BROOKINGS — Business and community leaders were presented with a smorgasbord of information at the Brookings Economic Summit on May 5 — including thought-provoking insights from panelists with connections to finances and academia.
The trio touched on topics ranging from supply shocks, employment, inflation and wages to what movers and shakers should be considering in the near future. The panelists were:
• Joe Santos, the director of the Ness School of Management and Economics at South Dakota State University.
• Jared McEntaffer, the CEO of Sioux Falls-based Dakota Institute.
• Devan Schaefer, of First Bank & Trust and the Dakota Institute.
Labor concerns
The tight labor market that’s been a hallmark in Brookings and the rest of South Dakota was a source of brief humor during an otherwise serious discussion by the panelists.
“The unemployment rate in the state just went up to 2.3%, so labor force constraints are easing!” McEntaffer said, bringing a wave of laughter from the audience. More seriously, though, “I think that it is a really long-term structural issue for this state.”
He noted that South Dakota is consistently at the bottom threshold of what is healthy, in terms of unemployment.
“We just do not have a lot of slack in our labor markets,” McEntaffer said. “Unless we get more population growth, unless we pursue things, develop opportunities, to help retain young adults from moving away from South Dakota.”
He continued, “I mean, that’s what we really need: People moving to the state that are in their prime working years or retaining young people from moving away. That’s what we need to do — those are efforts that can take decades, so there’s no easing the labor force constraints in the short run.”
That said, Santos chipped in with an experience that’s been something of a rarity in the years since the COVID-19 pandemic: He recently met with a student to go over their resume and to talk about what they may or may not be doing well to attach themselves to the job market.
“There hasn’t been an appointment of that sort in my Outlook calendar for five years,” he noted. “There’s a bit of softening around the edges, I suspect.”
Santos added that a shift in mindset might be a more productive and strategic way to handle the region’s labor constraints.
“Thinking about outcomes, innovation as a sort of product of labor as input might be a better way to think about this strategically than to think about bringing in jobs or creating jobs — not that there’s anything wrong with that, but that’s a tactical approach,” he said. “Strategically, no one ever thought about job creation when they came up with penicillin or anti-lock brakes or cancer treatments. The goal was innovation. Focus on innovation, focus on productivity, and then think of the labor as being drawn into the region as a result.”
Closing out the unemployment portion of the panel, McEntaffer pointed out that it’s important to always have some level of unemployment.
“It is healthy, it is good. You need people graduating from college and then going into the process of looking for a job. You need people moving from one job to another,” he said. “You need people entering retirement. There is always a healthy level of unemployment in any local, regional, national economy.”
Diverging economies
Another question that came up centered on how Brookings fits within a dynamic where, at the national level at least, there’s a divergence between rural and urban economies.
For his part, McEntaffer thinks Brookings is well-positioned within South Dakota. How so? He envisions the state as divided into three categories:
• Urban/metro South Dakota, such as the cities of Sioux Falls and Rapid City and their counties.
• Counties with a large anchor community, such as Aberdeen, Brookings and Watertown.
• Rural counties with generally less than 5,000 people.
McEntaffer said a lot of growth has been seen in the second category — where Brookings sits — over the last 10 to 15 years in population and economy, especially manufacturing.
“Brookings is kind of leading that pack. You have the contribution of (South Dakota State University), which can produce talent and find new ways of always having a constant supply of smart, talented labor coming into the community, being introduced to the community and then having employment prospects in the community. It’s a tremendous resource.”
On the other hand, McEntaffer said rural parts of the state are facing more of an uphill fight, including aging and declining populations. Still, it’s not all bad news.
“Manufacturing employment growth in rural South Dakota is actually pretty strong, too,” McEntaffer said.
Overall, South Dakota’s priorities — such as agriculture, value-added agriculture, dairy industries and technological innovations, including those arising from Dakota BioWorx in Brookings — means the state has a lot of potential, even with the labor challenges facing it.
Trends to pay attention to
The world remains a highly interconnected place, even with geopolitical and economic tensions and disruptions in recent times. It’s worth noting that, because it’s like when a person tosses a stone into a still pond — the resulting ripples reach far beyond the impact point.
With that in mind, Santos spoke to global supply shocks that carry negative and positive aspects, starting with the current troubles in the Strait of Hormuz between Iran and the U.S.
“There’s a war in the Persian Gulf. This places extraordinary pressures on supply chains, and it places pressure on price tags. So, when you bring that together with the effects of tariffs on input prices — all of this is sort of in the pipeline, if you will, in the economy — and it’s wreaking havoc on small businesses as much as it is large businesses,” he explained. “So, that’s the sort of negative supply shocks, global tariffs and war in the Middle East. So, there are challenges there that will very quickly, if they haven’t already, percolate to regional economies. That’s the beauty of macro-economic forces; only fools think they can avoid them, right?”
Santos also spoke to a supply shock with a potentially positive effect — the advancement of artificial intelligence.
“I think how that affects labor markets and how it affects production more generally — I sort of like to think of it as the recipe as opposed to the ingredients, right?” he said. “The ways we bring inputs together will fundamentally change with AI. And, again, I think those challenges will very quickly find their way into regional economies as well.”
Santos continued, “I think of these as, again, positive and negative supply shocks. There’s an overarching uncertainty around federal policy; you can go there as well … but I think those first two are the most prominent.”
