It’s October 3, 2025, and the federal government shut down two days ago for lack of budget legislation. It was not a surprise. Republicans holding power in the House of Representatives, the Senate, and the White House have made it a point not to negotiate a resolution, either among themselves (they had the power to resolve this all by themselves) or with the opposition party.
Citizens in the United States are becoming so used to dysfunctional federal government that the whole affair was met with a collective yawn on October 1. The pain will not hit immediately, and, when it does, most citizens believe it will not fall directly upon themselves.
Citizens in the United States have become so self-indulgent that pain which does not fall directly upon themselves does not matter.
In that context, all the follows may be a waste of time and computational effort. What follows is a quick look at the ongoing costs of a federal government shutdown on the state of Iowa. Iowa was picked because I am familiar with the data and I have a recently constructed economic impact model for Iowa. Similar calculations could certainly be done for any state.
The analysis will be done on the basis of a one-day shutdown. Results can be multiplied by the number of days the shutdown lasts to approximate total costs to the Iowa economy. Wherever possible, I will try to bring effects back to numbers of jobs lost.
To put this in perspective, over the past ten years, from December 2014 to December 2024, Iowa had a net gain of just 10 nonfarm jobs per day. Over the past year, from December 2023 to December 2024, Iowa had a net loss of 15.5 nonfarm jobs per day.
Federal Jobs
The first loss Iowa will see from a shutdown is the idling of federal employees. Iowa has about 18,400 federal civilian employees (Bureau of Labor Statistics – BLS). Most of them will be idled as nonessential workers. These employees generate an Iowa payroll of a little over $524,000 per workday (Bureau of Economic Analysis (BEA) and BLS). Like the rest of us, they spend their earnings on groceries, cars, clothes, dance lessons, and what-not.
When that payroll money does not get spent, someone else in Iowa doesn’t receive it. In general, taking half a million dollars out of Iowa payrolls will result in a loss of about 3.5 jobs. That means Iowa can expect to lose 3.5 jobs for every day the shutdown lasts. This is in addition to the 18,400 federal workers idled by the shutdown. This is a loss to the rest of us because those federal workers are not being paid and are not spending their earnings in the local economy.
Remember, over the past ten years, Iowa has generated only ten new nonfarm jobs per day.
Finally, this is not just workers. Idling federal workers will cost Iowa nearly $150,000 in business earnings (profits, rents, interest, etc.) for every day the shutdown continues. This is entirely from the effects of the unspent federal payrolls. This does not include the losses of federal contract or supply receipts or federal direct payments.
Direct Farm Payments
According to the Environmental Working Group, Iowa farmers received $43.5 billion dollars in direct payments over the past 30 years. This works out to an average of nearly $4 million per day, ever day, over the period. Because crops have already been cultivated this year, this is also best looked at as a subtraction from farm family incomes.
If we remove these sums from farm family incomes, farm families, like the federal employees above, will not be able to spend their funds on cars, houses, groceries, and what-not. This drop in expenditures means other Iowa families will not receive these expenditures as income.
The result of all of this is that reducing farm family expenditures by $4 million will reduce Iowa’s total employment by 26 jobs. It will reduce Iowa business earnings by $1.1 million.
On average, this will happen every day of the shutdown. The model is linear. The results can be multiplied by the number of days the shutdown lasts.
Remember, this will be in addition to the initial $4 million daily loss in farm family income.
Social Security Benefits
According to the BEA, Iowans received $15.5 billion in Social Security payments during 2024. This works out to an average of $42.5 million per day. This, too, is an addition to family income. When it does not arrive, recipients do not spend it on groceries, medical care, vacations, cars, and what-not. This reduces the incomes of Iowans who would normally supply these things to the recipients.
Reducing Iowa household income by the loss of daily potential Social Security payments would cost Iowa 278 jobs for every day that a shutdown stops Social Security payments. It would also cost Iowa businesses $11.7 million in lost earnings – every day that Social Security payments are not received. This is on top of and completely separate from the hardships imposed on Social Security recipients.
Medicare and Medicaid
The BEA reports that Medicare and Medicaid pumped $19.5 billion into the Iowa healthcare industry in 2024. This averages $53.2 million per day.
Unlike the impacts calculated above, these sums are not properly looked upon as changes to household income. Medicare and Medicaid payments are direct purchases of services from the healthcare industry.
Splitting these expenditures across the segments of the healthcare industry in Iowa results in a loss of 612 jobs for every day’s loss in Medicare and Medicaid expenditures in Iowa. It also results in the lose of approximately $21.7 million in business earnings across the state.
These estimates can be multiplied over the days payments are eliminated during a government shutdown.
These estimates are above and beyond the hardships imposed on recipients who are denied healthcare, and they are above and beyond additional costs that result from healthcare being denied.
