Friday, March 23, 2012

West Virginia got two wake up calls this week

It is unfortunate that West Virginia could not interest Shell Oil in building its proposed ethane cracker plant here.  But Shell's decision to locate in Monaca, Pa., did not surprise me in the least.  Bigger states can offer more.

Monaca is 25 miles from Pittsburgh.  The Pittsburgh metro area's population is one-third larger than West Virginia's entire population. 

West Virginia proposed a site in Hancock County (population estimated at 30,500 and on a downward trend from 2000).  One quick look at the map tells you that 90 percent (or more) of the plant's work force would have to commute from Ohio and Pennsylvania. Unless, of course, I have overlooked an indigenous tribe of intelligent forest creatures who could be trained to crack ethane.

West Virginia should feel very fortunate that Toyota Motors chose Putnam County to locate an engine plant.  This has been wonderful for our state.  The plant just keeps growing.

But a change is brewing.  Japanese business executives are the most polite people in the world.  A Toyota executive would never say anything derogatory about West Virginia's work force.   But the executive would drop a hint when appropriate.

Recently, Japanese corporate executives convened at the Toyota plant and started dropping hints.  They worried that West Virginia students tested poorly in math and science.  And they worried that West Virginia needed more skilled workers to operate modern equipment.  And they worried about illegal drug use.

If the Japanese were more forthright, like New Jersey plant managers, they would simply say: "Your kids can't add; your young men are wrench-turners in a robot age; and all of them are pot heads."

Here is what happened recently.  The state made a pitch to bring hundreds of new skilled jobs to Hancock County while simultaneously being told in Putnam County that we barely have enough skilled workers to fill the available jobs.

As for students who rank at or near the bottom in math and science, there can only be three reasons.  A). The kids are born with the "stupid gene" and will never learn anything.  B). The public education system has failed to educate our children.  C). The tests used to measure math and science comprehension are faulty.

West Virginia educators have opted for "C" to explain this phenomenon.

As for workers who lack those "tech savvy" skills that everyone likes to talk about, we just don't have an environment to learn these skills.  West Virginia has always been a natural resources state.  "Tech savvy," then, means chainsaws.  We know how to saw logs.  But we export our logs to the furniture manufacturing plants in North Carolina. 

When your job options are coal mine, saw mill or drilling rig, then it's very difficult to learn the skills to operate a complex milling machine at Toyota's engine plant.  Conversely, if you can operate a milling machine, you'll take a machinist's job in another state before going to the mines.

If West Virginia does ramp up tech savvy vocational schools, then the grads of those schools will leave the state if the skilled jobs aren't here. This is no different from losing our college grads to other states for the last 60 years. 

As for West Virginians being dopers, we need to face the fact that drug abuse in our state is a health epidemic. But we have treated the problem as a crime. We have built new prisons and overfilled them. A lot of good this has done.

Drug use is an attitude.  And until our elected leaders, our preachers, our teachers, our doctors and our civic leaders get on soapboxes and shame everyone who gets blitzed on bath salts, Percocet or pot, then our youth will continue to think it's cool when Mom and Dad do drugs.

Believe it or not, drug abuse was not a problem until the 1960s. That's when doctors hooked housewives on Valium, and rock stars glorified marijuana.  Attitudes, how shall I say, changed.

Going forward, West Virginia has some daunting challenges if it hopes to maintain a work force. Consider the biggest hint that the Japanese executives dropped at the Toyota get-together.  They worry about baby boomers retiring and not having skilled workers to replace them.

In New Jersey speak, this means:  No workers?  We're outta here. Bada bing!

In Japanese speak, this means:  We worry about West Virginia's future.

Friday, March 2, 2012

Payroll Tax Cut Is a Recipe for Disaster

"We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program."
President Franklin D. Roosevelt  (Memo to Luther Gulick, 1941)

               Beginning in October of last year, unleaded gasoline traded on the NYMEX for under $2.75 per gallon, and it remained below $2.75 until the end of the year.  For the first nine months of 2011, and except for a few brief dips, gasoline traded at prices over $2.75 per gallon.  Gasoline traded at its highest price for 2011 in April and early May; the wholesale price then was over $3.00 per gallon.
                For the nation’s economy, an economy that measures success by the Christmas shopping season, the downturn in gasoline prices was a boon.  Money saved on gasoline poured into the retail stores, which in turn made the fourth quarter of 2011 look like a turning point in the recovery.
                To examine only gasoline prices does not tell the whole story of the fourth quarter rebound.  The payroll tax cut in effect for 2011 is where consumers’ extra disposable income came from.
                The payroll tax is FICA—the Federal Insurance Contributions Act payment that funds Social Security.  The New Dealers wanted to avoid any mention of a new tax to fund the program.  The plan, after all, was hatched during the Great Depression.  Hence, FICA and not FITA.
                In 2010, tax cutting was on the minds of both the Republicrats and Demolicans.  They got together in a rare bipartisan effort and reduced the employee’s FICA rate from 6.2% to 4.2%.  They unashamedly pronounced this reduction a “tax cut”.  Apparently, maintaining the illusion that Social Security is funded through contributions was no longer necessary.
                As the tax reduction is two per cent of wages, the tax cut varies widely.  A minimum wage worker pockets $5.80 per week.  A clerk who makes $3,000.00 per month pockets $60.00.  A professional making $10,000.00 per month keeps $200.00.
                All in all, the payroll tax cut does not benefit any worker in noticeable fashion.   But the aggregate amount of every worker’s tax cut in a community does add up. 
Some economists maintain that the payroll tax cut is not spent immediately.  Rather, they say that the cut is saved or used to reduce debt such as credit cards.  I believe differently.  I see the tax cut as pure disposable income.
For nine months last year, I would argue that most consumers used their payroll tax cut to offset higher gasoline prices.  Then as gasoline prices fell, the tax cut was spent on groceries and the holiday season splurge. 
The holiday season has become a season of self-gratification first and foremost.  It is human nature to drive more, eat more, and buy the blu-ray version of “Transformers”.  The holiday season is a powerful urge to spend those disposable dollars.
In our current fiscal condition, cutting the payroll tax is neither very smart nor very productive.  We have been told in no uncertain terms that Social Security is running out of money.  We have crossed the threshold—current payroll taxes no longer pay the current benefits to retirees.  We are borrowing money to make up the difference.  There is no trust fund to dip into—just a filing cabinet in Parkersburg filled with IOU’s.
The stimulus effect of the payroll tax cut is negligible if it even exists.  Spending stimulus money on gasoline and groceries just seems to make them go up more in price while wage rates stagnate.  While it would be difficult to calculate the inflationary impact on gasoline and groceries just from the payroll tax cut, one can make the general argument that any artificial subsidy dampens the market’s ability to regulate prices. 
As for stagnant wages, employers have an incentive to pass up giving the workers a 2% raise.  Why bother if Congress is increasing the paycheck by cutting deductions in a like amount?
Here we are in 2012, and the payroll tax cut has been renewed for the year.  When will it become politically feasible to restore the FICA tax back to 6.2%?  Probably not for a long time.
President Ronald Reagan, a conservative Republican, and House Speaker Tip O’Neill, a liberal Democrat, worked together in 1986 to reform the Social Security program.  The FICA rate was raised to 6.2% to preserve the program.
In time, we will regret this payroll tax cut.  A rational worker would never drain his 401(k) or IRA plan to pay for this week’s gasoline.  But our national leaders are so desperate to win elections that they will drain the Social Security program.  This is a formula for disaster.