July 31, 2006
Revival of the rent market
The rental market looks as if it’s improving compared to where it was the last few years. N.C. State University economist Mike Walden explains what’s happened.
"In two words: interest rates. … If you remember back a few years ago when interest rates were going down, in fact got to a 25-year low, that’s when a lot of people who were renting said, 'Hey I can buy a house.'
"And so people en masse moved out of rental situations and moved into homeowning because they could afford to do so.
"And so that’s when we heard a lot of stories a lot of apartments up for rent, a lot of vacancies, et cetera. The rental market was really bad.
"Now, in the last year, year and a half, what have we seen? Well, we’ve seen interest rates go the other way. We now see, for example, home mortgage rates that are approaching 7 percent. So this makes homeowning, especially for first-time homeowners, ... more expensive. And it makes renting look relatively better.
"And so we are having now a revival … of the rental market. So it really goes in ebbs and flows based on the interest-rate cycle."
July 28, 2006
Measuring the debt burden
When it comes to considering the significance of government and household debt, N.C. State University economist Mike Walden cautions against looking simply at debt totals.
"A lot of people look at simply the raw dollar amounts, so they look at, for example, the federal government with $8 trillion worth of debt. They may look at households with $30 trillion worth of debt. And they look at how that’s changed over time, and they say, 'My gosh, we are simply going further and further into debt,'" says Dr. Walden, a professor of agricultural and resource economics.
"But economists argue that’s probably not the best way to look at debt -- in fact it probably gives you more heartburn to look at it that way. What you want to realize is that while debt is going up, so is our ability to pay.
"And so what you want to do to see if increases in debt are really becoming more burdensome is to look at how that debt has increased relative to the ability to pay income -- whether that’s income for the government or for an individual.
"Even more importantly, you want to look at the debt service payments –- that is, how much it’s costing you to service that debt (carry that debt) as a percent of your income.
"And when we do that, especially for households, we get a much better picture. We have not seen that households become overburdened when we look at their debt service as a percent of income."
July 27, 2006
North Carolina income
Income numbers for the first quarter of this year were recently released, and N.C. State University economist Mike Walden says they reveal mixed results for North Carolina. Listen
"It was a mix … our personal income was up, so that’s good, but we were not up as much as at the national level," says Dr. Walden, a North Carolina Cooperative Extension specialist.
"In fact, the income that we gained in North Carolina put us ranking of 34th among all the states. So we didn’t do quite as well as perhaps many would have liked.
"I think two factors really hurt us: One, we had a big decline –- in fact twice as much as at the national level –- in farm income. So we had some issues there with farm income. Also we saw a decline in income from what’s called nondurable manufacturing –- translated in North Carolina, that primarily means textiles and apparel.
"So recently those two sectors and those two factors have been hurting us. But, again, the good news is that we did see personal income go up."
July 26, 2006
Can business taxes backfire?
Today's globalized economy has changed the impact of taxes on businesses, says N.C. State University economist Mike Walden.
"Years ago, of course, when we did ask businesses to pay taxes, a lot of them have sort of grinned and bore it, just like we do it as households because they really didn’t have any ability to move," says Dr. Walden, a professor in the Department of Agricultural and Resource Economics.
"But now of course in the world economy, a business, maybe not immediately but over time, they can look around the world and say, ‘Well, if we don’t like it here, if we don’t like the level of taxes, if we don’t like the quality of labor, we can simply pick up and move our operations.’
"And so governments are having to be more careful in this world economy with taxing businesses because again businesses have greater mobility.
"Countries in Europe, especially Western Europe, have really been finding out this the hard way. Their manufacturing companies have really been leaving, have been reducing their scale of operations, and a lot of people point their finger at the very high level business taxes there as a reason."
July 25, 2006
Manufacturing moving up
With plants closing and overseas factories selling their products here, we are used to hearing bad news about manufacturing. But N.C. State University's Mike Walden says that U.S. manufacturing has actually been on a roll lately.
"The latest figures show that U.S. manufacturing productivity growth exceeded that growth we saw in previous periods after a recession," says Dr. Walden, an economics professor in the College of Agriculture and Life Sciences.
