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Friday, September 8, 2017

The ENDOW Report, Part 3

This is the last installment of my analysis of the ENDOW socio-economic assessment report. My final conclusion about this report is that the ENDOW group:

-has determined its conclusions already by defining the problem;
-fails to produce a coherent economic analysis; and
-spends far too much time on irrelevant statistics while ignoring the statistical elephant in the room.

More on that elephant toward the end of this article.

In the first installment I made the first point, explaining that the ENDOW group completely lacks foundation for its first economic reform proposal, namely a state-run airline. In the second installment I elaborated on the errors in the economic analysis, pointing to how the report - against basic economic theory and common business sense - conflates production capacity with the use of production capacity. This leads them to draw the inaccurate conclusion that the state needs to be involved in commercial air service.

In this the third installment I will wrap up my criticism of their economic analysis. In order to do so, I would like to start with again pointing to the weird prioritization that apparently has guided the composition of the report. They spend five and a half pages discussing details of the age composition and racial diversity of the Wyoming population. Compared to other sections of the report, the one about demographics is supported by detailed statistical facts. 

Here is, in a nutshell, what the report says about demographics:

a) While the report sounds the fertility alarm, the statistics it presents says that the U.S. fertility rate has remained stable over the past 40-45 years. There is one exception, and that is a slight downtick with the start of the Great Recession. It is inexplicable why the report makes such an enormous point of this slight decline; common sense would suggest that people make the right choice in not having kids when they can barely make ends meet in the first place. An improvement in the Wyoming economy will motivate people to have more kids.

b) Then they beat the "aging population" drum, a beat we have heard ad nauseam over the quarter century. The fact that people live longer - the real explanation for the "aging" phenomenon - is in itself positive. It is only a problem because government has decided that it, not we, is the best provider of health care and retirement security for the elderly. But there is another point to be made here, that eludes the ENDOW report authors: due to the absence of a death tax, Wyoming is comparatively attractive place to live when you get old. Anyone who believes that we have an "aging" problem in Wyoming could easily solve that problem by proposing a punitive death tax. It would scare the bejesus out of hard-working people who just want to live a quiet, dignified life as retirees. Most of them would pack up and leave the state; would that solve your "aging" problem, dear ENDOW report authors?

c) The ENDOW report spends a surprising amount of time discussing racial diversity. What on God's green prairie does racial diversity have to do with the Wyoming economy? Why does it matter to the ENDOW group, and apparently to Governor Mead, whether or not a person is an African American, a Native American, an Asian American, a European American, a Hispanic American, an Arab American, a Klingon American...? Why can't we all just be proud of who we are, where we came from and what we are doing to leave a better America for our children? 

With that said about demographics, let me pick off two final points about the ENDOW report's economic analysis, or lack thereof.

The first point has to do with forecasting, which I briefly mentioned in the first installment. Governor Mead has asked the ENDOW group to look into the crystal ball and figure out what the Wyoming economy will need, in terms of help to grow, over the next 20 years. Mead, the good man and lawyer he is, should abstain from getting himself that deeply involved in economic analysis. No economist in his right mind would ever try to make a serious - or even remotely meaningful - forecast of what the economy will look like even a decade from now. 

Yes, there is an entire industry called "forecasting" in economics, and yes, we hear about economic forecasts in the news all the time. But just because people can sell canned oatmeal, does not mean canned oatmeal is good. Forecasters have been able to prey on people's fear of the unknown, and especially the uncertain economic future, ever since man invented division of labor. 

That is not to say forecasting is irrelevant, but any decently educated economist should know not to go beyond 3-4 years in his outlook. We all stray from that rule occasionally, but then reality quickly sends us a "memento mori". The problem with longer forecasts is that they by necessity rely on unrealistic assumptions of how the economy works. When the ENDOW report tries to tie today's Wyoming to the same Wyoming 20 years into the future, it has to assume that major macroeconomic variables will remain constant; economists refer to this with terms like long-term equilibrium or steady state growth paths (depending on the exact nature of the analysis). 

From a policy reform viewpoint, regardless of the exact definition of the assumed long-term stability, its role is to make sure that only those things change that the report want to affect with its recommendations. This does, in effect, invalidate the entire project right from the start, but to be fair - and we always want to be fair on this blog - that is a method economists often use. It is understandable that the ENDOW group uses the same method. 

The problem is that any policy recommendations that eventually emanate from their work (their recommendations report is due at the end of the year) will be heavily conditioned by the assumption that they can accurately foresee the next 20 years of the Wyoming economy. While I will save my final verdict on their exact recommendations (except for those they have already dispensed) I will make this forecast (yes, pun intended): those recommendations will not be founded in a realistic assessment of the Wyoming economy. Put simply: their forecasting method will have contaminated their analysis and forced them to disregard properties of our economy that do not fit the 20-year narrative. 

My second and final point about the ENDOW socio-economic assessment report is somewhat related to the first, but more general in nature. The purpose of this their first report is to assess the Wyoming economy and set up for their policy conclusions and recommendations. Since the very purpose of the group's work is to find ways to help the Wyoming economy grow, one would expect some kind of analysis of the state's growth track record. Yet none of that is to be found in this assessment report. There is no mention of growth numbers, no statistical analysis of sectorial growth, or track record of private-sector income and job creation. 

There are more charts and numbers in this report about racial diversity than about macroeconomic performance. 

They do provide a brief sectorial analysis of our economy, but that is limited to what percentage of state GDP each industry contributes. This analysis is meaningless without a comprehensive analysis of GDP growth, both real and nominal (current-price); the former gives us a good idea of how exactly the Wyoming economy is operating, while the latter is a measurement of the state government's theoretical tax base. 

An analysis of personal-income growth would also help explain the actual performance of our state's economy. I suspect, though, that the ENDOW group does not want to publicize just how poorly household income has performed in our state, especially outside of the minerals industry; nor does it want people to know just what the discrepancies are between public and private-sector employees.

I hope I am wrong. But there has to be a reason why this report has concentrated so much of its work on irrelevant statistical factoids and avoided (evaded) the part of macroeconomics that really tells us something about our state. 

So much for the ENDOW report. Next week, we will be back to our regular programming. Thank you for your time. Enjoy the weekend. 

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