For Robert Kaplan, president and CEO of the Federal Reserve Bank of Dallas, the biggest headwinds for U.S. growth are the country’s aging population and the slow increase in the size of the nation’s workforce.
Economics borrowed the word headwind from aviation, where it means that wind coming from directly in front of an airplane slows the speed of the plane. A tailwind means the opposite.
He was speaking at the North Texas Community Foundation’s May 15 program titled “Community Matters: Economic Trends and Implications for North Texas.” Marianne Auld, foundation treasurer and managing partner of Kelly Hart, moderated the program.
Brandom Gengelbach, executive vice president for economic development for the Fort Worth Chamber of Commerce, spoke on the chamber’s efforts and needs locally.
Gross domestic product growth – the sum of the market values of all goods and services in an economy over a period of time – last year was about 3%, Kaplan said.
“We think at the Dallas Fed the growth this year will be in the neighborhood of 2.25%, maybe 2.5%” he said. “Growth will be slower this year. How much slower, I'm not sure.”
The growth last year can be traced to the massive fiscal stimulus launched in the fall of 2017, which had three parts. One was a big spending bill, which he said isn't talked about as much.
“That alone we think added a half a percentage point to GDP growth. Not just last year, but probably this year. And that will sunset,” he said.
There was an individual tax cut that “we think was basically financed with increasing national debt, which we thought when it was passed would cause a short-term bump and then it would wane,” he said.
The third part was corporate tax reform.
The Dallas Fed thinks that should have a longer term and some sustainable impact, causing companies to be more likely to domicile here, hire people here and spend on capital expense.
But, Kaplan said, the stimulus that caused the bump is beginning to wane and will wane through the end of 2019 into 2020 toward around 2% GDP growth.
Look at the audience, Kaplan said that’s lower growth than people in the room have seen in their lifetimes for several reasons, including population aging and the slowing of workforce growth.
“GDP growth is made up of growth in the workforce, plus growth in productivity, and growth in the workforce is going to be sluggish,” he said. “Every developed country in the world by and large has the same problem.”
It is especially serious in China, Kaplan said, because China has an aging issue and a workforce growth issue because of the nation’s former one-child policy.
EDUCATION AN ISSUE
One issue, he said, is that productivity growth isn't offsetting the slowdown and the growth of the workforce because the United States now lags the world in terms of math, science and reading.
“We used to be a leader. We're now 25th out of 35 industrialized nations and oh, by the way, Texas lags the country. We lag the United States, the United States lags the world, and that means we've got a less adaptable workforce,” Kaplan said.
There are several possible solutions, he said.
“We need to invest more in math, science and reading, but particularly get kids, particularly at-risk kids in ages zero to 5. They've expanded pre-K I see, and Fort Worth has universal pre-K. More investment in early childhood literacy I think would help,” he said.
The second thing is more investment in skills training.
“There's a big skills gap in the United States of over a million jobs where we can't find skilled workers,” Kaplan said. “Every one of those jobs that goes unfilled is also lower GDP. If we invested more in our human capital, my own view is, and our view at the Dallas Fed is, we would grow faster.”
China, he said, is making a big investment in infrastructure and a big investment in improving its human capital.
A lot of the solutions to the problems are going to have to be done at the local and state level, he said.
“I think the odds that Texas is going to do it now are very high. We've been part of this debate in Austin,” Kaplan said. “We've said to the governor, elected officials all across the state, the biggest return on equity investment that you could make is investment in education and if you had to pick one spot to really focus it, early childhood.”
For the country, that also in true along with increasing skills training.
“I think Texas is doing a pretty good job here in Fort Worth and Dallas, in El Paso, in Houston, but the United States is very uneven and we need to beef up skills training nationally,” he said.
“We've got the money. A lot of it doesn't need to be … paid for by the government. It can be paid for by businesses who are happy to help fund it, but you need partnerships to do that,” Kaplan said. “We try to convene those partnerships at the Dallas Fed statewide and in New Mexico and Louisiana to help make that happen.”