Roll It All Together
Summing up the impacts laid out above, each day’s loss of the federal funding would cost 920 jobs and $34.6 million in business earnings. This would be above and beyond the direct loss of incomes and services to the initial recipients of the funds.
This would be multiplied every day receipts and services are lost due to a federal government shutdown.
Unlike a layoff at John Deere or some other manufacturer, however, these losses will be spread across businesses throughout Iowa and will not be reported to the Iowa Department of Workforce Development as mass layoffs. They will not be reported in the media the same way a mass layoff would be reported.
It will start as reduced hours, lost shifts, and scattered individual job losses, but the steady march of reduced expenditures, incomes, and employment will be insidious. The victims will be largely invisible except to their own small circles of family and friends.
And On and On and On We Go
Without going on ad nauseum, this is not all of it. According to Common Good Iowa, in 2024
The USDA spent $916.6 million in Iowa beyond direct farm payments
The Department of Commerce spent $1.4 million
The Department of Education spent $676 million
The Department of Energy spent $7.6 million
The Environmental Protection Agency spent $139.1 million
The Department of Health and Human Services spent $795.4 million in addition to its Medicaid outlays
Homeland Security spent $11 million
Housing and Urban Development spent $77.2 million
The Department of the Interior spent $30.5 million
The Justice Department spent $17.3 million
The Department of Labor spent $60.2 million
The National Endowment for the Arts and Humanities spent $1.9 million
The Department of Transportation spent $934.6 million
It all totals another $3.77 billion in federal spending in Iowa – an average of over $10 million per day. All of this could also be allocated to industries and run through an economic impact model, but you get the idea.
Most of us won’t directly feel the effects of a federal shutdown unless it lingers for some time. Although scattered, however, those impacts are larger on a daily average basis than the largest mass layoff reports that regularly make headlines in Iowa.
The invisibility of the victims magnifies the cruelty of these impacts and the irresponsibility of the people who made the shutdown a reality.
We do a bit of business planning work here at Regional Strategic, Ltd. Our president, Mark Imerman, cut his teeth on business planning as a market development economist at the Iowa Department of Agriculture and Land Stewardship. It that role, he assisted farm operators and investors develop marketing facilities for alternative crops. It was a strategy pursued by the State of Iowa to reduce dependence on traditional row crops during the farm crisis.
In that role, he generally produced complete business plans:
Business description and objectives
Management qualifications
Personnel biographies and job descriptions
Sources of technical support
Market analysis
Competitive analysis
Pro forma financial projections
Investment and capital needs
At Regional Strategic, Ltd., however, we seldom get requests for the whole ball of wax. We primarily get contracts to do the market and competitive analyses. It is challenging and satisfying work. Every product, region, and delivery channel presents a different situation. All of these efforts are unique.
One thing we seldom see, anymore, is a full pro forma financial layout in small business development. This is true whether we are asked to help with small business planning or we are looking at plans done by others. Instead of detailed breakdowns of revenues, expenditures, and investment needs by month, we see rough annual estimates of total payrolls, start-up costs, production volume, and revenue.
This is unfortunate. The estimates might be well-informed and accurate, but the lack of detail is unfortunate, nonetheless. Annual estimates don’t match up revenues and expenditures as they occur. This is important, particularly in a small business startup. Without this, initial cash needs might be substantially underestimated simply because of mismatches between the accrual of expenditures and the realization of revenue. Annual estimates also hazard the risk of overlooking costs that might be incidental in and of themselves. These costs, in aggregate, can often be consequential. Missing them can result in material differences in overall estimates. There are often underestimation issues with startup costs, as well.
All of these factors increase the financial risk of business startup investors. They also increase uncertainty upon the part of potential lenders. This often results in elevated interest and insurance costs. In combination, these result in fewer small business startups in any given community. This reduces community income which reduces community tax revenues and impedes the improvement of community services. In short, they retard a community’s growth potential.
A five-year monthly pro forma financial layout encourages a business owner to walk through the first 60 months month-by-month. Properly set up, it will allow the investors and lenders to do what-if scenarios easily.
The table below is the fifth-year cash flow layout of one of Mark Imerman’s first business planning exercises. This particular plan specified financial requirements for a contract service provider engaged in planting, harvesting, packaging, and selling an alternative perishable food crop in Iowa. The spreadsheet analysis was set up with a single sheet of annual assumptions regarding acreage, service costs, output, waste, and revenues. Numbers in the cash-flow layouts were calculated from these assumptions. As a result, basic changes could be made concerning expected costs, acreages, yields, and sales prices, and those changes would automatically change the annual cash-flow layouts, which, in turn, would ripple through the annual operating and balance statements.
Pro forma financials are powerful tools. They result in better informed and prepared business owners, more confident investors and lenders, and increased potential for business growth within a community.
