trying to get unpopular ideas moved forward behind our backs.

I do not believe that our state's chief executive is deliberately trying to deceive voters. However, I can assure Governor Mead that there are more than a few among my large and steadily growing blog readership who will take the cynical viewpoint on this. I regret that the governor is not trying to prove those cynics wrong.

Lack of voter accountability is one of the problems with this non-transparent roll out of the ENDOW group's ideas. Another problem is the lack of quality control on the ideas themselves. It is the nature of politics and the legislative process that the less debate there is on an issue, the more likely it is to be of poor quality. In politics, closed-circuit vetting is a contradiction in terms. Therefore, by trying to move the ideas from the ENDOW group through the legislative committee process, before the group itself has formally presented its recommendations, Governor Mead runs the risk of implementing reforms that will do more harm than good to the Wyoming economy.

I have already pointed to the problems with the state-run airline idea that Mr. Rieman apparently endorsed on behalf of the governor at the Economic Development Committee. Let me take a step back and explain, in more general terms, how the ENDOW group's economic thinking - and what we know so far of its recommendations - will end up hurting our state. 

The problems that the group identifies all have one variable in common: they point to a lack of production capacity in the Wyoming economy. Commercial air services is part of that production capacity: to produce goods or services, businesses need - in broad categories - production capital, labor, organization and infrastructure:

Capital consists of: a) physical capital, namely tools and machinery of all kinds, from wrenches to assembly lines to advanced computer software, b) financial capital, either in the form of cash in the bank or affordable, readily accessible credit, and c) inputs that go into the production process;
Labor is what it sounds like, but we usually divide it into: a) manual labor, and b) human capital, which is everything from the know-how of on-the-job experience to the high-level skills of professional and academic education;
Organization is an often-forgotten part of the production capacity, yet its importance was identified already by the great economist Alfred Marshall a century ago; a bureaucratic organization slows down innovation and makes a business less adaptive to changing market conditions; a slim, dynamic organization makes a business resilient and prone to grow;
Infrastructure has four components: a) highways and railroads for on-the-ground transportation; b) electronic communications lines, from landline telephones to fiber-optic cables to satellite connections; c) energy supply lines, and d) commercial air services. 

Everywhere in the world, there is a finite supply of production capacity. However, the problem is not that it is finite in absolute terms, but how finite it is in relative terms. 

This is where the ENDOW report goes wrong. Those who are responsible for its its economic thinking have failed to understand the difference between absolute and relative production capacity. I am not going to bore you all with a lecture on how one line of thinking falls into the category of Austrian economics, another into original Keynesianism, a third into Real Business Cycle Theory, etc; that is all for another day. What matters, though, is how economic theory relates production capacity to the rest of the economy.

Those who laid out the analytical approach for the ENDOW report define the problems in the Wyoming economy in such a way that all we seem to have a problem with, is inadequate production capacity. Yes, it is true that we lack some infrastructure - air services being one of them - but to rush from that to the conclusion that all we need to do is expand air services, is to jump over more than a few essential analytical steps. Likewise, the ENDOW group's socio-economic assessment report claims that we have a shortage of workforce and therefore need inbound migration, allegedly with state support, and all of a sudden our economy would start growing again.*

Both of these points - on air service supply and supply of labor - miss out on the simple fact that most forms of production capacity will migrate to where there is work to be done. It is not the case (and I know I am stepping on some supply-side toes now...) that ample availability of production capacity will somehow automatically spawn prosperity. Supply does not create its own demand. Just because there is oil in the ground, does not mean it will be pumped up and sold at a profit; just because we have airports, does not mean it is profitable to fly in and out of them. 

The problem, in other words, is that existing production capacity in Wyoming is not profitable enough, and that it is not profitable enough to expand and invest in new production capacity in this state. Profitability does not change because government gets involved.

One counter-point sometimes made here is that it is difficult to make infrastructure profitable on free-market terms. This is a valid point: infrastructure sometimes, but not always, falls into the category of products that economists refer to as "public goods". This is not something provided by government, but a product where there is no exclusion in consumption; a street light - classic example - can provide light for Jack and Joe without Jack's enjoying the street light crowding out Joe's use of the same light. By contrast, a car is a private good: you cannot buy the same car that I just bought. 

Some infrastructure is "public good" in nature. A highway allows many people to travel without crowding out each other. However, once the highway reaches capacity and every individual's travel is affected by everyone else's use of the same highway, it changes character and becomes a private good. For the most part, though, our highways are of the public kind, and therefore it is reasonable that government is ultimately responsible for them.

The same goes for airports: so long as two planes do not try to start or land on the very same runway, at the very same point in time, there is no crowding out in use of the airport. It falls into the public-good category and it is fair to suggest that government is ultimately responsible for airports. (This does not mean they have to operate them - as with highways, that can be done in non-profit, public-private-partnership form. More on that later.)

Here, though, the ENDOW group makes the fatal error of jumping from the airport onto the aircraft that uses it. Let us make an analogy. If General Motors wanted to start building its next generation Corvette in Riverton, it would - among many other things - need a way to get the cars to the market. That would take highway or railroad capacity. Suppose that these lines of ground transportation offer enough capacity, but that Governor Mead and his ENDOW group would propose the creation of a trucking company for the purposes of providing GM and other manufacturers around the state with sufficient shipping capacity for all their products. 

By analogy of the state-airline initiative, WYDOT would set up a state trucking company and then contract with one truck owner to get all the trucks out there. This one trucking business would be operating as a subcontractor to the WYDOT/State run trucking company. The state would dictate prices for hauling Corvettes and all other manufactured products, and if the subcontractor could not make money on the deal, the state would add enough taxpayers' money to allow the subcontractor to be profitable.

When the ENDOW report ignores the difference between infrastructure and the use of that infrastructure, it ignores the difference between valid government involvement in the economy, and the realm of the free market. We do not have the commercial air service that the ENDOW initiative is suggesting, simply because it is not profitable to provide that service.

The ENDOW's weird references to demography and labor supply (again, see footnote below) make even less sense in this context. The workforce in Wyoming increases and decreases with demand and supply. When there is strong demand for workers, people move to where that demand is; when there is weak demand for workers, people move elsewhere. 

One line of defense for the ENDOW report's demographic comments could be that they have set out to talk about Wyoming 20 years from now. In fact, the quote above from Mr. Rieman suggests as much (as does their socio-economic assessment report). But if there is one thing I have learned as a Ph.D. political economist, it is that forecasting the economy 20 years ahead is about as meaningful as trying to forecast hurricane landfalls in Florida 20 years from now. 

This is actually a bigger point than I have room to discuss right now. I will return to it tomorrow, in the context of one final analysis of the ENDOW group's first report. Thank you for putting up with a long article; I wish I could keep this more succinct, but there is such great need for an impartial analysis of the governor's economic development initiative that I do not want to leave anything to chance. 
*) This is a side note, but I cannot help wondering why the ENDOW report makes such a big deal out of the growing "diversity" of the Wyoming population. Why does it matter what racial or ethnic background a person has? Furthermore, why do they discuss this in the context of a lower-than-historic fertility rate? Lower fertility is a demographic issue, as is the racial-ethnic composition of a population. It would seem that the ENDOW group is trying to sprawl into issues that are completely unrelated to their core duty, namely to analyze and recommend reforms to the Wyoming economy.

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