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January 11, 2016

Looks like a better year, but chronic weaknesses need to be addressed

J. Scott Moody: CEO and chief economist, Federalism in Action
Jonathan Reisman: Associate professor of economics and public policy, University of Maine Machias
Amanda Rector: Maine state economist
Charles Lawton: Chief economist, Planning Decisions Inc.
Garrett Martin: Executive director, Maine Center for Economic Policy

Every year, Mainebiz asks some of the state's leading economists to look to the coming year and offer their thoughts, worries and forecasts. We may be out of the recession, but there is plenty of uncertainty out there. Our experts weighed in with written responses. An edited discussion follows.

What are some areas of growth in Maine?

Scott Moody: Clearly, future economic growth in Maine will come from areas related to caring for the rapidly aging population — hospitals, nursing homes, etc. Maine already has the second highest proportion of its population over the age of 65 in the country at 18.3%, or 243,507 people. In the short run, this is a large market with plenty of discretionary income to spend on health services.

Jonathan Reisman: Sectoral: Health care, professional/business services. Geographic: Coastal Maine from Kittery to Belfast. Unfortunately, areas of growth include monument services, illegal drugs/rehab, climate change demagoguery, greenwashing. They don't include geoengineering research, freedom.

Amanda Rector: The recent low oil prices have been a boon for the state, allowing for greater real income growth and increased spending and investment. The low oil prices are expected to continue for much of this next year at least, which will continue to benefit Mainers, although the need for increased diversification of energy sources in the long term continues. There have been some exciting developments taking advantage of Maine's geography — both the continued expansion of the International Marine Terminal in Portland and the Front Street Shipyard in Belfast, utilizing Maine's unique coastline. The Midcoast Regional Redevelopment Authority has seen better-than-expected job growth through 2015.

Charles Lawton: By sector: Professional and technical services, particularly data analytics, information technology, engineering, scientific research; market research; home-based and remote service health care services. By region: Arts, cultural and recreational tourism in the midcoast; housing construction and remodeling in southern Maine.

Garrett Martin: Maine's demographics mean that health and personal care will continue to be the most obvious areas of growth. However, beyond that, there are tremendous opportunities for innovation and growth particularly related to agriculture and aquaculture, composites and biomedical and oceanographic research. Increasing broadband access across the state will also improve Maine's business climate and tourism, especially in more rural areas.

What are some trending industries?

Moody: Healthcare-related industries will continue to trend up while manufacturing will continue to trend down.

Reisman: The sustainability fetish. Everyone wants to be sustainable, but sustainability advocates rarely actually define it and they keep getting key assumptions about resources, technology and human behavior very wrong, just like the first professor of sustainability, Thomas Malthus. Most of our green gurus were modeling a world with oil at $100/barrel and rising. In mid-December, the price was below $40/barrel, and likely heading down. Low energy prices are driving environmentalists insane. We have climate alarmism, moral posturing and carbon shaming, staples of progressive politicians, business greenwashers, environmentalists and higher education. Green crony capitalism: Progressive confidence men and women successfully peddling wind, climate alarmism and expensive energy. Tax credits to subsidize and mandates to purchase “clean energy” are an example. Thank you U.S. Sens. [Angus] King and [Susan] Collins. Mill salvage and rehab: After Bucksport, potential projects loom in Lincoln, Jay and the Katahdin region. Maybe we can make ethanol from wood and our senators can have it mandated that everyone has to add it to their gasoline.

Rector: On the manufacturing side there are some niche industries that have a lot going on, such as aviation/aerospace, boatbuilding and composites. Other trending industries include data solutions; biotech and bioscience; agriculture (especially with the rise of the locavore movement); and health care, to name a few. Many companies in Maine are using new technologies to solve old problems and increase efficiencies.

Lawton: Local agriculture and food production, particularly those specializing in linking grower/producers to their customers.

Martin: Small is beautiful. Maine's economy is at a scale that entrepreneurs can test, refine and grow their companies in a supportive environment. Maine entrepreneurs are increasingly capitalizing on a growing appetite for products with a local and authentic feel, from craft beer to personal care products. Even well-established Maine brands like L.L. Bean and Tom's of Maine make the most of Maine's sense of place and unique identity in their marketing.

How would you assess the availability of credit for businesses?

Moody: On the one hand, interest rates have and continue to be very low, which means more manageable loan payments. On the other hand, obtaining a loan has been harder thanks in large part to Dodd-Frank, which has the effect, both intentionally and otherwise, of keeping capital on the sidelines. This is why the Federal Reserve continues to pump liquidity into the economy via the mortgage market because traditional bank lending to businesses and consumers is not up to the task.

Reisman: There is little evidence of a lack of financial capital availability for Maine businesses. Maine may be somewhat “overbanked,” and the strong community bank sector plus expanded Internet availability suggests a very competitive supply environment. Overall confidence has been sapped by years of sluggish growth, increasing regulatory burden, planning hubris and crony capitalism, suppressing the entire market for financial capital.