"What’s happening, I think, is that U.S. manufacturers worked really hard in the last decade to trim a lot of the fat, so to speak, to become more competitive. And now what they are doing is they are applying information technology and other measures to really boost their output to input ratios.
"And this is exactly what we need U.S. manufacturing to do to compete in the world’s market place," Walden concludes. "We are never going to have the cheapest labor, but what we can have is the most productive labor in manufacturing."
July 24, 2006
Where have we been spending more?
The government collects detailed information on how consumers spend their money. N.C. State University economist Mike Walden says that major changes are evident when you look at the data collected over several decades.
"First of all, in terms of the total percent of consumer spending, we see sharp reductions actually in the percent of our income we now spend on food and clothing," says Dr. Walden, a North Carolina Cooperative Extension specialist. "This doesn’t mean we are eating less or have fewer clothes. It’s simply because we have seen price reductions in those area, and that’s has allowed us perhaps to purchase less in terms of what it takes out of our budget.
"On the other hand," he adds, "we see higher shares of our budget going to areas like transportation and housing. Now the interesting thing here is that prices for transportation and housing also have not gone up over the last decade or two. In fact, housing in terms of homeownership is at an all time high. And, of course, people realize with the big incentives on cars that actually it’s cheaper today to buy a car than it was 10 years ago.
"But what’s happening, we think, is people simply want to have bigger houses and they want to have more vehicles. So they are devoting a bigger share of their budget to those two items."
July 21, 2006
Can rate hikes go too far?
With the Federal Reserve now increasing interest rates for the 17th straight time, some economists are questioning if this is too much. N.C. State University's Mike Walden examines the risk.
"The risk is … that monetary policy -- which is really what this is about, and what this is about is increasing interest rates to slow the economy down and prevent recession from getting out of hand -- that kind of policy works with a kind of lag," explains Dr. Walden, a professor of agricultural and resource economics. "In other words, it takes maybe six to 12 months to see the full effects.
"And the issue is we have not yet seen, for example, full effects of the interest rate hikes that the Fed did a year ago or even six months ago, so that when they look at the economy now and they may say, 'Well, it’s not to our liking. We need to raise rates again.'
"The issue is if six or 12 months down the road we find that, gee, the economy has slowed down -- but it’s put us in a recession. And some economists are now raising that red flag and questioning whether maybe the Fed has gone to far," Walden adds.
"Now in their defense, the new head of the Fed [Ben] Bernanke is an expert in these areas, this is what his whole academic career has been about, so he is well aware of the risks so presumably he’s weighed them in taking these actions."
July 20, 2006
Farm numbers, farm size and output
Fewer people are working on farms today, says N.C. State University economist Mike Walden, and that's affected North Carolina’s agriculture.
"Thirty years ago there were 91,000 farms … in North Carolina," says Dr. Walden, a North Carolina Cooperative Extension specialist. "Today there are only 53,000.
"But farms are getting bigger. The average farm in 1974, for example, had 123 acres. Today it’s 170 acres.
And even though there are fewer farms and farmers, "we are producing more," he adds. "In fact today we produce four times the amount of agricultural commodities than we did 30 years ago.
"These megafarms are really replacing small farms, and what’s happening with the megafarms [is] they can take better advantage of technology and thereby reduce their per unit cost and thus produce more," Walden says. "So this is a big change in the complexion of North Carolina farming."
July 19, 2006
Changes in North Carolina agriculture
Farming has always been important in North Carolina, but N.C. State University economist Mike Walden describes big changes that have taken place in agriculture in recent decades.
"North Carolina has gone through several transitions in its agriculture. Originally we were a state that produced tobacco, lumber and pine tar," says Dr. Walden, of the Department of Agricultural and Resource Economics. "Then we moved to cotton, then back to tobacco. In 1974, 39 percent of ag revenues were from tobacco; 38 percent from livestock; and other crops, 23 percent.
"But in 2002, the latest year for which we have full data, only 5 percent of ag revenues are now from tobacco –- just 5 percent," he says. "Twenty-four percent from other crops –- so that hasn’t changed much. The big increase has been in livestock.
"Livestock now counts for 71 percent of all farm revenues in North Carolina. Of course, this is primarily related to hog and poultry farming. So livestock came along just in the nick of time when tobacco was declining.
"The big question now, with some environmental issues with livestock," Walden says, "is whether there is another ag transition coming."