This was a relatively small investment project. It required a direct investment of about $130,000 and long-term loans of about $220,000 at the time. Given inflation, that is nearly equivalent to a total investment of $700,000 today. Long-term loans to accomplish this investment would likely have not been available in the absence of the pro forma analysis.
The second table shows a more recent example. It represents a potential frozen food manufacturer serving a limited geographic market in the upper Midwest. Figure Two shows the third-year expenditure portion of a five-year pro forma. Along the tabs at the bottom of the screen shot, you can see sheets for five years’ cash flows, balance sheets, and operating statements. There is also an assumptions sheet that drives cash-flow calculations. Cash flow calculations drive operating statements and balance sheets.
A set-up like this allows developers and investors to walk through alternative scenarios. You can see that production expenditures increase across the year. This reflects a scenario where output is still growing as the initial investment matures. Delivery expenses do not grow on the same schedule as production expenses. This reflects the lumpiness of delivery investments. All of these things become obvious when working through monthly pro forma cash flow projections. They are easily missed in annual lump sums.
Overall, the more recent operation is larger than that represented in the first table. The more recent table is part of the projections for a $5,000,000 investment. Generally, Regional Strategic, Ltd. works with business planning projects with investments between $500,000 and $15,000,000. It is a market segment that almost always benefits from a rigorous estimation of expenses and revenues.
Increasingly, we live in a world where the federal funding we have integrated into our local economies cannot be relied upon. At the same time, there are no guarantees that the lost funds will be returned to the economy in other forms if they are removed. There is substantial talk of deficit reduction and of selective tax cuts, but there is no sign that funds held at the federal level will be broadly distributed to the local economies which will bear the loss.
This is a simple analysis of what the Iowa economy would look like if four major flows of federal funding were cut off:
Agricultural Subsidies
Social Security
Medicare
Medicaid (the federal share only)
No assumptions are made of any alternative flows that would replace these losses. This is simply a look at general expectations assuming these funding flows simply disappear.
Data for this exercise were collected for 2023. This is the last year for which the full range of data could be obtained. All data except the level of agricultural subsidies was sourced from the United States Bureau of Economic Analysis (BEA). Agricultural subsidy totals were obtained from the Environmental Working Group, because the BEA has recently stopped publishing detailed agricultural industry statistics at the local level.
The effects of removing each of the four funding flows were analyzed using an impact model built with Iowa economic coefficients obtained from the BEA Regional Input-output Modeling System (RIMS II). Each of the four major funding sources was run separately, sums were taken, and a comparison was made to Iowa totals for actual 2023 gross domestic product and employment. The table below shows the results. Dollar values are in billions.
What all falls out is a loss in federal funding of almost $30 billion. As these losses percolate through the Iowa economy, they will result in
Lost economic transactions totaling $42 billion
Lost economic value added (GDP) totaling $24 billion
Lost business income, interest payments, rents, and direct production taxes of $10 billion
Lost labor income (payrolls) of nearly $14 billion
Over 268,000 jobs lost
At the end of the day, Iowa can expect to see its GDP drop by almost 12 percent and its employment totals to drop by 12.5 percent if these funding flows are terminated without replacement. Iowa is not unique among states with respect to the expected impacts if major federal funding streams dry up.
Additionally, we can use payrolls as a proxy for production and income to roughly estimate Iowa tax losses resulting from this. Iowa collects approximately 8.75 cents in general revenue for every dollar in statewide payroll. At this rate, the loss of payrolls resulting from losing federal flows of funds would result in a reduction of state general tax revenue by over $1.2 billion. This would further cut expenditures throughout the state and magnify the losses listed above.
Regardless of the pros and cons of government interventions in the economy, the economy has been built up over decades on the incentive systems driven by those interventions. It would behoove us all to be a patient and cautious in making changes.
None of these dealt directly with the typical small-government argument that an offsetting reduction in taxes will eliminate the adverse effects of eliminating programs.
This argument is not actually true in most cases. The reason is that markets are not neutral. They are created within the context of government intervention, and government intervention is required for efficient markets to function over time. Government defines and enforces property rights. Government oversees the accessibility and stability of the money supply. Government regulates financial transactions. Government influences marginal propensities to spend resources on and between categories of goods and services through taxation, investment, and program regulations and expenditures.
For better or for worse (I am not arguing one way or another), these influences shape markets, private investments, employment, and income. Making substantial changes to the way government influences the shape of markets and the economy will generally cause significant disruptions in the system. Those disruptions generally do not even out among all participants.
This analysis looks at the effects of eliminating federal Medicare and Medicaid benefits in Iowa and replacing them with equivalent increases in household income through tax reductions (see, in particular, Breaking Medicare and Medicaid – An Economic Perspective from Iowa). To develop this perspective, I
Set up a model of the Iowa economy
Removed $14.3 billion from the specific industry groups Medicare and Medicaid funding flow into
Added $14.3 billion to general household income
By both removing and adding $14.3 billion from/to the Iowa economy, the net initial impact on available resources is zero. The difference between where resources are removed and where resources are added, however, still results in devastating impacts upon the Iowa economy.
