Forecast for 2020 Looks Better Than it Did a Year Ago

Posted on January 8, 2020 by Christine Chmura
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What a difference a year makes. Last year at this time there was talk of recession, in part, because the stock market and yield curve were signaling warning signs. At the end of 2018, the Dow Jones Industrial Average had its worst year since 2008.
If the stock market is falling, then investors must think the sale of goods and services are going to decline to the degree that profits fall. That is a recipe for recession.
The yield curve was relatively flat at the end of 2018 and then inverted in 2019, with the interest rates for the 10-year Treasury lower than the shorter-term maturities such as the 3-month Treasury.
An inverted yield curve often proceeds a recession as the Federal Reserve is pushing the target federal funds rate higher, which causes 3-month bills and short-maturity Treasuries to rise above the longer-term 10-year Treasury.
Potential trade wars with China were a concern as 2018 closed and continued to escalate over the year, which eroded confidence to the degree that firms pulled back on plans to invest in equipment and expansions. Presumably, the concern was caused by uncertainty regarding demand for products as well as the ability to purchase supplies other from countries instead of China.
One year later, the Dow gained 22.3% while the benchmark S&P 500 index soared 28.9% for the year and the Nasdaq Composite gained 35.3.
The Federal Reserve lowered the federal funds rate target by 75 basis points over the past six months. As a result, the yield curve is no longer inverted with the 3-month Treasury, closing out the year at 1.54% and the 10-year at 1.92%.
Both the stock market and steeper yield curve point toward growth in 2020. Also, the first phase of the Chinese trade deal negotiated by the White House is said to be signed in mid-January. With Chinese trade uncertainty behind us, we might see businesses investing again in plant and equipment.
Aside from the increased sales to firms that construct plants and manufacture equipment, business investment will ultimately increase productivity, which enables the economy to grow faster.
Increasing productivity is critical to boosting the growth rate of the U.S. economy and improving living standards.
One trend that has not changed since last year is strong growth from the consumer sector, which makes up about two-thirds of gross domestic product. Although official numbers have not been reported, increasing employment and rising wages most likely gave retailers a strong holiday selling season.
When consumers are buying, retailers need to replenish inventories and that leads to more orders for manufacturers, who then give employees more hours to work or employ more people — a cycle that supports economic growth.
Based on these trends as well as slower population growth, Chmura Economics & Analytics is forecasting slower U.S. growth in the gross domestic product and in employment. GDP growth should increase 1.9% in 2020, compared with 2.3% growth last year. Employment growth should be 1.1% this year compared with 1.5% in 2019. We expect employment growth in the state and Richmond metro area to be about the same as the nation in 2020.
Our forecast is not looking for a repeat of the roaring ’20s, but predicts growth that will support expanding employment and wages.
This commentary was originally published in the January 5, 2020 edition of The Richmond Times-Dispatch.
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Agriculture Takes California to Court