Rector: In general, businesses are able to find the credit they need, particularly through local and Maine-based banks and credit unions, but there are some exceptions. Smaller businesses may have a difficult time, along with start-ups and new businesses. The rise of microfinancing has expanded the availability of credit in some areas, but there can be unexpected pitfalls with this type of financing and businesses and lenders alike should be cautious.

Lawton: Broadly available to prospective borrowers who have well prepared investment cases. There is growing competition among community banks and branches of big banks and credit unions. At the same time, documentation, preparation and regulatory compliance are increasing banking costs. Again, this puts a premium on developing relationships with lenders. Going in cold, saying “I need a loan,” won't be effective.

Martin: Maine has a good record meeting the borrowing needs of businesses. Equity and venture investments have been harder to come by, particularly for early-stage companies. This may have less to do with the quality of investment opportunities in Maine and more to do with the fact that investment opportunities tend to be fewer and smaller and therefore less appealing to investors from outside the state.

Are there any new laws that you think will have a major impact on businesses?

Moody: The economic fallout from Obamacare [the Affordable Care Act] is far from over. It has taken years just to get clarity from the Supreme Court on major structural components of the law. From an economic perspective, each ruling had the impact of new law and, at the same time, regulations are constantly being written and rewritten. Regardless of the direct impact on health care, the indirect impact on every business in America has been and will continue to be stifling.

Reisman: The continued implementation of the Affordable Care Act is costing jobs and weakening the economy. Watch the Maine health care cooperative Community Health Options carefully. Lauded as one of the few, if not only, success stories of Obamacare, the CO-OP has thrown up some recent financial red flags. The Paris Climate Change Agreement to reduce carbon emissions will raise our energy costs, redistribute wealth and income from Americans to the developing world and give a big progressive boost to green crony capitalism.

Rector: Some of the tax changes that are taking effect will help lower the tax burden on Mainers, allowing business owners to invest more in their companies and encouraging people to move to Maine. The military pension income tax exemption in particular will help attract veterans to the state, many of whom have excellent skill sets and are looking for second (or third) careers. Workforce availability will be more and more of an issue for businesses in the coming years, making it critical to pass laws that will attract workers to the state. On the other side of tax changes, the lodging tax increases to 9% this year, but this should have a limited impact on the lodging industry, as this rate is in line with other parts of New England.

Lawton: Dodd-Frank banking regulations are not new, but will have continuing effects on smaller community banks. Environmental regulations will affect electricity prices — tax credits, renewable power source requirements, pipeline construction limits. Future FCC regulations on telecommunications and the Internet will affect Internet and entertainment offerings.

Martin: There's not much major impact at the state level. The state budget deal did include additional funding for education and workforce development, which are important pillars of a strong economy. In 2016, Maine must submit its plan for using resources available through the federal Workforce Innovation and Opportunity Act. This has the potential to reshape workforce development, adult education, and vocational rehabilitation programs in the state, which are vital concerns for many businesses.

With the presidential election, what kind of impact might that have on the economy?

Moody: Unlike previous presidential cycles, this one has the potential to take political uncertainty to new heights. In both political parties, insurgent candidates — Donald Trump on the right and Bernie Sanders on the left — could topple the more “mainstream” candidates. This uncertainty will have a negative impact on the economy as businesses grapple with this reality.

Reisman: The economy is likely to have more effect on the presidential election than vice versa, but a little on both: The rest of the world and the United States are teetering on the edge of an economic slowdown. Both fiscal and monetary policy remain expansionary, but the Fed is coming off the gas pedal. Cheaper oil and energy helps everyone's bottom line except for the oil/energy sector, which is now shedding jobs in the United States. Fracking doesn't make economic sense with the price of oil below $70/barrel, and it's half that as this is written. If the U.S. economy slows down or is perceived as slowing down in the first two quarters, the party in power is not likely to be returned to power in the fall elections. That doesn't bode well for the Democratic presidential nominee, whoever she might be. Elections can be an economic boon for media and communication companies, especially if large amounts of independent expenditures come in. The progressive victory on so-called clean election reform will also put some additional dollars into legislative races. But the overall macro effect is not significant. 

Rector: Maine's economy is tied very closely to the economy of the nation as a whole. The policies enacted by the next president will certainly have an impact here in Maine, both directly and indirectly, but it will likely be at least 2017 before we see any real impacts on the economy. The information sector will be the biggest direct winner in 2016 as advertising buys ramp up ahead of the election.

Lawton: Uncertain expectations — about international terror policies, immigration, tax reform, interest rates, business location policies — all will limit investment and thus job growth.

Martin: In the near term, the presidential election will have minimal impact on Maine. Of greater consequence is whether or not Gov. Paul LePage's administration continues to forgo opportunities to leverage federal funds for the benefit of Maine people. Not only could these resources improve health care access and affordability, food security and educational opportunity, they could also help stimulate significant economic activity throughout the state.

What are the biggest challenges ahead?

