Friday, July 29, 2011

Weak GDP numbers

The Bureau of Economic Analysis released new GDP numbers today and the news is not good.  Annualized second quarter growth was a very weak 1.3 percent, while the number for the first quarter was revised down to an anemic 0.4 percent.  Does this mean that we are headed toward another recession?  Perhaps, but it's not unusual to have growth this weak yet still not enter recession.  The chart provides GDP growth since 2003 and shows that growth was similarly weak in late 2006 and early 2007, reflecting the softening of housing markets and rising oil prices.  GDP bounced back in 2007 as oil prices fell, but then it all hit the fan in 2008.

Many economists think that oil prices are one of the keys to understanding the occurrence of recessions. If they are right, then we might be in for some more trouble.  The chart below tracks the recent movement of oil prices.  Note the sharp increase in late 2010, just prior to the recent softening of GDP growth.

Wise words about Aerotropolis

I admit to not knowing much about Missouri Rep. Jeannette Mott Oxford (D-St. Louis) before I read this Missouri Watchdog article, but I'm going to keep my eye on her. The article has some perceptive quotes from her about the Aerotropolis plan, including
  • “A lot of people understand that things in this bill don’t smell right.”
  • “I don’t think there is evidence that tax credits create a lot of jobs,” she said, adding that businesses often threaten not to come to a region or state unless they are promised some kind of incentives.
  • “The words I use to describe this is mafia capitalism.”
Missouri Sen. Jason Crowell (R-Cape Girardeau) also deserves kudos for his wise words:
“Developers know this will not be a financial success,” Crowell writes. “Otherwise they would move forward with Aerotropolis without government subsidies.”
Finally, Sen. Kurt Bahr (R-O'Fallon) points out the peculiar logic of using money saved from doing away with ineffective state tax credit programs to finance a new tax credit program.

Let's hope that the good sense exhibited by these representatives of ours in Jefferson City is common enough to improve state economic development policies.

Wednesday, July 27, 2011

Boehner vs. Reid

Here is Keith Hennessey's take on the Boehner bill. He likes it for a variety of reasons, including that it gives a political advantage to the Republicans. He gives a good description of the mechanics of the bill here. Regardless of your politics, the description is worth your while.

There appear to be three alternatives being bandied about: the Boehner bill, the Reid bill, and failure. Maybe something else will crop up if the first two of these die. The Reid and Boehner bills both toss out the President's demand to raise taxes. The Boehner bill has what is now scored as $900+ billion in spending cuts, with mechanisms for further spending cuts and, just as importantly, tax reform later on. The Reid bill has mostly phony spending cuts, including a drawdown of spending in Iraq and Afghanistan that is already in the spending baseline. The Boehner bill gives only a short-term increase in the debt limit that will last for only 6 months or so. The Reid bill, on the other hand, raises the limit by enough that the issue shouldn't come up again until after the 2012 election. Apparently Democratic senators from red and reddish states do not want to be arguing for tax increases just before a bunch of them are up for reelection.

Focusing on fiscal sanity rather than politics, the Boehner bill is clearly superior to the Reid bill, while the Reid bill might or might not be better than failure. Boehner does something about spending and promises concrete processes to achieve more later, unlike the bipartisan Gang of Six plan from last week, which wasn't tied to the debt limit. Reid does next to nothing about spending and promises nothing down the road. It's seems to be nothing more than political cover. Obviously, all plans are designed to provide political cover, but not all of them also achieve something.

Update: Here is Douglas Holtz-Eakin's take, which sounds about right:  
The plans are quite similar. Indeed, the best way to think about the Reid plan is that it is simply the Boehner plan with fake cuts (largely war spending) added on. Put differently, executing the Reid plan is the same as executing the Boehner plan and then adding an unrestricted debt limit increase on at the end. Since so-called “clean” increases are a signal to markets that the U.S. cannot address its fundamental problems, this is extremely dangerous and undesirable.

Tuesday, July 26, 2011

Energy and the states, redux

USA Today has a nice summary of the reasons why Texas has accounted for about half of the country's total job growth since the end of the recession. Basically, it is some combination of an energy boom and a non-anti-business tax and regulatory climate. I've posted a couple of times (here and here) on the role of energy in helping states to recover from the recession. Today's Wall Street Journal describes how two states (New York and Pennsylvania) are handling their potential energy bonanzas, with predictable results.

