The first question everyone would like to ask of an economist is: What’s the stock market going to do? What are your expectations for 1999?

The stock market will begin to see some gains in January; 1999 will continue to see volatility. But, on a net basis, year-end, the stock market will have a gain. December is ordinarily a down month because institutional buyers are trying to establish their year-end figures. They’ll be selling off losses and gains for tax reasons. On the realized gain basis, you usually have an uptick in the market in the month of January .

How does the future of the stock market relate to 1999 business conditions in the U.S. and Kentucky?

The stock market is not going to have that much effect on the level of economic activity. The market has recently had billions of dollars worth of stock losses, but many of those are paper losses. Market losses will affect some spending patterns, but I think that effect is minimal.

Please give our readers across Kentucky a short comment on each of these areas:

Unemployment rates

U.S. unemployment rates will probably go up some in 1999. There may be a small increase in Kentucky, but I don't think it will be significant.

Inflation

The problem in 1999 is not going to be inflation; it may be deflation. Prices, especially in manufactured goods, will be going down. There could be some increases in foodstuffs, but hard goods will definitely be under downward pressure.

Interest rates

Interest rates will be on a slightly downward trend through the early part of 1999; the Federal Reserve has recently reduced interest rates and additional cuts are possible.

Housing starts

1998 has been a pretty good year. When interest rates are low in housing, that results in what is called "borrowing from the future." We’ve had fairly low mortgage rates and we’re going to have even lower ones. But I don’t think the interest rate reductions will be enough to stimulate the housing starts because so many homes have been built in the last year or two.

Multi-family development

In the ’80s, a large stock of multi-family housing was put in place. A lot of it was uneconomic to investors. Overbuilding was one of the things that contributed to weakness in the banking system and the whole commercial real estate market. Population growth is now providing stimulus for further growth in multi-family housing.

Bankruptcies

If the legislation that makes bankruptcy laws stricter comes to fruition, I would expect to see a decline in bankruptcies. We could have "let’s beat the deadline" or "let’s recognize the fact that we are bankrupt" - a factor that would accelerate filings in the short term.

What segments of the economy will do well in 1999 and which may underperform?

Construction and automobiles will not be a source of growth in 1999. The high-tech area will pretty much be flat also. The cycle may turn to non-durables and clothing, in particular. A swing towards suits, ties, shirts and nice blouses may be on the comeback; the retail sector (consumer goods, non-durables) will show strength in 1999. That’s usually the case when the economy begins to soften. Some forecasters think that 1999 could be a recession year. I’m not ready to buy that yet, but I do see a slow-down.

Has U.S. monetary policy helped stabilize the economy?

Monetary policy is one of the things that’s contributed to the lack of cyclicality in the U.S. economy. I won’t say the business cycle has disappeared – but it certainly has changed its shape. Since 1979, the U.S. Federal Reserve has been the best central bank any country in the world has had at any time. Paul Voelker and Alan Greenspan have both given us long periods of excellent federal reserve monetary policy. Associated with that, in recent years, has been a declining federal budget deficit and globalization of our economy.

Regarding globalization, it seems that Kentucky has gained jobs in some areas and lost some in others.

Here in Kentucky that is certainly the case. Apparel is the area where we’ve been losing jobs. That industry moved to Kentucky back in the ’50s and ’60s and we had a pretty good run with apparel for 30 or 40 years. Kentucky still has significant employment in apparel and that will continue as long as the plants remain relatively efficient. Now we have higher paying jobs in motor vehicle manufacturing and production of motor vehicle parts. Those are partly the reason why apparel is leaving the area. If you can work at an auto plant for $15 an hour, why work in an apparel plant for $7 an hour? That’s what happens when you bring in higher paying jobs; you tend to dry the labor supply for the industries with lower paying jobs.

Regarding the automobile industry, you recently prepared a report entitled "The Significance of Toyota Motor Manufacturing Kentucky, Inc.," which updated a 1992 study by the Center for Business and Economic Research at the University of Kentucky Gatton College of Business and Economics. What was the conclusion of this report?

The general conclusion is that the Toyota plant in Georgetown has been an important element in the growth of the Kentucky economy over the past 10-12 years. The plant has been a success in terms of the return on the state’s incentive package.