The change in how this $14.3 billion is allocated in the existing economic structure will result in a statewide payroll reduction of $5.6 billion reflected in the loss of over 70,000 jobs. Not all industries would lose jobs however:
Finance and real estate would see an increase of over 2,000 jobs
Wholesale and retail trade would see an increase of over 7,000 jobs
Education and the arts would see an increase of over 3,000 jobs
Accommodation and food service would see an increase in almost 2,000 jobs
On the other side of the coin
Health care would lose over 80,000 jobs
Professional services, management, and administration would lose over 7,000 jobs
These consequences would occur because markets are not neutral. They have been shaped for over 200 years by government interventions is property rights, taxation, expenditure, and regulation. An immediate and substantial change to the rules of the game can be expected to break down large segments of the economy that those rules have helped build up.
Regardless of philosophies regarding the long-term merits of one government-influenced market regime over another (and make no mistake, changes in government intervention only change the shape of government influence on the market – they do not eliminate that influence), it is important for the health of the economy that substantial changes be made slowly.
Furthermore, it is almost certain that the negative economic effects outlined above are understated. It will be worse than the results of the model shown above. It will be worse across all categories. Worse for the modeled winners as well as for the modeled losers. The reason is simple. The increases in household income (reductions in taxes) will not accrue to the same people who suffer losses of benefits.
In the model, the tax reductions were treated as increases to general personal income across Iowa. This assumes that tax reductions were proportional to incomes across the economy. That means that the people that lost Medicare and Medicaid benefits would be net losers in the transaction and everyone else would receive an unearned windfall.
A large proportion of this unearned windfall would go to high-income households with lower propensities to consume. This will result in a significant portion of the offsetting increases in income being removed from the economy as savings or financial investments. This would result in significantly lower offsetting economic activity than the model assumes. That, in turn, means the model results presented above are unrealistically optimistic.
In reality, however, this unearned windfall, these tax reductions, would not be spread proportionately across incomes within the economy. The current tax system and current proposed tax reforms heavily favor upper income households over lower income households (taxation policies are a major avenue through which government shapes the economy – see Why We Can’t Make Nice Things….). As a result, a predominant share (rather than the proportional share discussed in the previous two paragraphs) of offsetting personal income will accrue to upper income households. This will magnify the effect of lower marginal propensities to consume discussed in the paragraphs immediately above and further reduce the effect of offsetting income on benefit losses depicted in the model. For this reason, again, the economy-wide results modeled above are unrealistically over optimistic.
Regardless of the philosophical merits of any one form of government intervention over any other in shaping the economy, significant changes in these forms of intervention should not be made abruptly or haphazardly. The analysis above is clear that eliminating Medicare and Medicaid benefits in Iowa and replacing them with equivalent increases in household income through tax reductions will have a large negative impact on the Iowa economy. Markets are not neutral. They are shaped by the government. As a result, government has a responsibility to be responsible in changing the rules.
On February 6, 2025, I posted a note on the closure of the United States Agency for International Development (USAID). Regional Strategic, Ltd. turned down a contract to analyze the economic impact of that closure on an area of the Upper Midwest, because, in concert with the closure, the administration foreclosed access to data documenting USAID’s purchases and expenditures. The government actively denied the public the ability to evaluate government actions.
That denied my company the ability to conduct meaningful analysis for an industry group that needed to make immediate plans. That, in turn, foreclosed the generation of business incomes (and the residual personal incomes) on both sides of the potential transaction.
The note indicated that this was not the only case of data access restrictions occurring under the new administration in Washington, D.C. At that point, two weeks into the administration, data on healthcare, weather, and climate change that undercut the administration’s political positions had already been removed from public access. The note detailed some of the commercial problems these data restrictions would cause.
Yesterday, the administration moved again to restrict and/or alter major data streams available from the federal government. This time it was the Department of Commerce (USDOC). The USDOC is one of the major sources of data in the federal government. Data agencies within the USDOC include
The Census Bureau (Census) – which collects data on population, demographics, housing, employment, income, commercial activity, and international trade. These data streams are used to allocate congressional and state legislative seats, benchmark the National Income and Product Accounts (NIPA), manage and evaluate congressionally mandated programs, and determine the need for and effects of tariffs and trade restrictions.
The Bureau of Economic Analysis (BEA) – which is the national accountant. The BEA consolidates and analyzes data from the Census, the Bureau of Labor Statistics, the Department of Agriculture, and the Treasury to provide the consistent production, employment, income, and consumption data to generate the NIPA, which, in turn, is the source of national income and gross domestic product statistics.