Monday, July 25, 2011

Hurray for Lindenwood!

The Chronicle of Higher Education just released its yearly list of Great Colleges to Work For, and my own Lindenwood University makes the list again, ranking among the nation's top 10 large universities. It should be noted that two other institutions in the St. Louis area, Webster University and McKendree University, were also recognized. To get an idea of how impressive this is, the St. Louis metro area had as many colleges recognized as great places to work as did the entire state of California, which has roughly 13 times the population.

Lindenwood University is one of the great success stories in higher education. In 1989, the university was nearly bankrupt, was selling its campus from under its own feet, and had an enrollment that had fallen below 1,000.  By 2010, it was debt-free, had a 500+ acre campus, and an enrollment of over 17,000 students. This remarkable story deserves its own book, which it got in 2007 when my colleague, Ed Morris, published The Lindenwood Model: An Antidote for What Ails Undergraduate Education. The current state of the University can be found here

Friday, July 22, 2011

Preventing economic recovery

In my post on Monday, I described how the energy sector has helped Texas and North Dakota have much stronger recoveries than the rest of the country. I also noted that some other states might benefit from the high energy prices that are hurting the rest of us. Expansion of energy exploration and extraction in those states also would push energy prices down. It looks like the Obama administration is going to make sure this doesn't happen.

Thursday, July 21, 2011

On balance, I am in favor of the Gang of Six Plan

Keith Hennessey has two excellent posts on the so-called Gang of Six plan. Whichever side you fall on, they are must-reads.  His first post is the best description of the plan that I have seen.  It's very detailed, so perhaps it's not for the faint of heart, but it picks out the important issues.  His second post is all about why he strongly opposes the plan as "absolutely terrible fiscal policy."

Although I cannot disagree with much of what Hennessey says about what he likes and dislikes about the plan, my inclination is to be in favor of the plan because it is probably the least bad choice from an array of plans that are "terrible fiscal policy." The Ryan plan and the Bowles-Simpson plan are both pretty good fiscal policy, but they are both academic exercises that cannot realistically pass through Congress and be signed by the President.  All of the proposals that actually stand a chance of being enacted are terrible fiscal policy.  We are not left to choose from among a mix of terrible and good plans, only from an assortment of terrible plans.  Some, such as the Gang of Six plan, have elements that can pay big dividends in the future.

The advantage of the Gang of Six plan is that it contains four major structural changes: the technical correction to the CPI, elimination of the Alternative Minimum Tax, repeal of the CLASS Act, and a promise of tax reform that lowers marginal rates and reduces tax deductions.  Hennessey's opposition is primarily based on the vague and unbinding nature of the tax reform promises.  I agree that it would be much better if this was more binding, but this is something to be fought over in the future.  At least the plan puts it on the table.  Even if proper tax reform is not enacted right away, this is something that can be done when a more economically literate Senate and President are in place.

I am not among those who think that any change in policy that results in more tax revenue should be labeled a tax increase and, therefore, be dismissed out of hand.  Structural improvments like the CPI fix make tax and spending decisions more honest. Under the proper measure of the CPI, income-tax brackets will be adjusted more slowly, resulting in more tax revenue.  At the same time, increases in Social Security benefits would no longer rise faster than is warranted by actual cost-of-living changes.  If you want tax revenue and/or Social Security benefits to be what they would have been under the existing CPI measure, then put the tax rates and benefit levels to votes.  Don't let them be determined by hidden technical details.  Obviously, I would like the amount of revenue and spending to be determined by me and me alone.  Short of that, however, I want them to be determined by an open and democratic process.  I think that much of the trouble that we find ourselves in is due to a terribly structured and undemocratic tax and spending apparatus.  Because of this view, I am inclined to jump at chances to reform the apparatus.

Update: Today's Wall Street Journal has an editorial that is along the lines that I have been thinking.