July 18, 2006
Ethanol as an alternative fuel is hot today, and some pin their hopes for the U.S. becoming energy independent on this crop-based fuel. But as with any product, there are issues. N.C. State University economist Mike Walden says that fuel efficiency, production efficiency and public subsidies are key issues to consider when it comes to ethanol.
"Currently ethanol gets only two-thirds of the miles per gallon of conventional gasoline," says Dr. Walden, a North Carolina Cooperative Extension specialist. "So people need to keep that in mind when they are looking to buy ethanol. They are not going to get the same miles per gallon."
"Another issue," says Walden, "is efficiency of production. Some studies show that to produce ethanol it actually takes more energy than what you get out of it as a fuel. Now companies are working on that, but it certainly is an issue.
"And then the final one is subsidies. Right now, ethanol can’t compete head-to-head with gasoline without public subsidies -- both of the ethanol production as well as subsidies of the corn-based fuel.
"So these are all issues that we have to keep in mind," he concludes, "from the public perspective about ethanol."
July 17, 2006
Good news on jobs
When it comes to jobs, people are mainly concerned about two things: Are jobs available, and what do they pay? N.C. State University economist Mike Walden says that there's good news about the latter concern.
"A recent analysis done by a major bank in the U.S. looked at all the jobs in the U.S. and divided them very simply into two groups: those that are paying above average in terms of salaries and wages and those that are paying below average," explains Walden, a professor in the Department of Agricultural and Resource Economics.
"What they found was that in the last year the jobs that are paying an above-average salary have been increasing twice as fast as the jobs paying a below-average salary," he says.
"I think this is good news for two reasons: I think, number one, it’s simply good news that people know there are jobs out there -- and a lot of good paying jobs.
"But," he concludes, "I think also it indicates this shift that we think has been going on in our economy -- and it is indeed going on -- where we are seeing the types of jobs shifting more to those that require more skilled and more education but which also pay more."
July 14, 2006
An approach to reducing oil dependence
Most Americans want to reduce our dependence on oil, particularly foreign oil. N.C. State University economist Mike Walden outlines a way this might be achieved.
"What you hear is some people saying we need a big tax increase on gasoline to deter people from using gas. And, of course, that would reduce our dependence on oil. The downside of that ... is a tax increase would make all of us less wealthy because it would be taking a large part of our income," says Dr. Walden, a professor in the Department of Agricultural and Resource Economics.
"So there is one way around that: You could, for example, have the government impose a significant increase in taxes on gas, which would motivate people to use gas less, drive less," he says.
"But then the government could take that revenue and, rather than spending it, they could return it to households, not based on how much gas the people bought -- because that would just defeat the whole purpose -- but return it to households based on number of people in the household or some other measure.
"So what this would do is it would leave the average household the same as they were before: They pay the tax, yet they get some income back from the government. But it would change what is called relative prices," he adds.
"Gasoline would be more expensive, other things would be the same, and so we would get the reduction presumably in driving that some people want to achieve."
July 13, 2006
Efficiency versus equity
Whenever taxes are brought up there is usually a conflict from at least two opposing sides. N.C. State University economist Mike Walden explains why taxes are so controversial.
"Of course, one reason is simply that taxes represent taking money from people’s pockets, and people obviously don’t have that money to spend on other things," says Dr. Walden, an economist with the North Carolina Cooperative Extension Service. "But more fundamentally there are two real differing philosophies about taxes that are often in conflict.
"One side emphasizes efficiency of the tax system," he adds. "This philosophy says we should only have a tax system whose main goal is to raise revenue, and you want to raise revenue in an efficient way -- the cheapest way you can -- and you don’t want the tax system to get in the way of economic growth. You don’t want it to deter people from earning more and doing better.
"The other philosophy emphasizes equity in the tax system. The folks here will emphasize the impact of the tax code on incomes of different citizens. They will be concerned about how tax rates may vary by different income classes of people. They may also be willing to use the tax system to achieve certain social ends -– for example, if you want to encourage home buying you give a tax deduction for homeowners.
"So you get inevitable conflicts and debates between these two philosophies whenever you are talking about taxes," he says.
