Is the Stimulus Working?

Over at Cato, Chris Edwards asks Is the Stimulus Working?, taking a look at the components of GDP. As Edwards notes, "Government expansions usually cause private sector contractions" and the data indicates that trend has held up - since 2008, consumption is down, government spending is up, and private investment is plunging.

So the stimulus might be said to be “working” by keeping government fat while productive private investment falls off a cliff.

But is that what Americans really want in an economic recovery? Do we want an economy that ”recovers” with a bigger government workforce and a smaller private workforce? Do we want a ”recovery” where the government directs more of the nation’s investment and private businesses less of it? It certainly doesn’t sound like a prescription for long-term growth to me.

Putting Rendell's Layoffs in Perspective

Yesterday, Gov. Rendell announced layoffs for 255 state workers at a press conference, and said more might be coming if lawmakers don't pass a budget to Rendell's liking.

But let's put those layoffs in perspective:

1) Pennsylvania currently has over 5,000 vacant positions.  While some of those may not be funded in the coming year, there are a lot of potential openings, and state employees generally have a history of moving between departments.

2) Auditor General Jack Wagner proposed using early retirement incentives (and no replace the retirees/only hire within) - suggesting this would reduce the state payroll by 2,000 to 3,000.

3) The 255 jobs represent less than one-half of one percent of the state payroll.  Contrast that to the private sector, where Pennsylvania has lost 184,000 net jobs over the past year, or 3.6%.  In other words, if you work in the private sector, you are at least 12 times more likely to lose your job than working for the state.

	Private Sector Jobs (x1000)			State Payroll
Jul-08	5,111		Positions	83,508
Jul-09	4,928		Filled Positions	78,295
Net Jobs Lost	184		Layoffs	255
Percent Lost	3.6%		Percent Layoffs	0.3%

Job Losses are Never "Good News"

A number of media outlets, such as the AP, are reporting Pennsylvania's June job losses of 3,400 with a positive spin, as in the "smallest monthly job loss since August."

But that is ridiculous spin. Losing jobs is never “good news.”  That is like saying you lost less money gambling this month than you lost last month. 

Basically businesses that have laid off workers are laying off more – that’s not good for the economy, even if the 2nd round of layoffs is smaller than the first.  It is adding more people to the unemployed lines.

And the statistic in question net jobs, meaning more folks are being let go than hired.  Our economy needs to add jobs every month just to keep the current unemployment rate from rising. 

The trend of "fewer losses" could be indicative of then end of the worst, but it could also indicate that the economy has already shed so many jobs, it could only get gradually worse.

Why 16% Tax Increase Would Cost Pennsylvania 24,000 Jobs

I've gotten a couple of question on the "how" and "why" we estimate that Rendell's personal income tax increase will cost 24,000 Pennsylvania jobs.

The estimate of 24,000 jobs lost came from an economic modeling program called PA-Stamp developed for us by the Beacon Hill Institute at Suffolk University.   The “jobs lost” is the difference between how many jobs the state would have at current tax rates, and how many following an income tax increase. 

The model calculates, based on historical trends in PA and other states, the effect of changes in tax rates on economic performance, business, and individual  behaviors.  Why would jobs be lost?  People will have less money to spend, small business owners will pay higher taxes and have less to invest in their companies, and some individuals and businesses will move to other states.

That increase  is on top of what Pennsylvanians already pay for government (almost $40,000/family for state and local government), and the current tax burden - 11th highest in the nation.  As we have pointed out before, not too many people (about 1% of Pennsylvanians) think their taxes are too low.

What are the alternatives to a tax increase?  The Senate budget is a good start, as even with its cuts, it represents 36% spending growth under Rendell– about double the rate of inflation plus population growth.  And yes, we would support deeper cuts – we identified over $5 billion in wasteful spending in our report Government on a Diet: Spending Tips 2009.

We also recommended (in that report and elsewhere) – Medicaid reform, providing more school choice, reforming higher education funding, privatizing the state liquor stores, privatizing PHEAA, privatizing museums and the arts, reforming the state pension systems, and repealing prevailing wage laws (an estimated $9 billion cost on state and local government).