Wednesday, July 20, 2011

Bad news for Missouri

According to the Post-Dispatch, the Missouri legislature has agreed "on a tax credit deal that would include subsidies for data centers, science startups and a Chinese cargo hub at Lambert-St. Louis International Airport."  Time and again these state programs have been shown to be counterproductive, or at best ineffectual, in increasing employment in states that use them.  (I have a forthcoming paper that summarizes these findings.)  Nonetheless, politicians still believe that they are better than markets at allocating resources.  Perhaps their motives are not so pure. If there a policy that the Commerce Clause should be stretched to cover, this is the one.

Good News for Missouri

Moody's has decided that Missouri's triple-A bond rating will not be downgraded in the event of a failure to raise the Federal debt limit. The ratings of several other states would face a downgrade, however.

Since I moved to Missouri almost 13 years ago I have been impressed by the fiscal probity of its state government, no matter which party held sway in Jefferson City. Admittedly, the other two states I had lived in were New York and West Virginia, the latter of which had a substantial share of its political class in Federal prison, under Federal indictment, or facing Federal investigation.

So you can imagine how stunned I was the first time I received a check from the state when it had accumulated too large of a surplus. I discovered later that this check was due to the Hancock Amendment, which has been an effective bulwark against the profligacy that afflicts so many other states. Some commentators actually argue that the Hancock Amendment will lead to the state's bankruptcy when the opposite is surely the case.

Monday, July 18, 2011

Missouri's AAA credit rating at risk?

Missouri Watchdog has an interesting article by Brian Hook in which I give my two bits on the possible effects of Federal default/shutdown on Missouri's credit rating. Missouri, as one of a few states with AAA ratings from all three credit agencies, should have no problem handling any problems that arise if the Federal government reduces intergovernmental transfers. Even so, it appears that Moody's will be reviewing the state's credit rating. Missouri's excellent credit rating is hard-won through years of responsible fiscal management (thank goodness for the Hancock amendment), and it's a shame that the profligacy of others puts that at risk.

Energy and state employment growth

By May of this year, our ongoing economic recovery, which began in July 2009, had generated a net increase of about 637.4 thousand jobs nationwide. This paltry 0.5 percent increase in employment was not distributed evenly across the country. The stark differences beteween states can be seen within our own metro area: Missouri, which saw a net decrease of nearly 26 thousand jobs during the period, or a 1 percent decline, was among the laggard states, whereas Illinois, which saw an increase of 44.4 thousand (0.8 percent), performed better than average. 

Amazingly, a single state, Texas, accounted for 42.6 percent of the total net job growth in the country. Texas's job growth rate of 2.6 percent for the period was more than five times that of the country as a whole. Naturally, the governor of Texas, Rick Perry, has asserted that his pro-business (actually non-anti-business) policies are responsible for his state's outsized job generation.

While there is surely a great deal to Governor Perry's claim, another contributing factor lies in the fact that oil prices more than doubled over the period. Such sharp increases in oil prices tend to have positive effects on employment in energy-producing states such as Texas, while helping to depress employment in most others. (Sidebar: Coincidentally, I have a new working paper about this very thing.) The effect of oil is seen most starkly in North Dakota, which has been experiencing an oil boom for several years and saw its employment rise by 5.6 percent since the end of the recession until May, making it the state with the fastest job growth.

Given that many parts of the country are at the start of what looks to be a shale-based revolution in energy production, more states might be getting a similar economic boost very soon. Missouri and Illinios, however, do not lie atop any of the recently found exploitable shale deposits and will have to look elsewhere for their economic salvation.

Friday, July 15, 2011

Letter to the editor

The Post-Dispatch published my letter to the editor about St. Louis not being chosen by the Brookings Institution as one of their guinea pigs. The letter is a less snarky version of my blog post from a few days ago. They inserted a grammatical error by replacing a comma with a period in the first sentence, but so it goes. 

Thursday, July 14, 2011

Cities being eaten alive!

Among the various government entities in the St. Louis metro area, many are grappling with difficult financial issues such as underfunded pensions. St. Louis city, for example, is doing some juggling to handle its fire pension payments. Although these are difficult issues and these are difficult times, our government entities have done a better job of avoiding these problems than have others. As an area with strong German roots, we should enjoy a degree of schadenfreude from the mostly self-inflicted pain of certain "cities being eaten alive by public sector workers."

