Regional President Speech

PLANNING FOR WYOMING'S ECONOMIC FUTURE Thomas M. Hoenig President Federal Reserve Bank of Kansas City Annual Public Forum of the Wyoming Heritage Foundation Casper, Wyoming November 20, 1992 It is a pleasure to address this Tenth Annual Public Forum sponsored by the Wyoming Heritage Foundation. I am particularly pleased to have the opportunity to discuss with you some issues relevant to Wyoming's economic future. The views I present reflect not only my own observations on the region but also ongoing research by the bank's staff economists. At the outset, I acknowledge that Wyoming's slow but steady economic gains in recent years must seem like a snail's pace to many of you who remember the boom years of a decade ago. Nevertheless, the important fact is that the state's economy is growing steadily and outpacing the national economy for the first time in some time. In the years ahead, the challenge for Wyoming will be to develop strategies that will keep the state on this path of steady growth without triggering another destructive boom-and-bust cycle. Wyoming is not alone in its quest for sustainable long-term economic growth. Indeed, that quest is shared by all seven states in the region served by the Federal Reserve Bank of Kansas City. In addition to Wyoming, these states include Colorado, Nebraska, Kansas, Oklahoma, and parts of New Mexico and Missouri. My theme today is to suggest that the strategies with the best chances for achieving long- term growth in Wyoming will have a focus and foundation that is regional. I believe that Wyoming and the other states in this region will better their chances for economic success by formulating joint or coordinated economic growth strategies. In developing this theme, I will quickly assess Wyoming's current environment. I will then review some long-run challenges facing the state; and finally, I will suggest some ideas for improving long-term growth in Wyoming and the region as a whole. 2 RECENT PERFORMANCE OF THE WYOMING ECONOMY Today, Wyoming is outperforming, by almost any measure, a sluggish national economy. This performance stands in sharp contrast to the mid-1980s when Wyoming fell well off the national pace due to problems in the state's two key industries – energy and agriculture. Jobs and real income, two key measures of overall economic performance, have grown steadily in Wyoming the past three years. The state's economic gains in jobs and income of 2 percent a year have been modest by historical standards, but this still compares favorably with that of the nation. Wyoming can take heart from its steady overall growth, which generally has kept the national recession at bay. I would note further that Wyoming's recent performance is broad-based. The state's important energy industry has largely completed its sharp downsizing, and growing demand for Wyoming's clean-burning coal and natural gas suggests slow but steady growth in the energy sector in the years ahead. The state's farmers and ranchers have shored up their balance sheets after five years of solid recovery. Construction in the state is growing again, albeit from a much smaller base. And finally, the state's large service sector--including the growing tourism industry – continues to lend strength to the state's economy. I should note that this service sector adds a critical measure of diversity to the state's traditional farm and energy base. WYOMING'S LONG-TERM GROWTH CHALLENGES Simply put, the Wyoming economy is back on its feet, and the challenge now is to define what lies ahead. It is critical, I believe, to recognize that Wyoming is not alone in tackling its economic development challenges. Indeed, all across the seven-state Tenth Federal Reserve District we find leaders like yourselves faced with the need to improve their prospects for long-term growth. Thus, from my perspective there is real value in viewing Wyoming's future in a broader regional 3 context. The value lies, of course, in uncovering new ways to join forces with neighbors confronting the same challenges. Long-run growth prospects in Wyoming – and in the broader region I represent – will be framed by the quantity and quality of its basic economic assets. What are the strengths or weaknesses in Wyoming, and how do these relate to the economic challenges facing the region? While many factors will contribute to the region's long-run economic growth, three assets essentially define Wyoming's growth potential: education, infrastructure, and financial capital. Education The first key ingredient for economic growth is education. Wyoming and the region are blessed with an excellent work force that is well-educated, productive, and hardworking. Elementary and secondary education, which cannot be neglected in the future, appear to be working well in Wyoming. University research and development appears to present a bigger education challenge, both in Wyoming and in the region. Wyoming is a big state with a small population, so it is probably not surprising that the University of Wyoming ranks number 100 among public universities in terms of dollars on research and development. In fact, most of the universities in our region are second-tier in the scale of their research efforts. The Tenth District has only one of the top 25 public universities in the nation (University of Colorado: 19). When one combines public and private universities, the region has only the University of Colorado ranked among the top 50. With this as background, I suggest that increased university spending on research and development can enhance economic growth in Wyoming in the following ways. First, the state has enormous mineral resources that depend increasingly on advanced methods of recovery. The