Category Archives: Economy

The Self-Employed as a Political Constituency

Will 3-D printers swell the ranks of self-employed manufacturers?

Will 3-D printers swell the ranks of self-employed manufacturers? Image credit: CNN

The maker movement is transforming the American economic landscape. The number of people who make a self-employed living making stuff is still small — almost imperceptible in a U.S. labor market of 160 million — but it is growing.

In 2014 more than 350,000 manufacturing establishments in the U.S. had no employee other than the owner, up almost 17% over ten years, according to Commerce Department data reported by the Wall Street Journal. By comparison, the 293,000 establishments with employees had experienced a 12% decline in number over the same period. Overall, there are roughly 12 million manufacturing jobs in the U.S.

The boom in self-employed manufacturing is most pronounced in the “food” category, but also notable in chemicals (including soaps and perfumes), transportation, leather, and beverages & tobacco.

I expect the movement to gain momentum as the revolt against mass, industrial-era standardization gives way to mass customization. Technologies such as Computer Aided Design and 3-D printers continue to gain in capability and come down in price, making them available to almost anyone. Many colleges have 3-D printers on campuses, and students are learning how to use them. Meanwhile, just as the Miller-Budweiser beer duopoly has given way to the craft beer revolution — the biggest advertising budgets in the country could not halt that consumer trend — we are seeing the revival of artisinal foods, beverages, and craft products.

The proliferation of self-employed, small-scale manufacturers is part of a larger trend toward the so-called “gig” economy. So far, the needs and aspirations of makers, hackers, craftsmen and free-lancers have gone mostly unrecognized by the political establishment. These self-employed workers are even more politically invisible than small business. They are unorganized politically. They don’t have trade associations, they don’t hire lobbyists, and they don’t donate money to politicians. Indeed, the only politician I can think of who takes them seriously is Sen. Mark Warner, D-Virginia. While the senator has performed a valuable service in highlighting the group and its unique needs, his interest in the topic does not appear to be widely shared, and he can cite few tangible accomplishments yet.

Making a living as a free-lance writer and blog publisher for the past 14 years, I feel a strong affinity for this group. In Virginia, there are hundreds of thousands of us. And as consumer tastes continue to shift from standardized products and services to personalized products and services — our numbers will grow.

We are the petite bourgeoisie. We are noted for our stubborn independence and our ornery attitude toward our “betters” who would tell us what to do. In my view (which, I concede, may not be universally shared), we don’t seek special treatment. We don’t want subsidies, tax breaks or special privileges. We just want a level playing field.

The most important legislative priority for self-employed workers is to gain more control over our health care insurance and retirement plans. Our health insurance should enjoy the same tax status as health plans provided by corporations and other major employers. Our pension vehicles should be portable as we move back and forth between conventional employment and self employment. Oh, and it wouldn’t hurt to keep a lid on taxes.

As I scan the political economy of Virginia, I don’t see anyone (other than Warner) representing the interests of the self-employed. Neither Democrats nor Republicans, beholden as they are to established corporate and bureaucratic interests, provide a natural home for us.

The Libertarian Party could become that home if it moved beyond articulating abstract principles to applying those principles to real-world problems. Indeed, if the Libertarian Party has a natural constituency, it would be the free-lancers and small businesses whose interests are routinely subordinated to those of better organized, more vocal groups who turn to the government for everything. As Libertarians run for office, they would do well to cultivate the large and growing ranks of the self-employed.

Forget Globalization. Worry about Automation.

Automation is taking more American jobs than Mexicans are.

Automation is destroying more American jobs than Mexicans are.

Watcha gonna do… watcha gonna do… whatcha gonna do when robots come for you?

Robots aren’t science fiction. You need to start thinking about them — and so does Virginia’s political establishment.

The 2015 Oxford automation study, “The Future of Employment: How Susceptible Are Jobs to Computerisation,” concluded that 47% of all U.S. jobs in 702 occupations are at “high risk” of decimation by automation. If it’s any consolation, an Organization for Economic Cooperation and Development (OECD) study found that a mere 9% of jobs are at risk. But don’t get complacent. A 2016 McKinsey study predicts that 60% of all U.S. occupations could see 30% or more of their work activities automated.

