It is Monday morning. We are in the 20th day of the federal government shutdown. One of the things that most strikes me is the complete lack of information from politicians and officials on both sides of the aisle about how much money is at stake, and what the impacts of stopping those flows of money might be.
We hear who’s fault it is, but we don’t hear about what it really is. No one wants to talk about the problem. No one wants to talk about the repercussions. Everyone is obsessed with the blame.
Today, we are looking at the broad sweep of federal transfers to the Iowa economy. It is only one state, but it is instructive.
A Reasonable Minimum
Common Good Iowa maintains a compilation of federal funding transfers to Iowa governments and nonprofit organizations. In 2024, it totaled $8.58 BILLION, or $23.5 million per day. It is a big number, but given the complexity of intergovernmental finance, it is almost certainly incomplete. Let’s look at it as a reasonable minimum.
This Includes
This includes Medicaid funding, which was heavily cut prior to the shutdown. It includes about $2 million per day for education funding, which the president has directly targeted with layoffs and terminations since the shutdown started.
It also includes nearly a billion dollars for transportation. Most of this goes into highway construction and repair. How many of those barricades you have been detouring around will still be there next year because of the shutdown? A lot of them.
This Does Not Include
It does not include direct payments to individuals or farms or trust fund payments for Medicare. Social Security, farm payments, and Medicare payments to Iowa in 2024 were triple the total in the Common Good Iowa compilation, at $26.20 BILLION, or $67.4 million per day.
It does not include veterans’ benefits from the Veterans Administration or operating costs for Veterans Administration facilities. It also does not include several smaller federal pension funds’ distributions in Iowa. These total $2.73 BILLION per year.
This also does not include Department of Defense funding for military installations around Iowa and civilian and military employees of the department. Total defense contract, grant, and payroll spending in Iowa in 2023 was $3.4 BILLION.
It does not include Department of Energy direct contracts and grants to businesses and department operational costs of $80.26 million.
It does not include direct grants and loans to students of $1.35 BILLION from the Department of Education.
Finally, it does not include direct federal contract and grant expenditures to Iowa business entities by federal departments other than the Department of Defense, the Department of Energy, and the Veterans Administration. There are almost certainly several BILLION dollars more that we have not captured here. Every BILLION not accounted for would equate to another $2.74 million in federal inflows per day.
Summing Up the Whole Ball of Wax
So, between the direct infusions to state and local governments and nonprofit organizations, Medicare, defense expenditures, and direct payments to individuals and farms that we could account for, the federal government pours about $42.34 BILLION into Iowa per year. That averages $116 million per day. We are certain there are several more BILLIONS of dollars we have not been able to account for.
Most direct payments to governments, nonprofits, and farms will not be made during the federal shutdown. Most federal payroll will not be paid during the shutdown. Direct payments from the Social Security and Medicare trust funds, while they don’t directly affect the budget, will be available entirely at the discretion of the president, who has made no secret of wanting to shut both programs down.
The Larger Impact
In addition to the hardships that will be imposed upon the direct individual and business recipients when these funds are cut off, THIS WILL ALSO IMPACT OTHER IOWANS whose incomes depend on the direct recipients cutting payroll checks, ordering supplies, letting construction contracts, or buying groceries, utilizing health care, and purchasing other goods and services.
The most conservative way to model the impact of this is to assume these funds all go directly into household incomes, so that is what we will do here. Every time we remove $116 million in household income from the Iowa economy, we should expect a loss of 710 jobs and $32.9 million in lost business incomes (profits, rents, and interest). If we remove $116 million every day, we should expect to lose 710 jobs and $32.9 million in business income every day.
That is a conservative estimate of the average Iowa cost of every day of a total federal shutdown. It won’t happen all at once. The federal government has not stopped all transfers, but every day that the shutdown continues the remaining transfers will increasingly be subject to presidential whim. While private closures and layoffs tend to lag as businesses struggle to survive, eventually the loss of cash flows will be overwhelming.
The longer the shutdown goes on, the closer we will come to these daily average total impacts.
This is doubly true as the federal government continues to extract taxes from Iowans as it strangles the flow of funds back to Iowa.
Impact on the State Budget
There is also the state budget. In FY2024, Iowa collected about 5.8 cents in revenue for every dollar of personal income its residents received. The average potential loss of 710 jobs per day during the shutdown carries an expected average payroll loss of $33.23 million for every day the shutdown goes on. Losing that payroll will deprive the Iowa treasury of about $1.93 million in revenue for every day that the shutdown continues. This in a state that is already living with a budget deficit.
