A Different View of State Employment Performance

In light of the recently released Goldman Sachs study on comparative state performance during the recession (h/t Michael Leachman; no link, but thanks to study author Zach Pandl for sending me more info on the study) and the widely-quoted analysis at Political Math, both of which use raw employment numbers as their core, I've thought about what a better measure would be.

The problem with raw job numbers, and we see it in the case of Texas, is it makes a state look better than it is if it has a rapidly increasing population that job growth is unable to keep up with. Since December 2007, the state has added 247,000 jobs, but its labor force grew by 739,000 through June 2011, which is why the unemployment rate has gone up by 4 percentage points.

Pandl's study calculates June 2011 employment as a percentage of December 2007 employment, for all states. From the graph he sent me, it appears that North Dakota is tops at about 109%, Alaska next about 104%, DC third at about 103%, and Texas fourth at about 102%. I asked Pandl, what if we use a different dependent variable for your regression analysis, unemployment rate in July 2011 (newly available in the past week) as a percentage of the unemployment rate in December 2007. If we want to know how much worse a state's unemployment got, this is a pretty intuitive measure. I hope Pandl considers this calculation, because it turns out the results are substantially different. The table below ranks the states from best to worst (lowest percentage to highest percentage) on this measure.

State		July 2011 P	Dec 2007 P	Ratio 1
North Dakota		3.3	3.3	100
Alaska		7.7	6.5	118
Oklahoma		5.5	4.5	122
Nebraska		4.1	3.2	128
Arkansas		8.2	5.9	139
Vermont		5.7	4	143
Michigan		10.9	7.6	143
New Hampshire		5.2	3.6	144
Minnesota		7.2	4.9	147
Kansas		6.5	4.4	148
Iowa		6	4	150
Ohio		9	6	150
Maine		7.7	5.1	151
Mississippi		10.4	6.8	153
Wisconsin		7.8	5	156
South Dakota		4.7	3	157
Missouri		8.7	5.5	158
New York		8	4.9	163
South Carolina		10.9	6.6	165
West Virginia		8.1	4.9	165
Pennsylvania		7.8	4.7	166
Kentucky		9.5	5.7	167
Massachusetts		7.6	4.5	169
Oregon		9.5	5.6	170
Illinois		9.5	5.5	173
Virginia		6.1	3.5	174
DC		10.8	6.1	177
Louisiana		7.6	4.2	181
New Mexico		6.7	3.7	181
Connecticut		9.1	5	182
Indiana		8.5	4.6	185
Tennessee		9.8	5.3	185
Texas		8.4	4.5	187
Wyoming		5.8	3.1	187
Colorado		8.5	4.5	189
Maryland		7.2	3.8	189
Hawaii		6.1	3.2	191
Washington		9.3	4.8	194
Rhode Island		10.8	5.5	196
California		12	6.1	197
Arizona		9.4	4.7	200
North Carolina		10.1	5	202
Georgia		10.1	4.8	210
New Jersey		9.5	4.5	211
Delaware		8.1	3.8	213
Montana		7.7	3.6	214
Nevada		12.9	5.8	222
Florida		10.7	4.7	228
Utah		7.5	3.2	234
Alabama		10	4	250
Idaho		9.4	3	313

Sources: http://www.bls.gov/news.release/archives/laus_01182008.pdf, Table 3 (seasonally adjusted); http://www.bls.gov/news.release/pdf/laus.pdf, Table 3 (seasonally adjusted). Note that both figures are the preliminary ones from the initial press release for the month in question; Texas and Massachusetts have both been adjusted downward by 0.1 point for December 2007, for example, but I didn't want to download 51 spreadsheets to make this table. “Ratio 1” is simply the July 2011 rate divided by the December 2007 rate, expressed as a percentage.

