Relating Politics and Fiscal Policy…Textbooks and TV

This week, America went to the polls. We voted. And voted for another 4 years with Obama as our leader. Beyond his leadership, we also voted for his fiscal policy…whether we as voters understood/understand that or not. For my entry this election week, I am reflecting on the election and how America understands (or dosen't) fiscal policy when making their choice.

I have always known that I did not understand even a surface scratch about what fiscal policy really meant. I knew it was taxes and government spending, both something that I personally support, but do I really understand why I support these things? Or what they really do? Nope. Taking economics again is opening my eyes to a much larger view of fiscal policy, and what my high level beliefs really do mean in the fiscal policy spectrum…and how hard it is for the average voter to dissect the thinking behind these approaches.

It has been said, over and over for months now, that the #1 issue for voters was the economy, and how our government is either hindering or helping it to recover. This week we covered some very interesting, very basic sets of economic principles that discuss how government spending, taxes, GDP and employment are related. Bottom line, government spending can drive increased aggregate demand which will push the unemployment rate back to a level of higher (and possibly full) employment for the country. Seeing how these ideas relate, and impact each other, show me that my beliefs that taxing and spending are a good thing, even if it raises national debt, and are helping us to avoid another economic collapse.

 

Changes in government spending, changes in tax levels and changes in transfer payments through programs like social security, all impact income and employment levels, as well as inflation rates. Clearly, with stagnant incomes and a high rate of unemployment, the government should be targeting a fiscal policy that will bring those both up. Expansionary policy, that invests heavily to induce full employment, cannot happen without implementing less popular political moves like raising taxes and borrowing money (debt).

A high level summary of President Obama’s fiscal policy (according to this National Journalreport): Economic stimulus now, deficit reduction over the long term. Tax the wealthy to raise additional revenues. Trim military spending, Medicare, federal pensions, and farm subsidies.

Clearly, this approach is a mix of the three main components discussed above. Both economic stimulus (government spending) is the expansionary policy in action, and the increased tax on the wealthy is the funding source. Another component of boosting up the economy in expansionary fiscal policy is increasing transfer payments, which is not reflected in Obama’s plan to reduce the transfer payment streams listed above.

There are opinions that oppose this expansionary approach with a preference to lower taxes, and lower spending to allow private investment in the market to flourish. However, historical data shows that even in times of reduced taxation, the private investment does not dramatically increase (this articlecited in Norm’s blog expands on the idea further). Through that was what Mitt Romney was promoting for his fiscal policy reasoning.

Through this election, I am curious how much the average voter even understood why the candidate’s policies differed. What is presented to the public are two sentence sound bites to what is a large and complex issue…and dramatically shapes an administration far more than their laundry list of issues. Right now we are in need of dramatic change, and it seems to me that government investment, paid for by us, the people, is the way to move forward. I wonder how the US electorate would vote after everyone took a semester of macroeconomics.

Job Creation and Unemployment

On Friday, the Bureau of Labor Statistics released its monthly unemployment numbers. “Both the unemployment rate (7.9 percent) and the number of unemployed persons (12.3 million) were essentially unchanged in October, following declines in September.” This was based on household survey data from the US. This number only accounts for persons who are still actively looking for work. It does not count people who worked odd jobs for pay, are underemployed or have become discouraged and stopped looking for work. My sense is that the actual “unemployment rate” would look far worse if we adjusted our metrics to really include the full picture of the working family in America.

We focused on understanding the three main components of unemployment: cyclical unemployment, is due to lack of demand for labor; frictional, which reflects the time it takes to match job seekers with those looking to hire; and structural unemployment, which is a mismatch between the skills in the labor force and the skills needed by firms. In Norm’s blog, he discusses the political arguments that both parties make to force our unemployment numbers to fit more cleanly into one of these categories to assign blame on why unemployment is so high.

So how does this relate back to coal export terminals? Last week’s initial search yielded not a financial statement from Millennium, but rather an economic report published by the company to show its projected positive future impact based on this terminal development. It included many tables and graphs illustrating many variables, including education, current income levels, population statistics, and fiscal expenditures for Cowlitz County. I thought that this document would be interesting to review this week with our economic focus on unemployment, as well as relate to our discussions of environmental justice.