Finally, Iowa Is a Recipient State
Iowa is a recipient state. Iowa receives substantially more from the federal government than it contributes in federal taxes and fees. In 2023, Iowa received $1.28 in federal expenditures for every $1.00 Iowa contributed in federal taxes and fees. That is equivalent to Iowa making a 28% profit on its federal taxes!
Whenever the federal government starts cutting across-the-board, Iowa suffers disproportionately, because the net positive federal funding stream is incredibly favorable to Iowa.
In 2023, only 6 states contributed more to the federal government than they received. All 6 are blue states. Another 4 states came within a nickel of breaking even. Three of the 4 were blue states.
Sources
This information was generated using data available from Common Good Iowa, the Environmental Working Group, the Rockefeller Institute of Government, the Bureau of Economic Analysis, the Bureau of Labor Statistics, the Office of Local Defense Community Cooperation, the Department of Energy, the Department of Education, the Veterans Administration, and the Social Security Administration.
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.
People talk about the “1%” as if it was something of the outer world. It is assumed to be a small cadre of individuals with seemingly infinite wealth who live in the economic stratosphere. This is not actually the case.
In 2024, there were only 813 billionaires in the United States. These people are the ones we often think of when we think of the “1%.” However, because there are 340 million people in the United States there are 3.4 million people in the “1%.” If you took away the 813 billionaires in the United States, there are still 3.4 million non-billionaire people in the “1%.” Almost all of us know some of them.
According to Investopedia, the minimum net worth to be among the “1%” was $13.7 million in 2023. This essay looks at one possible journey into this cohort. It starts with a simple model of farmland acquisition initiated by an inheritance. It shows how, over the course of 30 years, this can provide entrance into the “1%.” It concludes with some insights into the results of the process illustrated.
The Situation – Inheriting the Average Iowa Farm
Assume that one inherited an average Iowa farm in 1992. It consisted of 325 acres valued at $2,559 per acre in 2022-equivalent dollars. It was inherited it complete with the equipment and facilities required for operation. Assume it was inherited free and clear. It was paid off, and any inheritance and estate taxes and any other transfer costs were covered by the previous owner’s life insurance or a cash component in the estate. As a result, one acquired real estate (farmland) assets valued at $831,643 in 2022-equivalent dollars. (Some calculations may not be exact due to slight rounding errors in the presentation.)
We can build a model of the land value account of this operation utilizing publicly available data:
Number of farms, land in farms, and average farm sizes from the United States Department of Agriculture
Average Iowa farmland values per acre from Iowa State University
Average Iowa ag land rents per acre from the United States Department of Agriculture
Farm income and government payments information from the United States Bureau of Economic Analysis
The model is driven by land value appreciation and rental income (savings) per owned acre. Beyond the initial inheritance, additional land acquisitions are entirely funded by either capitalizing land value appreciation or in the form of cash purchases supported by accrued rental income (savings) in excess of mortgage payment needs. The amount of land value appreciation that can be capitalized is limited by the availability of rental income (savings) to fund mortgage payments. All dollar-denominated data is adjusted to 2022-dollar equivalents to facilitate comparisons and trends.
The rules to the model are listed below:
The land value account is isolated from other income. Land acquisition is supported by nothing other than the value appreciation and rental income (savings) generated by the initial 325-acre inheritance.
Rental income (savings) must be sufficient to cover mortgage payments at the time of any purchase or refinance.
Land can be purchased on terms of 40 percent down, 7.5 percent interest, and 20-year amortization with payments once a year throughout the period modeled.
The land is inherited in 1992, the first year in which we have complete single-source data.
The model runs through 2022, the last year in which we have complete data from the same sources.
The unencumbered value of the initial inheritance is utilized as collateral to purchase as much land as possible in 1993.
Following 1993, land is purchased and/or debt is refinanced every five years to whatever extent land value appreciation and rental income (savings) supports under the assumptions above.
At purchase points, accrued surplus rental income (savings) over mortgage payments is used to purchase land for cash as long as total purchases (cash and amortizations) total 10 acres or more.
Farm operating income and expenses, including property taxes are ignored.
From 1992 to 2022, the average acre of Iowa farmland appreciated at an average of $282.75 per acre per year in 2022-equivalent dollars. Over the same period, average farmland rents increased from $182 per acre to $256 (reaching a peak of $314 in 2014). These increases varied from year to year but have been significant over time. This farmland appreciation and increasing rental value provides significant leverage to increase wealth.