The International Trade Administration (ITA) – which collects data on our international trade and the trade positions of our trading partners.
Sounds like pretty dry stuff, but this data underpins nearly every
Piece of market research
Investment decision
Community economic development plan
Interest rate
Bond issue
Congressional revenue and expenditure enactment
made in the United States.
On a personal level, this data underpins a complex integrated financial system that supports your auto loans, mortgages, and credit card transactions – all of which will get significantly more expensive as the quality and consistency of these data streams deteriorates.
The accuracy and consistency of these data streams is critical to business decisions, government action, and personal income.
On Sunday, March 2, 2025, Howard Lutnick, Secretary of Commerce, announced his intention to strip government activities from gross domestic product data. On Tuesday, March 4, 2025, he announced the disbanding of two important advisory boards:
The Federal Economic Statistics Advisory Committee
The Bureau of Economic Analysis Advisory Committee
These committees are made up primarily of professional and academic statisticians that advise the USDOC on proper data handling and increasing the quality and precision of the data and estimates the government produces and disseminates. To be effective, however, committee members need to be made aware of changes being made and how those changes are being accomplished.
Over the past five days, the federal government has, in quick succession,
Announced its intentions to make one of the most radical changes to federal data systems in modern memory
Dismissed the very experts it would need in order to accurately and successfully accomplish these changes.
While much of the general public is not aware of these data streams on a daily basis, interrupting them is a major affair that will directly and significantly affect their livelihoods if not done correctly. It will be infinitely more disastrous if these disruptions are done politically.
This is a big deal that should command more attention than it is getting.
Post script
The list below is of posts I have made over the past 15 months that would not have been possible or accurate without the consistency of the data streams put at risk over the past five days. These are just short musings I have put up as examples of what can be done.
They do not include the extensive market reports I have generated for Midwest businesses and industry groups, economic impact studies I have done for the likes of John Deere, Des Moines University, the Iowa Off-Highway Vehicle Association, the National Balloon Classic, and others, or the policy analyses I have done for agricultural commodity groups. None of these efforts would have been possible without consistent quality data streams on the economy.
Beyond this, most people don’t spend their lives with there noses in the data. Most who do perform internal statistical analysis and do not work with the economic and social environments that underpin economic and policy analyses. Removing or corrupting the data streams discussed above will eliminate the jobs of hundreds of thousands of folks like me that connect the data to markets, the economy, development initiatives, and social and recreational initiatives.
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.
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.
We are doing some market analysis in Texas and surrounding states. One of the issues is to identify populations that might be potential purchasers of a particular offering. That is at least partially a function of income.
The graph below shows estimates of real per capita income trends within Texas household income quintiles.
For this graph, we didn’t work with any of the detailed categories. We stuck with total personal income.
Data came in a zip file with data for every state from 2012 to 2022. There were separate workbooks for every state. For every state there were separate worksheets for every year. Job one was to extract the data and combine all the years for Texas.
The downloaded data was not adjusted for inflation. We could easily see that some quintiles had seen income growth. With others, however, we could not immediately see if that was growth or if that was inflation. Step two was to download Consumer Price Index (CPI) data and adjust all of the years and quintile values to 2022-equivalent dollars. CPI data is available for download at https://www.bls.gov/cpi/data.htm. We used data for all urban consumers in the Southern region of the U.S. We used annual measurements that were not seasonally adjusted.
With inflation-adjusted data for quintiles of Texas households, we still could not see if individuals were gaining or losing ground. This is because every year the quintiles each give data for one-fifth of the households, but we have no idea of household or population growth.
We made a simple assumption that households averaged the same size across all five quintiles. That allowed us to take annual Texas population estimates divided by five as the number of people in each quintile. Dividing inflation-adjusted quintile incomes by population gave us the per capita income estimates shown in the graph. We utilized Texas population estimates from the BEA at https://www.bea.gov/data/by-place-states-territories, because data from the BEA is remarkably easy to locate, download, and use.
There are a few things about the data and the data manipulation that deserve note.
First, for every year the total income received by the top quintile was greater than the income received by the bottom four quintiles combined. This was not changed by any of the manipulations described above.
Second, the assumption that household sizes are the same across all quintiles was convenient and gave us the ability to normalize the data for population size but is probably not completely accurate. For any quintile where household sizes are larger than the overall average, the quintile’s per capita estimate would shift down. Conversely, for any quintile where households are smaller than the overall average, the quintile’s per capita estimate would shift up.
Our best guess is that the lower quintiles have larger households and that the higher quintiles have smaller households. This is consistent with the demographic arguments in the recent post, “The Coming Depopulation.” If so, the lines for the bottom quintiles would drop and the lines for the top quintiles would rise.