Using the same methodology as the Oxford study, Dr. James V. Koch, an Old Dominion University economist, calculates that nearly 1.9 million jobs are at risk in Virginia — about 51% of all jobs, four percentage points higher than the national average.

Seeking refuge in a college education will not necessarily save your job from robots or artificial intelligence. A hair stylist in Harrisonburg stands better chance of surviving the job carnage wrought by our robot overlords than, say, a tax preparer in Danville.

The deciding factor, says Koch in an essay in the “2016 State of the Commonwealth Report,” sponsored by the Virginia Chamber Foundation, “is the extent to which jobs require creative and and social intelligence and the ability to manipulate as opposed to being dominated by repetitive, routine tasks capable of being learned by machines fueled by artificial intelligence.”

So, in the immortal words of 19th-century Russian revolutionary Nikolai Chernyshevsky, “What is to be done?”

Writes Koch:

Wise public policies in this arena should focus on “riding the wave” of technological change rather than encouraging resistance movements that are destined to prove futile. Astutely constructed public-private partnerships between governments and firms have the potential to develop programs designed to compensate and redirect job losers, who in many cases are relatively innocent victims of dynamic economic forces beyond their control.

Koch, a former Old Dominion University president, argues the state should work to increase the skills, flexibility and mobility of the workforce. By skills, he means proficiencies that count in the marketplace. “This is not the same thing as generating massive numbers of additional bachelor’s degree holders, or STEM-degree holders,” he says. “There is relatively little rigorous economic evidence available that a significant shortage of job candidates exists in STEM-related occupations.”

By flexibility, Koch means “suppleness in thinking and approach” — critical thinking. And by mobility, “wise public policy will reduce barriers that discourage people from moving geographically and/or telecommuting to jobs that may be located thousands of miles away.”

What the empirical evidence tells us, says Koch, “is that the current range of public policies is insufficient to deal with the occupational ferment that Frey and Osborne (the authors of the Oxford study) have identified. We are forewarned.”

Is Northern Virginia Turning the Corner?

Monthly changes in professional and business services employment and federal employment in Northern Virginia, June 2011 to June 2016. Despite decline in federal spending, the all-important Professional & Business Services sector is performing handsomely.

Monthly changes in professional and business services employment and federal employment in Northern Virginia, June 2011 to June 2016. Despite a decline in federal employment and procurement, NoVa’s Professional & Business Services sector is performing handsomely. Source: “2016 State of the Commonwealth Report.”

As Northern Virginia goes, so goes Virginia. The wealthy Virginia suburbs of Washington, D.C., account for 45% of the state’s economic output. If NoVa is in a slump, as it has been the past few years, a peppy performance in Richmond, Hampton Roads or elsewhere won’t do much to counteract it.

The sequestration-driven decline in federal government employment and a cutback in procurement contracts hit Northern Virginia hard over the decade. But James V. Koch, an Old Dominion University economics professor and author of the “2016 State of the Commonwealth Report,” sees hints of a turnaround. Major NoVa employers, once tethered to the federal government, have been diversifying their business base by making inroads into the private sector.

What’s his evidence?

Federal spending in the Washington metropolitan economy has declined over the decade. “Between mid-2011 and 2014, federal employment each month was consistently lower than the comparable month in the previous year,” writes Koch, in the report, which was sponsored by the Virginia Chamber Foundation. “This had, and still has significant consequences for the region because annual average wages per federal employee approximate $100,000.” Moreover, federal procurement spending in the Washington region declined dramatically, from a peak of $82.5 billion in 2010 to $71 billion in 2015.

The good news:

Since the middle of 2014 … a new pattern has emerged. The professional and business services sector has begun to grow even though federal employment and procurement remain relatively flat. While it is a bit early to declare that this signals the emergence of a new economic model for Northern Virginia, clearly this is a potentially significant change. It appears that professional and business services companies in Northern Virginia may be diversifying their markets and becoming less reliant on federal spending. If so, it bodes well for the region.