The table below presents the major items of interest. It covers the starting point (1992), the ending point (2022), and the purchase points throughout the period (1993, 1998, 2003, 2008, 2013, and 2018).
Our inheritor inherited 325 acres in 1992. It was valued at $831,643 and was free and clear. There were no loan or loan payments. At 1992 rental rates, it generated $59,006 in rental income (if rented out) or rental savings (if farmed by the inheritor) annually.
In 1993, the inherited acreage was fully leveraged to purchase an additional 491 acres. Our inheritor then had land assets of $2,070,614 and a mortgage of $1,246,158. Expected rental income (savings) of $150,175 annually is more than enough to cover the mortgage payment of $122,238. Any surplus of rental income (savings) over mortgage payments is accumulated. If sufficient, it is used for cash purchases of land at subsequent five-year transaction points. Any future appreciation in land values is capitalized at five-year transaction points to purchase more land up to the point where expected rental income (savings) is sufficient to cover mortgage payments.
Our inheritor will continue to make land purchases with capitalized appreciation and excess cash every five years to the extent possible. In 2013, the final land purchase is made. At that point, land holdings are 2,132 acres. This is 656 percent of the initial inheritance of 325 acres. In terms of dollar values, 2013 holdings are worth $22,934,292. This is 2,758 percent of the original inherited value of $831,643.
Land value increased substantially more than acreage because we constrained our mortgage obligations to levels where expected rental income (savings) could cover mortgage payments. Land values increased significantly faster than rental rates, so our inheritor was not able to capitalize a significant portion of land value appreciation. Had the inheritor faced lower interest rates or longer mortgage terms, it would have been possible to accumulate significantly more land and generate a significantly higher net worth.
In 2013, the land value account has a net worth of over $16 million. That is well over the $13.7 million needed to be a member of the “1%” in 2023. It took only 20 years of land value appreciation and rental income (savings) to raise a 325-acre inheritance to the “1%” level.
Land values hit a peak in 2013 and fell through 2018. Rental rates also fell. As a result, our inheritor could not purchase land in 2018. In fact, falling rental rates were insufficient to service the existing mortgage, so property needed to be refinanced in 2018 in order to spread remaining debt and lower payments to rent-serviceable levels. Refinancing was possible under model rules, but, unfortunately, net land value fell below $12 million.
By 2022, land valuations had recovered, but rental rates had continued to fall. This increased net worth but decreased the level of mortgage payments rental income (savings) could support. It is assumed that 2023 (which is just beyond the model) will require another refinance to spread remaining debt obligations and lower payments to a rent-supportable level. The net worth of the land value account is over $18 million. That put our inheritor solidly back into the “1%.”
It should be noted that there is nothing here about farming the land. Our inheritor could have rented the entire accumulated acreage out. While not of interest here, farming the land – no matter who farmed it – would have generated average of
$54.75 per acre per year in direct government payments
$120.72 per acre per year in operating income
$175.47 per acre per year in total farming income
Over the period from 1992 to 2022, farming these holdings would have generated a total of nearly $9 million. That would have averaged nearly $300,000 per year.
Things to think about
There are several things going on, here. First and foremost, these things are not at all unique to the farming industry. Ag land was used in the example because existing historical data makes it easy to consistently separate asset values and incomes from operational incomes in farming. The asset-value accumulations and the inheritance value advantages illustrated here are common across nearly all industries in the United States.
Contrasting Purchase to Inheritance
In the example above, we closed off the land value account from all other sources of funds. The acquisition process was initiated by the inheritance of 325 acres of unencumbered land. That inheritance was critical to the land value accumulation observed.
Suppose someone wanted to initiate this process by buying 325 acres of land on the same credit terms outlined above. That purchase would require collateral. Suppose that collateral was in the form of an unsecured loan at 7.5% interest (the same interest used in amortization throughout this analysis). We would initiate the model with
325 acres of land in 1992
$831,643 in land value
$498,986 in a bank mortgage with payments of $48,947 annually
$332,657 in unsecured debt
Whereas our inherited land in the example above was unencumbered and could immediately by leveraged to purchase more land, the land purchased here is completely leveraged and cannot support any additional purchases.