Wednesday, July 13, 2011

Updated St. Louis Employment

In my inaugural blog post I described how the St. Louis MSA was doing worse than depicted by the standard payroll employment data from the Current Employment Statistics (CES). Specifically, the more accurate Quarterly Census of Employment and Wages (QCEW) indicated that St. Louis had a deeper recession and a slower recovery than the U.S. as a whole. Another three months of QCEW data are now available, so I have updated my projection of what the St. Louis job numbers look like through May 2011 relative to the start of the recession.

In this graph, the dashed lines are my projections of QCEW employment from January to May 2011. I obtain these by applying the trends from the CES data for the period to the latest-available month of QCEW data.

According to these projections, as of May 2011, US employment was 5.1 percent below its January 2008 level. Also, since the bottom of the recession in February 2010, the US had recovered 20.5 percent of the employment decline.

By May 2011, St. Louis employment was 5.7 percent below its January 2008 level and had recovered 21.9 percent of the decline that had occurred by the bottom of its recession in December 2009.

Tuesday, July 12, 2011

Missouri's household-moving regulations

Yet another excellent post from Dave Nicklaus, this time about Missouri Gov. Nixon's veto of a bill that included provisions to remove the anti-competitive requirements on moving companies. I was unaware of these specific rules, but they are ridiculous. A veto overide might be in the offing.

Paul Krugman: Two economist for the price of one!

Mickey Kaus notes Paul Krugman's two views on the effectiveness of one type of stimulus spending. Characteristically, Krugman expresses both views with the same confidence and "Nobelesse" oblige.

A sound policy change might actually occur

Dave Nicklaus has a nice column today explaining why it is a good idea to use a chain-weighted price index to adjust Social Security benefits for inflation. The idea has been around for a while and is uncontroversial on a technical level. The politics of it have always been difficult because the price index that has been in use, which overadjusts for increases in the cost of living, was a way to increase benefits without appearing to.

Education, education, education

There is a large amount of research examining the determinants of city and metropolitan area growth. A dominant theme of this research is that differences in human capital, as measured by educational attainment, explain a great deal of the difference in economic performance between any two places. Government initiatives such as development tax credits, centrally directed resource allocation, and studies by think tanks, on the other hand, have not been found to be particularly important.

The table below illustrates how good a job the St. Louis area does in educating its youth, relative to the rest of the Midwest and to a successful peer metro area, Minneapolis-St. Paul.

The table provides educational attainment shares of those aged 18-24 from the American Community Survey for 2005-09. This age group is the most pertinent because it is mostly beyond high school age and, unlike older age groups, is less likely to have been affected by in- and out-migration. It is clear from the table that the St. Louis MSA as a whole, and the city of St. Louis in particular, lag in providing its young workers with education. Smaller shares of them have advanced to higher education, and larger shares dropped out of high school.

Our government leaders might look at this table before expending any more resources chasing after think tanks to "identify strategies by which to capitalize on (our) unique assets; specify catalytic products, policies, and interventions; and establish detailed operational and financial plans."

Monday, July 11, 2011

St. Louis has dodged a bullet

The St. Louis economy received some excellent news last week when the Brookings Institution announced that it will not use our economy as a guinea pig. Instead, Brookings will try out its experimental Metropolitan Business Plans on four other unwitting and unfortunate economies. Although the Post-Dispatch editorial board is predictably dismayed that we will not be subject to this ridiculous statist experiment, the rest of us should breathe a huge sigh of relief.

According to Brookings, "Metropolitan business planning adapts the discipline of private-sector business planning to the task of revitalizing regional development. Such planning provides a framework through which regional business, civic, and government leaders can rigorously analyze the market position of their region; identify strategies by which to capitalize on their unique assets; specify catalytic products, policies, and interventions; and establish detailed operational and financial plans. These plans can then, in turn, be used to restructure federal, state, and philanthropic engagement in ways that invert the current top-down, highly siloed, and often ineffective approach to cities and metropolitan areas while bringing new efficiency to development activity." Yech!!!