The Millennium terminal in Cowlitz County is a great example of how industrial and environmentally burdensome projects can move into a community, with many local community supporters. According to the report, here are a few key statistics about Cowlitz County.

• Cowlitz County has a population of 102,410

• The largest employment sector in the county is manufacturing, which employs about 20% of the total workforce; construction comprises 8% of total county employment

• In 2010, the county had an unemployment rate of 11.1% and a median household income of $41,000 (in 2012 it was up to 12%)

• County general tax revenues have been hard hit by the recession.  Adjusted for inflation, revenues have declined both in total and on a per capita basis since 2006

• About 52% of workers living in the county are employed within the county; the County has a net job outflow of more than 8,000 jobs

Clearly, the county needs jobs, and the local workforce is skilled for industrial type work. With an unemployment rate higher than the national average, this could be an appealing proposal. A company coming in promising that “state and local benefits will include new and significant jobs, wages, output, and tax revenue. It is also expected that the majority of the positions would be filled from the local labor pool.” What especially when the first publicly published information is about initial jobs: Construction activity is estimated to support 1,350 temporary direct jobs, with an additional 1,300 additional jobs in the related community. However, this rosy and significant number drops significantly after construction stops. The long term estimate of the job creation from this $643M project is 135 direct jobs, and 165 subsequent secondary (indirect and induced) jobs. For a population of over 100,000, that is not a very significant unemployment solution.

For some sections of the community, this proposal’s positive benefits far outweigh the environmental risks. They are focusing on the positive impacts this development could bring, including the cleanup of the brownfield site, more jobs and economicstimulus. “I could see us hiring another large group of workers to come in for good family-wage jobs with benefits,” he said. “That trickles down through the economy. It’s not only a benefit to us, but to local businesses, schools and the tax base.”

For the moment, these two sides are at odds, and working through the NEPA, SEPA and public comment process before any plans are finalized. What jobs will roll out of the final decision will wait to be seen. 

Investment Profile: Income & Expenses

All environmental/social/political issues aside, the proposed PNW coal export terminals come with a price tag, and a hefty one at that. Investment for the proposed port near Longview, WA, by Millennium Bulk Terminals, totals $643 million. Three projects proposed along the Columbia River near Portland represent around $1 billion in privateinvestment. That is a lot of money building a foundation for economic development in the Pacific Northwest economy.

This week we have been focusing on understanding financial statements: the messengers illustrating financial health of an organization. It is important to me that if a company is pouring millions in investment into a new venture (especially one in my region), that they are financially stable so they will not be walking away bankrupt 6 months or 2 years into the project. It only seemed fitting to dig up a set of financial statements for some companies proposing the coal terminal investment.

Millennium Bulk Terminals, the company referenced above, is an entity owned 62 percent by Ambre Energy’s U.S. division, and 38 percent by St. Louis-based coal firm Arch Coal Inc. Their plan would invest roughly $600 million to turn a former Alcoa smelter near Longview, Washington, into a private coal export terminal with initial capacity of 25 million metric tons. The project is projected to create 300 full-time jobs and another 2,750 in construction and other indirect positions over two years. (Sustainable BusinessOregon, 2012)

I wanted to gain insight into the longer term health this investment’s backers, so I investigated Ambre Energy, the majority shareholder of the company. I easily found Ambre’s previous 5 years of annual reports, with the 2011 financial statements carefully included starting on page 55 of the 110 page document. I was most interested in inspecting their income statement, partially since this is the one I am most familiar with, and it would give me insight what direction their expenses and revenues were headed as Ambre continues to invest in the Longview project.

From my initial observations, the company appears to be slipping. Revenues are declining while benefits and other expenses are increasing significantly. However, as I continue sifting  through the pages of financial metrics I different parts of the story unfold. I see that the consolidated statement of cash flows paints a completely different picture comparing 2011 to 2010. Through the annual investing, financing and operating activities, the net cash in hand at the end of the year is significantly higher in 2011 (10,980.040 compared to 2,909,037).

As I work through the statements, I am drawn to lines that I understand: revenue, employee benefit expense, total comprehensive income. Since I recognize these, they make me want to dive in deeper, and further understand what was behind the numbers, and potentially understand why they are so varied between 2010 and 2011. For example, employee benefit expense.

