Katrina's Waves

In the wake of the misery caused by Hurricane Katrina, there have been untold stories of the death and destruction caused by the wind, storm surges and flooding. New Orleans is resembling the scenes from "Mad Max" rather than a major U.S. city. Gut-turning stories of lost love-ones and sheer desperation bombard us from CNN, MSNBC and the networks. That region of the country, one that I have never been to, will probably not be the same for years. But what will be the impact on West Virginia, and most importantly, what can be learned from this terrible storm?

We can see on the news that the immediate impact will be that our gasoline will be more expensive and more scarce. Here in North Carolina, there have been calls from the governor to conserve gas, as the two major pipelines that account for 90% of the gasoline are down, because they start in the Gulf area. It appears from the news that prices are even higher in West Virginia, and there could be shortages in the supplies for some counties' police, public transportation and emergency vehicles. But unless there is another disaster somewhere in the world's oil production system, the supply situation will probably resolve itself fairly quickly. The real lesson is that the vulnerability of this country's energy needs, especially in the area of transportation. Our nation's love affair with automobiles, and the resulting addiction to oil, has caused this current crisis. What does mean for West Virginia specifically? It means that the state has to gain control over its energy sources, namely coal and natural gas. Until the time when we have a reliable, renewable, non-polluting and cheap source of energy for our electricity and our transportation, our energy sources inside our nation's borders will be vital. And if West Virginia wants to improve its economy, those sources that rest beneath the mountains need to be in the hands of companies based in the Mountain State. We can no longer be merely a supplier of the raw materials, being satisfied that our people have jobs. There must be ownership and control over the state's natural energy resources; otherwise the environment and the economy will continue to suffer from out-of-state decision makers. The aftermath of Katrina has shown us the future. Does West Virginia have the will to act on the vision, or will the waves of economic suffocation continue to wash over the state?

Changes

Looking at the Charleston Gazette online today, the first two stories illuminate what I feel are some of the main issues facing West Virginia's economy. The first story involves the sale of Mountaineer Gas to an Oklahoma company. The second story reported that the state has the third-highest adult obesity rate in the nation and is first in the percentage of adults with diabetes. Although the focus of the Gazette story on Mountaineer Gas was the increase on monthly gas prices, and the obesity story dealt primarily with the impact on health and the government's attempt to combat the problem, the angle that should be noted is the negative impact on West Virginia's ability to reverse its economic trends. The new study on obesity supports the previous post's position on the tie-in to a population's healthy lifestyles and its economic prowess. As stated in the article by Shelly Hearne, the executive director of Trust for America's Health, a nonprofit, nonpartisan health organization in Washington, D.C., "As the state struggles more and more with an obesity epidemic, it's going to cost people in their quality of lives and in their pocketbooks". Although Ms. Hearne was no doubt speaking of the increased medical costs stemming from obesity and diabetes, the economic impact goes beyond that direct cause-and-effect. The ability of the state to attract companies to the state is shadowed by the impression (and a certain degree the truth) that the state's workforce is fat and unhealthy. Why would a company wish to come or stay in West Virginia when it knows that it will be facing higher medical insurance costs and higher missed productivity? The state has not only a moral and medical obligation to get the obesity rate down, but also a clear-cut financial and economic incentive also.

The sale of Mountaineer Gas is not only troubling as the obesity study, it is also expected. It is part of the disturbing trend of the assets of the state being sold to out-of-state interests. Of course, it must be remembered that Mountaineer Gas's current owner, Allegheny Power, is based in Pennsylvania, and that the sale to IGS Utilities and ArcLight Capital Partners (who also recently signed a deal with Arch Coal to take over a number of mines in the state) reportedly will create some new jobs, which is always good news. But the sad fact remains that the profits from this utility, a state-allowed monopoly that gains its earnings from the people of West Virginia, will be leaving the state. That means that not only the profits, but that money's purchasing power and investment potential is also going to benefit some other state, some other region. What does it say that ArcLight Capital Partners, a private investment firm based in Boston and New York, has been involved in the purchase of West Virginia's energy assets and there has been no in-state involvement? It is not that ArcLight is pursuing some nefarious course of action; the firm is doing what it should be doing, looking for great investment opportunities. But why is there not a West Virginia version of ArcLight out there, purchasing these assets that will not doubt have great returns, especially in the current energy situation? No doubt there was some involvement from different in-state players, from legal counsel to perhaps banking advice and loans. But the bottom line is that the ownership of Mountaineer Gas, like too many other aspects of West Virginia's economy, is not in the state, and therefore the state will continue to suffer because of this fact.