Kentucky provided a incentive package valued at $147 million in 1986. When you add interest costs to that, it comes up to about $305 million over a 20-year period. Between 1986 and 2005, the state will collect approximately $1.5 billion in additional taxes. The state’s net gain will be $1.5 billion minus $300 million. That works out to a rate of return of 36.7 percent per annum. If your business could make 36.7 percent per annum you’d be delighted.

Did the study look at just the taxes generated by the Toyota plant and its direct employees, or did it look at the fact that Toyota also brought in other companies that stimulated additional employment?

Yes and no. We looked at the Georgetown plant (TMMK), their payroll and expenditures in Kentucky for parts, plants, equipment and supplies. What is spent by TMMK becomes income for somebody else who in turn spends. And there are standard multipliers for calculating that. But as the study points out, at the end of 1997 approximately 175 manufacturers of automobile parts were operating in Kentucky. When Toyota announced it was coming here, there were only 55 parts manufacturers in the state. Toyota currently purchases from only 58 of those. We have gained 120 parts manufacturers that are in part producing for Ford, Corvette, Saturn, etc. They found Kentucky to be a good location. I call this a spin-off effect. We didn’t take spin-offs into account. The bare bones story of Toyota is so good in terms of success, you don't need to keep adding on.

What factors caused the return on the incentives given to Toyota to exceed initial forecasts? Were people too conservative when they projected what the return would be? Or did Toyota’s success exceed their initial expectations?

I think all of the above. As Jamie Butters at the Lexington Herald Leader has put it, "Toyota under promises and over performs." Toyota’s original commitment was to invest $800 million to build a plant, hire up to 3,000 people, and produce up to 200,000 vehicles. The Toyota investment is now $4.5 billion, there are 7,800 team members, and the plant may produce 435,000 vehicles this year. TMMK found that the labor force was good. Everybody lived up to their commitment. The Camry is a quality product of a world-class company. Toyota was treated right by the local people and state government. The emphasis on training obviously paid off.

Population in Kentucky increased only about 25,000 from 1980-1990. This decade, Kentucky's population is forecast to increase (by more than 350,000) to over four million persons – a growth rate 14 times faster than during the’80s.

What factors have created such a significant increase?

Three factors. Jobs, jobs, jobs. That’s what causes population growth, jobs. We’ve had tremendous growth of jobs and higher paying jobs than we saw during the ’70s and ’80s.

Outmigration (moving out of Kentucky) has slowed down because there are jobs here in the state and people can stay. And, we’ve had some inmigration. At Toyota, 95 percent of the workforce comes from 116 of the 120 counties in Kentucky. Some of these people had left the state and were working in the auto industry elsewhere and then came back when the opportunity arose.

The Kentucky Cabinet for Economic Development has received criticism for giving incentives to companies. Based upon your studies, are incentives in general good investments?

The incentive package for Toyota is one of the most successful incentive transactions ever done by any state. Seventy-eight hundred jobs is a lot of jobs to come over a 12-year period from a $147 million investment. Kentucky needs to invest more. I regard incentives as an investment. I don’t think the question is whether we should or should not have incentive programs; that is part of the recruitment competition these days.

The current incentives in Kentucky generally give the employer a credit based on the amount of state income tax normally paid by its employees. The theory is, Kentucky is not really giving money away, it's giving employers a credit equal to the taxes that are being generated by the newly-created employment.

The state’s profit on Toyota would probably pay for all of the incentive programs they’ve ever had and maybe will have for the next few decades. [But] that’s not really a good way to look at it. I have mixed feelings about the current structure of the incentive programs. I think the incentive programs are necessary. I think they need to be well-designed programs. The one for Toyota was well designed. It included purchase of the land, site improvement, putting in the water sewers and utility lines, the training facility, money ear-marked for training and the highway system around the plant. All of that is enduring investment in terms of real estate, real capital and human capital.

Would a post-incentive analysis at the end of five or ten years allow the state to determine how good an incentive it was and how to design more effective future incentives?

There should be a post-audit on all incentive programs. Continuous monitoring by some state agency other than the economic development cabinet would be beneficial. The economic cabinet is doing a good job but the lack of information creates suspicion. A post-analysis would totally dispel any criterium.

What advice would you give business owners in the area of economics that might help them operate their business better in the coming year?

They should give serious thought to the quality of their employees, their motivation and their training. What I see happening is that the value of efficient, courteous service has become greater. When I go to my bank, I don’t want to be dealing with some machine or robot, whether it’s a human robot or an electronic robot. I want a level of knowledge and service and courtesy that meets my needs. I think business has gotten too far away from that.