Growing Pennsylvania's Economy

A coalition of business groups released their proposals aimed at improving Pennsylvania's economic climate. Among the top of their list were state spending limits, lower business taxes, health care reform, and tort reform.

Click here for the full report.
Growing Pennsylvania's Economy

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Will Government Motors be a Partisan Operation?

With the federal government taking control over Chrysler and GM, ill-conceived ideas are sure to ensue.   The planned restructuring of GM (soon be renamed Government Motors?) is one - heavily favoring the UAW, and giving bondholders a fraction of the ownership, despite the fact they are owed more.  And I have been extremely puzzled by the plan to close down dealers based on the idea that these car companies are selling too many cars.

But I was looking at it from an economic perspective, not as a cynic would.  Details are now emerging that the plan to close Chrysler dealers came directly from the White House, not Chrysler managment, and those being shuttered were largely Republican donors.  The DC Examiner has a column on this, and blogs  Bucks Right and Director Blue have crunched some of the numbers.  Ah, the world makes sense again.

Latest Pennsylvania Job Numbers (March 2009)

According to the State Department of Labor and Industry, Pennsylvania lost 30,500 jobs in March alone.

The data indicate that since the recession began - officially in December of 2007 - Pennsylvania has fared better than most states, but so far this year, Pennsylvania ranks among the highest states (7th, to be precise) in the number of jobs lost.  This would seem to indicate that Pennsylvania is continuing its historic pattern of feeling the effects of recession later than other states (historically the state as also recovered later), given the dynamics of the state economy.

The numbers also indicate that Pennsylvania has now lost jobs under Governor Rendell (Dec. 2002 to March 2009, not seasonally adjusted), ranking Pennsylvania 34th in job growth during that time - 31 states actually had job growth. 

 

State Personal Income and Pennsylvania's Economic Ranking

The Bureau of Economic Analysis has released the latest data on personal income by state. For the first time in many years, Pennsylvania grew faster than the nation as a whole - 4.0% to 3.9% - and ranked 28th among the 50 states.

That bit of good news (tempered by the fact that is a relatively slow rate of growth, and that PA historically is behind the nation both in entering and exiting a recession) aside, Pennsylvania still lags behind the rest of the nation in job, income, and population growth under Governor Rendell; ranking 33rd, 40th, and 43rd among the 50 states, respectively. Had Pennsylvania grown at the same rate as the U.S. since 2002, the state would have 72,000 more jobs; 550,000 more residents, and $19.5 billion in additional personal income.

As a point of reference, I included Texas, as Gov. Rendell's minister of propaganda has claimed Pennsylvania has done better than any other "large state" - which is clearly false.

Establishing the "Facts" about Pennsylvania's Economy

Chuck Ardo - spokesman for Gov. Rendell - has an op-ed in Sunday's Patriot News about what a great success Gov. Rendell's economic policy has been.  This taxpayer-funded propaganda criticizes unnamed "conservative characters" because they "confuse dogma with established fact."  Amazingly, Ardo seems to ignore all established facts about Pennsylvania's economy.

Ardo asserts, for instance, that Pennsylvania has more jobs now than when Rendell took office, as though every single new job is created by government, not the private sector.  He ignores the fact the Pennsylvania has lagged behind the rest of the nation in job, population, and income growth since Rendell took office (ranking 40th, 42nd, and 40th in those categories since 2002).  More importantly, states that spend the most on "economic development" (Pennsylvania ranks second) have slower economic growth than the rest of the U.S, whereas states with lower taxes outpace high tax states (again, PA is on the wrong end of the spectrum)
 
Ardo's rhetoric can't quite explain why residents keep "Movin' Out" of Pennsylvania to other states.  Pennsylvania is the 4th highest "outbound" state, according to United Van Lines.  The Commonwealth lost 12,000 residents to other states last year, and 58,000 since 2000, according to the US Census.

Pennsylvania gets low marks from almost all independent rankings of the state's economic competitiveness.  Forbes considers PA the 10th worst state to do business; the Beacon Hill Institute Ranks PA 39th, ALEC ranks the state 44th, and CEO Magazine ranks us 37th.