Training can address the workforce skills issue, but it won’t change the aging issue. Immigration reform might help, he said.
That, he said, is a sensitive issue so he and others at the Dallas Fed are careful about what they say.
What his organization’s research indicates is that the United States would be well served to make the immigration system more skill-based and employer-based.
“Canada does this to great extent,” Kaplan said. “Go around and interview businesses in the country, and then backward integrate into your criteria, and take workers that fit the demands of our businesses around the country. More skill-based and employer-based. We think that would be sensible restructuring.”
That’s similar to a Trump Administration recent proposal to give weighted consideration to skills needed in the United States.
What doesn’t work are calls to cut immigration in half, Kaplan said.
“We're saying you could do that, but to say you're going to grow GDP and you're going to cut immigration, those two things don't go together,” Kaplan said. “Immigrants and their children have made up over half the workforce growth in this country over the last 20 years. We think their percentage will be higher. Every person you cut in terms of immigration just means slower workforce growth, means slower GDP growth.”
The estimate is that federal government debt held by the public is 77% of GDP and the present value of unfunded entitlements is now up to $59 trillion, Kaplan said.
“I try to talk about this in every speech I give. It doesn't seem like it's a problem,” he said. “One of the reasons right now is because the dollar is the world's reserve currency.”
Companies, individuals, central banks around the world overweight to the dollar, he said, using a financial term used to indicate the worth of an investment.
“If there's a crisis in the world, people want to be in the dollar. It allows us to finance this debt at relatively historically low rates,” Kaplan said. “My concern is we can't … assume it will always be the world reserve currency.”
If it is not, the cost of borrowing goes up.
“We would pay more for our debt, and we've got $20 trillion before we get to entitlements. So, if we paid 100 basis points more, that's $200 billion a year,” he said. “We need to talk about it. One way to be less leveraged is grow faster.
“This is why the immigration discussion is a lot more interesting discussion if you add to the fact about immigration that it's key to GDP growth and we're very highly leveraged,” Kaplan said. “Then all of a sudden you might be willing to make different decisions to grow the workforce.”
Entitlement reform, while it's a sensitive subject politically, also needs to be considered, he said.
“But we need to find ways to moderate our debt growth. Either by growing faster and/or doing entitlement reforms. Our guess is we're going to have to do both,” Kaplan said. “This is why I talk about education, infrastructure spending, immigration. Even though they're all touchy issues, we need to do them to grow faster.”
On the Texas economy
Texas is coming off a very strong economy in 2018, attracting more business and corporate locations and expansions than any other state by a wide margin. Oil and gas are doing well.
But past success doesn't necessarily equate to future success. What’s the outlook for the Texas economy?
Robert Kaplan, president and CEO of the Federal Reserve Bank of Dallas, notes the biggest challenges to the economy nationwide are the aging population and slow growth in the workforce.
“Texas is bucking that trend because of migration to the state,” Kaplan said. “We're one of the leading states in this country in migration of people and firms to the state.”
He said the story of Texas over the last 20 years is that it has grown population faster than the rest of the country and it has diversified the state.
“We think the prospects for the energy business, by the way, and for price of oil are very positive … because we think we're about in global supply and balance, and we don't think shale, as prolific as it is, will not be sufficient to keep up with global growth,” Kaplan said. “The dynamics of that business are excellent.”
Texas is outperforming the country and will continue to do so, he said. Job growth in Texas was about 2% and add a percent for productivity growth, he said.
“There's no reliable numbers on this. Probably we out-grew the United States probably by half a percent or a percent last year, and we think we'll continue to probably view that. It's good for Texas, but the reason we're able to grow this fast is we're taking population from the other states in the country,” he said.
“I can go state by state in this country. Population growth is either flat to down in a significant number of states,” Kaplan said.
“We've got the income growth. We've got the most valuable thing a state can have, which is population growth, and cities like Dallas and Fort Worth and Houston and Austin are among the fastest growing cities in the United States,” he said.