July 12, 2006
One of the reasons given for the good news about North Carolina's budget surplus is bracket creep. N.C. State University economist Mike Walden explains the term and what it means for taxpayers.
"It’s a simple term that indicates … when economic times are good and taxpayers are earning more income, they may be pushed into a higher tax bracket for, in this case, state income taxes," says Dr. Walden. "And so some of their extra income is actually going to be taxed at a higher rate, and the state obviously benefits from that. And that’s one of the reasons why we have seen ... state tax revenues going up quite dramatically.
"Now, it does work in reverse," he adds. "When economic times are bad and people lose income, they are pushed into lower tax brackets. And that can … have adverse effects for the state.
"So what this does, however, it contributes to this instability -- this volatility -- in state tax revenues."
One remedy, Walden says, would be to index the state tax rates to inflation. "That would tend to reduce bracket creep. And in fact this is what the federal government does with the federal income tax."
July 11, 2006
Are gas taxes really high
North Carolina has a reputation for high state gas taxes when we look at the tax levied on each gallon of gasoline bought. But N.C. State University economist Mike Walden says that, if we look at gas taxes in another way, we can draw a different conclusion.
"Let me quickly say that part of the reason North Carolina gas taxes are high is because the state performs most of the highway functions in North Carolina," Dr. Walden says. "In other states ... counties do a lot of the highway spending, and so obviously because the state of North Carolina is doing most of the highway spending they are going to have to have a higher tax than in many other states.
If you look, Walden adds, "at the gas tax levied on a per gallon basis, we are high. But if you look at gas tax paid by drivers per miles driven you get a different conclusion.
"In fact I looked at this over the last 20 years, and actually the gas tax paid by the average driver per mile driven is 10 percent lower today than it was 10 years ago, and I think this may be the reason why we see, despite high gas taxes per gallon, ... a lot of highway needs.
"It’s because simply people are driving so much more, using the roads more and actually the revenue for the gas tax per mile driven is lower."
July 10, 2006
Medicaid has been a hot topic this year in the North Carolina General Assembly as legislators have discussed changing the rules about how much of this significant program is paid by counties. N.C. State University economist Mike Walden examines the problem facing lower-income counties and what the legislature is considering.
"Medicaid, which is the program that helps pay medical expenses for people under a certain income levels, … is a very big program. It’s an increasingly expensive program, and the unique thing in North Carolina is that counties have to kick in some of the money for Medicaid," he says.
"In the vast majority of other states, Medicaid is handled by the federal government and the state government, but locals don’t have to contribute. And in North Carolina they do," adds Dr. Walden, a North Carolina Cooperative Extension Service specialist.
"And this is an issue. You talk to county commissioners and others, and they will say this is one of the biggest issues they face because ... the expenses are growing -- and especially if you are in a lower-income county where you may have many folks on Medicaid, you just don’t have the resource base to meet those commitments.
"So there’s been talk for a number of years, and we are hearing it again in the General Assembly about, for example, maybe limiting the amount of contribution that counties make to Medicaid.
"Or there’s been some talk of some grand trade where the state will take over all of the state cost for Medicaid, including the local’s, in exchange for maybe taking back one of the sales tax revenue streams that the counties get.
We’ll obviously have to wait," he says, "and see what becomes of this."
July 07, 2006
Together with textiles and furniture, tobacco was part of the big three that once dominated the North Carolina economy for decades. N.C. State University economist Mike Walden discusses what he thinks the future holds for North Carolina tobacco.
"Of course many factors … contributed to the reduced output in the industry," Dr. Walden says. "Domestic smoking per capita in total has been falling for really 40 years, so that final market has shrunk.
"North Carolina tobacco used to be by far the highest quality tobacco in the world. Now other countries are matching it and are able to produce their leaf for lower cost," he adds. "So the cigarette production that we do do here in the U.S. increasingly is using foreign-made tobacco.
"If there are any growing markets for tobacco products they are going to be in foreign countries and so for this reason we expect to see both tobacco production at the farm level as well as the cigarette production going increasingly to foreign countries.
"So I think we certainly have had a long and important history with tobacco in North Carolina," Walden concludes, "but I think it’s permanently going to be a much smaller part of our future."
July 06, 2006
Why is inflation bad?
