The Economics of Hillbilly Elegy

In June, 2016 J.D. Vance, a native of Middletown, Ohio with deep familial roots in Kentucky, published his book Hillbilly Elegy, an account of his experiences growing up in Appalachia. His book draws attention to rural poverty, an issue which seems to have been largely forgotten by a great swath of the American populous. His book deals with the economic insecurity, rampant drug use, and cultural components of life in Appalachia and the “hillbilly culture” which defines the region. Vance’s book, along with the rise of Donald Trump, who was able to effectively energize this specific group of people, has drawn increased attention to the issue and has made finding a solution more necessary.

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What is Rural Poverty?
Rural poverty, or nonmetro poverty, is an issue that has become more pervasive in recent years and is an issue that will continue to divide the nation unless comprehensive solutions can be found. According to figures by the USDA the rural population of the United States was about 46.2 million in July 2015, or 14% of the population, and this population continues to struggle with higher than average rates of poverty.

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The Geographical Concentration of Rural Poverty

Rural poverty is highly concentrated in the South (especially the Appalachian Region) of the United States and thus the Appalachian Region can act as a case study of the more general phenomenon of rural poverty.
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What are the Causes of Rural Poverty?

Poverty is a deep seeded issue with a complex range of causes. Rural poverty is a result of many of the same causes: namely educational inequality, labor market issues and changes, stagnation of wages for low wage earners, race, lack of affordable housing, drug use, medical costs, and regional inequalities.

Rural communities, Appalachia in particular, have been especially impacted by the changes in the labor market, educational inequality, the opioid crisis, and cultural components; it is thus these four causes that deserve particular attention in regards to rural poverty.

Labor Market Changes

The labor market has changed dramatically in the years since WWII. The growth of the information and technology based economy has made it incredibly difficult for individuals to find and keep stable and well paid work without an education. Mechanization, environmental regulations, and globalization have eaten away at rural jobs and in many cases the only new jobs being created in the region are in the service sector- jobs like greeting at Walmart. In an interview with the New York Times Vance argues that “Poverty is the family tradition” and the jobs of his ancestors: sharecroppers, coal miners, machinists, and millworkers, are specifically the jobs which are dying out in the modern economy.

The ongoing national discussion regarding the coal economy reflects the growing pains of the changing labor market. This coal jobs are not coming back and yet the rhetoric for these jobs reflect the real effects of the loss of work for low income and non-college educated individuals. The post recession rural job market has shrunk 4.26% since 2008 and it is this data which quantifies the “shuttered coal mines on the edges of rural towns and boarded-up gas stations on rural main streets. In these data are the angers, fears and frustrations of much of rural America.” (Beda).

Educational Inequality

Historically, the education system and educational attainment in Appalachia has lagged behind the nation. Although today there are governmental programs aimed at the region, the historical trend has continued. This regional educational inequality has had great impacts on Appalachia as education is one of the most important components in future earnings. Individuals with less than a high school education have a poverty rate around 35% and the average income of an individual with no diploma is $19,169-compared with $78,093 average income for individuals with an advanced degree (US Census Bureau). Education has become a necessity in today’s economy and yet remains out of reach of millions nationally and in Appalachia.

Drug Use

Rampant drug use is both a cause and effect of debilitating poverty. In Appalachia the figures regarding drug use are especially astounding. Since 1999 over one fifth (22%) of opioid related deaths have been concentrated in seven states in Appalachia: Kentucky, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia and West Virginia. Furthermore, in Kentucky, Tennessee, and West Virginia (the states hardest hit by opioid addiction and rural poverty) opioid addiction costs (as measured by loss of revenue due to jail time, treatment time, and decrease productivity) have accounted for $2.72 billion annually. This drug use thus is a product of and a cause of rural poverty.