Posted on January 8, 2020 by Gary Baise
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The National Pork Producers Council and American Farm Bureau Federation delivered an early Christmas gift for American farmers on Dec. 5, 2019. The gift is in the form of a Complaint filed in U.S. District Court in Southern California. It is likely the two representatives of agriculture will have a more sympathetic judge than the Hollywood judge ruling on the case of the North American Meat Institute.
The new Complaint clearly states, “Proposition 12 has no relation to Foodborne Illness or Human Health.” Finally, someone has decided to take on California’s ludicrous claim that concentrated animal feeding operations (CAFOs) contribute to human health problems.
The Complaint states, “The idea that square footage provided to sows has bearing on the safety of the food product derived from their offspring is incredible.” The Complaint also declares there is virtually no likelihood that a sow’s piglets would ever develop salmonella. The Complaint tells the Court and the world that “strains of salmonella found in food products at grocery stores are more commonly traced to strains of salmonella found at slaughter and processing plants than at farms.” In fact, the Complaint is very clear that research shows moving from 16 to 24 square feet will have no impact on public health either for the consumer or the sow. “There is no link between Proposition 12’s sow housing requirements and food safety or foodborne illness.”
The Complaint even demonstrates the silliness of having hogs housed in fields. In fact, the Complaint declares there is a greater risk of pathogens coming from hogs being fed and housed in open fields. When hogs were fed outside, they were likely to be exposed to Trichinella and Toxoplasma. When the industry moved to CAFOs, these diseases were virtually eliminated. Hogs fed outside are likely to contact Toxoplasma which come from the feces of infected cats, and Toxoplasma has been considered to be one of the top 5 causes of death.
For a change, the two farm organizations have gone on the offensive, which is great news for agriculture. Clearly Proposition 12 poses a threat to agriculture and no assistance to sow welfare. As expected, a number of declarations were filed by producers across the country. One producer from Minnesota produces approximately 250,000 hogs a year. He suggested that smaller sows in his herd were attacked by the larger and more dominant sows and now houses his sows individually. This producer indicates he will not comply with California’s Proposition 12 because the requirements will hurt the welfare of his animals, cause the productivity rates to fall and of course Proposition 12 will increase his production costs. Therefore, this producer’s product will be unable to be sold by his packer into the California market.
The most interesting declaration was from a leader of a Hutterite colony in Montana. This colony has a number of pork producing farmers, and they rely on hog production for most of their income. Just as important is their hogs are shipped into the state of California, and the packer has demanded the Hutterites comply with Proposition 12. These farmers “…would need to reduce their sow populations by 20%.” In addition, “the colonies would also need to purchase 20% more replacement gilts to replace sows that are injured in fights between sows held in group housing.”
Common sense tells us that Proposition 12’s requirements will force sow farms to either build new housing that provides 24 square feet per sow or retrofit existing barns. One producer estimated such construction for his herd of 10,000 sows will be approximately $3,000,000. All this money for no improvement of human health. California is attempting to impose its police powers beyond its own borders.
What we have is two farm organizations attempting to stop California in engaging in regulation of hog production in the other 49 states. What a New Year’s gift we all will receive when this case is adjudicated in favor of agriculture. Happy New Year!
This commentary originally ran in the December 24 edition of the online Farm Futures.
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The Most Progressive Budget in Virginia’s History