“I'm optimistic about the future of Texas. It doesn't mean we'll choose to allocate resources on these critical priorities, but we've got the money to do it, and I believe if we focus enough on it, which we are, we will make these decisions. I'm more worried about the country,” Kaplan said.
– Paul K. Harral
On Fort Worth
Fort Worth is in an amazing environment with population growth, low unemployment rates, development all around the Metroplex and a strong oil and gas industry, and thing are moving in a positive direction, said Brandom Gengelbach, executive vice president for economic development at the Fort Worth Chamber of Commerce.
But, he said, he wanted to note some of the underlying factors that do not get much attention.
He mentioned three areas of concern:
– Jobs: 70% of all jobs in the DFW Metroplex are on the Dallas side; 30% of the jobs are on the Fort Worth side.
¬– Property Tax revenue: In Fort Worth, 60% of tax revenue to the city comes from residential and only 40% comes from the commercial sector.
– Education: Just 30% of the population has a four-year college degree or above, below the national average, and certainly below Fort Worth’s peer cities.
“[There are] some challenging issues when you dig down deep and we're feeling it on the business side of things,” Gengelbach said.
He mentioned the loss of influential corporate headquarters through outright moves, business difficulties and mergers and acquisitions.
That’s different from the early 1990s when the Department of Defense cancelled the Navy’s carrier-based attack aircraft A-12 program (cancelled in 1991), General Dynamics laid off 10,000 people and Fort Worth almost immediately faced the closing of Carswell Air Force Base (deactivated in 1993).
“It was a stressful time in Fort Worth's history and we came together as a community. We came together as a public sector, as a nonprofit and foundation sector, and we came together in the private side of things to be able to develop some solutions and work together to generate enormous economic prosperity in Fort Worth during the 90s, during the 2000s,” he said.
Much of that effort was led by corporate headquarters that were located in the city but are no longer based here.
“However, there is the ability for us as a community to band together to create the type of local economic prosperity that we have to have here in Fort Worth,” Gengelbach said, to combat some of the issues that are negatively impacting the Fort Worth area
“So how do we do that? We do that by leveraging our assets and telling her story. The good news is we can come together and we have an amazing story to tell,” he said.
The city has great assets – four Berkshire Hathaway companies, airports, logistics and other amazing assets, but the problem is that people elsewhere do not know that.
“The city did a study that showed [that] the average person ranked Fort Worth the 45th largest city in the country. We're the 15th largest,” Gengelbach said. “I took my kids to California with my wife on a whale-watching tour and the captain said hey, where are you guys from? We said, we're from Fort Worth. And he said, I love Florida. Really, I'm not joking.”
The solution is for the community to band together to share the story of Fort Worth to the people who can make the decision about relocations and startups that can provide the growth needed to sustain the city.
He listed five takeaways:
– Recognize that while residents are happy to be here, there are some underlying issues that are causing some serious economic concerns in Fort Worth.
– While Fort Worth is doing good things on the early childhood front and in education, those investments will not have the return necessary without a business sector that is thriving and doing well locally.
– While 100% of the businesses in Fort Worth talk about workforce as their No. 1 issue, only 37% of those businesses actually have a relationship with a high school or a post-secondary institution. Businesses need to communicate with those institutions.
– In development is a toolkit in cooperation with the North Texas Community Foundation and other foundations, to help businesses with efficiency and retention and to help employers to be an attractive place, including for employees with children and single mothers and fathers.
– Come and help the chamber.
“We need your knowledge. We need your insights. Who do I need to be talking to and telling the Fort Worth story to? What business leader, what industry do I need to visit? What part of the country do I need to go? How can you help us recruit talent, and recruit new business to the area? We need your counsel and advice,” Gengelbach said.
“I promise you if we come together as a community like we did in '89, public, private, and the nonprofit foundation side, we will create a level of economic prosperity that we have not seen before. So let's do it,” he said.
– Paul K. Harral