The Illusion of Recovery in West Virginia

Pat McGeehan

Recent media headlines reported out of Charleston are suggesting good news for our economy here in West Virginia. Foremost, federal stimulus money being spent in our state since 2009 has caused our economy to “grow”-as total Gross Domestic Product in West Virginia has supposedly increased by 4%.

 In addition to this, our state government is now looking at a surplus of tax dollars coming into Charleston-to the tune of several hundred million dollars. The increase in our economy’s “growth” and the higher tax revenues are indeed coming from this new federal spending and the alleged “strength” of the mining and export sectors in West Virginia. But unfortunately, this rosy story only paints a small fraction of the economic big picture, and while doing so, fails miserably at giving us meaningful insight into the conditions our state faces in the long term. By looking into basic economics, we can understand more readily why these headlines are short-sighted, and why this is more myth than news.

It is indeed the case that the Gross Domestic Product-or GDP- number, here in the Mountain State, has increased. But GDP is often times misleading, and can never tell us other significant economic factors. The GDP measurement used to gauge our economic growth over the past couple years only takes into account “end” spending. This number placed on total spending levels is tallied up by combining private sector consumption with the total levels of government spending within our state’s borders. While this measurement would certainly show an increase-because of the massive amounts of government tax money dumped into West Virginia over the past few years-the GDP number does not reflect gross production, merely it reflects gross end consumption. Since government always and everywhere merely consumes resources, without ever producing, or developing both wealth and resources, it should come as no surprise that the GDP number-used to measure gross consumption-has indeed soared. In the long term however, it is critical to also analyze the real effects this goliath-dumping of government money has had on the actual productive structure of our state’s economy.

For starters, this federal government money has certainly provided those in-state government contractors, bureaucrats, and other government-associated enterprises with a huge advantage. The increased levels of government-spending has given these special-interest groups more and more power to command resources than what they otherwise would have had-helping these politically-connected groups to bid away raw materials and other resources from the true private sector firms in our state’s economy. So in essence, this influx of government money from Washington D.C. has had the effect of raising the price on goods and services for private industry and the like. This is in some way, an additional “tax”, as these private firms and companies must now pay higher prices for these raw materials than what they did before- higher prices for the same amount of goods and services. This forces private sector firms to become stretched thin, and the burden for smaller businesses can become just too much.

To illustrate this concept, imagine a small construction company, which primarily makes its money by building residential houses for people in Wheeling. Before the enormous amounts of government money came rushing into West Virginia, prices were fairly steady for the raw material this small company purchased, in order to build homes for its customers. Once the “stimulus” money came roaring in however, politically-connected businessmen were awarded the funds, and new, often times “made-up” government work was dished-out. For example, these specially-privileged contractors began to build new public buildings, re-pave roads, or place another layer or two of paint on government-owned bridges. Concrete, asphalt, paint, equipment, and a whole host of other construction materials began to increase in price-or at least remain higher in price then what they would have been otherwise-as these materials are now in heavier demand throughout our local economy. To continue building houses for residents in Wheeling, the small construction outfit must now pay these higher prices to continue its own production. These higher prices effectively represent a new tax on “the small guy”-or the guy that doesn’t get the government money, the guy who remains in what is left of the “free economy”. The crony capitalist wins, and of course, the true capitalist loses.

Quite telling that this concept has indeed taken effect is the fact that over the last few years, the growth of private sector firms, outside of health care and mining, has been virtually non-existent in West Virginia. Since 2009, some statistics show that private sector growth in the Mountain State has actually been negative. Government spending “crowds out” the private sector, as they both must compete for the same amount of scarce resources. Since the government can always just steal more money-without having to voluntarily persuade others that these new projects are both necessary and useful-the government typically comes away as the winner.

But perhaps one of the biggest illusions has been the reported growth of the mining and export sector in our state-and in essence, this growth too has been largely artificial (the reported numbers on the “GDP” statistic are inflated because of this false growth as well). The mining sector began to seemingly surge shortly after the federal government-with the help of the Federal Reserve Banking System-began to severely debase and devalue the US Dollar, not long after the financial collapse in 2008. In an effort to boost liquidity, provide monetary stimulus, and help exports (all phrases used as a pseudonym for printing more and more money), the Fed has essentially engaged in outright money printing, counterfeiting hundreds of billions of US dollars over the course of the last 3 years. But since then, several large mining companies (as well as other exporters) in West Virginia have seen their exports overseas grow substantially. But this increase in exports did not come from new demand for their product, or from an increase in their own productivity, but because foreigners could now “make out” by buying these export products at the same NUMERIC price, only with a less-valued US dollar. This happened across the board in American export markets, not just those located in West Virginia. But this surge in exports is merely an accounting illusion, as these export companies-like those in coal and timber-are actually selling their product to foreigners in return for LESS real resources than what they otherwise would have before the “money-printing” intervention occurred in Washington. In fact, these exporters are taking losses, but do not yet realize these losses until later, after the new money forces prices higher and higher (if they overtly realize them at all). In essence, they are moving more product, but they are moving more product for less in return-all the worse, because this fact remains hidden until the harm is already done.

These federal subsidies also have another tertiary effect; they make state legislators in Charleston more insensitive to the real consequences of direct over-taxation. When the government consumes more and more wealth from society, private individuals must produce with less, typically leading to less tax revenue in the long run. But since the federal transfer payments plug these shortfalls, the cost of our state government’s direct taxation becomes concealed-this effect of less and less revenue becomes hidden to the eyes of those in power.

Currently, our state government is collecting tax revenue from this artificial-economic growth-artificial because this government-funded growth is simply not sustainable. It will eventually cease to exist. With this illusory tax revenue being generated from the short-term federal spending, new state government programs have been implemented already-expanding the reach of our own state government. Over the past few years, as the private sector in our state has struggled to keep its head above water, our state government’s budget has exploded-growing bigger and bigger nearly every year since 2008. Of course, the increased amount of state tax dollars coming in is partly caused by the increased federal spending. All of this “growth” appears to be happening in the face of state tax rates in West Virginia which well exceed levels much higher than most other states in the union-granting the appearance here in West Virginia that both government and the private economy can be big at the same time.

Pat McGeehan is a graduate of the US Air Force Academy in Colorado Springs. He served in the West Virginia House of Delegates from 2008-2010, and is currently Chair of the Republican Party in Hancock County. He is employed by Frontier Communications in Wheeling. He resides in Chester.

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