“No Easy Answers” for Wyoming Economy

By Guest Writer, 6-23-09

In an interview with WyoFile, Federal Reserve Bank of Kansas City President Thomas Hoenig recommend Wyoming wean itself from a commodity diet.

Hoenig was in Sheridan earlier this month to give a speech titled: An Economy at Risk.

Although Hoenig was addressing the national economic recession, the title to his speech could not be more fitting for the perilous state of Wyoming’s immediate economic future.

Wyoming has watched as the $2.05/thousand cubic feet (and falling) natural gas price has reduced its 2009-2010 budget surplus from $900 million to $187 million (and dropping).

Wyoming gets 52 percent of its mineral tax revenue from the sale of natural gas. In April, Wyoming suffered its worst monthly job loss since 1987, although it still has one of the country’s lowest unemployment rates. Wyoming remains among the least economically diversified states in the nation. That needs to change, says Hoenig.

When it comes to a single-economy state like Wyoming, there are “no easy answers,” said Hoenig. The state faces tough choices, Hoenig said, particularly smoothing out the state’s earnings. “You are mineral driven,” Hoenig said.

“Wyoming has been working on economic diversity and I would encourage them to do more. But I’m not sure their infrastructure can handle any real change.”That “real change,” means moving away from commodities, even one with green appeal.

While Hoenig praised the development of wind power, “it’s still a commodity. You’ve got to build all those transmissions lines. You can’t store it.”Wyoming has been identified as one of the top wind producing states. Last year, the London-based energy company National Grid identified southern Wyoming as the primary source for wind energy to supply one of the biggest electricity sucks around: Arizona, southern Nevada, and southern California.Within ten years one county alone, Carbon County, could have up to 3,000 wind turbines.

Hoening urged the state to think carefully before using any state money to subsidize wind power. “Can (wind power) make a profit on its own? Could you get a better return from something else in the long term? Wyoming has to make a decision.” Such government intervention as wind-power subsidies “leads to distortion” and muddies the decision-making process, he said.

The American Recovery and Reinvestment Act of 2009 gave the Western Area Power Administration, which serves Wyoming, the authority to borrow up to $3.25 billion from the U.S. Treasury to support transmission lines for renewable fuels.If the state insists on using its own money for subsidizing wind power, Hoenig encouraged the use of sinking funds, which allow states to set aside money to retire indebtedness, as a way to finance bigger projects. He supported the idea of Wyoming’s permanent mineral trust funds and agreed that Norway is a good example of how to use mineral money to diversify the economy. Norway has $350 billion its mineral-funded government pension fund. Wyoming has $3.6 billion its permanent mineral trust fund. The Kansas City Federal Reserve has gained stature over the last 25 years as it oversees mineral-rich, Wyoming, Colorado, Oklahoma, and portions of northern New Mexico.

The primary job of the United States Federal Reserve, founded in 1913, is to control the nation’s money supply.
The Kansas City Federal Reserve, known as the Tenth District, oversees several branches, in including one in Denver. Each branch has its own board. Between Denver and Kansas City, Wyoming has three Federal Reserve board members: Mark Gordon and John Pearson of Buffalo and Charles Brown of Wheatland.

All three were present during the June 3rd speech in Sheridan.A quasi-independent, public-private body, the Kansas City Fed has carved out a niche for itself among the 12 Federal Reserve Banks by operating the influential Center for the Study of Rural America. The Kansas City Fed also sponsors the annual Jackson Hole symposium, a major Federal Reserve event that brings together bankers and economists from around the globe.

For Wyoming – and the rest of the nation – the real problem is: “how do you incentivize change?” “That’s the million dollar question, isn’t it?” asked Hoenig.

Recessions are often a good time to push change “because people are willing to take risks. We want to avoid a repeat of the 1970s where it took three or four years to tame inflation,” he said.Equipped with a PhD in economics from Iowa State, Hoenig is known for his blunt and pragmatic mid-western talk. For example, Hoenig said there’s a perception that Lehman Brothers and Bear Sterns failed, while the insurance giant AIG did not.

AIG received $170 billion in federal bailout money.

“AIG did, in fact, fail. The question now is how do you resolve it?”

In previous speeches, Hoenig has encouraged the U.S. to let big companies fail and go through the bankruptcy process like everyone else. The phrase “too big to fail” has never impressed Hoenig. Coddling firms and doting on them with bail out money year after year only exacerbates the problem. He has compared Japan’s bailout of banks (incremental, slow and cautious) with Sweden’s aggressive approach to solving their 1992 banking crisis.Hoenig prefers the Swedish model, but the U.S. is “more like Japan right now,” he said.

Adding a twist to John Maynard Keynes’s famous warning about focusing on the long-term (“in long-term we’re all dead,”) Hoenig said, “Yes, and our children will be there to pick up the pieces.”

This story originally appeared on WyoFile.