Since revenue decreased 2010 to 2011, but employee benefit increased, I was curious about what contributed to this number. It turns out that the little “19” next to that item connected me exactly to that answer. In the notes (which is FAR longer than the financial statements themselves) I learned that two specific variables had dramatically increased for employees: wages and salaries, and annual leave. To me that says people got paid more and took time off! Sign me up! What would have helped my understanding further would have been information on employee counts etc. so I went back to the annual report. This time I learned some additional items that help my understanding of the financials presented in this report:

“We are proud to announce that in 2011, Ambre Energy transitioned from a development company to an operating company with the acquisition of key assets. In January 2011 the company acquired what is now known as Millennium Bulk Terminals-Longview (MBTL) in Washington State, USA, providing potential access to growing Asia-Pacific markets for US thermal coal. “ (page 8)

 Takeaway: this was a development year rather than a revenue focused year…that gives some perspective on one reason why revenue shrank in 2011.

 

“A number of key specialist appointments were made in 2010-11, to increase the technical competence in mining and geology available in-house in Australia. In the US, there was also a strong focus on expanding the team to secure a skills base to finalize port and mine acquisitions, and prepare for operation. Reflecting the stage of Ambre Energy’s growth, a significant investment was made in 2010-11 to buy-in the specialist skills required in the short term, to supplement existing resources and to take proposed projects to the next development stage.” (page 43)

 

Takeaway: investment in people was a high priority as well. This is reflected in the dramatic increase in wages (tied to new hires with specific skills and/or advancement for people with new skills)

My understanding of these financial statements is clearly very elementary. There were significant sections that I did not even bother reading because the words and associated numbers on the page mean nothing to me. At this time, I still don’t have a solid evaluation of Ambre’s financial health, but I have learned that they are taking the time to invest in the future viability of their company through the acquisition of assets (both physical and human capital). This alone leads me to feel slightly less critical of the company’s intentions. I could spend many more hours diving into the financials and annual report and still not see what experienced economics eyes would find. What insights can you share about your impressions of a company based on their financial statements? And how does investigating these companies change or influence your opinion of their role in a complex, controversial issue like the proposed coal terminals?

 

One final note: The first public hearings for the terminal projects, conducted by the Army Corps of Engineers, are set to begin October 27 in Bellingham, at Squailcum High School.

Unpacking the Problem

Over the past three weeks, I have expanded my understanding, interest and working vocabulary hundred-fold as it pertains to economics. Diving into the details of the US (and following global) financial crisis has opened my eyes to the complexity of our current system, and given me more ideas on how to explore my chosen my focus topic of coal exports from the PNW coastline.

My interest in this topic stemmed from personal experience as I introduced in my initial post. My interest stemmed primarily from the social and environmental impacts, but I am gaining more confidence in discussing and understanding the numerous economic drivers and consequences. My expanded knowledge and language is helping me to zero in on the economic factors of this issue, such as financing, market impact and investment.

I am working to step back from my personal connection with these proposed coal export terminals, and rely on the facts to drive my discussion. Does this mean I will lose sight of the passion and interest I bring to the discussion? I sure hope not! I am working to bring clarity to my readers about the issues, and drivers, while sharing my perspective on how economic decisions impact local communities. 

So what is the core issue at stake here: coal. Coal in itself is not an issue. In the ground it is just fine. Doing no hard. Once it is extracted and burned it becomes a problem. How it is extracted and used as an integral part of human development and existence, and the continued exploitation of it as an energy resource is the challenge we are facing. Spiraling out from coal, we have the drivers of how this resource impacts society. As discussed on my economics’ professor, Norm’s blog, coal is ample and cheap. It is therefore a centerpiece of the world’s electricity production. Electricity production from coal requires mining, transportation, processing, and exportation. This is the simplified production and distribution side of the equation, and is the side that the United State is primarily involved with. Coal use of for the creation of electricity has dramatically decreased in the United States over the past decades in favor of cleaner, more efficient fuels.

On the flip side, developing nations, such as China and India, are still heavily dependent on this cheap but dirty source of energy. They are driving demand for more and more coal and their economies and populations require more electricity. Mitigating the environmental impacts of coal through strategies like carboncapture and storage are not a long term solution, and really are not financially feasible on a large scale. Mitigating emitted carbon (from burning coal) does not seem to be the correct approach. As we look through the history of sustainability initiatives and cultural shifts, awareness eventually evolved most problems from reactionary (clean up, like CCS) to preventive strategy, such as emissions limits on cars. Perhaps we should be asking ourselves (as many people are), why are we positioning ourselves to export ever more of this dirty fuel? Where is the preventative/proactive strategy in that? Wouldn’t we all be better off leaving coal in the ground and focusing on cleaner solutions?