University of Wyoming already has an institute on enhanced oil recovery, but other mineral extraction technologies probably merit more attention. Also, mounting environmental regulations may provide a need for the university to explore new technologies that extract energy resources with 4 less disruption to the environment. New extraction technologies also might find a ready market abroad, creating new opportunities to expand Wyoming jobs. Second, the Wyoming economy now depends on its inherent strengths--natural resources and tourism. Yet, as we peer further into the future, there is an opportunity to broaden the state's economic base. Other states in the mountain region--Colorado, in particular--have been successful in nurturing new high technology industries. In fact, the Tenth District has a high-tech corridor stretching from Albuquerque to Fort Collins. High-tech firms are not found across the entire span, to be sure, but the growing network represents an impressive constellation of economic activity. While it is unlikely that Wyoming will become mainly a high-tech economy, there may be a niche that Cheyenne and Laramie might fill – perhaps as the new northern terminal of this high-tech corridor. The University of Wyoming's growing expertise in environmental research could create one such niche, and there may be others. Infrastructure The second key ingredient for long-term economic growth is infrastructure. Wyoming has extensive infrastructure, ranging from roads to natural gas pipelines. What additional investments in infrastructure, if any, are needed to support future economic growth? Dependent on natural resources, Wyoming's economy must have efficient transportation to move its products to market. The state's current transportation infrastructure seems to favor future growth. Wyoming's highways are generally in better condition than in the rest of the nation, although the state does have a high proportion of unpaved roads. The state's railways have encouraged steadily rising coal production. Low-cost rail transportation will be critical to the future development of Wyoming coal. And the new Kern River pipeline has opened the West Coast market to Wyoming natural gas. Wyoming must continue to provide a clear pipeline to what promises to be a growing U.S. market for natural gas. 5 While transportation will be a critical issue in the future, Wyoming should also give some thought to new types of infrastructure that might create links with growing foreign markets. Like the rest of the Tenth District, Wyoming is a long way from the prime growth markets in the global economy, such as Latin America and the Pacific Rim. Wyoming is, however, only one state away from Canada, our nation's leading trading partner. The challenge ahead is to create new ways to put Wyoming businesses in touch with foreign buyers. Access to foreign markets may not matter a great deal for energy or tourism, but it will be critical if the state hopes to diversify into high technology or manufacturing. Financial capital The third ingredient for long-term economic growth is financial capital, and Wyoming must help assure that it has sufficient capital and the financial institutions to sustain growth. Following a tough decade, the region does have strong financial institutions. But the conservatism born of tough times, though reassuring in light of the nation's banking problems, poses questions about the region's future economic growth. Commercial banks in Wyoming and the Tenth District have historically had lower loan- asset ratios than banks elsewhere in the nation. That conservatism has served the region's bankers well over the past five years as the nation's banks have seen the number of bad loans skyrocket. Nevertheless, two things are worth noting. First, the gap between regional and national loan-asset ratios is the widest in more than two decades. Second, the region's loan-asset ratio--currently at 46 percent--has generally been on the decline since it peaked in 1984. The question, of course, is whether Wyoming and the region have the financial resources to fund adequate economic growth. In addition to having more conservative bankers formed by tough times, the region today controls a smaller share of the nation's bank assets. Over the past two decades, the Tenth District's share of U.S. bank assets has slipped from more than 6 percent to less than 5.5 percent. Small in percentage terms, the decline still amounts to $17 billion, an amount 6 bigger than any commercial bank in the district. In other words, the deposit base from which loans are made is shrinking relative to the rest of the nation. Other things equal, the region's capital base seems likely to fuel slow, not rapid, growth. ADDRESSING WYOMING'S GROWTH CHALLENGES This report card of key growth assets reveals some clear economic challenges ahead in Wyoming and the region. Although many factors will influence the long-term outlook, the three key growth ingredients I've touched on today suggest a Wyoming economy that will grow slower than the nation over the long term. What can you and other leaders in the region do to change that outlook? The three assets we just reviewed point to a growth strategy based on investing in research, building more infrastructure, and expanding capital. New investments in research How can Wyoming, a state with limited resources, bolster its university research programs? While there are many small colleges in the state, and I would not under any circumstances neglect them, efforts to enhance research activities probably will be most successfully aimed at the University of Wyoming--the state's only major research institution. The state might choose to raise taxes and devote them to targeted research