Cultural Components

Although rural poverty is caused in large part because of these clearly quantifiable components: changes in the composition of the job market, educational inequality, and drug use, Vance also argues that rural poverty and Appalachian poverty also derive from a more abstract cultural norm. He argues that the Appalachian culture “increasingly encourages social decay instead of counteracting it” and that poverty will be pervasive in the region unless this culture can be altered.

 

What are the Impacts of Rural Poverty?

Loss of Communal Identity

In the Southeast, especially in Appalachia, the job market of a particular town or county was a large part of the culture of the area. According to Steven Beda, of the University of Oregon, “It used to be that, when someone first arrived at these towns, they knew what people did and that they were proud to do it” (Beda). The changing of the composition of the job market thus begs the question “how do you communicate your communal identity when the work once at the center of that identity is gone, and calling the local high school football team the ‘Walmart Greeters’ simply doesn’t have the same ring to it?” (Beda).

National Economic Burden

General poverty and rural poverty are problematic because they burden the entirety of the US economy. The economic costs of poverty include: a loss of productivity “that ultimately reduces the aggregate value of our economy” (Holzer), social welfare costs, justice system costs, and other costs.

Increased Regional and Societal Inequality

Beyond the economic impacts, it seems wrong that there could be such dire poverty concentrated in certain parts of the country. The US is a nation built among the pillars of equal opportunity “regardless of race, ethnicity, or family background” therefore “inequities associated with children growing up in poverty are troubling” (Holzer).

 

What are the Solutions to Rural Poverty?

According to Brian Thiede, Assistant Professor of Rural Sociology and Demography at Pennsylvania State University, the nonmetro- metro gap cannot be explained solely by factors impacting workers including education rates, job industries, and other factors that impact a laborer’s wages. In order to reduce the rural poverty there must be more “attention to the structure of rural economies and communities” (Thiede). These solutions are more difficult to determine, but general policies that are effective in reducing poverty include: conditional cash transfers (like the Earned Income Tax Credit) and  whole child policies (which focus on long-term child development).

 

Sources:

https://www.ers.usda.gov/topics/rural-economy-population/rural-poverty-well-being/geography-of-poverty/

https://www.ers.usda.gov/webdocs/publications/80894/eib-162.pdf?v=42684

http://www.alternet.org/culture/divide-between-rural-and-urban-america

https://www.irp.wisc.edu/newsevents/workshops/teachingpoverty101/participants/Presentations/Haveman-CausesofPoverty1.pdf

http://nautil.us/issue/47/consciousness/why-poverty-is-like-a-disease

https://blogs.lt.vt.edu/appalachianiswhatshappenin/2016/11/30/final-project-drug-abuse-in-appalachia/

http://www.npc.umich.edu/publications/u/working_paper07-04.pdf

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True impact of the Syrian Civil War

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With US escalation in Syria along with continual pouring of weapons and aid into Syria, the news is dominated by this type of news. However one important segment that is often neglected, although the most tantamount topic, is the crippling economic crisis that lingers long after the guns have stopped firing. According to the United Nations Economic and Social Commission for West Asia (ESCWA), Syria has estimated cumulative losses of about $260 billion between 2011 and 2015. And by the end of this year, Syria’s economy will fall by its 1990’s standards. This crisis can be almost all attributed the war of course which hinders economic growth with destruction of public and private property. But another crucial factor is the sanctions laid by the US and EU in 2011 that prevents imports and exports of even basic goods. It is estimated that exports have fallen nearly 90% due to the destruction of Syrian industrial centers such as Aleppo and the same for its oil and gas industries (which accounts for 25% of Syrian revenue).