Most people are aware that burning coal is not good for the environment. However, this is not the only issue we are grappling with as a country. What is the #1 issue headlining presidential debates? The economy. It is a big issue overshadowing most decisions the general public will make. When coal export industry analysts report that the new coal terminal will generate $2 and $6 billion to the economy, that catches people’s attention. Proponents explain the benefits of “thousands of jobs, millions of dollars in new tax revenue,” which yes, our economy and communities really do need According an Oregon Public Broadcasting poll, 55 percent of respondents in Washington, Oregon and Idaho support expansion of the coal industry because of the economic benefits.

Clearly, people in the PNW are struggling with this choice. We could take the high road and say our communities will not support the exportation of such a dirty fuel, regardless of the jobs it could create. Many groups in these communities are uniting to protest this, much like a demonstration a few weeks back on the exact beach inspiring my story. One of the realistic factors that need to be considered is this intense, high demand for coal. The market for coal is strong overseas, and demand is expanding with every new appliance and house connected to the grid. This significant market will drive coal exporters to export their product. The real question is, will they succeed in achieving this through the proposed PNW terminals. Will the projects more forward, infiltrating communities trading environmental and ethical concerns for profit and jobs, or will those benefits move on to other towns and cities welcoming this opportunity for economic development. 

 

Introduction

My name is Lauren, and I am starting my first year at Bainbridge Graduate Institute (Seattle, WA) pursuing an MBA in Sustainable Systems. Following an undergraduate education in Environmental Science, I started a career in the construction/engineering field with a focus on sustainability. I have always been interested in how we can make “industry” cleaner, and more fair to the planet, communities and local ecosystems while maintaining productivity and progress. After three years of working, I realized that my scientific background was a solid foundation for understanding the issues, but I lacked the business language necessary to effectively interact with clients. I needed new a new set of skills to make my case. Solution: business school. I was not looking for just any business school though, and when I found BGI, I instantly knew that this was the school for me.

BGI focuses on educating future business leaders differently. Contained in the core curriculum are all the elements covered in traditional MBA programs, but the method of teaching these is what makes BGI unique. The classes are integrated, and taught with a real-world, hands on approach. There is also a major focus on leadership and personal development, ensuring that graduates are not only prepared academically, but personally as well.

This blog will be a constant thread during my two years at BGI. The core of the blog will cover economic topics, following relevant events in the news. For this first quarter, I am intending to investigate a headline close to my heart: the proposed exportation of US coal to China through Pacific Northwest ports. Not only does this topic have a multitude of economic and environmental facets I can expand on, but it impacts me as an individual. My parents live 5 miles from one of these proposed export terminals, and the beach it is proposed on is our summer crabbing grounds. This proposed terminal, and the larger issue it embodies, is a prime example to discuss the triple bottom line: people, planet, and profit.

the Cherry Point Beach where we crab in the summer, and where a coal export terminal is proposed.

There are six proposed coal export terminals peppered along the Oregon and Washington coast, providing capacity to export as much as 145 metric tons of coal per year to Asia and China. This recent focus on coal exportation has two major factors: the coal consumption in the US is declining, while the demand for cheap fuel in China is expanding. Debates on the impact of this supply chain span every topic imaginable, many of which I will explore on future blog posts. There are impacts for jobs (both mining and shipping), investment and economic assets, and the environment both locally and globally. There are cultural and ethical issues at stake as well: community impact for mining towns, terminal towns, and the entire railway track between. Another global question is within the context of climate change. If the US has so significantly reduced our dependence on coal (high GHG emissions) how can we justify shipping it to be burned elsewhere. Thus moving the emissions offshore, and out of our backyard. The coal exportation through PNW shipping terminals has been a debate I have been following for the past two years. It maintained an underground news presence in the beginning, at least in my parent’s local community, but has recently gained more coverage as more groups are voicing opinions.

I look forward to sharing my BGI experience through this blog, and hope to shed light on some of today’s economic issues. I encourage you to share your opinion and knowledge on my posts through comments!