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Notes from Regional Strategic, Ltd.

USAID and the Business Implications of Data Disappearance

Yesterday, Regional Strategic, Ltd. was asked to evaluate the effect shutting down the United States Agency for International Development (USAID) would have on demand for agricultural commodities in a specific area of the Midwest. We had to decline the project. After looking at available data, we found that, in shutting down the USAID website, the administration had denied citizens and the business community the ability to evaluate what had been lost and plan for the alternatives that remained.

The question is not trivial. It appears that USAID acquired approximately $1.8 billion in U.S. food products to support its activities in 2022. Every $100 million spent on food production and processing in the upper Midwest generates approximately

  • $100 to $120 million in value-added economic activity within the Midwest
  • $55 to $70 million in labor income
  • $30 to $65 million in corporate profits and tax revenue
  • 1,000 jobs

Any of these estimates could be increased 18 times to accommodate the $1.8 billion demand loss from eliminating USAID. All of these totals would go up if the impact was evaluated across the entire United States.

Clearly, local regions that are heavily invested in commodity production and processing would like to evaluate what portion of existing demand is being taken off the table:

  • Every $100 million reduction in 2022 Iowa corn purchases in Iowa would have been equivalent to idling over 75,500 acres of 200-bushel corn
  • A similar reduction for wheat in Kansas would have been equivalent to idling over 310,000 acres of 37-bushel wheat

The sudden lack of data with which to evaluate these impacts on local areas is a business issue. It is a family welfare issue. It is an employment issue. It is a public policy issue.

This is not limited to the situation involving USAID. In the first two weeks of the present administration, data access has been restricted in the areas of health care, climate, and weather forecasting where those data run counter to the administration’s political inclinations. This is bad for business, and it is dangerous.

Health data is being restricted at a time when the United States is experiencing a growing bird flu epidemic, Africa is experiencing renewed Ebola outbreaks, and drug-resistant tuberculosis is becoming more prevalent worldwide. Any one of these situations could rapidly become an international health problem. Any one of these is a personal safety issue. Each of these could rapidly become a workforce issue.

Weather and climate data are critical for construction, shipping, food production, tourism, energy distribution, and many other industries. Data on income, trade, consumption expenditures, and demographics are critical to any business doing market, workforce, or facility siting analysis. In any of these cases, businesses that rely on private vendor subscriptions are not immune, as their private vendors all depend upon public data sources as foundations for their models.

Given the rapidity of data “Disappearances” in the first two weeks of the administration, we don’t expect it to stop. There is plenty of information that contradicts the administrations political proclivities in the Bureau of Economic Analysis, the Bureau of Labor Statistics, the Census, the Energy Information Administration, the International Trade Administration, the Department of Agriculture and other agencies. We anticipate that many of these sources will disappear or become restricted in the coming months. Restriction of any one of these would have major implications for significant portions of the economy.

The situation is made more critical by online data access and delivery. Thirty years ago, data histories for all these sources were published and available in libraries across the country. That is no longer the case. Unless restrictions are anticipated and data is downloaded, catalogued, and stored, even data histories will be unavailable. The reduction in publication and distribution costs has resulted in more and better data over the intervening period, but it has also put citizens and business at risk under the current administration.

There has always been public data that made elected officials uncomfortable. The current difference is that the administration is not willing to address and live with its discomforts – opting instead to eliminate the evidence of its contradictions.

THIS IS A BUSINESS ISSUE. It is time for businesses to step up to help resolve it.

Those are my two cents. Spend them as you will.

Stick to the Voodoo You Do

We all get our best results if we stick to things we are good at and interested in, but every enterprise involves a lot of tasks that don’t fit into any team member’s, “Voodoo set.”

Many economic development staff, business entrepreneurs, and community advocates are vision people. They must be to keep teams of volunteers, employees, and stakeholders together, focused on the goal, and moving forward.

It takes a lot of marketing, a good bit of dreaming, and a whole bunch of optimism.

That doesn’t leave a lot of time for analysis – whether that is the quantitative analysis of hard data or the qualitative analysis of personal feedback, surveys, and community discussions.

A lot of this very important stuff gets done at the frustration level. That is a recipe for lost opportunities.

Regional Strategic, Ltd. specializes in the analysis of data and community input. We can help you build a solid foundation under your vision. We are data experts. We are stakeholder input experts.