Inflation appears to be back, with recent reports showing it higher than in recent years. Recent turmoil in the stock market, some say, is over this inflation scare. But why should we fear higher inflation? What’s so bad about it? These are the questions N.C. State University economist Mike Walden answers in today's Economic Perspective.
"I think one simple reason is higher inflation means that we have to get that much more out of our job to stay even," says Dr. Walden, a professor in the Department of Agricultural and Resource Economics. "In other words, if the inflation rate is 5 percent a year that means you’ve got to get a 5 percent pay raise just to keep pace with rising costs.
"From a business perspective, inflation eats into business profits. It … gives businesses a much more difficult time adjusting, for example, to international competition," he adds.
"On the investment front, inflation sort of clouds what we are getting from our investment returns. For example, let’s say you are earning 6 percent on an investment. If we had no inflation, that would be a very good return. But if inflation is 5 percent, that’s a very bad return, so you have to keep that in mind when you are looking at these investment alternatives.
"And then, last, inflation often leads to higher interest rates," Walden concludes, "and so anyone who wants to borrow money it’s going to be more expensive. So I think for these many, many reasons this is why economists tend to prefer lower inflation."
July 05, 2006
Can textiles and furniture survive?
Textiles and furniture were once mainstays of the North Carolina economy, but in the last 30 years they have together cut over 300,000 jobs in our state. N.C. State University's Mike Walden says that these once mighty industries are changing. Listen
"First of all I think unfortunately the job cuts are going to continue," says Dr. Walden, an economist with the North Carolina Cooperative Extension Service. "It’s simply much cheaper to make a lot of textile and furniture products overseas where labor costs especially are lower and shipment costs are very negligible today with modern shipping techniques.
"So if these industries are going to survive, they must change. And indeed they are changing," he adds. "For example, the modern North Carolina furniture manufacturing company knows it cannot compete on mass produced furniture so what it’s doing is emphasizing customer service; it’s emphasizing specialty and customized furniture. Those are going to be smaller markets, but they are viable markets.
"Textiles, the same way –- as well as there is a renewed focus in textiles on non-apparel textiles for industrial and commercial use," Walden says.
"So I think these industries will survive, but they will be smaller and they will have a different focus."
July 04, 2006
North Carolina’s growth, combined with many droughts in areas of our state during the past couple of years, has meant water shortages in many communities. Economist Mike Walden considers ways these shortages can be dealt with.
"Over the long run, what that motivates many communities to do is increase their supply of water," says Dr. Walden, a specialist with the North Carolina Cooperative Extension Service. "For example, Wake County is planning two additional reservoirs over the next 20 or 25 years. But those are very long run propositions.
"In the short run when you do have a drought and you have growing water demand there are really only two things you can do. You can have the government come in and set rules on how much water people can use. For example, we have seen some governments do that in terms of you can only water outside on certain days.
"We often don’t see the government say we are going to restrict you to this number of gallons, but they do try to monitor that in terms of restricting particularly outdoor use. That’s one approach.
"Another approach," adds Walden, "is to simply charge higher prices, maybe not for a baseline amount of water usage but for usage above a certain level. The nice thing about that is it doesn’t get the government involved in policing water usage, and also it allows people to make individual choices.
"If, for example, using an extra 10 gallons of water is worth a significant amount to you, you can go ahead and pay the price to do that.
"So we have these two different approaches that governments may find to use when we do have water shortages," he concludes.
July 03, 2006
What happened to gas prices last year?
When gas prices jumped to $3.50 a gallon last year after hurricanes Katrina and Rita, there were charges of price manipulation and price gouging by oil companies and gas sellers. Dr. Mike Walden, an N.C. State University economist, outlines what a government agency has to say in a recent report about those charges.
"And this was an exhaustive study. It was done by the Federal Trade Commission; these are not political appointees -- no politics here. These are staff, career economists and others," he says.
"You can go online to the FTC’s web site and pull down their report. What they found bottom line here is no evidence of either price manipulation or price gouging. They found no evidence of companies for example withholding supply to raise prices. They found no evidence of price levels being higher than market conditions at the time would warrant.
"And they concluded," Walden says, "that the very simple reason for the high prices after those hurricanes was that the hurricanes caused a major reduction in the supply of oil and gas products. And whenever you have that, you are going to have an increase in price.