expenditures. But I know that new taxes are not especially popular. So, let me suggest another approach that allows Wyoming to play to its strengths within a regional context. Wyoming might work together with other states in the region to create regional centers of excellence. Wyoming has many natural allies in its quest to bolster university research. very state in the Tenth District is anxious to spend more on university research, yet there, as here, funds are scarce. Here is how a regional research consortium might work. Duplicate research programs would be eliminated while specialized centers of research would be expanded throughout the region. To 7 give an example, there would not be an environmental research center at every university across the region. There would be one--perhaps at the University of Wyoming. For its part, the University of Wyoming might give up some of its agricultural research in favor of a food research center at the University of Nebraska. The savings from the agricultural programs would enable excellence in environmental research. In short, joining forces with other states in this way would create a de facto major league research university in the region. The problem, of course, is that there is no means of creating and then channeling cooperation across state lines. But joining forces with other states is still probably more attractive than raising taxes or shortchanging your program. New investments in infrastructure Next, what can be done to expand infrastructure in Wyoming? Infrastructure investment will be difficult because Wyoming, like other states in the region, is confronted by a fiscal squeeze. The region's tax capacity, a comprehensive measure of taxable resources, declined in the 1980s, from 10 percent greater than the national average to 6 percent less than the average. Wyoming, thanks to its wealth of minerals, still has a tax capacity well above the national average, but it did shrink noticeably in the 1980s. Taxes, meanwhile, increased in Wyoming and other states in the region in the 1980s. With limited funds, government leaders here and elsewhere must target infrastructure spending. Roads will remain a spending priority in Wyoming, but the state will probably be forced to make tough choices between upgrading some roads and building others. Wyoming may want to consider whether its current roadways take full advantage of expanding north-south trade due to a North American Free Trade Agreement. Disciplining infrastructure investment to those projects with a clear payoff is badly needed in a region with public service demands that range from cities to the remotest rural areas. 8 Wyoming leaders may also want to consider creating new institutions that better link Wyoming to potential trading partners. Wyoming will continue to sell its energy resources mostly to a domestic market. On the other hand, Wyoming's expertise in oil and gas technology may be an export business ripe for development. The former Soviet Union has enormous energy reserves that will only be developed with Western technology. Why not Wyoming technology? Moreover, if the state's leaders want to extend the Rocky Mountain high-tech corridor to Wyoming, the state probably must tap foreign markets. I believe there is a role for new institutions that would coordinate the flow of information and assist technology transfer between the region's industries and foreign markets. Expanding capital Finally, how can the state enlarge its pool of capital, the fuel of economic growth? After a tough decade, Wyoming's financial institutions have recovered. Earnings are robust and Wyoming's banks have strong capital reserves. In general, Wyoming banks appear to be supporting economic growth. Bank loans have grown at a faster rate here than in the nation the past couple of years. But loan-asset ratios remain low in Wyoming – 46 percent versus 52 percent in the region. Moreover, Wyoming banks are holding a bigger portion of their assets in securities than a couple years ago. So, there appears to be additional opportunity to expand lending here. There is no escaping the fact that lenders must be leaders if Wyoming is to reach its full economic potential. CONCLUSIONS As Wyoming looks toward the future, it faces some tough challenges as it looks for ways to improve its long-term economic outlook. Like other states in the region, Wyoming's research university is second tier in size, raising questions about the flow of innovations to develop the state's resources. Wyoming has extensive infrastructure, but additional investments will be needed to reach 9 both domestic and foreign markets. Finally, Wyoming has solid financial institutions, but they tend to be conservative. An assessment of long-run growth ingredients suggests that Wyoming, like the region, is brewing a recipe for slow growth. But this need not be the case. The state's public and private leaders can adjust the recipe. This conference attests to the vitality and the desires of the leaders in Wyoming to recognize and address problems inherent in spurring future economic growth. Efforts like these are clearly needed in Wyoming and in the region. And if such efforts continue, particularly in cooperation with your neighboring states, I am confident that the economic picture for Wyoming can and will be bright in the period ahead.

Thomas M. Hoenig (1992, November 19). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19921120_thomas_m_hoenig

@misc{wtfs_regional_speeche_19921120_thomas_m_hoenig,
  author = {Thomas M. Hoenig},
  title = {Regional President Speech},
  year = {1992},
  month = {Nov},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19921120_thomas_m_hoenig},
  note = {Retrieved via When the Fed Speaks corpus}
}