McEntaffer shared similar sentiments.
“I definitely think, short-term, it’s the war in the Mideast. It’s the impact on gasoline prices, which we have not felt overly in the United States yet. There are parts of the world — Europe, Asia — where the pressures of increased gasoline and diesel prices are felt much more strongly,” he said. “But as this conflict continues, I think we’re going to start feeling that pinch a lot harder in the United States.”
In his worst-case scenario, pump prices will just keep increasing.
“Essentially, we’re seeing tankers coming to the U.S. to start taking gasoline, diesel from the U.S. to then basically escort that to the rest of the world,” McEntaffer said. “As they do that, they will bid up prices here. There’s absolutely no reason we will not sell our gasoline and diesel supplies to foreign purchasers. When that happens, our prices will start to be bid up as well.”
Meanwhile, Schaefer brought up interest rates, mentioning that the Fed was expected to cut those rates once or twice this year — but now, with uncertainties emerging with the war in the Middle East and the national job market, things might not be so cut and dried.
“Now we’re bracing basically for no cuts or maybe a chance of a cut … that has real implications for both the economy and business leaders,” he said.
Interest rates
Are they too high? Too low? Or at a sweet spot? How a person answers depends a lot on their financial position, and it’s a topic the panel acknowledged.
Santos thinks higher rates should be the new normal, noting that the rates are higher relative to a “cataclysmic financial crisis in 2008 that left the world in a way that we had never seen it before with zero interest rates — that’s not the baseline to which we compare interest rates right now.”
He noted that interest rates from the 1980s and 1990s — when they ranged from 6% to 9% — are closer to the norm, rather than 2% to 3%.
“I think interest rates higher are the new normal. … So, all the evidence that I can see suggests higher interest rates would be more appropriate and certainly higher now in light of the oil crisis and the AI shock,” Santos explained.
McEntaffer, meanwhile, brought up how the nation’s debt plays a role in interest rates.
“It’s going to be harder to convince people on margin to lend to the U.S. government just because the debt is becoming so large,” he said. “That’s pressure for those interest rates to rise.”
McEntaffer then pivoted to the petrodollar system and the potential for its disruption, especially if people start trading oil in cryptocurrencies or the yuan instead of dollars — and what influence that would have on the global demand for dollars and, hence, the effect on interest rates.
“I’m actually fairly optimistic about the future of the dollar as a reserve currency,” Santos said. “I don’t think the euro or the yen or the yuan is going to be a competing force there.”
He said that’s in part because the world is so reliant on the dollar, while also acknowledging that “it’s not the strongest argument.”
Santos added that while the observance of property rights, the rule of law and a stable government are key tools in the dollar’s dominance, an unspoken truth is that a lot of it comes down to military power.
“It’s ultimately the power of coercion. It’s because you’ve got the 82nd Airborne. As long as you have that, then your rules actually mean something because you can enforce them with lethal force,” he said. “Let’s not lie to ourselves: That ultimately is what brings it home.”
That reserve currency dominance originated in the wake of World War II, which was won by the U.S. and its allies.
“Until that goes away, I don’t think you really lose economic faith in the U.S. dollar,” Santos said. “So, I’m quite optimistic for reasons that are somewhat troubling, but optimistic nonetheless.”
The importance of wages
It’s good to have a paycheck, but it’s always better to have an even bigger paycheck — and that’s something few folks would disagree with. That said, South Dakota has its challenges there, too.
McEntaffer more or less seconded that notion, especially when taking into consideration factors such as unemployment rates, labor force participation rates and the gross domestic product.
“We look good on paper because we have a high per-capita personal income. We have a per-capita personal income because more people are working than in other states,” he said. “You can end up with a high per-capita income even if you are a low-wage state, and South Dakota is a low-wage state.”
He pointed to the state’s low teacher salaries, but that it goes beyond that as well: “If you look at average annual wages, South Dakota is, for the last 20 years, sort of chasing the bottom five positions.”
McEntaffer said wages play a crucial role in attracting residents. “That’s something that I think we should spend more time talking about and trying to figure out ways to boost that number.”
Closing observations
With one final chance to make a point, the panelists put their voices to commonly held assumptions about the economy that they think is either wrong or, at most, over simplified.
• Santos: “Interest rates are too high and that the Federal Reserve needs to lower them,” he said. “There is no compelling evidence — there was no evidence before AI, there’s no evidence before the Persian Gulf, and there certainly is no evidence for this now.”
• McEntaffer: He said there’s no sales tax growth in South Dakota. “When you adjust things for inflation, it’s all imaginary, right? There’s no actual, fundamental real growth in our sales tax revenues in this state, which is just really, really challenging because the costs are going up.”
• Schaefer: He spoke to the K-shaped economy, where people with high assets have benefited from great stock market returns since the COVID-19 pandemic, but it’s a different story for folks without access to such resources and who are also dealing with higher interest rates and ever-rising inflation.
The “K” in question refers to the diverging paths of the wealthy (moving up) and the working class (moving down).
“It’s just really hard to live,” Schaefer said. “You kind of have this disconnect where, maybe on paper, everything looks great and you look at GDP or unemployment, but people are really feeling that pressure on them.”
— Contact Mondell Keck at [email protected].
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