How, then, can West Virginia's economic path be changed? I think that there are three different avenues of change that be pursued in the short-term that would have a positive impact. First, investment in in-state companies and start-ups needs to be increased. Second, ownership in West Virginia's economic assets, particularity its energy and natural resources, should be sought by in-state firms and individuals. Third, the efforts to obtain foreign investment and entice foreign companies to open facilities in the state should be intensified. Two of these avenues are already being addressed to a certain degree, but increased efforts are needed to reverse the tide.

Turnaround

What are the chances of West Virginia turning around its economic fortunes? If history is a basis, not good. After all, "King Coal" has always been the 800 pound gorilla in the economy, and the general economy has been tied to coal's booms and busts. At the current moment, coal is in the middle of one of its boom cycles, as pointed out in a recent article in the Charleston Daily Mail by George Hohmann. Profits are at record highs for some of the coal companies, including Peabody Energy and Massey Energy. Whether these profits will have a lasting impact on West Virginia is a subject for another time. But if the Internet bust of 2000 taught us anything, it is that the business cycle is always there and what is currently up will come down to one degree or another.

But I believe that West Virginia is not bound to its history, if certain steps are taken. These ideas are not radical, and the best news is that there are recent successful templates that can be followed. The models not states, but two countries that could not be more different except for their recent economic turnarounds: China and Ireland.

A recent commentary in the New York Times pointed out that the reasons behind the economic powerhouse that China (meaning the People's Republic of China) is becoming can be broken down into 4 separate areas:

Good education
Learning good work habits
saving and investing prudently
living healthy lives

What can be learned from this and applied in West Virginia? The people of the Mountain State already, for the great majority, have great work habits. It is always listed as a strength when any national or international company opens a plant or facility in the state. The stereotype of a lazy hillbilly sucking up government checks simply does not apply for the vast majority of the workforce.

As far as saving and investing prudently, it is my belief that West Virginians have always been conservative with their money, maybe a little too much. Until recently (in the last decade or so) you would have been hard pressed to find someone who knew what a venture capitalist was, let alone find one in the state. As an example, my great-grandmother, who grew up in Ritchie County and was a hundred and two when she passed away, had taken out a U.S. savings bond when I was born. Needless to say, the idea was getting a stock or some non-governmental bond probably never entered her head, and her attitude to savings was indicative of most people in the state the greatest part of the 20th century. The issue regarding savings is that there has historically never been mountains of extra capital within the state, held by the general population, to invest. However, the banking industry has always been relatively staple, mirroring the non-risk taking attitude to money of the state's citizens.

The remaining two points put forward in the Times definitely are areas that West Virginia need to work on. Numerous studies have shown that West Virginians have one of the least healthy lifestyles in the U.S. My thoughts on it is that due to the relatively low income, eating habits are focused on the cheapest food, which in our backwards national food pricing system is loaded with the most fats, carbs and preservatives. Also, when one is working hard, physically-demanding jobs, the likelihood of running down to the local gym or going for a quick three-mile run is very low. My hope is that with an improvement in the state's economy, the natural beauty of the land will draw more local participation in such activities such as hiking, walking, biking, and canoeing.

The final area of note is in education. At this point, it would be a cliche to say that education holds the key to the state's economic future. It is a shock to no one that the highest paying jobs in the information age demand levels of education that most West Virginians do not have. The high-school dropout rate is high, the percentage of young adults attending college is low, and the public teachers still have one of the lowest pay rates in the country. Money has been poured into the problems, but the general picture is still rather bleak. But the choice made by the Emerald Isle when faced with similar conditions gives West Virginia a road map to follow. An Op-Ed by Thomas Friedman in the N.Y. Times discussed the choices made by Ireland back in the Eighties. Like West Virginia, Ireland was facing an aging population as its young left for Great Britain, Europe and the U.S. to find jobs. Ireland decided at that point to tackle the problem by making its workforce attractive to foreign investment. But besides the built-in advantages of location on the edge of Europe and its common language with the U.S., Ireland was not at the time a prime location for international companies. However, it made itself attractive by educating its children to the greatest degree possible. Ireland figured correctly that a highly educated workforce would be highly appealing to high-tech companies looking to expand in Europe. It increased money to its secondary schools. It made a college education free to all. With this workforce being made available to the world, it is no mistake that Dell and Microsoft, among many others, have set up operations. Ireland is now the "Celtic Tiger", hearkening to the Asian Tigers of South Korea, Taiwan and Hong Kong of the 80's and 90's.

Why can't West Virginia become the "Mountain Tiger"? Money will always been seen as the excuse, but if there is ever an investment to be made, it should be in the area of education. Increase teacher salaries. Although tuition at the state schools is already low, make it totally free to every West Virginia child. Float whatever bond the state can to fund it all. Making West Virginia's workforce not only competitive but better than other states and indeed countries must be the goal.

But this is a long-term goal, and one that would be better served if the economy of the state improves so that the burden on paying for its educational dreams is somewhat lessened. Therefore, the short-term improvement is key, and will be the topic of the next entries.