As with Pandl's study, North Dakota and Alaska do very well, taking the top two spots. His other two strong performers, DC and Texas, fall slightly below the median (Virginia), however. Four of his five weak performers (California, Florida, Arizona, and Nevada) all do pretty poorly here, but so do states like Idaho (313% of December 2007 unemployment rate), Alabama (250%), Utah (234%), etc. His fifth poor performer, Michigan, actually does quite well (143%) on this metric, though it should definitely be discounted since the state has been losing population overall.

At this point, I don't have an explanation of why some states do better than others, since I don't have Pandl's dataset to run regressions myself. Energy works for the top three states, but not states like Louisiana, Texas, and Wyoming. I don't currently have the data on exposure to subprime mortgages or presence of high-end services (both of which Pandl found to be statistically significant) or for the many variables he did not find significant. But people with access to a lot of state-level data might want to take a look at this, or perhaps Pandl will do so.

The bottom line is that this view of employment performance undermines glib references to a Texas Miracle and challenges us to find an explanation of what really differentiates the states' employment performance. We should recall, too, that employment is not the only dimension of distress in our current economic situation (foreclosures immediately spring to mind), but it is an important one in its own right and contributes to the other major problems as well. Understanding why some states did better than others may give us some clues on what states should do differently, but we may find instead that a non-replicable factor like the energy industry remains statistically significant after controlling for other variables.

Texas Unemployment Worsening Relative to National Average

Michael Leachman at the Center on Budget and Policy Priorities has a new post up today

on why some state economies have weathered the recession better than others, naming Alaska, Texas, and North Dakota as prime examples of this. He cites “a new Goldman Sachs study,” which is apparently subscription-only (I'll follow up with the link if one turns up.) As we saw in my post, “The Massachusetts Miracle,” there are a lot of things worse in Texas than in the state conservatives love to hate, Massachusetts. In fact, in some ways the uninsurance rate in Texas is even grimmer than I painted it: While 26% of the entire population lacks health insurance, a full 33% of adults 19-64 is without insurance, the country's worst, compare to 7% in Massachusetts, the country's best.

According to Leachman, the three things that predicted better performance were the presence of the energy industry, low exposure to the housing bubble (in Texas, strong banking regulation), and having high-end service and technology jobs, which accounted for ¾ of the difference in state outcomes. He notes that the Goldman Sachs study found no effect from low taxes (income or property) and state government spending.

But I want to question the claim that Texas has done all that well. Yes, its unemployment rate is lower than the national average. But its unemployment rate was lower than the national average before the recession. In fact, its relative performance has worsened since the recession began: In January 2008, Texas' unemployment rate was 88% of the national average but in July 2011 it was 92.3% of the national average. See the following table, using monthly data at 6-month intervals.

Date                         Mass. Unemp. Texas Unemp. National Unemp.

January 2008                  4.4%              4.4%                 5.0%

July 2008                        5.3%              4.9%                 5.8%

January 2009                  7.1%              6.4%                 7.8%

July 2009                        8.5%              7.8%                 9.5%

January 2010                  8.8%              8.2%                 9.7%

July 2010                        8.4%              8.1%                 9.5%

January 2011                  8.3%               8.3%                9.0%

July 2011                        7.6%               8.4%                9.1%

Sources: For MA and TX, Bureau of Labor Statistics (http://data.bls.gov/cgi-bin/dsrv?la then, as Matthias Shapiro says, “select the state or states you want, then select "Statewide", then select the states again, then select the metrics you want to see”). For national rate, http://data.bls.gov/timeseries/LNS14000000.

Texas and Massachusetts entered the recession in December 2007 and in January 2008 with the same unemployment rate, 4.4%. The national rate in both months was 5.0%. Contrary to my implication in “The Massachusetts Miracle,” over the entire period of the official recession (December 2007-June 2009), Texas outperformed Massachusetts on the unemployment rate. This continued until January 2010. Since then, however, Massachusetts has had its unemployment rate fall by 1.2 points, whereas Texas' has been stable, even increasing by 0.2 points. Massachusetts now has a significantly lower unemployment rate than Texas, even though they started from the same level pre-recession. Texas' unemployment rate, at 8.4%, is now 92.3% of the national average, while Massachusetts has a rate that is only 83.5% of the national average.