Moody: The biggest challenge facing Maine is demographic winter. The latest Census Bureau data released in December shows that Maine's net natural population growth — births minus deaths — in 2015 was negative again. In fact, four of the last five years were negative for a total deficit of 1,990 more deaths than births. Additionally, the burden on Maine's shrinking younger generations will intensify. For example, the majority of Maine's long-term care industry for the elderly is financed by Medicaid. As the demand for long-term care explodes, so will the cost of Medicaid. If this forces taxes to go up, this will slow the economy even more.

Reisman: Restoring economic freedom to Maine and the United States. Once one of the top three nations in this requisite for economic growth and prosperity, the United States has fallen out of the top tier and is now behind Canada. The effort to ignore or restrict economic freedom in Maine is led by the progressive left, labor and environmental groups. Both of our senators and U.S. Rep. [Chellie] Pingree are on board for reducing, as opposed to restoring, economic freedom. Restoring the First Amendment guarantees of freedom of speech and religion. Progressives are attacking free speech via campaign finance reform, political correctness, internet regulation and efforts to punish climate “deniers.” Progressives are attacking religious liberty through health care and marriage mandates and regulation. Progressives are effectively establishing environmentalism as our state religion (it's called sustainability). Progressives have applied a climate change religious test to candidates for office. Recognize the wisdom from Sun Tzu's “The Art of War.” Know your enemy. If you can't name them for what they are, you cannot even begin to defeat them.

Rector: Maine's demographics are the single largest challenge facing the state, but there are other issues in play as well. Energy costs remain high, especially for industrial customers, and while consumers have had a break from low oil prices, continuing to increase the diversity of energy sources in the state is important for future economic stability. Adjusting to continuing technological advancements is both a challenge and an opportunity for the state — existing businesses will need to adapt, but there are places where Maine is stepping up and becoming a leader in new technologies and emerging industries. We need to develop policies that will improve Maine's competitiveness both in terms of attracting workers and businesses to the state and expanding those businesses already here, which includes continuing comprehensive tax reforms.

Lawton: For Maine, the overwhelmingly biggest challenge is expanding the workforce. If we can't provide more jobs for young people — from Maine, from the rest of the country, from international migration — we will continue to suffer the inevitable consequences of demographic imbalance. These are the inevitably rising costs of education deriving from the fixed costs of existing programs and facilities and declining enrollment and the opposite effects on health care as the elderly population becomes a larger and larger portion of the entire population.

Martin: The biggest challenges are those of attitude. We have to overcome the narrative that Maine's aging demographic severely constrains our economic prospects. We must also recognize that we've got a lot going for us and that the path forward is one that celebrates and builds on our spirit of innovation, entrepreneurship and hard work that already resides here, as well as on Maine's unique natural environment and quality of life.

Will Maine ever resolve the challenge of available labor/workforce?

Moody: Without significant policy and cultural changes, the answer is simply “no.” Not only is the labor force shrinking, but the growth in elderly health services is labor intensive. This means less labor to fuel the industries of the future which are already predisposed toward younger more dynamic areas of the country. With so much of Maine's population beyond their child-bearing years, there are only two options available to turn this situation around: 1) have larger families or 2) import thousands of young families. Yet, average household size continues to shrink and more people are moving out than are moving in. When Rust Belt states like Indiana and Michigan feel they need to enact right-to-work to remain competitive, Maine needs to listen.

Reisman: Not with our current business and political climate. The answer, short of a time machine to go back and raise fertility rates, is immigration, but you need a pull factor to compete with other states or countries, and improve our attitudes towards capitalism and immigrants. Heck, we deride folks from Massachusetts, let alone Syria or Somalia. Those attitudes are not helpful.

Rector: While Maine is faced with a very serious challenge from the aging workforce, there are policies that could help turn the tide. The problem needs to be tackled from multiple angles: encouraging older workers to stay engaged in the workforce as long as they want to and are able to; assisting as many people as possible in finding jobs, including veterans, the long-term unemployed and people with disabilities; and attracting people to move into the state, especially young workers. Addressing issues like student loan debt burdens, the high cost of energy and tax reforms can make it easier for people already here to earn a living and for people living elsewhere to decide to move to Maine.

Lawton: Yes. Businesses will increasingly come to see that voluntarily paying higher wages and directing toward schools the same attention as they now direct toward their material supply chains will be the only way they can survive. When a resource becomes scarce, we inevitably come to treat it more carefully and learn how to use it more productively. Look at how much more productively we use all forms of energy today than we did in the 1970s. The same will be true of labor over the next several decades.

Martin: We must remember that in the global context, Maine is not an outlier in terms of our aging population. Technological innovation, better pay, greater flexibility and more family-friendly workplace policies have helped other countries like Germany (and many Maine businesses) overcome these challenges. Where we are an outlier is in the diversity of our population. The countries and states that are reversing the trend of an aging population are those with significant in-migration, particularly from diverse populations. Maine's quality of place — the safety of our communities, excellence of our schools, and extraordinary natural amenities — make our state an exceptionally desirable place for people of all ages and backgrounds to live. We need to do a better job of marketing our assets to the rest of the world and ensuring that those who choose to live here regardless of their place of origin, race, or ethnicity feel welcome and able to contribute fully to our communities and economy.

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