THAT IS THE VOODOO WE DO.

Why We Can’t Make Nice Things…

This all started with some import-export data from the United States Bureau of Economic Analysis (BEA) and a couple of import-export graphs from the Economic Research Service (ERS) of the United States Department of Agriculture (USDA). It is not really about imports and exports in general, however, or even agricultural imports and exports in particular. It is about how our international transactions are influenced by the United States’ system of taxation. In particular, it is a discussion of how the United States’ tax system disadvantages labor relative to other factors of production and how that disadvantage affects our transactions with the world.

The graph below is “Export value share of production, 2013-22” for U.S. agricultural and food production. While we are just looking at industry production shares and not total volumes, it is clear that U.S. agricultural and food exports are heavily weighted towards relatively nonperishable commodities, low value food products. The majority of U.S. agricultural products are non-manufactured and non value added. Since 2008, the export share of U.S. agricultural production has remained relatively constant at about 20 percent.

The second graph is “Import share of U.S. food consumption, 2011-21.” The accompanying explanatory notes indicate that imports accounted for 15 percent of U.S. food consumption for the period, and that they steadily grew as a consumption share over the period. The unstated takeaway is that imports must be significantly above 15 percent of U.S. food consumption now.

As in the export graph, we are looking at industry shares rather than total volumes or values. It is still clear, however, that U.S. agricultural and food imports are skewed towards perishable and value-added food products – high value stuff. The explanatory notes also suggest that this is due to, “…numerous factors – including relative competitiveness in production…,” but no explanation for the, “…relative competitiveness of production…,” is given. It is assumed that relative competitiveness is a given – a state of nature.

It is not.

One of the reasons the U.S. exports nonperishable, non-manufactured, low value-added agricultural products and imports perishable, manufactured, and high value-added products is the competitive position of labor within the U.S. We often hear about the competitive position of labor between the U.S. and other countries, but that is not what we are discussing here.

The uncompetitive position of labor within the U.S. is largely a creature of the U.S. tax system. The tax system penalizes labor utilization within the U.S. in a number of ways. In general, taxes on labor are high. Income taxes, which are levied on wages and salaries, earned income, are substantially higher than taxes on capital gains, which are levied on incomes derived from physical and financial capital. This artificially raises the cost of labor in production. It also artificially lowers the cost of capital in production.

Income taxes are also generally levied on gross earned income and are collected immediately upon payment. Labor has very few means of minimizing or deferring their share of taxes. Labor pays gross rates. In addition, the U.S. government funds very large components of its social expenditure package (Social Security and Medicare) with direct taxes on labor. All of these increase the production cost of utilizing labor. It also increases the participation threshold of labor in production, making it less likely that labor will participate in the production process.

Conversely, recipients of receipts from physical and financial capital benefit from multiple incentives that can reduce rates that are already favored over labor (and further distort investment decisions). Among these is a very favorable schedule of depreciation, allowing owners of physical capital to claim a significant portion of receipts during the depreciation cycle as expense deductions. Recipients of returns from capital also have substantial leeway in determining when and how to realize those returns. This allows them to time and combine their receipts in tax-advantaged ways. When they do realize those returns, the recipients pay taxes at filing time rather than upon receipt. They pay net rates rather than gross rates. Furthermore, a large proportion of receipts from returns on capital is self-reported, generating substantial opportunities for tax avoidance.

Taken together, U.S. tax policy raises the relative cost of utilizing labor and lowers the relative cost of utilizing capital in the production process. At this point, one might ask, “What the heck does that have to do with the industry distribution of agricultural imports and exports?”

The answer is relatively simple. High-value food products, perishable, manufactured, and specialty foods, are generally more labor intensive than low-value foods. Through its tax policies, the U.S. disadvantages local production of high-value foods and encourages the production of low-value foods. This is mirrored in the types of food the U.S. exports and imports. There are other factors, but U.S. tax policy is a significant factor in this imbalance.

Tax policy doesn’t just affect employment and production in agriculture. Its effects are economy-wide. Luxury cars and watches are not generally products of the United States. Premium handmade shoes are generally imported, as are handmade suits. We export relatively capital-intensive goods and services. We import relatively labor-intensive goods. Both trends are supported by a domestic tax system that penalizes labor (earned incomes) and rewards physical and financial capital (unearned income).