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These sanctions are highlighted by Obama’s four sets of economic sanctions in Syria which effectively cut off bank transfers, fuel, and medicine. Without funds to finance the economy, the Syrian Lira began depreciate from 47 liras to 1 USD in 2011 to 520 lira to the dollar today. Although inflation and destruction were rampant throughout the country, the cost of living in cities like Damascus actually went up from 196,000 lira ($380) in 2011 to 220,000 lira ($425 in 2011 prices) now. Amidst price increases in living costs and everything else, salaries have dropped significantly with average workers now making monthly wages 26,500 lira ($53) as opposed to 11,000 lira ($220) in 2010. With no cash available to spur any kind of investment albeit exacerbating the inflation and foreign investors forbidden from doing business in the country, black market monopolists made it out of this crisis by monopolizing certain luxury goods such as candy, cell phones, cigarettes, etc in government controlled zones. In addition, pro government forces often loot cities and zones they recapture, leaving the people with even less to work with.

Overall, it is estimated by BMI that the Syrian economy will continue to decrease by an average of 4.9% annually from 2016 to 2019. Then even if the war comes to a close, there still will be illegitimate profits amidst a heavily displaced country with approximately 6.6 million refugees within and outside of Syria(from a population of 21 million) and no viable infrastructure to facilitate economic activity until at least 2021.  In addition to these statistics, approximately 4 million Syrian children (45% of adolescent population) are not in school which will further hinder growth on top of the displacement of labor and human capital. With no sign of abatement to the conflict, unemployment is on the rise with its current rate at over 57% and inflation increasing haphazardly at rates up to 60%, it is expected that it will take 40-50 years for the Syrian state to recover if ever.

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-Alex Ha

 

Sources:

https://www.globalenvision.org/2015/03/25/cost-civil-war-syria%E2%80%99s-economy-after-four-years-conflict

http://www.tradingeconomics.com/syria/crude-oil-production

https://www.theatlantic.com/international/archive/2016/10/syria-war-economy-damascus-assad/502304/

http://www.businessinsider.com/syria-economy-destroyed-2016-6

 

Cheers to the Derby!

While it makes sense the greatest two minutes in sports would have such a large economic impact on the Kentucky economy, what shocked me the most was how much the horses themselves affect the economy. Horses are Kentucky’s number one cash crop. There is an annual cost for horse care of about 4,510 per animal leading to a $3 – $4 billion impact each year for Kentucky just through the equine industry. The horse industry also provides somewhere between 80,000 and 100,000 jobs annually. This all leads to the Kentucky Derby itself.Screen Shot 2017-05-05 at 9.20.12 AM

Kentucky has an economic impact of $10 billion per year through the tourism industry, horses being the primary attraction but more specifically the two-week long Kentucky Derby Festival. The Kentucky Derby was studied in 2001 and was seen to have a 217.8 million dollar impact to Louisville. Even the drinks sold at the Kentucky Derby have a direct impact to the economy since their main drinks are made with Kentucky Bourbon and locally grown mint is used in the Mint Juleps. If you care to get in the spirit, here is The Kentucky Derby’s official Mint Julep Recipe:

2 cups sugar
2 cups water
Sprigs of fresh mint
Crushed ice
Early Times Kentucky Whisky
Silver Julep Cups

Make a simple syrup by boiling sugar and water together for five minutes. Cool and place in a covered container with six or eight sprigs of fresh mint, then refrigerate overnight. Make one julep at a time by filling a julep cup with crushed ice, adding one tablespoon mint syrup and two ounces of Early Times Kentucky Whisky. Stir rapidly with a spoon to frost the outside of the cup. Garnish with a sprig of fresh mint.

Cheers!

 

 

https://www.kentuckyderby.com/uploads/wysiwyg/assets/uploads/Fun_Facts__2016_.pdf

https://nationalhbpa.com/wp-content/uploads/HorseIndustryFactsandFigures.pdf

https://www.pri.org/stories/2012-05-03/kentucky-derby-history-mint-julep

http://www.wave3.com/story/16496850/ky-derby-festival-economic-impact-nearly-128-million

https://www.pri.org/stories/2012-05-04/kentucky-derby-5-things-you-need-know-about-greatest-2-minutes-sports

https://www.derbymuseum.org/education/why-study-the-derby.html

And With The 51st State, The US Selects…

At long last, Puerto Rico has filed for bankruptcy. Over the past 10 years, Puerto Rico’s economy has been in slow decline: losing 20% of its jobs from 2007 and 10% of their population. With this double-edged sword, their national incline is in steady decline and their amount of tax revenue also sharply declined; this combination led Puerto Rico to its current state of solvency issues. With the announcement of the Title III bankruptcy filing, many from both inside the island and out are left wondering what will happen in the coming months. The severity of this situation and the uniqueness of Puerto Rico’s unprecedented circumstances make the outlook of the future very murky.

