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Can We Please Try Limited Government Now?

On Thursday April 28 the Bureau of Economic Analysis released its advance estimate of GDP growth for the first quarter of 2016:

Real gross domestic product -- the value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production, adjusted for price changes -- increased at an annual rate of 0.5 percent in the first quarter of 2016, according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 1.4 percent. 

  Actually, according to the current-price GDP numbers reported by the BEA, growth over fourth quarter 2015 was only 0.31 percent. But even if the number were 0.5 percent, it would be a big embarrassment for President Obama. He is now in a position to become the first president since national accounts were invented without a single year of three-percent growth With GDP measured as four-quarter moving average – a convenient way to illustrate an annual trend – so far Obama has only presided over one (1) quarter of GDP growth in excess of three percent:

Annual GDP Growth

In fairness, the entire Western world has experienced a downward adjustment of GDP growth over the past 30-40 years. This includes the United States, where GDP growth in the past 15 years has been less than half of what it was in 1950-1965.

That said, a historic trend is no excuse for either Congress or the president. On the contrary, our slow decline into economic stagnation should be a call to battle for every responsible elected official. This includes, of course, the president and all member of Congress, but also state legislators and governors. In the depth of the Great Recession, 2010-2013, Wyoming had the worst economic growth of all 50 states:

  Real average annual GDP growth, 50 states, 2010-2013  
1 North Dakota 9.85% 26 Arizona 1.45%  
2 Texas 4.47% 27 Kansas 1.40%  
3 Michigan 2.80% 28 South Carolina 1.32%  
4 Nebraska 2.63% 29 Pennsylvania 1.27%  
5 Oklahoma 2.44% 30 New Hampshire 1.25%  
6 Iowa 2.39% 31 Maryland 1.04%  
7 Minnesota 2.29% 32 Georgia 1.03%  
8 Montana 2.25% 33 North Carolina 0.94%  
9 South Dakota 2.22% 34 Virginia 0.92%  
10 Oregon 2.16% 35 Florida 0.88%  
11 Tennessee 2.07% 36 Illinois 0.85%  
12 Indiana 2.07% 37 Idaho 0.84%  
13 Kentucky 2.03% 38 New Jersey 0.72%  
14 Utah 2.02% 39 Rhode Island 0.69%  
15 Ohio 1.92% 40 Mississippi 0.67%  
16 Arkansas 1.88% 41 West Virginia 0.60%  
17 Massachusetts 1.84% 42 Missouri 0.37%  
18 California 1.79% 43 New Mexico 0.16%  
19 New York 1.76% 44 Nevada 0.14%  
20 Wisconsin 1.67% 45 Louisiana 0.12%  
21 Washington 1.67% 46 Connecticut 0.02%  
22 Colorado 1.57% 47 Alaska -0.04%  
23 Hawaii 1.57% 48 Maine -0.27%  
24 Vermont 1.57% 49 Delaware -0.36%  
25 Alabama 1.51% 50 Wyoming -1.28%
               

Source: Bureau of Economic Analysis.

Conventional wisdom would say that the poor performance of the Wyoming economy is due to lackluster demand for our natural resources. There is a great deal of substance in this argument, but not entirely for the apparent reasons. Yes, demand for coal has declined substantially, though the bulk of the decline did not take place until after this period. It is also true that growing producer competition in the oil market has capped production and driven down prices; again, though, most of the consequences of new, competing supply were not felt in Wyoming until 2014-2015.

The real reason why the Wyoming economy has performed so poorly is that a decline in demand for natural resources, caused by a business-cycle downturn, happened to an economy that was overburdened by government. By measure after measure, Wyoming stands out as a big-government state:

One of the largest government payrolls in the country, consistently over time;

Government is our second-largest industry;

The nation’s third most burdensome government employee compensation;

A structural deficit that has been visible in the state budget since at least 2014;

The third fastest growing government spending in 2012-2014.

There is no doubt that the government sector has grown to these proportions because of the state’s seemingly endless stream of severance tax revenue. The tax has been treated as a “freebie” by legislators: the natural resources are sold to other states and exported, so “someone else” is paying the taxes anyway.

This is not true, of course. When a business in Wyoming pays taxes to the state of Wyoming, they pay the tax here and now. It is a burden on their activity here in Wyoming; wherever they get their revenue from is a different matter. But more importantly, the false notion that severance taxes are some sort of “free income” has led the state’s lawmakers and governors to build the nation’s largest government sector. This government lived high on the hog during the good years with a strong global economy and substantial inflation in natural resource prices.

Those days are over now, a fact that seems to have hit the state’s elected officials like lightning from a clear-blue sky. Governor Mead, for example, seems glued to the idea that our government sector must be preserved in its current form at all cost. In his 2016 State of the State speech he mentioned “government” 18 times but “growth” – as in growth of the economy – only three times. Two of those mentions gave the impression that government can somehow create, facilitate or generate economic growth.

One of the governor’s 18 mentions of “government” referred to a request for another $123 million for local governments. Overall, Governor Mead has abandoned the promising start of his gubernatorial tenure, where he both promised to restrain government spending and took some good budget measures to deliver.

At no point has Governor Mead or the state’s legislators demonstrated any insight into the true nature of our state’s economic problems. We are a mono-industrial economy; the governor’s few attempts to help industrial diversification have not yielded statistically measurable improvements in economic diversity. Our main industry, which has also been the main supplier of money to our big government sector, is ailing and will not come back to anything near its heydays. As a result, the state is at a crossroads:

Either our elected officials embrace the theory and practical meaning of “economic freedom”, or

They double down on their defense of our big government, own the consequences and raise taxes.

The latter alternative, regardless of what taxes are raised, will spell doom for Wyoming as a prosperous state. Yet with the CREG reports getting increasingly pessimistic by the quarter and the long-term budget outlook creeping closer to a $1 billion deficit in 2020, anyone holding on to big government will have to drive the state right into that dungeon.

There is only one route to a prosperous future, namely economic freedom. What does that mean in practice? That is the topic for a separate article. Stay tuned.

---

Sven R Larson, Ph.D., is an economist specializing in macroeconomics and the welfare state. He is the author of Industrial Poverty about the decline in the European economy, and Robbing the Millennials about the looming U.S. debt crisis.

Chicken City, Wyoming
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Comments 2

Guest - Al Anderson on Saturday, 30 April 2016 10:55

Thanks for the great contribution.

Thanks for the great contribution.
Guest - Al Anderson on Sunday, 01 May 2016 10:28
These so called leaders of a community just do not get it. These handouts have to be stopped. http://www.laramieboomerang.com/opinion/editorials/community-editorial-board-investing-in-growth-to-weather-the-storm/article_bbfa43da-0f57-11e6-bf67-9f420455770f.html
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