Regional Federal Reserve Bank President Sees W.Va. Economic Growth

The region’s Federal Reserve Bank president is touring West Virginia to learn about and comment on the economic progress and challenges facing the state.

The region’s Federal Reserve Bank president is touring West Virginia to learn about and comment on the economic progress and challenges facing the state.

Federal Reserve Bank of Richmond President Tom Barkin’s region covers Washington, D.C. and five states, including most of West Virginia. He also serves on the Fed’s chief monetary policy board.

Barkin began his West Virginia visit in Huntington. He spent his first day talking with business owners large and small, as well as people across the economic spectrum. His second day of the Huntington tour began with a question and answer session with the Huntington Chamber of Commerce.

Barkin said the Fed’s decision to continue to raise interest rates in an effort to lower demand thus lowering prices was the best way to bring inflation back to a manageable level. He compared the nation’s economic recovery after a global pandemic to recovering after a world war.

“When a war ends, it’s really hard for an economy to return back to normal,” Barkin said. ”There’s often a fiscal hangover, soldiers need retraining, plants need to restart and supply chains are fragile. And amidst all this adjustment, if you win the war, your consumers spend euphorically. And so as a result, at the end of a war, typically inflation spikes.”

Barkin said he sees more economic growth in the state than in the past few years. He said there is a national competition among small towns like Huntington and Charleston, in terms of attracting people and workers. He said developing broadband and creating housing for expected workers at new businesses like the NUCOR plant are two of several competitive economic advancement elements.

“As the cost of construction goes up, and as people attract workers, this question of building and making available enough housing for workers becomes a very big issue in this competition among cities,” Barkin said.

He said when you take the neighboring states’ large, metropolitan cities out of the equation, West Virginia’s lagging labor force participation numbers more closely align with the region. He said getting more eligible workers back to work here includes creating more stable and better paying jobs while improving education across the board.

“A good example would be disability,” Barkin said. “Disabilities actually came down into and through COVID-19. ”If you’re on disability, one of the trade-offs you make when you return to the workforce is the compensation and health benefits you’re going to get in your job over time, versus a package that might be less money but bridges you through to Medicare and Medicaid.”

Barkin said supply chain issues are on a slow road to a complicated fix. He said before the pandemic, companies built their supply chains for efficiency, not resiliency.

“I was with an auto manufacturer in South Carolina,” Barkin said. “It turns out that they make their drive trains in Germany, then ship them to South Carolina, then assemble their cars and they ship the car to China. That may have been efficient because of whatever economies of scale here and in Germany, but in the world that we’re living in today, do you feel like that’s how you design an automotive supply chain? I don’t think so.”

Barkin will continue his economic fact-finding and discussion tour in Charleson, and then visit other towns and cities throughout West Virginia.

Provision In Manchin's Bill Could Bring Clean Energy Jobs To State

The bill sets aside $4 billion exclusively for coal communities — those that previously had mining or power plant activity.

U.S. Sen. Joe Manchin held a roundtable in Charleston Friday to talk about the Inflation Reduction Act.

The sweeping energy and climate policy bill, which Manchin helped craft with congressional Democrats, expands the 48(c) tax credit for clean energy manufacturing.

It sets aside $4 billion exclusively for coal communities — those that previously had mining or power plant activity.

President Joe Biden signed the legislation on Tuesday, with Manchin present.

Brandon Dennison, founder and CEO of Coalfield Development, said the provision could bring new investment and jobs to southern West Virginia.

“I’ve had more interest from the private sector, manufacturing sector, in the past year, with an eye toward this passing, than I did in the previous 11,” he said.

As an example, Dennison said, Solar Holler would be able to double the size of its business.

WVU Professor Breaks Down Historic Inflation

Whether it's at the gas pump or at the grocery store, West Virginians have been feeling the pinch of recent record inflation. But understanding why things cost more in a modern, globalized world can get tricky very quickly.

Whether it’s at the gas pump or at the grocery store, West Virginians have been feeling the pinch of recent record inflation. But understanding why things cost more in a modern, globalized world can get tricky very quickly. Reporter Chris Schulz sat down with West Virginia University associate professor of economics Scott Schuh to better understand higher prices, and how they might come down again.

Schulz: Can you start us off by just telling us what exactly inflation is?