The professional & business services sector contributed roughly one-third of the 35,400 net new jobs created in Northern Virginia between June 2015 and June 2016, Koch notes.

It will not be easy for NoVa’s tech companies to shift from a business-to-government model to a business-to-business model, says Koch, but he sees the region’s expertise in cyber-security as an obvious way to make inroads with private-sector clients. He also sees potential in the biotechnology sector. However, for NoVa’s economy to take off, other industries will have to make the switch as well, and it is less clear what they might be.

“Northern Virginia has the assets to turn the corner and become a more business-oriented, globally competitive region,” he says. “But will it happen? Stay tuned.”

What the Trump Victory Means for Virginia

What does a Trump presidency mean for Virginia?We woke up this morning to a very different world than most of us expected twenty-four hours ago: the prospect of a Trump presidency and a Republican-controlled Congress. After four years of political gridlock, the odds have improved immeasurably that something will get done in Washington. You might not like the result, but the logjam will break. The ramifications for foreign and domestic policy are far-reaching.

Herewith are some preliminary thoughts on what a Trump presidency means for Virginia.

Energy policy. Trump famously declared global warming to be a hoax perpetrated by the Chinese, and he has campaigned on the promise to boost the U.S. energy economy and revive the coal industry. It’s safe to say that he will do what he can to scrap the Clean Power Plan, which is designed to slow global warming by reducing CO2 emissions from electric power plants. Whether he can do so with a stroke of the pen — issuing an executive order that reverses President Obama’s order — is not clear to me. But one way or the other, I expect he will modify the plan significantly if not kill it outright.

What does that mean for the future of Virginia’s electric grid? Coal is the big winner. Most likely, some coal-fired power plants in Virginia will enjoy an extended lease on life. In the case of Dominion Virginia Power, that implies the need for fewer natural gas-fired plants in the future (or at least a delay in their deployment), which in turn implies diminished future demand for natural gas. What does that portend for the proposed Atlantic Coast Pipeline and the Mountain Valley Pipeline? I’m not sure, but these are obvious questions to ask.

The future of solar and wind energy also is up in the air. Congress has extended hefty tax credits for the renewable energy sources well into the 2020s. Trump and Congress may spike those subsidies, and the political pressure will be off Dominion and Appalachian Power to boost their commitment to solar and wind. But the economics of solar and wind are steadily improving, and Dominion has stated its conviction that there is value in having a diversified energy portfolio. Furthermore, there is nothing to stop merchant power generators from building solar farms and wind farms and selling the energy into wholesale electricity markets, thus bypassing the established utilities.

In sum, while the pace of adoption may slow, the progress of renewable energy, electric vehicles, battery storage, voltage regulation and other technologies suggests that the electric grid will look very different ten years from now than it does today, regardless of what Trump does. Virginians need to prepare for that future, even if it is not imminent.

Medicaid. Trump campaigned on a promise to end and replace Obamacare. Repealing the program will probably be more difficult than Trump was willing to admit on the campaign trail– will he really yank benefits from the millions of Americans who benefited from the plan? — and his plan to replace it is still fuzzy. But it’s a safe bet that the option of expanding Medicaid under provisions of the Affordable Care Act in Virginia will be taken off the table.

Given the unpopularity of Obamacare with a majority of the population and the promise of Congressional Republicans to repeal it if they got the chance, General Assembly Republicans were wise to have rejected Medicaid expansion. Thankfully, Virginia maintained its safety net of hospital-provided indigent care, health clinics, health wagons, and other patchwork programs that provide at least a modicum of treatment for the poor and near poor. That safety net is inadequate but it’s better than nothing.

One thing Virginia can do to replace Obamacare is eliminate the dozens of mandated benefits that drive up the cost of open-market health insurance. One reason the plans in the Obamacare health exchanges are so expensive is that they are gold-plated with federally mandated benefits. If Trump and Congress repeal those mandates, state mandates still will stand in Virginia unless the General Assembly repeals them as well. Health insurers should be given the option of offering stripped-down, basic health coverage which, while less than ideal, would provide cheaper options than are available now.