Posted on December 21, 2019 by matt ohern
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In the introduction to his budget statement released yesterday, Governor Ralph Northam described his proposed 2020-22 budget as “the most progressive in Virginia’s history. If by “progressive” he means “leftist,” with a strong propensity for taxing, spending and wealth redistribution, it’s hard to argue with him. That’s exactly what it is.
In previous posts on my blog Bacon’s Rebellion, I’ve critiqued the governor’s major spending initiatives, totaling about $2.5 billion in ongoing and one-time spending proposals, so I will not repeat myself here. Instead, I focus on the revenue side of proposed budget. I’ll address the negatives first, then touch upon a couple of silver linings.
Northam proposes to raise taxes even while the economy is growing and tax revenues are increasing. According to the Economic Outlook and Revenue Forecast for the 2020-2020 Budget, General Fund revenues are predicted to grow 4.5% in FY 2021 and another 3.7% in FY 2022. That represents a healthy increase over inflation, which is running around 2%. If Virginia needs to raise taxes when revenues are growing, what will happen when a recession makes them shrink?
The governor is obscuring how much the tax hikes add up to. Bits and pieces have been made public, but the big picture is elusive. Northam proposes to gain $340 million over two years from killing last year’s tax relief fund; $230 million in taxes on cigarettes and other tobacco products; $125 million on so-called “games of skill” that compete with the Virginia lottery; and a 12-cent increase in the gasoline tax over three years, partially offset by killing annual auto inspections and cutting the state vehicle registration fee in half.
Of all the tax increases, the gasoline tax will be the most politically problematic. Little wonder, then, that the Governor’s Office did not put a dollar value on the tax hike. Calculations are difficult because “the gas tax” consists of a mix of wholesale taxes, at-the-pump retail taxes, and special taxes on diesel and gasohol. According to the Virginia Department of Transportation budget, the “sales tax on motor fuels” yielded about $850 million in revenue in FY 2019. If we guesstimate that boosting Virginia’s 16-cent-per-gallon excise tax by another 12 cents yields a 60% revenue increase when all sources are considered, we’re talking about $500 million a year in extra revenue. That will be offset by about $130 million in savings from the automobile license fees, plus $20 per automobile for eliminating the mandated annual inspection — a big loser for taxpayers. Hopefully, the General Assembly will insist upon seeing hard forecasts for those numbers.
Add up all the tax increases, and net damage to taxpayers will run in the neighborhood of $500 million a year when the full gasoline tax increase goes into effect. Such a number, or anything close to it, would make for terrible headlines, so the Governor’s Office declined to release it.
The governor has packaged his tax increases shrewdly. One of the governor’s gambits is to say that the revenue generated by the increase in tobacco taxes will be used to help reduce health insurance premiums 20% by setting up a state reinsurance plan to stabilize premiums for the 400,000 Virginians who purchase private insurance. What better source of revenue for such a program than tobacco, considering that smoking costs Virginia taxpayers nearly a half billion dollars a year in Medicaid?
Similarly, Northam proposes a tax on unlicensed, untaxed electronic “games of skill” that are cutting into Virginia lottery revenues and to funnel those revenues to K-12 schools. This tax supposedly would substitute for lost lottery revenues that would have gone into K-12 schools.
In a shred of good news, Northam proposes adding $300 million to the state’s cash reserve. Between the cash reserve and the rainy day fund, the state would have a $1.9 billion cushion by mid-2020, about 8% of the General Fund budget, to buffer a loss of revenue in an economic downturn. One could argue that $300 million is small potatoes given the gusher in revenue the state will likely enjoy if the economy grows as predicted and Northam’s tax hikes are adopted. But at least it’s a gesture toward fiscal responsibility.
Although Northam wants to hike transportation taxes, at least he’s inching back to a user-pays funding system. I’m not convinced that the tax increase is necessary, but if you’re going to increase transportation taxes, make motorists pay in proportion to which they use the transportation system. Under a gasoline tax, the more people drive (and put a strain on the transportation system), the more they pay. By contrast, the vehicle registration fee is a flat tax that applies equally whether you’re a little old lady who drives about 2,000 miles a year or a road warrior who drives 20,000 miles a year. We still need a mechanism to get people who drive hybrids or electric vehicles to pay their fair share, but it’s a small step in the right direction.
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When is a Clean Water Act Permit Needed?

Posted on December 21, 2019 by matt ohern
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The issue of whether a Clean Water Act permit is needed when a pollutant originates from a point source and reaches a navigable water of the United States by virtue of groundwater, a non-point source, was argued Nov. 6, 2019, in the U.S. Supreme Court.

The case is the County of Maui v. Hawaii Wildlife Fund and Sierra Club. In the suit, the Pacific Legal Foundation argues environmental groups are unjustifiably attempting to expand the CWA’s authority. This nonprofit group is attempting to stop the 4th and 9th Circuits’ attempt to expand the reach of the CWA to the regulation of groundwater.

Lawyers argued that if Maui County loses this case to a group of environmental activists, there will be a new threat for tillage and animal agriculture. Fertilizers, pesticides, herbicides and manure are applied to farmers’ fields. A fraction of these products can seep into groundwater.  One brief claims, “…farmers likely face the biggest risk of being prosecuted for groundwater contamination due to regular farming practices, like fertilizing crops, because fertilizers have the ability to soak into the ground and, thus, groundwater.” Those who participate in agriculture have always known this discharge was treated as a non-point source discharge and exempted from CWA permitting.  Agriculture and farming have an agriculture stormwater runoff pollution exemption.

The case

Maui County injects treated wastewater into wells which are approximately a half mile from the Pacific Ocean. This treated wastewater was discharged into groundwater not “from” a point source. The groundwater eventually conveyed the treated wastewater to the Pacific Ocean.

Environmental groups argued that the pollutants discharged by Maui County traveled through a “confined and discrete conveyance,” such as groundwater, to a navigable water, the Pacific Ocean. Two U.S. Circuit Courts of Appeal have determined that a person need not directly add a pollutant to a navigable water to be held liable under the CWA. Another U.S. Court of Appeals claimed a person is liable under the CWA if a person discharges pollutants into the ground and those pollutants eventually make their way to a navigable water. These federal courts believe that a pollutant need only come from a point source. In Maui County, the pollutant was from wells. For agriculture, it would be from the farm field.