Schuh: Sure, it’s a general rate of increase of the average price level in the entire macro economy. So it takes into account prices of all final goods, goods that go to consumers. We look at the average price level for the whole economy, and we then calculate the growth rate of that average price level, taking into account all goods and services. And that rate of growth of that price level is inflation. Because the price indices jump around month to month, we typically look at the rate of growth over 12 months. So when they say it’s 9% inflation, it’s roughly a 9% increase in goods and services prices over the past 12 months.

Schulz: That kind of leads me into my next question, which is why is inflation so high right now.

Schuh: So there are two schools of thought. One is that inflation is always, everywhere, a monetary phenomenon, meaning that when the rate of growth of money increases, the rate of growth of price of prices increases about the same. A second hypothesis about inflation is that it’s related to the degree of utilization of resources in the economy. So for example, how close are we to full employment? How close are we to the potential output level in the economy?

What’s interesting about our recent episode, however, is that we’ve seen an unusually large rate of growth of money in a very short period of time. From 2020 to 2022, the stock of money grew about 40%. That is off the charts high. To people who favor the monetary hypothesis for inflation, they point directly to that and say, ‘Yeah, maybe 5%, or 7%, or 9%, growth of money wouldn’t have caused high inflation, but 40% is going to always and it’s not going to take very long for that to happen.’ In my opinion I think the evidence is a little bit stronger right now that it’s the monetary growth that’s causing the inflation.

That said there are also complications going on at the same time about things that people call the supply chain. That whole process of production has different prices along the way. And so while we don’t think of those as inflation, they can, if that supply chain gets out of whack, which it seems to be in many places, that can cause the relative prices of different stages of production to go up or down. And right now we’re seeing the pass through of that to final goods inflation as well. So that’s a complicating factor. And it’s very hard to pinpoint exactly how much is monetary, how much is that supply chain.

Schulz: I think the question that everybody who might be listening to this is going to have is how does COVID factor into this?

Schuh: Well, COVID was by far the largest decline in output and the shortest period of decline in output that we’ve seen, perhaps ever, but certainly in the modern post World War Two era, even more so than during the financial crisis. But it rebounded basically within two quarters, which is an unheard of rate of return to high levels of growth. The health crisis caused us to have to reduce production and people just couldn’t go back to work. Well, that’s an issue that we think of in macroeconomics as one of potential output. Normally, potential output is fixed there, and it stays steady for a long period of time. It doesn’t fluctuate.

Unfortunately, in my opinion, monetary and fiscal policy treated this as if it was a demand shock. And they said, ‘Well, outputs are going down so incomes are going down. So we should give people more income and wealth.’ So there were a lot of fiscal transfers, there was monetary stimulus to reduce the interest rate. And what that caused people to do is want to buy more. That’s normally what happens with monetary and fiscal policy when it tries to combat a recession. The problem in this case is we couldn’t produce more. So everything sort of fell apart at once. But the real problem was people had plenty of income and wealth from the stimulus, but they couldn’t buy or get the goods that they wanted. And so we had, as usual, too much money chasing too few goods, and that causes inflation.

Schulz: The big question is, and this is what you and your colleagues have been looking at, is how this is going to impact different people differently. What have you seen in your, in your research, and in your study, about the different impact of this situation?

Schuh: Yeah, the classic mechanism by which inflation affects the economy is on the side of households and consumers. It affects people who have a lot of money, not people who are wealthy or rich, but people who hold a lot of their assets in what we call money like cash, checking accounts, even savings accounts. The number one thing inflation does is it causes interest rates to rise. You need to keep up with inflation otherwise the real value of that money is going to decline. Their balances are going to devalue in real terms because the price level is going up. What they have in their bank account won’t buy as much tomorrow. So this is called the inflation tax on money and it’s very hard for many people, particularly lower income people and people who don’t have skills or the taste for investing in more risky assets. They lose value during inflation, and that’s a big hit on their wealth. At the same time, inflation tends to hit certain types of prices like food and energy, as it’s doing now, that are essential items that people can’t substitute away from. So when those prices go up, that hits directly into people’s budgets, they can’t shift to something else as easily. And so people with lower incomes and lower wealth are going to be disproportionately harmed by the inflation because it hits what we call inelastic goods that they have to buy, and that they have to swallow the price increases. So it’s a big hardship on them.