Military spending. Virginia’s economy has taken a big hit from the reduction in military spending under the Obama administration. Trump has promised to rebuild the military. A Trump presidency undoubtedly will spare the state from further defense cuts, but given the budget box the country is in — a $19+ trillion national debt, rising deficits, and a Federal Reserve Bank seemingly intent upon nudging interest rates higher — it is difficult to see how the U.S. can ramp up military spending to anything close to Bush-era, war-on-terror levels. Relief may be coming, but the glory days are not returning.

Boomergeddon. Dr. Trump has been peddling a magical elixir of tax cuts, deregulation and a confrontational trade policy to get the economy rolling again. Let’s just say I’m skeptical. Trade wars will be disastrous. Tax cuts may goose the economy, but they will add to the deficit. Deregulation will help, but I think there are practical limits to what can be deregulated. Yes, deregulating the broadband sector and re-examining Dodd-Frank bank regulations could provide a stimulus. But most regulations are embedded in the economy and don’t make sense to scrap. Just to pick one example, are we really going to deregulate coal mine safety after mining companies have already created the technologies, developed the business practices and absorbed the costs of meeting those regulations?

While some economic sluggishness can be blamed on Obama administration policies, not all of it can. As I noted recently on this blog, the aging of the population and the lack of growth in the workforce are demographic trends impervious to public policy manipulation. Meanwhile, Trump has evinced no interest in reforming entitlements like Social Security, Medicare, Medicaid and the panoply of anti-poverty programs. Massive spending increases are baked into the cake. The United States is in a fiscal box that limits our economic options, and there is no politically painless way out of it.

Bottom line for Virginia: Don’t look for a miraculous restoration of economic growth and tax revenue. Budget austerity is the new normal. Trump won’t change that. We need to get on with the business of re-thinking the way state and local governments do everything.

Chart of the Day: Revenue per Hotel Room

Source: "State of the Region: Hampton Roads 2016"

Source: “State of the Region: Hampton Roads 2016”

As Virginia casts around for an industry to lead the way in economic growth, don’t look to the hotel sector. Hotels in Virginia have severely under-performed the national average as measured by a key indicator, revenue earned per available room (REVPAR). The chart above, taken from the “State of the Region: Hampton Roads 2016” compares the change in this metric over the course of the current business cycle for the U.S., Virginia, Hampton Roads and various sub-markets in Hampton Roads.

Don’t blame Airbnb, says the report, which was produced by the Center for Economic Analysis and Policy at Old Dominion University. “There is little mystery attached to the causes of the under-performance of the hotel industry in Virginia in recent years. The combination of the Great Recession plus federal government budget sequestration constituted powerful blows from which the industry has yet to recover.”

Aggravating the tumble in demand, the supply of hotel rooms in Virginia increased between 2006 and 2015, creating oversupply. If there’s a silver lining says the report, supply has leveled off — it’s actually a tiny bit smaller than in 2010. “Nonetheless, happy days are not likely to return until federal spending in the Commonwealth, especially for defense, revives.”

— JAB

An Aging Economy Is a Sluggish Economy

Source:

Source: “The Effect of Population Aging on Economic Growth, the Labor Force and Productivity.” (Click for more legible image.)

by James A. Bacon

Why is U.S. economic growth slowing? Perhaps for the same reason economic growth is slowing in Europe, Japan and other advanced economies — our populations are getting older. That was a major theme of my book “Boomergeddon,” written in 2010, when I accurately predicted that U.S. economic growth would fall short of the optimistic expectations in U.S. eonomic and budget forecasts. I don’t pretend I got everything right — I failed to foresee the fracking boom that ignited the U.S. energy boom, and I did not anticipate how quantitative easing would goose goosing the economy by inflating asset values. But I was pretty certain about one thing — the U.S. population was getting older, and an older population would dampen economic growth.