Third, the data estimates current realized income. That is pretty close to total income for the bottom quintiles. Households in the upper quintiles, however, are likely to have significant levels of unrealized unearned incomes in the form of appreciation or capital gains on investments. These streams are reported and show up in the data as they are realized. If they are realized in a constant steady stream over time, the data is probably an accurate reflection of reality. To the extent that unrealized income streams are growing over time, the data will underestimate them during any period.
This was an interesting exercise undertaken as part of a larger analysis of market potential in the Southern U.S. It is possible to replicate this for any state and to engage the data at a more specific level. While multistate regions can also be analyzed, they require additional manipulation because income ranges on household quintiles will be unique to every state. In all cases, a careful disclosure of assumptions made and the potential implications of those assumptions is required.
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.
I am a recovering economist. I spent most of my adult life with production functions, growth models, economic impact studies, and such. Traditional economic practice and the concepts of progress it embodies assume things grow. Sure, there are recessions. There are depressions. There are areas of the world that stagnate and decline. Those, however, are aberrations. They are failures of individuals or small groups of people. They grow out of market failures that can be identified and cured. At least, that’s the theory…
While we studied the concept of scarcity when we learned price theory in introductory microeconomics the production functions in upper-level micro seldom have explicit limits. It is assumed that individual players are too small to affect total supply or demand, so individual players appear to have an unlimited supply of resources at their disposal. It is only a small conceptual jump for most of us – even those of us who are economists – to internalize the assumption that the resources of production are unlimited.
Input-output systems utilized in economic impact modelling explicitly assume unlimited linear production relationships. It is possible in the context of these models to define an economic event that will employ an additional 10,000 workers in areas having populations of less than 10,000. The model will dutifully crank out an impact to scale (for a quick look at some of the implications of this, see my blog post at Regional Strategic, Ltd.)
Beyond economic impact modeling, whenever we perform cost-benefit analysis looking forward, we discount future costs and benefits on the basis of some factor (generally an assumed future interest rate). The effect of this is that current benefits nearly always swamp future costs. Future costs approach zero the farther out we look because the discount rate reduces them at a geometric rate. In a world of limited resources, one might think that future costs should approach infinity as we run out of valuable stuff to consume, but that is not how we model the future. Our modeled perceptions are probably some distance from our grandchildren’s coming realities.
The Coming Depopulation
These ubiquitous assumptions of continuous growth are running headlong into the reality of worldwide population decline. This is not the Malthusian catastrophe or Paul Ehrlich’s population bomb. It is not due to famine or war ignited by overpopulation, poverty, and despair. The simple fact seems to be that as people around the world are getting better off they are having fewer children.
This reinforces theories of economic demography which suggest that in poor societies children are demanded as a form of insurance against illness, injury, and incapacity. Where infant and child mortality are high, this generates a substantial demand for more children as a hedge against both poverty and mortality. On the other side of the coin, in rich societies with low infant and child mortality and significant insurance infrastructures, the increased demand for children is channeled into quality rather than quantity. In this sense, children in rich societies are acquired much like luxury durable goods – why have a Chevrolet when you can have a Mercedes? Fewer children have greater opportunities to participate in elite sports or arts groups, get more prestigious educations, and, later in life, receive larger inheritances. This increases the status of their parents as an exclusive cadre of exceptional children is paraded about town.
This, to varying degrees, increasingly appears to be the situation around the world, at present. For individual families and children, it is a favorable development. Society wide, perhaps, not so much.
Worldwide population decline has not been experienced since the 14th century when the great famine and the bubonic plague savaged the known world in quick succession. That episode, however, generated substantially different demographic effects than we can expect from the current depopulation of choice.
The famine and the plague inevitably victimized weaker segments of the population – likely the elderly and the infirm – at greater rates than they affected the stronger. As population declined, the working-age population increased relative to other population segments. This increased the productive potential of the population that remained. As total population declined, it also bid up the wages of the working population that remained. Finally, because they inordinately victimized the elderly, the twin catastrophes accelerated intergenerational transfers of wealth.
As a result, the famine and the plague increased the productivity of the remaining population and redistributed wealth towards the working portion of the population. It is quite likely that the rapid population and wealth redistributions of the 14th century were substantial factors in the coming of the renaissance in the 15th and 16th centuries. In other words, increasing the proportion of the productive labor supply in the population and increasing the proportion of society’s resources available to that productive labor supply helped usher in two centuries of phenomenal economic innovation and growth.
The coming depopulation of choice will have very different ramifications. The coming depopulation will be the product of millions of decisions to have fewer children. That will mean fewer people entering the labor force. At the same time, increasing life expectancies will result in an increasing number of older people who have left the labor force. Unlike the 14th century situation in which the relative size of the working-age population increased and the relative size of the elderly population decreased, in the coming depopulation there will be an increasing proportion of elderly matched against a decreasing labor force.
