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Exploding Government Dependency in Bristol Virginia

by Lewis Loflin

Summary: the huge loses in manufacturing and mining jobs can't be replaced by service and retail jobs to maintain a decent standard of living. While job growth increases on paper household income is falling and being made up by government transfer payments and government employment. This accounts for 50% of household income across the Tri-Cities region. Transfer payments fill the financial void created by a failing private sector job market.

A King University study suggests that manufacturing can rebuild Southwest Virginia. The study also looked at tourism. Here I'll concentrate on transfer payments as related to an income source.

First, my opinion having been in electronics and computer automation for over 30 years. Very few manufacturing jobs will be created even if a lot of manufacturing moves back from overseas. In articles in the Wall Street Journal and the New York Times show that most of these jobs will be going to automation and robots. Manufacturing won't be bailing out the Tri-Cities economy.

Ref. KIRES Report No. 12, "Replacing Coal Mining Jobs: Marginal Economic Impacts of Selected Industries in Southwest Virginia. http://kires.king.edu

The Government will continue to be the economy for Appalachia. The report notes that from the second quarter of 2014 to February 2015, 1400 coal mining jobs have been lost in just Southwest Virginia. Future projections for the mining industry "are not encouraging."

The additional losses in associated service sector jobs comes out to 3240 jobs and $215 million in income.

The study looks at "what is the economic impact of the gain or loss of 100 jobs in a particular industry?" The loss of a single coal mining job cost the region's economy $154,397. The creation of 1.51 jobs in "machinery manufacturing" will offset one coal mining job while it takes 5.71 jobs in restaurants to replace a single coal mining job. Or put another way around 4 burger flipper jobs are needed to replace a good manufacturing job.

Tourism is sold as a way of "diversifying" the Southwest Virginia economy and tens of millions in government grants have been spent to develop tourism. The results have been dismal. Retail stores, for example, have a multiplier of 0.142, so $1 million in retail sales raises household earnings of $142,000, less than a single mining job.

On average across five sectors associated with tourism is a multiplier of 0.3846 or $385,000 for every $1 million spent. That's about the same as 3 mining jobs or 4 manufacturing jobs. It isn't just the loss of mining jobs that are killing the region's economy. Bristol Virginia and Washington County lost 350 manufacturing jobs in May 2016 alone.

One problem I've found is the numbers on tourism spending are inflated. When I visit my brother 50 miles away in Wise County and buy gasoline for my car is that counted as tourism or local consumption? In particular, with retail is somebody visiting the area for personal or business reasons counted as a tourist? I've asked the question of tourism developers and they have no answer, but their ability to collect more grants depends on answering yes.

The Bristol Herald Courier on June 23, 2016, notes a 19.5% increase in Bristol retail sales in the First Quarter 2016 to $301 million. In fact, Bristol Virginia-Tennessee has had plenty of retail growth, but continuing losses in manufacturing and other better-paying jobs. 19.5 percent of $301 million is $58.7 million. These new jobs are nearly 100% retail and food service jobs.

These would be typical "tourism" type jobs so that multiplier for retail stores of 0.142 times $58.7 million comes out to $8.3 million - the May job losses at two businesses wiped out all the retail sales gains by a factor of 3! The total real income gain for Bristol retail for the whole quarter was $301 million times 0.142 equals $42.7 million.

The following references KIRES PAPER NO. 7, February 2013. To quote, "The earnings multiplier per job column in Table 1 may be used to estimate the number of new jobs needed in other industries of the economy to offset the loss in total earnings resulting from the elimination of one coal mining industry job. For example, it takes 4.7 new jobs in the retail industry to offset the loss of one coal mining job (found as 127,595 divided by 27,280)."

The chart shows wood product manufacturing returns $77,490. The losses in jobs May 2016 included metal products (Bristol Compressors, Ball Corp.) which pay better than wood products usually do. Using $77,490 as a baseline it takes 4.4 food service jobs or 2.84 retail, call center, or nursing home jobs to replace a single manufacturing job. The loss of those 350 manufacturing jobs in May 2016 cost the Southwest Virginia economy $27.1 million that hasn't had time to ripple through the economy yet.

This doesn't include 89 layoffs at Kennametal in Smyth County (Chilhowie) announced May 31, 2016 and the closing of Aurora Casket Plant in Piney Flats (Bristol TN) June 22, 2016 costing another 100 manufacturing jobs. Related to the coal industry downturn was the loss of 300 jobs at the CSX train yards in Erwin, TN October 2015.

It's easy to see that in real income the loss of another 350 manufacturing jobs more than wiped out any income gains in retail and services for an entire quarter in a single month. The question becomes, how do we have so much loss of jobs and income, or should I say earned income, but have explosive growth in retail?

A King University study dated March 15, 2016 supplies much of the answer. To quote,

"over the past several decades there's been a pronounced shift in the composition of personal income ... in the regional economy ... a half-century ago, earned income accounted for 70 to 80% of total personal income. By 2014, the share of total personal income attributable to earned income had fallen to 57% in the Tri-Cities and 50% in Southwest Virginia."

Also, "accompanying this decline in earned income share was steady growth in the share of total personal income attributable to government transfer payments."