Most blatantly false is Ardo's statement that "Pennsylvania [is]on stronger economic footing than any other large state in America."  Isn't Texas still considered a "large state"?  In 2008, Pennsylvania lost 77,000 jobs; Texas added 155,000, despite a national recession.  Since Rendell took office, Pennsylvania has added 109,000 jobs; Texas has added 1.03 million - over nine times as many.

Ardo is correct when he compares Pennsylvania positively to our neighbors, particularly New York and New Jersey, whose economies and state budgets are in bad shape.  Unfortunately, Rendell seeks to imitate the failed policies of these states, rather than those of thriving states.

Rendell should reject the federal “stimulus” money

I know it will never happen -- just like asking him to pass on a greasy cheese steak sub -- but Gov. Rendell should reject the federal "spendulus" money. He should view it as the stolen cash it is -- stolen from our children and our children’s children. But, alas, he won’t pass up the "free" money. He’ll spend it all, and then some.

Of course, there’s no such thing as free money. But too few people are asking who is going to pay for it. "David Cameron" did. That’s his nom de plume because he works a little too close to the political mischief in Washington and his employer would have his head -- and his job -- if he publicly spoke out against the president’s spendulus plan. Nevertheless, the questions have been asked, and the Obama/Pelosi/Reid team isn’t answering.

Governors in states like South Carolina, Texas, Louisiana and Alaska are giving their own answers. They know that even if they get this influx of cash, the strings attached from Washington will be a "mile long."

S.C. Gov. Mark Sanford is thinking about the long-term consequences of building his state budget on one-time infusions of federal money. He said, "You get this huge slug of money. It funds programs for a couple of years, and then what? You get it started, you get a constituency established, and then we’re supposed to yank the rug out from under people when the federal money runs out?"

But that, I believe, is the intended purpose of this spendulus plan. Cameron agrees that this part of the unspoken plan will increase government spending for decades to come.

Here’s how it will work in Pennsylvania:

First, the state is projecting a deficit of $2.3 billion, bringing projected state revenues down to $25.9 billion for FY 2008-09. But with the infusion of $3.5 billion of "free" federal money, Rendell plans to both fill the current budget-deficit gap and spend even more money next year -- to the tune of nearly $29 billion, an increase of nearly 12 percent during an economic downturn.

But what happens when that one-time infusion of $3.5 billion is spent? You got it, Rendell declares another revenue crisis and tells all you working stiffs out there that we need to raise your taxes, otherwise we’ll be destroying all those jobs government just "created."

This is how you turn temporary "stimulus" spending into permanent and massive government spending. The result, unfortunately, will be significantly higher taxes, significantly deeper deficits, and much slower economic growth. But at least we might be able to move to South Carolina.

Was that the kind of stimulus you were expecting?

Matthew J. Brouillette is president and chief executive officer of the Commonwealth Foundation. This blog originally appeared on the Capital Domes at the Central Pennsylvania Business Journal.

The Super Bowl (Economic Version): Phoenix vs. Pittsburgh

Harold Miller has an interesting blog post, featuring a few graphs, comparing the economic growth of the Pittsburgh region to the Phoenix region - the two hometowns for tonight's Super Bowl competitors.

Over the past 16 years, however, the Phoenix metro area has almost doubled in population, and is now the 13th largest region in the country, while the Pittsburgh metro area has fallen from 18th to 22nd. A lot of the population growth in Phoenix was fueled by the kind of immigration that Pittsburgh has failed to attract. In 2007, 58% of Phoenix residents were born in another state, compared to only 13% in Pittsburgh, and 17% of Phoenicians were foreign-born, compared to only 3% of Pittsburghers.

While the Phoenix area has been dominant over recent decades (the reverse of the football team's fortunes), they have struggles more recently, fueled by the collapse in their housing market, a problem Pittsburgh hasn't faced (as it hasn't had a strong housing market in decades). Of course, none of this should have an impact on tonight's game. Nor will the Steelers win impact the region's economy.

Those who do not learn from history ...

Deb Erdley has an article in the Tribune Review about the increasing taxpayer cost for the Pittsburgh Penguins arena, as well as details on the $1.5 billion in borrowed money spent on "economic revitalization" under Governor Rendell.

Despite all this "economic development", Pennsylvania continues to lag the nation in economic growth, ranks poorly in state economic rankings, and is losing residents to other states.