That’s not a controversial view among the handful of economists who study the impact of aging. It just isn’t appreciated by the broader economic profession, the geniuses who have consistently overshot economic growth forecasts over the past decade, or a political class that has shown no willingness to put entitlements and debt accumulation on an economically sustainable basis.

Now comes a study, “The Effect of Population Aging on Economic Growth, the Labor Force and Productivity,” by Nicole Maestas, Kathleen J. Mullen, and David Powell, and published by the National Bureau of Economic Research. Their disturbing conclusion: “We find that a 10% increase in the fraction of the population ages 60+ decreases the rate of GDP per capita by 5.5%. … Our results imply annual GDP growth will slow by 1.2 percentage points this decade and 0.6 percentage points next decade due to population aging.”

Extrapolating from differential rates of aging and economic growth in the 50 states, the authors see a number of forces at work. Slower growth in the workforce accounts for about one-third of the effect. The rest comes from slower productivity growth from an aging workforce, with possible spillover affects among younger workers.

The fraction of the United States population 60 or older will increase by 21% between 2010 and 2020, and by 39% between 2010 and 2050. This dramatic shift in the age structure of the U.S. population — itself the effect of historical declines in fertility and mortality — has the potential to negatively impact the performance of the economy as well as the sustainability of government entitlement programs.

We can argue over the impact of taxes, regulation, quantitative easing, fiscal policy, and most will retreat into our respective ideological corners, agreeing upon nothing. But the aging of the population is an undeniable phenomenon that transcends partisan analysis. And there is consensus in the economic profession that once a tipping point is reached — as it has in many countries — the economic impact is negative. The U.S. and other aging countries which once had the demographic wind at their back now are leaning into a gale. None are likely to return to the economic growth rates of the early post-World War II era.

Virginia impact. Sadly, the paper did not provide a state-by-state breakdown for aging. However, two maps in the appendix (including the one above) show that Virginia’s population aged more rapidly than that of most other states between 1990 and 2000, and again between 2000 and 2010. One could conjecture that the aging effect has dampened economic growth here somewhat more than the national average. There may be more to blame for Virginia’s economic sluggishness than federal sequestration or flawed public policy.

No one can foresee the future, but if there is one aspect of the future that is predictable with some reliability, it is a nation’s (or state’s) demographic profile. And if there’s one thing we can say with some certainty, it is that economic growth will be slower. Our elected leaders should bear in mind as they discuss expanding entitlements and taking on more debt. No miraculous resurgence of economic growth will make it easier to pay our bills.

When the political class ignores this advice, don’t say I didn’t warn you.

Universities as Economic Engines

Source: "The Economic Impact of Universities: Evidence from Across the Globe"

Source: “The Economic Impact of Universities: Evidence from Across the Globe”

by James A. Bacon

The world’s first university was founded in 1088 in Bologna (in what is now Italy). The idea of bringing scholars together in a dedicated institution caught on. In time, universities were established throughout Europe, the United States and the rest of the world. Almost every country has a university today, with Bhutan in 2003 being the latest nation to open its first. The proliferation of universities has coincided with the accumulation of knowledge and growth of the global economy. Scholars (most of them employed by universities, as it happens) have debated the extent to which universities have contributed to that growth.

Drawing upon a 60-year database of nearly 15,000 universities in 1,500 regions across 78 countries, Anna Valero and John Van Reenen with the London School of Economics think they have an answer. “Doubling the number of universities per capita,” they say, “is associated with 4% higher future GDP per capital.”

Perhaps most significantly for readers of Bacon’s Rebellion, universities appear to have positive spillover effects to neighboring regions. In other words, the effect is felt locally and regionally, not just nationally.

Writing in “The Economic Impact of Universities: Evidence from Across the Globe,” Valero and Van Reenen posit several channels by which universities affect growth.

Perhaps most obvious and easy-to-measure impact is the demand created by students, staff and universities’ purchase of local goods and services. Like any other primary industry, universities provide a service (higher education) that pumps income into the region where it resides. The effect is especially positive when costs are financed through national governments from tax revenues raised mainly outside the region in which the university is located.