 

The citizens: In the past 10 years already, tens of thousands of Puerto Ricans have flocked to the state of Florida in an attempt to escape the economic hardship they were facing: this is legal. By law, all Puerto Ricans are US citizens, so they may move to the mainland whenever they please. However, most residents of Puerto Rico enjoy the dichotomy they are afforded while on the island. The citizens of Puerto Rico find their situation very nice: being protected under all US laws and gaining all US rights while staying away from what they view as the tyranny of Washington DC. However, if they choose to stay on the island, they will likely see programs like pension funds and Medicare take a huge cut, as permissible by the Title III bankruptcy legislature.

 

The Investors: Herein lies a majority of the concern. Investors that hold secured government debt are in the best situation; these investors have a decent percentage chance at receiving their repayment in full, but this is still subject to judicial rulings. Investors that hold unsecured debt and all other types of investments are in a true wait-and-see situation. With the hearings likely to take place in the coming months, all that are invested in Puerto Rico will be tuning in with great detail, waiting anxiously to see how they rank in terms of repayment priority.

 

Puerto Rico: Numerous possibilities lie ahead for the island nation. What is most likely to happen is that Chief Justice John Roberts will appoint a judge to oversee the rulings. In this procedure, the appointed judge will likely have a lot of say in what happens to Puerto Rico, mainly because there is no other bankruptcy case in history like this one (Puerto Rico is $74 billion in debt, which is 100% of their Gross National Product). However, Puerto Rico is not forced to sell off assets in order to repay these obligations: they are protected from this under the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA). During the rulings, the judge overseeing the case will likely be the one deciding if Puerto Rico must sell assets such as beachfront property to reconcile their obligations, as creditors will no doubt push heavily to acquire assets such as that.

With all of this turmoil surrounding Puerto Rico, their future economic stability is in grave danger. The recently laid out a plan to help significantly fix their situation by 2020, but it is clear at this point in time that that will not work. Amidst all of these uncertainties, many are speculating if the US could gain a 51st state, and it seems more likely than most people would believe. Since Puerto Rico is apart of the US even as just a territory, US Government is very unlikely to just let them be and figure it out on their own, because that hurts the US as a whole. Also, Puerto Rico’s argument for remaining separate was that they kept Washington at bay, which is now a very weak argument considering the legal battle they are about to enter. These developments will certainty be interesting to keep an eye on, as we could have a new member to the United States of America.

-Corey Manley

It’s Time to Raise the Minimum Wage

The federal minimum wage that was established in 1968 is $7.25, but 29 states have still proceeded to pass legislation raising the minimum wage. Critics of minimum wage increases have strong grounds that fall under economics 101. Economics 101 says when the price of a good goes up, people buy less of it. In this case if the input price of labor rises then business owners will buy less labor. They will hire fewer people, which means unemployment will rise. Some economists believe that based off this logic the low-wage jobs will suffer, ironically, the largest hit. But what if economics 101 is wrong, or does not apply to the case of America?

States and cities that implemented a minimum wage bump have seen little effect on unemployment. In 2014, Seattle imposed a $15 minimum wage. Since then unemployment has actually fallen by 17.4%, from 6.3% to 5.2%. A couple years ago the Congressional Budget Office released a report indicating that one-million people would actually rise above the poverty threshold if minimum wage increased to $10.10.