Increasing the relative size of the elderly population can also be expected to decrease the resources available to the working-age population for two reasons. First, it will be necessary to commit an increasing share of output to a population that is no longer productive. Second, as people live longer, the intergenerational transfer of wealth slows. When people die at 50, inheritances accrue to people who are 30 and improve the lives of the dependent children of those beneficiaries. On the other hand, when people die at 80, the inheritances accrue to people who are 60 and will be held by those beneficiaries to support their coming unproductive years.
In the coming depopulation, we can expect the remaining population to become less productive because of the resulting age distribution and the reduction in resources that can and will be dedicated to support the productive portion of that population.
The Current Situation
In affluent countries, where life expectancies are high and premature death rates low, the replacement birth rate is approximately 2.1 children per adult female. This replaces two parents and accounts for pre-adult mortality. In less affluent countries, where pre-adult mortality rates are higher, the replacement rate must also be higher. In 2022, fertility rates in every region of the world except Africa, the Middle East, and Central and South Asia were below affluent-society replacement rates (2.1 children) and falling. Even the fertility rates in regions above the replacement level are falling. With the exception of Sub-Saharan Africa, fertility rates are below 3.0 for all of the above-replacement regions.
The population in China is already falling. East Asia as a whole has a fertility rate of only one-half the replacement level. The fertility rate in India is already below the replacement rate, as is true of all four of the world’s most populous countries (India, China, the United States, and Indonesia). While these trends are increasingly becoming the subjects of attention, they have been recognizable in every region of the world since at least the 1960s.
The United States is not experiencing depopulation. Fertility in the United States, at 1.6 births per female, is far below replacement levels, but strong immigration supports continued growth in the United States population. On the basis of current trends, the United States will continue to have an increasing population until about 2080, but current trends are largely dependent upon immigration.
As outlined in the previous section, the coming depopulation will be accompanied by significant aging in the population. Over the past 30 years, the proportion of the population over the age of 65 has increased by about 15 percentage points in East Asia, 10 percentage points in the European Union, and 5 percentage points in the United States. At varying rates, this trend is occurring in every region of the planet.
As the elderly live longer, working-age people move into the ranks of the elderly, and low birth rates fail to replenish the labor force, fewer and fewer productive people will be supporting larger and larger unproductive populations. In addition, as the elderly live longer, intergenerational transfers of wealth will slow and will become almost entirely transfer cycles within a multigenerational elderly population – continually concentrating resources within the ranks of the unproductive population.
The two demographic solutions to this are higher fertility and accelerating elder mortality. Neither of these appear to be on the horizon anywhere in the world.
Potential for Immigration and Replacement
In spite of sub-replacement fertility, the United States still experiences population growth due to strong levels of immigration. This immigration is driven by the need for labor force replacement in the United States coupled with a positive wage differential between the United States and the immigrants’ home countries.
These two factors are in place throughout the Western industrialized world. While Europe is increasingly concerned about immigration, Europe needs immigration to support its labor force. Hostility towards European Union immigration rules was a major instigator driving the Brexit movement, but Great Britain still needs to fill the labor gaps generated by an aging population with a declining labor force.
The wage differential between the United States and the undeveloped areas of the world (particularly Latin America) all but guarantees immigration, legal or illegal, into the United States. The same is true for Western Europe, particularly with respect to the Middle East and Africa. No nation has ever been able to stop economically driven immigration. In fact, dedicating significant resources in the attempt to stop such immigration will almost certainly exacerbate the internal labor force issues that are the major drivers of immigration in the first place. At best, nations can hope to shape the quality and quantity of their immigrant packages through carefully integrating national entrance and foreign policies.
A major issue with the labor force needs of the developed world is the skillset of immigrants from areas of the world with surplus populations. In an increasingly technical world, labor force needs will require immigrants with substantial skills. In contrast, it is estimated that 90 percent of young people in Sub-Saharan Africa and India, the two largest pools of remaining non declining population in the world, lack basic skills. To a lesser extent, this is also true of Latin America, the Middle East, and the rest of South Asia. These people are drawn to the labor shortages and wage differentials of the developed world, but they are not equipped to contribute at the levels required. The immigrant labor the developed world desperately needs is woefully educationally deficient.
What the Situation Requires
At its base, a solution to the problems that will accompany global depopulation and aging must revolve around increasing economic productivity. This is such an urgent need that the September 2024 issue of the International Monetary Fund’s Finance & Development publication is titled, “PRODUCTIVITY and how to revive it.” As smaller and smaller populations of productive people are left to support the needs of larger and larger unproductive aging populations, we will need to either generate increased levels of output from the productive population or succumb to decreasing standards of living for the population as a whole.
There are basically three means of increasing productivity:
Increase the availability of resources.
Increase the technical ability to transform those resources into goods and services that generate income and wealth.
Increase the skills of the population engaged in resource transformation.
