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Monday, November 25, 2019

Right and Wrong about Wyoming Economic Growth

Does it really matter what GDP growth number we use? Oh, yes it does. The difference between sloppy reporting and accurate analysis is the difference between higher taxes and your job.

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There is a news story wandering around Wyoming:
According to the United States Bureau of Economic Analysis (BEA), Wyoming experienced the second-fastest growth in GDP in the second quarter of 2019, with a 4.2 percent increase – just behind Texas (4.7) and ahead of Alaska (4.1) and New Mexico (4.1). The BEA cited natural resource development as the leading contributor to the economic growth in Wyoming, as well as in Texas, Alaska, and New Mexico. “This report from the Bureau of Economic Analysis confirms what we already know here in Wyoming,” said Pete Obermueller, President of the Petroleum Association of Wyoming. “Resource development and specifically oil and natural gas, continues to be the primary driver of Wyoming’s economy. When the industry succeeds, Wyoming thrives.”
While SweetwaterNow does not explicitly say so explicitly, they give the impression that it is an annual growth rate. That is not the case: their figure is the growth rate from one quarter to the next. 

The actual annual growth number for the second quarter of this year was 3.8 percent. We were behind Texas, New Mexico and Washington, and only marginally ahead of Utah.

But why does the number matter? Isn't it enough to know the economy is growing?

To answer the last question first, the details about our state's economic growth matter a great deal. The difference between one and two percent annual growth is a difference of $400 million dollars in economic activity. This is equal to 6-8,000 private-sector jobs. For some communities, it can be the difference between rising and declining property values and enough tax revenue to hire another police officer.

If politicians do not have the right information, they cannot make the right priorities. Say, e.g., that we under-estimate growth. This could lead a city or county council to postpone key infrastructure investment because they don't see the extra revenue that higher growth will bring in. That, in turn, can have consequences for local businesses making decisions on whether to expand, or refrain from making further commitments to the community.

From the other angle, if growth is over-estimated it may lead our lawmakers in Cheyenne as well as in counties and cities to be too profligate with taxpayers' money. If it looks like the economy is growing faster than it really is, they may believe that there is more tax revenue coming in the near future, thus spend money they neither have nor will have.

Yes, I know - politicians in general have a penchant for fiscal optimism... but this is actually a serious problem that affects all of us. I have on many occasions criticized the CREG report for its downright fanciful forecasting habits. While they have shaped up and are doing a better job now than a couple of years ago, the same mindset of unwarranted revenue optimism is pervasive in legislative circles. A news story that exaggerates GDP growth only serves to reinforce that mindset. 

It is important to repeat that the SweetwaterNow story does not intentionally mislead the reader. Perhaps the writer does not even understand what the GDP growth number actually represents. That is, of course, no excuse and it serves as a poor explanation, but just to once again highlight what this is about:

  • The SweetwaterNow story reports GDP growth in one quarter only; if we annualize it, i.e., assume that it is the number for the whole year, it comes out to only 1.05 percent growth for all of 2019;
  • The number I mention, 3.8 percent, is the growth in one year, from the second quarter of 2018 to the second quarter in 2019; this is the annual growth rate.

Anyone who has ever made a budget for a business knows how important it is to get time and money flows right. It is no less important to do your homework when it comes to macroeconomics and public policy. 

On one point, though, the SweetwaterNow article gets it right: our current economic growth - such as it is - comes almost entirely from minerals. As I reported back on November 7, the minerals industry contributed more than 86 cents of every dollar of growth, even though it only accounts for 28 cents of every dollar of our GDP. This means, bluntly, that the remaining 72 percent of the economy contributed less than 14 percent of our growth.

Across large swaths of the private sector, we actually see stagnation or decline. And this was back in the second quarter of this year, before the private sector slammed the brakes and dumped us to 49th place in jobs growth. 

I do not look forward to third- and fourth-quarter GDP data for Wyoming, and if I were a legislator I would do everything in my power to stop legislation that in any way could further discourage private-sector investments in our great state. This includes a firm no to tax hikes, of course, but it also includes a firm no to Medicaid Expansion.

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