Residents of the Tri-Cities received $5 billion in government handouts in 2014 accounting for 28% of the Tri-Cities personal income of $18 billion. 80% of those transfer payments was Social Security benefits and various forms of Medicaid and Medicare.

Southwest Virginia is even worse receiving $2 billion in government transfer payments accounting for 36% of the region's total personal income of $5.5 billion.

From 2000 to 2014 this was an increase of 23% in Tri-Cities. This explosive growth was led by staggering 77% gain in health care spending and 66% in Social Security benefits.

Let's contrast Southwest Virginia and the steep decline in actual earned income for years. Real earned income fell 17% from 2011-2014 alone. Southwest Virginia residents received a staggering $.72 in government handouts for every dollar of earned income in 2014.

The report further states, "We have a particular interest in examining the economic impact of Social Security benefits because they are a dependable and predictable source of income for the local economy. Social Security benefits are not measurably affected by the business cycle, and because benefits are indexed to inflation, they have a stabilizing effect on income in inflationary periods."

In other words, welfare and transfer payments are a steady source of income while the private sector continues to be hammered by globalization, mass immigration, automation, etc.

The number of residents outright living on government handouts is staggering in the Tri-Cities Metro area as of December 2014. 141,120 residents were receiving Social Security payments. This includes 83,715 retired workers.

In Southwest Virginia's coalfield region the number was 56,740 as of December 2014, which includes 23,410 retired workers and 17,250 disabled workers. Total benefits paid to these workers was $761 million in 2014. Disability has become an escape from the dismal jobs market for marginal workers.

The report's authors claim that these huge government transfer payments generate 14,248 full and part-time jobs and Tri-Cities and 3784 full and part-time jobs in Southwest Virginia. As one can guess the vast majority of that is going to be low-end retail, restaurant, and service jobs. That's as far as their direct spending goes.

The huge spending on medical services such as Medicare and Medicaid along with the Veteran's Hospital in Johnson City account for our massive hospital and doctor industry in the area - and large numbers of nursing homes. I'm not sure if the numbers above included employment in these medical related industries.

The report concludes these jobs generated $535.3 million in labor income for Tri-Cities and $136.5 million in Southwest Virginia.

Separate issue not stated in these reports is the large degree of home ownership in the region. Particularly for those that are retired or older almost 50% outright own their homes with no outstanding mortgages.

Up to one-third of the remaining homes have high levels of home equity. So not only do large numbers of people have a reliable income from government transfer payments, they also have additional disposable income that isn't going into mortgage payments. Add in the additional savings over the last year or two due to low energy prices and artificially low-interest rates. It's easy to see why the Bristol region has an explosive growth in retail despite massive drops in real earned income and continuing losses of good jobs.

We are trading in self-sufficiency for government dependency. We are eroding the middle class and exploding the lower class that often breeds a myriad of other social problems that are rapidly growing in the region. Southwest Virginia and Tri-Cities to their credit hasn't developed the culture of violent crime inner cities have. The population here is about 90 percent white.

The reports define Southwest Virginia as the coalfield counties of Buchanan, Dickenson, Lee, Russell, Tazewell, Scott, and Wise. This also includes the cities of Norton and Bristol VA and the counties of Smyth and Washington.

Government transfer payments are payments made by governments to individuals for which no current production of goods or services is performed. Nationally and locally, the major components of government transfer payments are Social Security benefits and medical payments, primarily payments made through intermediaries/vendors for care provided to individuals under the Medicare and Medicaid programs. Transfer payments also include income maintenance programs, such as the Supplemental Nutrition Assistance Program (SNAP), the Earned Income Tax Credit (EITC) and Supplemental Security Income (SSI). Other important transfer programs are Unemployment Insurance Payments and Veterans Benefits. A detailed list of government transfer payments, including U.S. payment levels and explanatory notes, may be accessed electronically at

united-states.reaproject.org

Sullivan County 7th in Tourism in Tennessee. Of the 95 Tennesee counties Sullivan is 7th in economic impact of tourism. Bristol includes the Bristol Motor Speedway, concerts such as the Rhythm and Roots Reunion, Birthplace of Country Music Museum costing taxpayers $12 million, The Bristol Train Station, which sits empty and has no trains costing $6 million, etc.

As I've shown above, tourism development has a very low economic impact on household income. Despite being more populous and wealthy than Southwest Virginia 43% of the Tri-Cities population centered on Sullivan County lives on transfer payments. They too continue to lose good paying manufacturing jobs and replace them with bottom feeder tourism and call center jobs. Aurora Casket in Piney Flats slammed the doors on June 22 costing another 100 good jobs.

The Tri-Cities Labor Market Report 1st Quarter 2016 shows "strong growth" led by "by retail trade, leisure and hospitality, and education and health services." Education (we have several colleges including East Tennessee State University in Johnson City) and health services are for all practical reasons government, while the private sector job market is mainly low wage burger flipping, retail, and lodging.

While losing manufacturing in the previous quarterly report, this report shows no change. The huge job losses in manufacturing in May and June will likely show up in the next quarterly report. Reference BHC June 25, 2016.

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