As I stated in my last post, I don't consider Shapiro's argument at Political Math (that growth in jobs and the labor force are the best metrics to analyze employment performance) to be that persuasive: he conflates growth in the labor force with interstate immigration, and I don't see how adding two new unemployed people to the labor force for every new employed person is such a “good problem to have.” As we saw above, Texas' unemployment rate has worsened more than the national average, and the state fares poorly on a whole host of economic and social indicators compared with “Taxachusetts.”

Texas Employment: When Do Conservatives Consider Illegal Immigration a “Good Problem to Have”?

A commenter on my Massachusetts article says I could have saved myself “a decent amount of time and embarrassment” by relying on data from Political Math. As other commenters pointed out, Matthias Shapiro's post was not addressed at anything but job numbers, and hence had not undermined anything I said about income, violent crime rates, uninsurance rates, infant mortality rates, poverty rates, educational attainment, etc.

Shapiro's argument is that we should primarily be judging Texas vs. other states on its job creation. Especially in light of Ross Douthat's endorsement of Shapiro's numbers in his column Monday, it's important to investigate Shapiro's figures. In fact, his post is marred by the failure to see the difference between immigration and labor force growth, and by the fact that nowhere does he tell us how few jobs Texas created relative to its labor force growth.

In my view, Shapiro is overly impressed with Texas's employment growth, saying, “With Texas, we say, 'Damn. Looks like they've recovered already.'” Part of the problem is that Shapiro has confused labor force growth with population growth. He says “people are flocking to Texas in massive numbers,” yet gives no data on migration, only on the size of the labor force. Indeed, the number of people he says “have fled into Texas,” 739,000, exactly matches the growth of the labor force from December 2007 to June 2011 in his Bureau of Labor Statistics data source (http://data.bls.gov/cgi-bin/dsrv?la then, as Shapiro says, “select the state or states you want, then select "Statewide", then select the states again, then select the metrics you want to see.”). A state's labor force can grow for reasons other than in-migration, such as higher birth rates or people moving out of the discouraged worker category back into the labor force by looking for work. Moreover, migration includes lots of non-labor force members, such as dependents. In any case, as Matt Yglesias shows, Texas' population has grown pretty consistently at close to 2% per year for the last 10 years. He points out, “...in good times Texas adds jobs faster than people, whereas in bad times it adds people faster than jobs.” That's the way it is today.

But it is Shapiro's “personal favorite chart” in his post that is the least meaningful. In it, he divides the June 2011 number of jobs by the December 2007 labor force to come up with a notional “unemployment rate” that supposedly corrects for between-state migration. Of course, he does not have data for interstate migration, but only for changes in the state's labor force. This ignores migrants who aren't in the labor force, like dependents, which adds to actual interstate migration; while also ignoring Texas' higher birth rate, movement from the discouraged worker category to the labor force, and, illegal immigration, all of which would have to be subtracted from the 739,000 increase in the labor force to get actual between-state migration of workers.

Besides not actually measuring (and hence not correcting for) interstate migration of workers, the chart is meaningless because it advantages states that attract unemployed workers. What's so great about attracting unemployed workers to the state? Even though they won't collect Texas unemployment insurance since they weren't employed there, these workers' children go to school, their families will receive uncompensated care at emergency rooms, they drive down wages, some will commit crimes, etc.: There are plenty of costs to the state to attracting unemployed people. Yet Shapiro says of adding 739,000 people to the labor force (not mentioning that it only added 246,000 jobs) from December 2007 to June 2011: “Anyone who takes that data and pretends that it is somehow bad news for Texas is simply not being honest. At the worst, I'd call it a good problem to have.”

Really? Adding almost half a million unemployed workers to the labor force is good news for Texas? The state added two unemployed people for every new job holder in the labor force. And when is the last time a conservative said illegal immigration was a good problem to have? Yet that's what Shapiro has committed himself to, since a good portion of the increase in Texas' labor force has been through illegal immigration.