Because the land value account is closed, we consider the unsecured debt as an obligation that must be retired before additional land can be purchased. Funds for this can be acquired in two manners:
Land value appreciation can be capitalized to pay the unsecured debt. In effect, this trades increased mortgage balances for decreased unsecured balances. This is limited by both the amount of land value appreciation and the amount of mortgage payments that can be supported by rental income (savings).
Increases in rental income (savings) generate surplus cash that can be used to pay off the unsecured debt.
In 1998, 2003, and 2008, increased rental income (savings) is used to restructure the bank mortgage, capitalizing all the land value appreciation that rental income (savings) can service as mortgage payments. The entire value of this increased mortgage in each period is utilized to buy down the unsecured debt. There are no additional funds for land acquisition.
Restructuring in 2013 is sufficient to completely clear the remaining unsecured debt and to purchase an additional 27 acres of land. This is the only land acquisition that will be made in this scenario. As in the discussion above, land valuations and rental values fell from 2013 to 2018. In 2018, mortgage debt had to be refinanced to spread remaining debt and lower payments to a level supportable by rental income (savings). Rental values continued to fall through 2022. It is assumed that mortgage debt will have to be restructured again in 2023 (which is beyond the model) to lower payments so they can be supported by rental income (savings).
At the end of the model period, our purchaser has
352 acres of land, versus 2,132 acres accumulated by our inheritor
$3 million net worth in the land value account, versus $18 million accumulated by our inheritor
Recall that, in both scenarios, the land value account is closed. It is driven by land value appreciation and market rental rates regardless of whether our owner farms the land or rents it out. Had our land purchaser farmed these acres, it would have generated $1.77 million in farm income over the period, or an average of almost $59,000 per year. Our inheritor, on the other hand, would have generated nearly $9 million in farm income for an average of nearly $300,000 per year.
Intergenerational Implications
In the current tax environment, neither of our landowners would be in a position where their assets were subject to estate taxes when they die. In most jurisdictions, their heirs would not be subject to inheritance taxes. This has tremendous intergenerational implications.
Suppose our original purchaser and inheritor both die in 2022. Sufficient land is sold to cover their remaining mortgage debts and rental income (savings) shortfalls, and their land is bequeathed to heirs prior to the end of 2022.
We assume that property sold to cover existing debts is subject to capital gains taxes totaling 23.98% at the national and state level. We assume that any remaining property passes to the next beneficiary tax free. We also assume that the basis of any inherited land is stepped-up upon inheritance, freeing the beneficiary from any capital gains that had accrued to the deceased owner.
In order to clear $5.4 million in outstanding debts, our inheritor’s estate liquidates a total of 515 acres of land. Disposing of the highest-basis land acquisitions to minimize capital gains taxes covered both the outstanding debts and a $273,863 capital gains tax obligation (an average of $530 per acre sold).
At the conclusion of these transactions, our inheritor’s beneficiary is bequeathed 1617 acres of land valued at nearly $17.9 million. Of this, $12.9 million was acquired as capital gains by the previous owner. Stepping up the beneficiary’s basis is equivalent to a gift of $3.1 million in foregone capital gains taxes (over $1,900 per bequeathed acre).
It should be noted that, even had the estate or beneficiary paid or retained liability for these taxes, the beneficiary would still have received land of sufficient value to remain among the top “1%.” All of this results from the simple appreciation of the inheritance of an average Iowa farm over 30 years. Within this land appreciation model it has not even been necessary for the original inheritor to farm the land. Rental values and appreciation were all that were required to generate this result.
Alternatively, consider our other example, the individual who bought 325 acres in 1992. At the point of death in 2022, the value of land owned is nearly $3.9 million. Debts are $779,863. In order to clear debt, this estate liquidates 81 acres of land. This includes the 27 acres purchased in 2013 and 54 of the original 325 acres purchased in 1992.
The sales result in a capital gains tax obligation of $112,180 or $1,385 per acre sold. Note that this is over 250% of the per-acre capital gains tax obligations for our original inheritor. This is because our inheritor was able to continue acquiring land as land appreciated. This increased his basis on land sold, which reduced his capital gains on transactions. Our original buyer was able to acquire only 27 additional acres over the model period. The majority of his sales came from land with 30 years of capital gains.
After the land sales, our original owner’s beneficiary is bequeathed 271 acres valued at nearly $3 million. Of this, $2.3 million accrued as capital gains to our original purchaser. Stepping up the basis of this farmland at inheritance is effectively a gift of a little over $551,000 to our original purchaser’s beneficiary ($2,034 per acre bequeathed).