Cutting through the gobbledygook, this says that, rather than having businesses decide for themselves what and where to invest, committees of local worthies will take on the task and devise an overall economic plan for the entire region. Although Brookings calls this a new approach, it is simply the same fatal conceit that befalls so many politicians: "All we need is to replace those terribly inconvenient individual decisions and market interactions with pronouncements from committees of people like us who know what's right." 

They could not be more wrong. The last thing we need is for our self-appointed best and brightest to "identify a regional job-creating 'niche' in what Brookings calls an 'increasingly export-oriented, lower-carbon, and innovation-driven' global economy."  What we do need, however, are politicians who understand that the local economy is best served by government leaders who know how ill-suited they are to decide what the private sector should do. Such leaders would focus government activity where it belongs: on providing the basic education, infrastructure, and legal framework for the private sector to flourish.

Friday, July 8, 2011

It's Obama's recovery

Today's employment report from the BLS suggests that labor markets are getting even weaker, two years after the official recovery began. In June, payrolls grew by only 18,000 and the unemployment rate rose to 9.2 percent.

Typically, when the President is asked about slow job growth and high unemployment, he refers back to the scale of the job losses in late 2008 and early 2009. He rightly notes that these job losses were not the result of his policies. As with all non sequitors, this answer is irrelevant. The ongoing sluggish recovery is the President's, and his policies have failed to revive labor markets. Many believe that the recovery would have been stronger if different (mostly opposite) policies had been pursued. Now that job growth and unemployment are even worse than a year ago, the President cannot credibly claim that his policies have nothing to do with the current situation. It wasn't his recession, but it's his recovery, and it's terrible.

Update: Here's the President in 2009 taking ownership of the economy.

Thursday, July 7, 2011

Is he ignorant or is he lying?

The President has claimed more than once that income tax rates are lower now than in recent decades. He did it again yesterday. This claim is an utter falsehood. It's not even close to accurate. It bears little to no resemblence to reality. It is laughably easy to fact check.

Here are some accurate statements: The current maximum marginal income tax rate has been 35 percent since 2003. It was above 38 percent from 1993 through 2002. In 1991 and 1992 it was 31 percent. By the end of the Reagan administriation in 1989 it was 28 percent. When Reagan took office in 1981 it was 70 percent.

I hope that President Obama is lying. We're in pretty deep trouble if he actually knows so little about taxes.

The huge costs of small regulations

I've been visiting my home state of New York this week (I'm from Upstate NY, not that other part of the state). One doesn't have to be in NY very long to appreciate how even small differences in economic freedom can impose significant burdens. For example, the first time you stop to fill up with gas in NY you realize that there is no device on the pump handle to keep the pump going by itself. Instead, you have to squeeze the handle until your tank is full. Now, this might not seem like a big deal, but it does mean that you need to add time to your stop if you want to wash your windows. Instead of washing them while you wait for your gas to finish filling, you need to wait until after it's done. As a result, a quick stop to fill your tank and wash your windows takes maybe 50 percent longer in NY than in Missouri, or nearly every other state. (Note that in New Jersey and Oregon you are not allowed to pump your own gas.)

What seems like a minor inconvenience is really a very costly policy. Say it takes an average of 1.5 additional minutes for you to pump gas and that fill your tank once a week. Based on an average hourly wage of $20, this translates into a time cost of 75 cents every time you fill your tank, or $27.50 per year. Multiply this by the 10 million (this is an educated guess) motorists in NY state, and you get a total cost of $260 million. So, according to my very back-of-the-envelope calculations, this seemingly minor inconvenience costs New Yorkers over a quarter a billion dollars a year.

It's easy to quibble with the details of my calculations, but the fact remains that this minor irritant costs hundreds of millions of dollars per year. Multiply this by the many minor and major (and often pointless) regulations that govern our daily lives, and one begins to appreciate the scale of the burden that regulations can impose.

Tuesday, July 5, 2011

Can we call it a failure now?

The President's own economists claim that the stimulus package, which has so far cost U.S. taxpayers $666 billion, has added or saved almost 2.7 million jobs. Jeffrey Anderson has done the math for us and comes up with $278,000 per job. Ignore for now the questionable economics behind the jobs claims and focus on the fact that these numbers are from the President's own economists using very optimistic models. Now realize that if it were up to the administration we would be in for another round of stimulus and billions more dollars down the rabbit hole.