There is a lesson in all this - so-called economic development/infrastructure spending is no economic stimulus.  Unfortunately, this is not a lesson Governor Rendell has learned. He refuses to cut pork-barrel spending, even in the wake of a state deficit, and is pushing for the federal government to bail-out the state, wasting more taxpayer funding on these failed programs.

Worst Economy Since the Great Depression?

Free Market Politics with no words (or 6,000 if you think a picture is worth a thousand words) debunks the oft-stated rhetoric that we are facing the "worst economic crisis since the Great Depression".

Using job and output (GDP) data it would be tough to argue that this is the worst recession since 1981 (output declines were much higher in the 1990 and 2001 recession), and it would be negligent reporting to suggest the current recession was worse than those beginning in 1948, 1953, 1957, 1960, or 1981.

In fact, it would be more accurate to describe this recession as somewhere between a "mild" and "average" recession. None of that should be seen as good news, but certainly not the catastrophic circumstances politicians are using to justify a massive expansion of government (on top of the massive expansion we've had in recent years)

Movin' Out of Pennsylvania in 2008

United Van Lines has release their 2008 migration study, detailing shipments into and out of each state. Pennsylvania saw 58% of movement leaving the state, ranking as the 4th highest outbound state (see related story in the Times Leader).

This data coincides with recent census data, which showed the Pennsylvania lost 11,500 residents to other states from July 2007-July 2008. Despite what Governor Rendell may claim about his success restoring Pennsylvania to prosperity, this is the continuation of a long trend in which Pennsylvania's economic and tax climate drive residents and businesses away.

Residents Still "Movin Out" of Pennsylvania

The Census Bureau released the latest annual population estimates.  The trends for Pennsylvania remain much the same:

• Pennsylvania grew by 0.2% between July 2007 and July 2008 - ranking 45th in population growth.  Since 1970, Pennsylvania ranks 48th, and the state has dropped a spot - to 43rd - in population growth since Governor Rednell took office.
• Pennsylvania continues to lose residents to other states.  While Pennsylvania added 22,000 residents in natural change (births minus deaths) and 15,000 immigrants, the state lost about 11,500 in net state-to-state migration.  Since 2000, Pennsylvania has lost 58,000 residents to other states.

While Pennsylvania residents continue their trend of "movin' out", it isn't as bad as some states - Michigan, California, New York, New Jersey, Ohio, and Illinois all lost between 49,000 and 144,000 just last year.  I bet if I tried really hard, I could find something these states had in common.

Stimulus Follies

OpenMarket.org has a good post on the failure of "stimulus" packages (i.e. government spending) to improve the overall economy.

What happened to the Great Depression II?

Carpe Diem points out that holiday retail sales were up over the weekend from last year.

Yet the CNN Money article with the same chart contains more of the doom-and-gloom reports, writing "signs persist that holiday shopping will suffer in the weakest economic climate in decades" despite higher sales than 2007, which was higher that 2006, which was higher than 2005, which was higher than 2004, which was higher than 2003, which was higher than 2002, which was higher than 2001, which was higher than 2000, which was higher than 1999.

Small Businesses in the Pennsylvania Economy

The Small Business Administration has published their latest profiles of small businesses in the US and each of the 50 states. Some of the data is a bid old (data on employment by small business is from 2005, and some of the other data is from 2007) so it does not cover the recent downturn in the economy.

However, the numbers are still very telling, particularly when looking at the Pennsylvania profile versus the US total. A look at the number of business (and total employment) show that the growth is in the number of small employers and nonemployers (i.e. self-employment and independent contractors). It also shows that Pennsylvania lagged behind the US.

Looking at the number of employees by firm size is even more telling. Small employers (those with less than 500 employees) now employ over half of all workers, both in Pennsylvania and nationally. Furthermore, all of the job growth occurred in small businesses; large employers lost workers from 2002-05, both in PA and the US. This finding adds greatly to the discussion of "creative destruction" in the economy.