Questions of Equity
If we were able to continue the model, we would start with two beneficiaries:
Heir A: our original inheritor’s heir bequeathed 1617 acres
Heir B: our original purchaser’s heir bequeathed 271 acres
In 2023, our two heirs would be able to leverage their unencumbered inheritances. Heir A could purchase 2,425 acres for a total of 4,048 acres with 40% equity. Heir B could purchase 406 acres for a total of 677 acres with 40% equity. This is where cycle number two begins.
There are clearly issues of equity revealing themselves. Recall that we did not expect any of the owners to farm their land. They did nothing other than fully exploit their passive income from rents and their passive appreciation in land values. There is no difference in behavior or apparent merit between our participants, yet their opportunities at the outset of any cycle are vastly different and are diverging.
In addition to the disparity noted above, there are serious concentration problems. To begin the first cycle, our two participants each acquired one average sized farm (325 acres of land). At the end of the cycle, they bequeathed 1,888 acres. In effect, they concentrated nearly 4 additional average sized farms into their two operations. To start the second cycle, our two heirs immediately purchased an additional 2,831 acres of land. Even given an increased average farm size of 345 acres, this transaction concentrated another 8.2 average-sized farms into their two operations. The relative ease with which inheritors can multiply their holdings stands in stark contrast to the opportunities available to new purchasing entrants (recall our first generation, above).
Assuming that this cycle of land value increases over 30 years is consistent, in less than 6 generations (30-year cycles) our two current heirs will have accumulated land in excess of the current farmland total in Iowa. This is unstable just between the two of them. Assuming they are not alone, the individual advantages proffered by inheritance will almost certainly lead to an unstable and unsupportable farmland market in a couple of cycles.
The situation our model illustrates is a market failure. We have two individuals who cannot be distinguished with respect to market performance yet see inevitably diverging economic outcomes. In addition to that, we have a rapidly concentrating land market that inhibits market competition and competitor entrance. Furthermore, we have inheritance and capital gains tax environments that exacerbate the problems illustrated.
Conclusion
At the outset, we noted that the majority of the top “1%” is not otherworldly. Our model demonstrates that a relatively common inheritance and equity appreciation can move an individual into the “1%” in the course of a single generational cycle if that individual diligently exploits and capitalizes unearned incomes and equity appreciation. Our model also shows that individuals starting from scratch with similar assets cannot match the results of inheritors, even if no distinction can be made between them in terms of economic merit.
This points to economic failures that could and should be addressed by the estate, inheritance, and capital gains tax environments. If we are going to provide opportunity to every individual, we need to assure that the accumulations of previous generations do not override the potential of current participants.
The Iowa Legislature is currently working on a bill (SF 615) to impose work requirements on able bodied adult recipients of Medicaid. The bill passed the senate on Tuesday, March 27. It was passed with amendments by the house on Wednesday, March 28, and sent back to the senate. It will likely be passed and signed into law during the week of March 31, 2025.
On the face of it, it is kind of hard to figure out what this means. The governor apparently put forth the bill, but neither the governor’s office nor the departments of health & human services, public health, revenue, or management & budget provided any information to the Legislative Service Bureau on costs, savings, or fiscal implications of the bill.
Either they don’t know, don’t care to know, or don’t want anyone else to know the implications of SF 615. One can easily find estimates on the internet that 75 percent of Iowa adults on Medicaid already work, but it is hard to determine the potential exemption status of the other 25 percent.
To its credit, the Legislative Service Bureau did provide some important estimates to underpin the analysis presented here:
The bill will generate Medicaid savings of $3.1 million to the State of Iowa in the first year
The bill will generate savings of $17.5 million in the second and subsequent years
The funding percentage split between federal and state is 88.4 percent federal and 11.6 percent state
This means that when the state saves $3.1 million in the first year, the federal government will save $23.6 million, and when Iowa saves $17.5 million the second year, the federal government will save $133.4 million. Summing these up, during the first year while the State of Iowa is saving $3.1 million it will be cutting health care expenditures in the state by $26.7 million. During the second year the state will save $17.5 million by cutting statewide health care expenditures by $150.9 million.
So far, this has all been derived directly from the estimates made by the Legislative Service Bureau.
The United States Bureau of Economic Analysis (BEA) generates estimates of expenditures for each state. Assuming the healthcare expenditures eliminated by SF 615 are spread through the system on an equivalent basis to Iowa’s overall health expenditures, they can be run through an input-output model to see how they will affect the entire Iowa economy. The model was set up using coefficients available from the BEA.