But there are other channels. Universities produce human capital, nd skilled workers tend to be more productive than unskilled workers. Universities also spur innovation. The innovation effect is both direct, as when university researchers themselves produce the innovations, and indirect, as graduates enter the workforce and innovate. A third channel is by fostering pro-growth institutions. “Universities,” write the authors, “[provide] a platform for democratic dialogue and sharing of ideas, through events, publications, or reports to policy makers.”

None of this is earth-shattering stuff, although the computation that a doubling of universities per capita results in a 4% increase in wealth is interesting. And there is ample room to refine the conclusions. The authors concede that their methodology does not adjust for the size or quality of universities. All other things being equal, one would expect that a large, prestigious university would have a larger positive impact on the regional economy than an obscure, als0-ran institution.

Bacon’s bottom line. But the study provides a useful reminder as Virginians think about what they expect from their public education system — especially the flagship institutions of the University of Virginia, the College of William & Mary, and Virginia Tech. On the one hand, we want to make high-quality higher education affordable and accessible to Virginians. On the other, we like it when universities function as engines of local and regional economic growth. Insofar as it takes money for universities to generate bigger payrolls, R&D contracts, business spin-offs and other economic benefits, institutions that most effectively extract revenue from whatever source, including their students, will tend to be more powerful economic engines.

The trade-off is most clearly evident at UVa where administrators devised a way to cobble together a $2.2 billion pool of capital capable of throwing off roughly $100 million a year in unrestricted funds. The Board of Visitors voted to dedicate that money to enhancing the prestige of the university, indirectly stimulating economic growth, rather than lowering tuition & fees in order to make a UVa education more affordable.

I have criticized the board’s decision; I think the university has lost its way by embracing the Ivy League high tuition/high aid financial model that exploits its student body, especially middle-class students who struggle to pay the massive bills but don’t quality for student aid. But I also acknowledge that the UVa approach does have the advantage of creating economic growth. If the university were a company that, to pick a fanciful example, developed and manufactured leading-edge smart phones, for which it charged ever-higher prices and plowed revenues back into growing its business operations, Virginians would applaud it as an economic champion.

The higher ed affordability crisis is very real. But so is the economic contribution of Virginia’s universities. We need to strike the right balance between the two.

Economic Productivity Takes a Nose Dive

Image credit: Wall Street Journal

Image credit: American Action Forum

More bad news on the economic productivity front. From today’s Wall Street Journal: “Non farm business productivity — the goods and services produced each hour by American workers — decreased at a o.5% seasonally adjusted annual rate in the second quarter as hours worked increased faster than output.”

It was the third consecutive quarter of falling productivity, the longest streak since 1979, and it caps an abysmal growth rate averaging 1.3% between 2007 and 2015.

Whatever could be the cause?

Could part of the explanation be that, according to the American Action Forum, the Obama administration has issued 600 major regulatory rules costing $1.4 billion on average, or about $743 billion overall, during its seven-and-a-half years — with more to come?

Nah, that can’t be it. It’s all George Bush’s fault.

— JAB

Virginia Economic Growth Still a Struggle

New home of Phone2Action -- celebrating small victories.

New home of Phone2Action — celebrating small victories.

Straws in the wind regarding Northern Virginia’s business climate:

Budget sequestration may be a thing of the past, but the federal budget squeeze is not. In her latest Richmond Times-Dispatch column, economist Chris Chmura notes that in the fiscal year ending Sept. 30, 2015, federal spending on contracts fell 4.4% — some $2.4 billion — in Virginia. About two-thirds of that was defense spending. With slow economic growth and Baby Boomer retirements driving Medicare spending ever higher, there is likely no relief in sight. Short of another big war, it seems to me, it is difficult to imagine a strong rebound in federal contracting.