Pending decision

If the Supreme Court does not support Maui County, it will be declaring the CWA regulates pollution that reaches navigable waters through groundwater. The CWA states “…any person who directly discharges pollutants into a navigable water without a permit violates federal law.”

The U.S. Supreme Court needs to stop the lower courts’ improper expansion of the CWA. The Supreme Court needs to stop the CWA from being used to burden agriculture and land owners throughout the United States. Justice Alito, in another CWA case, states, “The combination of the uncertain reach of the Clean Water Act and the draconian penalties imposed for the sort of violations alleged in this case still leaves most property owners with little practical alternative but to dance to the EPA’s tune.”

We will know the outcome of this case by next June. Even though this case comes from Hawaii, it will have a major impact on tillage and animal agriculture.

This commentary was originally published in the November 19 edition of the online Farm Futures. 

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Should U.S. Consider Modern Monetary Theory to Improve Economy?

Posted on December 21, 2019 by matt ohern
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The U.S. budget deficit reached $984 billion in 2019. That’s 4.6% of gross domestic product.
Such a large deficit should cause interest rates to rise, according to traditional economic theory, because government debt “crowds out” private sector debt.
Since there is a limited supply of money, the price of borrowing (interest rates) goes up for all borrowers.

This is undesirable because higher interest rates slow economic growth. Fewer people can afford a mortgage or investments become too costly for businesses.
According to Modern Monetary Theory, however, this is not the case.
This theory, commonly called MMT, postulates that countries such as the U.S. that issue their own currencies can simply issue more money to avoid the crowding-out problem.

MMT is drastically different from traditional economic theory and is not well-accepted by mainstream economists.
There are variations to the assumptions behind MMT, but many supporters of this theory see government spending as a way for the government to put money into the economy.
They acknowledge that inflation can accelerate if there is not enough supply or workers to satisfy all the spending.
But the potential acceleration in inflation can be headed off by increasing taxes and thus taking money out of the economy. When there is less money in the economy, the potential for bidding up prices diminishes.
Consequently, it is not necessary for the Federal Reserve to sell government bonds in order to increase or decrease interest rates to stimulate or restrict economic growth as it currently does to carry out its dual mandate of stable inflation and full employment.
Under MMT, the Fed maintains a 0% interest rate, which is neither restrictive nor accommodating to economic growth. Congress and the president take over the dual mandate with their fiscal authority.

In a sense, the role of the central bank and monetary policy would be eliminated under MMT, and fiscal policy would be the only tool to manage the national economy.
Regarding the full employment mandate, rising unemployment rates are the result of the federal government not spending enough and collecting too much in tax revenue.
During times when inflation is picking up and the government needs to raise taxes to slow it down, some people will lose their jobs.
The problem of getting back to full employment is resolved by a job guarantee.
Individuals who can’t find jobs in the private sector would be given a job in the public sector and paid a minimum wage that is managed at the local level but funded by the federal government.
In addition, paying minimum wages helps to keep wage pressures down.
MMT was developed by Warren Mosler, who has a bachelor’s in economics from the University of Connecticut. He worked as a Wall Street trader and later founded a hedge fund. In the 1970s, he began to develop the concepts that underlie this theory. In 1993, he published “Soft Currency Economics” that gained the attention of some economists.
Presidential hopeful Sen. Bernie Sanders and Rep. Alexandria Ocasio-Cortez have further popularized MMT by arguing that their spending proposals will not cause inflation to accelerate under this theory.
To date, MMT is viewed with caution by most economists.
Tim Sablik, an economist with the Federal Reserve Bank of Richmond, wrote in a recent Richmond Fed magazine article how Sebastian Edwards of the University of California at Los Angeles argues MMT had been tried in various Latin American counties with disastrous results.
Sablik also referenced Nobel Prize-winning economist Thomas Sargent of New York University who provided examples from Europe after World War I that resulted in hyperinflation.
In a Bloomberg news article, Federal Reserve Chairman Jerome Powell made it clear that he is no fan of MMT: “The idea that deficits don’t matter for countries that can borrow in their own currency I think is just wrong.”
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