If you recall your international trade course in undergraduate economics, trade is determined by relative input cost differentials within countries. Movement between countries equalizes internal cost differentials for both partners regardless of single-factor cost differentials between them. That means we can alter our import and export mix with the rest of the world by reducing the tax policy distortions between earned and unearned income. We are often told that unfair competition is stealing American jobs, but before anyone can be accused of cheating, we need to stop driving American jobs away with a distortionary tax regime.

In addition to the artificial cost differentials between labor and capital, the practice of funding social benefits through taxes on labor builds the cost of pensions and health care into the cost of goods on the market. This directly penalizes domestic consumers, and it increases the prices of U.S. exports, making labor-intensive exports even less competitive on the world markets. In most industrial nations, pensions are paid through general taxation and do not directly translate into export prices. In many, such benefits are paid for through value-added taxes that are only levied on goods sold domestically. This makes exports from these countries more competitive than exports from the U.S.

The tax distortions also cause fundamental economic problems and political distortions. While producers face artificially high costs of labor due to taxes, labor gets artificially low returns due to those same taxes. As a result, productive labor is often not an attractive trade-off with respect to the informal economy or household production. High labor costs due to taxes are coupled with low returns to labor due to taxes. We end up with:

  • A labor to capital cost differential that distorts our production and international trade
  • Stagnating labor incomes
  • A shortage of labor

All tied to a tax regime that penalizes earned income and rewards unearned income.

Recipients of unearned income recognize there are distortions in the labor market, but they have no interest in giving up their tax advantages. As an alternative, they insist that U.S. labor is paid too much. They fight to reduce the rights of labor to organize. They fight to reduce labor regulations that address fair payroll practices, overtime payments, working hours, and child labor. In order to get labor costs back in line, they fight to further reduce returns to labor while also defending and expanding the tax differentials that are the root of the problem.

An Inquiry into Farmland Value Streams

We are doing some work on farm and farmer value streams here at Regional Strategic, Ltd. The pilot work is using Iowa, but the intent is to take what is found and expand the work across the Upper Midwest.

One of the first major questions regards farmland valuation and appreciation. The graph below shows a simple relationship that leads to a number of complex questions. The graph shows cumulative inflation-adjusted value streams for ag land appreciation (from Iowa State University’s Farmland Value Survey), direct government payments (from the Bureau of Economic Analysis), and farm income net of government payments (derived from the Bureau of Economic Analysis) per acre of farmland (from the Census of Agriculture).

The period runs from 1993 to 2022. The scenario assumes that an acre of land is purchased in 1992 and the purchaser initiates production in 1993. The three lines show accumulations of income and land appreciation over a 30-year period. The endpoint is set as the last year in which complete stable information was available from the Bureau of Economic Analysis.

The first thing that jumps out is that accumulated land value appreciation outruns operating income and direct government payments. Accumulated land appreciation separates from the other two streams in 2002. In addition, Operating income breaks out above direct government payments in 2007.

Over the thirty years, the three inflation-adjusted value streams generated an average of $458 per year. Averages for each of the components were

Of this average value stream, only 38 percent came from income, and nearly a third of this income was in the form of direct government payments. Operating income accounted for only a little over 26 percent of the value stream generated by an average acre of Iowa agricultural land.

Average farm earnings net of government payments (operating income) was only sufficient to pay a 4.72 percent return on the 1992 purchase price of $2,559. Operating income plus direct government payments were only sufficient to pay 6.86 percent return to purchase price. This is all barely enough to cover interest or carrying cost on the investment.

Given these low production returns, what makes land price appreciation average 11.5 percent per year?

What caused land appreciation rates to break away from operating income and direct government payments in 2002?

What caused operating income to break away from direct government payments in 2007?

A portion of these relationships might simply be the result of the period being observed, but the size and consistency of the breaks suggest there is something more. There appears to be a confidence in the value of Iowa farmland that overrides observed farmland productivity. Why is that?

  • Is it due to indirect subsidies?
  • Is it due to the conviction that subsidies and relief will always maintain farm income?
  • Is it because of a belief that the removal or reduction of farm subsidies, both direct and indirect, will inordinately affect other production areas and concentrate production and value in Iowa?

We honestly don’t know the answers to these questions. That is the point of the inquiry. More will come as we noodle this out.

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