Meanwhile, Washington, D.C., continues to gain competitive advantage over outlying jurisdictions in the metropolitan region. Even Arlington County, which is highly urbanized, close to the urban core, and blessed by mass transit and walkable neighborhoods, is feeling the challenge. “The county is … facing heavy competition from Alexandria and D.C., both of which are aggressively recruiting the same pool of talent,” writes Daniel J. Sernovitz with the Washington Business Journal.

The competition has gotten so fierce that Governor Terry McAuliffe made a trip to Arlington last week to celebrate the leasing of 3,586 square feet on Wilson Blvd. by Phone2Action, a 25-employee startup that had recently landed $4.7 million in venture funding. The governor provided $127,800 in state assistance. According to Sernowitz, Opower, an energy conservation company, has wangled money out of the state and Arlington County, to stay in Arlington rather than move to the district. Meanwhile, Arlington and Alexandria, he reported in February, felt compelled to set aside more funds for business recruitment.

To mangle an old phrase, if Northern Virginia sneezes, Virginia catches a cold. The commonwealth finished the 2016 fiscal year $266 million in the red, as revenues increased only 1.7%, short of the projected 3.2%.

— JAB

The Hidden Risk in Money Market Funds, and What It Means for Virginia

Cranky old man... or seer of the future?

Cranky old man… or seer of the future?

by James A. Bacon

I’m sure many readers are tired of hearing my jeremiads about excess debt, fiscal unsustainability, and the necessity of re-engineering Virginia institutions to survive the inevitable reckoning. Well, too bad. The global economy is severely out of balance, Virginia is part of that economy, and we will suffer the consequences when the world’s 21st century experiment with fiscal and monetary perpetual motion machines collapses. State and local polities that prepare for the inevitable storm will be in a better position to ride it out.

Bacon’s Rebellion has explored the unintended consequences of the Federal Reserve Bank’s policy of monetary easing, which has been magnified by comparable policies of monetary easing and reckless credit creation in the European Union, China and Japan. While near-zero interest rates benefit the world’s largest debtor, the United States federal government, it punishes savers and the institutions that serve them. Thus, the Social Security and Medicare trust funds are generating lower income from their surpluses, leading to premature depletion. Insurance companies are earning less on their capital, causing them to increase premiums. The rate of return for pension funds are earning less money, compelling corporations and governments to bolster their contributions.

Even money market fund are affected. A new study published by the National Bureau of Economic Research, “The Unintended Consequences of the Zero Lower Bound Policy,” has found that zero-interest rate policies create problems for savers who park their cash in seemingly safe money market funds. In an effort to deliver non-negative net returns to their investors, portfolio managers have not only reduced expenses charged to investors but chased higher yields by taking bigger risks.

That money market fund you think is a safe and stable repository for your cash? It may not be as safe and stable as you think. Not only is the yield approaching zero, but you may be shouldering risks you didn’t know existed. What’s worse:

Although our empirical results speak mostly to one part of financial markets, we want to emphasize that the effects we document are not necessarily limited to [the] money fund industry only. The reaching-for-yield phenomenon has been observed in other markets: for example, an average insurance company has shifted its assets toward riskier equity holdings, reaching the level of equity exposure of almost 20% in 2014. Similarly, pension funds expanded their holdings into more than 60% equity, away from typically held bonds. More work is needed to better understand the transmission mechanisms underlying the effects of the zero lower bound monetary policy on the stability of financial markets.

Just as generals are said to fight the last war, economic policy makers fight the last recession. Just as the masters of the universe in Washington, D.C. pursue policies to prevent a repeat of what they failed to foresee in 2007, they are blind to the extraordinary leverage built into the global economy, the linkages between sectors, and the mechanisms by which defaults in one corner of the globe will spread panic and chaos to other parts of the globe.

The best way for state and local lawmakers to insulate Virginia and its communities is (a) to curtail borrowing and (b) stop creating new long-term obligations that cannot be readily pared back. That’s not to say that we should cease borrowing altogether or refuse to launch any new programs, but it is to say that we live in times of great volatility and unpredictability and we should set higher standards for incurring any new liability.