For a variety of reason unemployment is not rising with spikes in the minimum wage. One reason being that employers can not reduce their staff without cutting their revenues. Additionally, higher minimum wages tend to stimulate the economy because low-wage earner are likely to spend and not save any additional income. A final theory is that worker productivity increases when being paid a higher wage. This was first displayed during Henry Ford’s $5 days which paid workers double the average rate and worker productivity increased as a result. This leads to less worker turnover. While businesses may suffer a small loss they can increase revenue based on worker productivity.

An additional factor that is overlooked is the amount the government would save if a higher minimum wage was imposed. 53 percent of workers earning less than $12 rely on some form of government assistance, such as food stamps, Medicaid, refundable tax credits, and housing and energy subsidies. EPI estimates that the government could save $78 billion dollars each year that supports the families of workers earning less than $12 an hour. This prediction also does not account for Medicaid or premium subsidies in healthcare exchanges.

Although it does seem contrary to basic economics, raising the minimum wage would not be overly burdensome on businesses and it would not affect unemployment to any significant extent. Raising the minimum wage is a unique opportunity to help families in poverty and save the government some of the money spent on assistance programs.

-Luke Reynolds

Sources:

https://www.bloomberg.com/view/articles/2015-05-27/finally-an-answer-to-the-old-minimum-wage-question

https://www.cbo.gov/publication/44995

http://www.cnbc.com/2016/07/21/adjusted-for-inflation-the-federal-minimum-wage-is-worth-less-than-50-years-ago.html

http://www.epi.org/publication/the-impact-of-raising-the-federal-minimum-wage-to-12-by-2020-on-workers-businesses-and-the-economy-testimony-before-the-u-s-house-committee-on-education-and-the-workforce-member-forum/

https://www.forbes.com/sites/timworstall/2015/03/16/we-are-seeing-the-effects-of-seattles-15-an-hour-minimum-wage/#63ad3c4c3a22

https://www.usnews.com/opinion/economic-intelligence/2014/02/14/why-raising-the-minimum-wage-doesnt-kill-jobs?int=opinion-rec

 

 

A shock to the Quarterback Market

In order to be successful in today’s NFL, a team must have a quarterback that the team can build itself around. However, an economic crisis has taken over the NFL. The demand for GOOD quarterbacks has gone through the roof, while the supply has remained the same. This simple economic principle can be demonstrated by the contracts that are being offered in the NFL, and also by the product that is being put on the field.

Last weekend at the NFL draft, three quarterbacks were taken in the first round, and ten were taken overall. Of the ten taken, perhaps the most controversial was Mitchell Trubisky, whom the Bears traded four picks away in order to take with the second overall pick. Why so many people found this move controversial was because Trubisky, who was one of the top-rated quarterbacks in the draft, had only started thirteen (!!) career games while in college. Trubisky’s lack of career starts, quite honestly, is not his fault though. He sat behind an upperclassman in college which is FINE, however, once he became starter his junior year, he immediately left to enter the NFL, which some coaches and scouts found unwise, as staying in college would have given him more time to develop. However, what some people seem to often forget is that while you’re playing college football you cannot make money (???). The opportunity cost of staying in college has gotten higher and higher in recent years, as there is just too much money to be left on the tables in the pros. In addition to the surpise drafting of Trubisky, this offseason the Bears made a huge splash in free agency by signing Mike Glennon to a four-year $45 million dollar contract––$15 million guaranteed. That is an astronomical amount of money for a guy who hasn’t started an NFL in the almost four years.