Schulz: Does that disproportionate impact also carry over into the business sector? For smaller businesses, say?

Schuh: Well, certainly for businesses that maybe say are sole proprietorships, or home businesses or smaller things, they actually have a lot of characteristics that are similar to the typical household. But by and large, business firms don’t have that problem, in part because they manage their assets better, they have people on staff that can do that. So they’re more inclined to be invested in things that would earn a higher return than cash, they would not hold on to cash in an inflationary environment.

What really hurts the businesses with regards to inflation is the difficulty with understanding whether the overall rate of inflation is directly related to their business. So they have to determine, ‘Is my price going up because of inflation? Or is price going up because the relative demand for my product is going up?’ And if they can’t discern that correctly, they may expand output too much, and then crash more later.

One last thing is because of the supply chain, the issues coming overseas, they have to be able to forecast ‘How much are my inputs going to increase? How much can I reasonably commit to produce in light of that uncertainty? How long will the product get here?’ That that sense of uncertainty, which is caused particularly by the supply chain oriented contributions to inflation, are very difficult for firms of all types to manage.

Schulz: This level of inflation that we’re currently seeing, 9%, how does that end? When does it end?

Schuh: Well, most of the time, inflation ends through one of two things, or both. One is a contraction of the monetary money supply. That’s beginning, the Federal Reserve is starting to raise interest rates. The way they’re going to do that is by reducing the amount of money supplied to the economy. The Fed contracting the money supply has virtually always ended in lower inflation. The history of the Fed has been that it typically raises rates too late and often a little too much so that there ends up being a recession.

The second force that brings down inflation is a contraction in output. This is both the monetary and the utilization theories of inflation playing together and building one off the other. As the money supply contracts, interest rates go up. But then because interest rates are higher, people start buying fewer cars, fewer homes, and they start worrying. And then we have a recession, and then demand declines below potential output. And then we have additional downward pressure on prices. So it’s a monetary contraction, followed by a decline in output, usually a recession, that will bring inflation down.

Schulz: Nobody wants a recession, I don’t think. These cycles seem so extreme. In my lifetime, we’ve seen the Great Recession, and now this. It seems like the periods between these cycles are getting shorter and shorter. Is there something that can be done through policy, or more broadly, to kind of normalize things a little bit more?

Schuh: That’s interesting, because from a macro economist’s perspective, there’s almost universal agreement that recessions have become much less frequent in the last 40 years. The average duration of an expansion has been increasing over time. Some of that credit probably goes to better monetary policy, for sure. There are other things in the economy that I think have adjusted like, for example, the ability to manage the supply chain and to reduce large buildups of excess inventory. That’s been a real private sector development that has helped reduce the amount of business cycle fluctuations.

But what sticks in most people’s minds is the last two have been ginormous. One was a financial crisis, which by the way started back in 2007, or eight, and was over by 2010. So it’s now over a decade old. And there was a very, very long period of economic growth and expansion with no recessions. And then we’ve had this pandemic, which was unusual in so many different regards, because it wasn’t really economic, in a sense, it was health oriented and as we talked about was faster and deeper than usual. So we actually see fewer recessions. But the last two have been so big that they stick in our minds as being really bad recessions. And they are, but they’re very uniquely different. So there’s not a one size fits all forecast for what to do, what’s going to happen, what to do about it. They’re each both very different.

Schulz: Is there anything else that we need to know about this?

Schuh: One thing that’s really important is to make sure you keep abreast of what’s actually happening, keeping an eye on that inflation rate and trying to manage your financial resources around that. For example, the Treasury Department recently launched a new type of bond that is ideal for households. It’s a savings bond, similar to what other people have used, but it pays interest based on the rate of inflation. So that might be something that people might want to check out and see to help guard against the issues of the inflation tax that we talked about before. Anytime we’re on the border of a recession, there’s a concern that the probability of becoming unemployed is rising. Bearing in mind as you plan your expenditures, and your savings and your investments, that that’s a possibility. It may lead some people to maybe increase the amount that they save during this period of time in case they become unemployed for a season.