The first of these offers, at best, limited potential. Having treated resource availability as infinite for over three centuries since the industrial revolution, the world’s available resources are becoming harder and harder to locate, develop, and acquire. In fact, the world is dedicating increasingly large shares of the second and third factors of increased productivity to the acquisition of the first. It is not a zero-sum game, but diminishing returns are certainly a reality.
The second requires investments in basic research that almost certainly will have to come from public initiatives. Private entities will willingly invest in the specialized research and development needed to bring marketable products into production. They will not, however, invest in the basic research and scientific progress that underpin their specialized research activities. Basic research results in knowledge available to any private entity. An individual corporation cannot engage in basic research because the successful results of that research do not accrue specifically to the corporation. The results might actually give competing corporations an edge in the marketplace.
Without public investment, basic research falters. Without basic research, productivity falters.
Unfortunately, in both North America and Western Europe, the cores of the world’s basic research infrastructure, levels of funding for basic research are falling. The public appetite for funding basic research through the expenditure of tax revenues has diminished. As a result, it will be very difficult to significantly increase the efficiency with which we transform resources into income and wealth as the world depopulates and ages. This does not augur well for the future.
In addition to funding, increasing basic research capabilities requires maintaining and improving the quality of students entering the various fields of basic research. This fits hand in hand with the third means of increasing productivity: increasing the skills of the population engaged in the transformation of resources.
Both the second and the third means of increasing economic productivity require continuous improvement in basic education. This should drive increasing commitments to and investments in education. As the working-age population diminishes, it is absolutely necessary that the skillset of the working-age population expands. This is immediately true in the developed world, where populations are aging rapidly, and working-age populations are shrinking rapidly. It is also necessary in the less developed world, which will inevitably be asked to replenish the shortfalls in developed nations’ productive workforces.
Unfortunately, public investments in education are also in decline in the United States and across Western Europe. The simple truth is that all three of the necessary components for increasing productivity and maintaining incomes in a depopulating and aging world are going in the wrong direction in the only areas of the world with the resources to improve them.
It gets worse. Even if the developed world invests in domestic education and research to improve productivity, it is almost certain that domestic productivity cannot be raised fast enough. The rapid declines in productive populations juxtaposed against the rising economic needs of an expanding elderly population will almost certainly outstrip even extraordinary productivity improvements. Additionally, the ability to raise the productivity of what are already the highest productivity populations in the world will be limited.
The simple fact of the matter is that maintaining income and wealth for the developed world will require augmenting the developed world’s labor force with imported labor, immigrants. In a world where most available immigrants lack the basic skillsets to be productive participants in a technical industrial and service economy, those skills will have to be improved before they immigrate.
This will require the developed world to invest in the educational advancement of less developed nations which can provide immigrants. This will have to be done by developed nations for two reasons. First, less developed nations simply cannot afford to upgrade their educational systems and human capital fast enough to address the immigration requirements of depopulation and aging in the developed world. Second, educating potential immigrants from the less developed world, like basic research discussed above, will not generate value that the host countries can directly capture. In fact, the very premise, here, is that the people educated will migrate from their less developed home countries to the developed world.
If they desire to maintain their income levels in the face of depopulation and aging, developed countries will have to invest heavily in improving both their own education and human capital development systems and education and human capital development in the less developed world. In addition to maintaining their own income levels, this will have an impact on improving income levels for the world as a whole.
Not all newly educated youth in the less developed world will migrate out. That will improve the productive human capacity of their home countries. It can also be expected that a substantial proportion of the immigrants to developed countries will remit earnings to their home countries. This may not sound familiar, but it has parallels to the situation discussed above concerning the twin catastrophes of the 14th century. By increasing the productivity of the workforce in less developed countries and providing additional capital to that workforce (through both external investments in education and emigrant remittances), we might create conditions for at least some of those less developed countries to take off.
Conclusion
The coming world depopulation appears to be set in stone. Over half of the people in the world live in countries where fertility rates fall below replacement rates. All four of the most populous nations in the world (India, China, the United States, and Indonesia) fall within this group. Only three broad regions on Earth have fertility rates above the replacement level: Africa, the Middle East, and South Asia. Fertility rates are falling in every nation on Earth, even in countries where fertility remains above replacement levels.
Depopulation due to declining fertility rates inevitably means populations will age significantly. Rising proportions of elderly people juxtaposed against declining productive populations will result in declining incomes unless rates of economic productivity increase substantially.
The central component to increasing economic productivity is education. Maintaining income levels in the coming depopulation will require an immediate commitment to increase investments in education. This will be necessary but not sufficient in the developed world. It is also imperative that the developed world make an immediate commitment to increase educational investments in less developed countries. This is necessary because the developed world will be dependent upon technically proficient immigrants to augment its labor force as its populations shrink and age.