Trubisky is one of many examples of leaving college too early in order to go make money. Since there is no developmental league in the NFL, many different quarterbacks have endured the same situation, with Mark Sanchez being the most recent example. Additionally, Glennon is not the first unproven quarterback to be paid an absurd amount of money in the offseason (see Brock Osweiler). It is not the fault of these quarterbacks, however. The NFL’s product has diminished significantly in the past decade and a half, with so many teams that struggle to find a franchise quarterback being unable to put together more than one successful year at a time. Getting back to economics, this is exactly like having an economy that has endured a demand shock. With such a pass heavy style of play in today’s NFL, the demand for a good (emphasis on GOOD) quarterback has gone up, however the supply for a good quarterback has not changed. This has created a complete imbalance in the competitiveness of the NFL, and has led to a worse product on the field. It is so expensive to find a good quarterback, that NFL teams are overpaying greatly for their services, and kids that are in college see how much money they can make in the NFL and cannot give it up. Since the only substitute for a good quarterback is really an average to below-average quarterback, the market has had a hard time correcting itself.

The NFL must look at the quarterback market, and look at how it is affecting their product as a whole if they want to stay as America’s #1 sport. The quarterback market must see change, perhaps through a developmental league for players out of college so that they can work on their game without being thrown into the fire, much like the MLB, NHL, and recently the NBA have done. This is the only way in which the supply for good quarterbacks will be able to see change in the long run, and is something that could get the market for quarterbacks, and the market for the product that the NFL is delivering back to it optimizing quantity and price.

Puerto Rico Files

Puerto Rico’s filling for bankruptcy on Wednesday comes as the largest municipal bankruptcy in U.S history. Their $73 billion bond debt far exceeds Detroit’s, whose dept was approximately $10 billion in 2013. The filling is arguably long overdue, as Puerto Rico’s economy has been struggling for the past decade, the island of 3 million managed to accumulate dept that far exceeds their capability of paying back creditors.

Puerto Rico has been dealing with a struggling economy for about ten years. Among their 3 million inhabitants, 12% are unemployed. That is double the national average. A lack of investment due to increasing costs has led to huge government cutbacks. Things like schools, hospitals, and social-service programs have taken the biggest hit from these cutbacks. The only thing that kept the Puerto Rican economy above water was the U.S federal tax credit they received. This was given to incentivize the island to move out of an agricultural based economy to a more manufactured driven economy. Since the tax credit was halted in 2006, Puerto Rico has had serious difficulties creating jobs. Consequently, Puerto Rico’s failing economy prevented them from paying back long overdue debts to investors and Hedge-Fund creditors

Creditors of Puerto Rico have recently filed lawsuits in the hopes of getting back their investment. In 2014, Puerto Rico municipal bonds were selling at an all time low, this naturally enticed many creditors to buy them with the expectation that the Puerto Rican economy would turn itself around. According to the Wall Street Journal “for years, investors over-looked these fiscal and demographic problems because Puerto Rico’s bonds offered high yields and because they believed the island’s economy would eventually recover.” This comes as a huge loss and disappointment to creditors who had high hopes of getting back their investments when Gov. Ricardo Rossello had been elected. Gov. Rossello in his campaign pledged to repay the territory’s debt to Wall Street, but with the filing on Wednesday, it seems Rossello will not be able to fulfill his campaign promise (not like he’s the first).

Puerto Rico’s Title III Filing, (which they are calling it because they technically cannot legally call it a Chapter 9) resulted in an announcement from the oversight board stating that they would not consider paying creditors more than $800 million, way below the amount of debt they owe. Another option is austerity, but because Puerto Rico is a state of the U.S, citizens can just leave to avoid paying back dept. Therefore, it seems creditors may just have to live with their poor investment choices and take a loss. Puerto Rico on the other hand may be okay if the government decides to relinquish them of their debt. President Trump has voiced his disapproval of this approach along with many Republican Congressman. They argue that the federal government has been giving Puerto Rico subsidies for years and should no longer continue to do so. However, Puerto Rico says that if the government decides to cancel their debt, they may finally be given the fresh start they so direly need.

 

https://www.wsj.com/articles/puerto-rico-to-request-bankruptcy-protection-1493824050#_=_

http://www.economist.com/news/finance-and-economics/21721670-islands-debts-will-now-bring-protracted-legal-battle-puerto-rico-declares