Closing the Gap: The Story of the Middle Class

While the middle class is more of a state of mind than a voting block, both presidential candidates are promising prosperity for these crucial voters. Obama talks about "a rescue plan for the middle class" and McCain has designated himself the spokesmen of the middle class by adopting the plight of Joe the Plumber. How do we keep the American dream alive? Does recent history provide any insights? A piece by The Wall Street Journal's Stephen Moore in The American, looks at the progress of the middle class and comes to an important conclusion.

• After-Tax real comprehensive household income has increased since 1993 for every class including the middle class.
  
• Those in the highest income bracket have gained the most wealth partly because those in lower brackets move up when their wealth increases, but the richest have no place to go.
  
• America is still the land of opportunity, 270 on the Forbes 400 richest list amassed their own fortunes.
  
• The average salary up for a middle class American increased from $40,000 in 1967 to $60,000 in 2005 (even without adding health benefits, increased vacation time and other perks).
  
• Economists estimate the purchasing power of the middle class has increased a third and those in the middle class who earn $75,000 or more have tripled since 1967.
  

If the middle class is doing so well why are the poor always with us?

• The constant flow of immigrants replenishes the poor class and disguises upward mobility.
  
• Most of the poor households in the United States are headed by senior citizens, because the elderly have many assets but very little income.
  
• A 2007 study by the Treasury Department based on family incomes between 1987-1996 and 1996-2005, found a correlation between the extent of poverty and rapid income gain. At the end of each study the average family had doubled their original income.
  
• Another explanation for the exaggerated gap between the rich and the poor is the exclusion of government benefits and from official calculations. When you include all sources of income the poor saw a 9% rise from 1993-2005. And the number of people in low-income housing has been shrinking as a result of the family breakdown.

More good news . . .

• Income gaps between races and sexes are closing. Moore estimates the remaining gaps are likely to be a result of one's skills and productivity.
  

Finally, Moore asks if higher taxes on the wealthy would help the middle class continue this positive trend?

"In 1972 when tax highest tax rate on the rich was 70% and the top capital gains tax rate was 35%, the richest 1% of Americans paid 17% of the income tax burden. Today, with a top income tax rate of 35% and capital gains at 15%, they pay 39%." What's the point? "With higher income tax rates the rich shelter more of their income through tax carve-outs, they invest less in the United States and more abroad, and they work less."

Bottom Line: The best way to ensure prosperity for the middle class is to allow every person to keep more of their money, regardless of their income bracket.

Obama's tax plans and small business

Originally posted at the Capitol Domes, a new blog from the Central Pennsylvania Business Journal.

Barack Obama says he's for raising taxes on the Fat Cats and Big Businesses, not on middle-class workers and small mom-and-pop operations. But how will his plans play out in reality once we finally move past the political rhetoric?

Not well. At least that's the analysis of the nonpartisan Tax Foundation. Yesterday, the 71-year-old organization released a report from Dr. Robert Carroll showing small businesses -- approximately 45 to 55 percent of them -- would take a major financial hit under Obama plans.

This is not good says Carroll because "Small businesses are an important source of innovation and risk-taking, creating between 60 and 80 percent of net new jobs, employing over half the labor force, and generating more than one half of the nation's gross domestic product."

But if Obama is proposing to increase the top two bracket rates from 33 and 35 percent to 36 and 39.6 percent, respectively, how will that negatively impact small businesses and employees?

Carroll explains it this way:

An often underappreciated feature of the U.S.-tax system is that most small businesses are not required to pay the corporate income tax. Instead, small-business income "flows through" to the owners who report it on their individual income tax returns and pay taxes due. Indeed, about 35 percent of business taxes are paid in this manner by the owners of "flow-through" businesses -- sole proprietorships, partnerships and S-corporations.

The top individual tax rates are particularly important because a disproportionate share of the flow-through income reported by small-business owners is taxed at those rates. Among the small share of tax returns that are subject to the top two tax rates, most receive small-business income.

But what is also lost in this tax increase discussion is the recognition that businesses ultimately don't pay taxes, only people do -- people earning incomes from both big and small businesses.

Don't worry too much about the rich and large corporations though. They'll figure out how to avoid the brunt force of the Obama tax increases (including moving their operations overseas to any number of countries that have cut their corporate taxes). But standing right behind them -- absorbing the blow -- will be the entrepreneurial sector comprising our community mom-and-pop businesses and ultimately our jobs.