Four scenarios were set up – two each for first year and for second year reductions in health care expenditures. In the first scenario for each year, health care expenditures were cut, and no other changes were made. In the second scenario for each year, it was assumed that the State of Iowa’s estimated savings were concurrently returned to taxpayers as household income (equivalent tax cut scenarios spread proportionately to income distributions).
Scenario One: First year health care expenditure cuts without equivalent tax reductions
State of Iowa savings – $3.1 million
Health care expenditure cuts – $26.7 million
Statewide payroll reductions – $17.3 million
Statewide jobs reduction – 307 jobs
Reduction in statewide returns to capital (profits, interest, rents, etc.) – $10.9 million
Job losses will fall predominantly in these sectors:
Health care – 189
Finance & real estate – 28
Professional, management, & administrative – 23
Wholesale & retail trade – 21
Additionally, a very rough estimate of state general revenue fund tax loss can be made by dividing state net tax deposits (Iowa Department of Revenue) by earnings by place of work (BEA) for Iowa. That calculation results in 8.75 cents in general fund tax deposits per dollar of payroll in the state.
This estimated tax loss would be $1.5 million. It would not include losses in non-general state income, such as the lottery or liquor, and it does not include local government receipts, but it would still amount to approximately half of the state’s anticipated savings from restricting access to Medicaid.
Scenario Two: First year health expenditure cuts with equivalent general tax reductions
State of Iowa savings – $0 (all savings are distributed in an equivalent tax cut)
Health care expenditure cuts – $26.7 million
Statewide payroll reductions – $16.4 million
Statewide jobs reduction – 287 jobs
Reduction in statewide returns to capital (profits, interest, rents, etc.) – $10.0 million
Estimated general revenue tax losses – $1.4 million
Job losses will fall predominantly in these sectors:
Health care – 185
Finance & real estate – 24
Professional, management, & administrative – 21
Wholesale & retail trade – 17
Scenario Three: Second year health expenditure cuts without equivalent tax reductions
State of Iowa savings – $17.5 million
Health care expenditure cuts – $150.9 million
Statewide payroll reductions – $97.7 million
Statewide jobs reduction – 1735 jobs
Reduction in statewide returns to capital (profits, interest, rents, etc.) – $61.5 million
Estimated general revenue tax losses – $8.5 million
Job losses will fall predominantly in these sectors:
Health care – 1068
Finance & real estate – 155
Professional, management, & administrative – 128
Wholesale & retail trade – 119
Manufacturing – 38
Scenario Four: Second year health expenditure cuts with equivalent general tax reductions
State of Iowa savings – $0 (all savings are distributed in an equivalent tax cut)
Health care expenditure cuts – $150.9 million
Statewide payroll reductions – $92.9 million
Statewide jobs reduction – 1620 jobs
Reduction in statewide returns to capital (profits, interest, rents, etc.) – $56.7 million
Estimated general revenue tax losses – $8.1 million
Job losses will fall predominantly in these sectors:
Health care – 1047
Finance & real estate – 134
Professional, management, & administrative – 121
Wholesale & retail trade – 95
Manufacturing – 33
Some thoughts
Regardless of the merits of imposing work requirements where the great majority are already working (recall that the governor and affected state departments declined to provide details regarding those merits), this is not simply a state budget reduction effort. It will significantly affect payrolls, employment, profits, and tax receipts across the state.
These effects are magnified by the fact that the federal government multiplies Iowa’s investment. For every dollar the state puts into these benefits the federal government contributes $7.62. That means that for every dollar the state saves with SF 615, the state forgoes $8.62 in economic activity that generates payrolls, employment, profits, and tax revenue. The state savings of $17.5 million per year will cost the state’s economy almost $151 million in expenditures (economic activity) per year.
The magnitude of these losses, particularly in the health care industry, will force providers to abandon billions of dollars worth of investments in facilities and infrastructure. These abandonments will not magically reappear if SF 615 is subsequently modified or repealed.
It should also be noted that, as expenditures fall, payrolls are cut, profits disappear, and jobs are axed it will be harder for Medicaid recipients to find the required jobs. This will remove more of them from Medicaid. This will save the state more money. For every dollar saved in this manner, another $8.62 in health care expenditures will be removed from the economy and the cycle of disruption to the state’s economy will continue to expand.
These are a costs that deserve more analysis than the governor or the statehouse has given.
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.
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.
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