Inflation Makes State’s Highway Construction More Expensive

Secretary for the West Virginia Department of Transportation, Jimmy Wriston, told the Joint Committee on Government and Finance that inflation is making highway construction more expensive in the Mountain State.

At an interim meeting of the Joint Committee on Government and Finance on July 26, West Virginia Department of Transportation Secretary Jimmy Wriston said the department’s contracts for current projects have clauses to adjust for rising inflation. While it relieves some of the added costs for contractors, it raises the project fee for the department.

“If all of our projects today were completed, and I had to calculate that asphalt and fuel adjustment and pay that today, it would exceed 14 million dollars,” said Wriston.

Supply chain shortages are also making it harder for the department to buy equipment and vehicles.

“The Division of Highways runs on its trucks,” Wriston said. “That’s a particular concern to us.”

Wriston suggested the state should develop a policy for upcoming projects under the Infrastructure Investment and Jobs Act to include clauses that compensate contractors to offset added expenses.

“We’re always anxious to be told what we can do to lower barriers to activation on things,” Speaker of the House Roger Hanshaw, R-Clay, said. “So if you’re trying to adjust or make mid-course corrections on anything that we can do to be helpful on, we’d certainly appreciate knowing that.”

Hospitals Ask For Help With Rising Costs

The West Virginia Hospital Association is urging state and federal policymakers to help hospitals by increasing the amount of money provided to patients through government insurance programs.

As health care prices continue to rise, hospitals are feeling the squeeze.

The West Virginia Hospital Association is urging state and federal policymakers to help hospitals by increasing the amount of money provided to patients through government insurance programs.

Association President and CEO Jim Kaufman argued recently that West Virginia hospitals are at a disadvantage. He claimed 75 percent, or 3 out of 4 patients, receive their health insurance through government programs – Medicare, Medicaid, and the Public Employees Insurance Agency (PEIA).

Based on enrollment numbers from PEIA, the Centers for Medicare and Medicaid Services and data released by the West Virginia Center for Budget and Policy, that number may be closer to 61 percent.

West Virginia Public Broadcasting (WVPB) found that as of March 2022, 75,292 West Virginians are enrolled in PEIA and 442,545 in Medicare. As of July 2021, 584,000 West Virginians received Medicaid. This, however, does not account for the state’s uninsured population.

Kaufman said each of these programs pay hospitals less than the cost of care and these payment rates are non-negotiable since they are set by the government.

A report from the American Hospital Association (AHA) in April highlighted necessary hospital expenses have seen an increase from 2019 to 2021. Labor – which accounts for as much as 50 percent of a hospital’s expenses – have increased 19 percent, while drug expenses are up 37 percent.

In an email to WVPB, the West Virginia Department of Health and Human Resources – which manages the state’s Medicaid program – said the organization partners directly with the hospital association to ensure rates are appropriate.

Separately, the West Virginia Department of Administration – which manages PEIA – said via email they have increased reimbursements over the past two years, as well as pay 20 percent more for inpatient COVID cases. However, the email did state that reimbursements for inpatient hospital stays have not increased.

Appalachia Health News is a project of West Virginia Public Broadcasting with support from Charleston Area Medical Center and Marshall Health.

Skyrocketing Building Costs Affecting W.Va. School Construction Projects

In April of last year, seven West Virginia counties (Mercer, Jefferson, Roane, Greenbrier, Mineral, Ohio and Summers) divided up $75 million in state funding to either replace, renovate or relocate outdated school buildings.

Inflated building costs are causing school construction projects across West Virginia to go back to the drawing board.

In April of last year, seven West Virginia counties (Mercer, Jefferson, Roane, Greenbrier, Mineral, Ohio and Summers) divided up $75 million in state funding to either replace, renovate or relocate outdated school buildings.

But with rising construction costs, the state School Building Authority (SBA) estimates a 25 percent increase to fund those projects, maybe more.

SBA Director of Special Projects Sue Chapman said the authority is working to refinance bonds and get an additional $29.5 million to supplement project costs.

She said each school district will also have to pare down on their original construction plans.

“Each of those counties are going to have to go back and look at their projects,” Chapman said. “And take those projects down to the minimum of what the school building authority may require in their policies for construction.”

Chapman said the state’s debt payment on the bond refinancing will come from excess lottery funds.

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