Far from proving the strength of Texas' job performance, the job creation vs. labor force growth numbers show just the opposite.

“The Top 1% Pays...” and Other Tax Myths

You often read claims along the lines of “The top 1% of taxpayers pays 38% of all income taxes.” The implication, of course, is that the poor people whose returns showed incomes over $380,354 per year in 2008 are grossly overburdened, and we can't possibly consider closing tax loopholes, fighting tax havens or, God forbid, raising actual income tax rates on high incomes.

When someone tries to get you to focus on only one part of a complicated picture, it's a safe assumption they are trying to mislead you. In the area of individual income tax, that is an even safer bet when they don't tell you what share of income the top 1% earns. Exhibit A is the National Taxpayers Union. Under the category of “Tax Basics,” NTU gives ten years of tables showing “Who pays income taxes and how much?” 

Who Pays Income Taxes and how much?

 

Tax Year 2008

Percentiles Ranked by AGI	AGI Threshold on Percentiles	Percentage of Federal Personal Income Tax Paid
Top 1%	$380,354	38.02
Top 5%	$159,619	58.72
Top 10%	$113,799	69.94
Top 25%	$67,280	86.34
Top 50%	$33,048	97.30
Bottom 50%	<$33,048	2.7
Note: AGI is Adjusted Gross Income Source: Internal Revenue Service

As you can see, the table shows percentiles of adjusted gross income (AGI), the AGI cutoff for that percentile, and how much that percentile paid in income taxes. No mention at all of what, say, the top 1% of returns actually earned in income. Even the conservative Tax Foundation is willing to tell you how much of all income the top 1% earned, and what their average tax rate was (20.00% and 23.27%, respectively), but not NTU.

Lately, the top Republican presidential candidates have complained that almost half of Americans do not pay income taxes  (h/t Greg Sargent). Again, we see that old misdirection ploy: focus only on one of the major taxes. What Michele Bachmann, Rick Perry, and Mitt Romney have all left out most prominently (see Weisman's article for more detail) is the payroll tax which all wage earners pay, but only up to $106,800 on the Social Security portion. Thus, as earnings rise above $106,800, the tax takes a smaller and smaller percentage of one's income, the very definition of a regressive tax.

The National Taxpayers Union takes this misleading misdirection to the limit, however. Take another look at the link, but this time look at the menu on the left under “Taxes.” Payroll taxes, which accounted for 36% of federal government revenue in fiscal 2008, don't even rate a category, while the excise tax (3% of federal revenue) and the estate tax (smaller still), do. NTU tries to make over 1/3 of federal taxes disappear as an issue!

Another myth you often hear, that taxing the rich doesn't raise much revenue, was recently refuted by Chuck Marr of the Center on Budget and Policy Priorities. Using the same IRS figures cited by the Tax Foundation, he shows that in 2008 the top 1% had $1.7 trillion in income. His analysis is simple: if, instead of the 23.27% tax rate the top 1% paid in 2008, they paid at the highest recent rate (1996's 29%), that would generate about $100 billion a year, or $1 trillion over 10 years. To raise the actual rate paid, it would take some combination of loophole closing and tax rate increases. Since $1.2 trillion over 10 years was considered a big number in the debt ceiling negotiations, I'm going to go out on a limb here and say that $1 trillion over ten years is also a big number.

We see, then, that to evaluate the fairness of the tax system, it's necessary to look at all of its elements, not just take one of them in isolation. It's also necessary to have many years worth of hard data to see what the parameters of tax reality really look like.

The Massachusetts Miracle

With Rick Perry's entrance into the Republican Presidential race, there has already been a lot of debunking of the so-called Texas Miracle he allegedly presided over. Taking a cue from Paul Krugman's column Monday, I want to point out how liberal “Taxachusetts” has outperformed Texas on a whole host of measures of economic and social well-being.

As Krugman points out, Texas has a significantly higher unemployment rate than Massachusetts (8.2% vs. 7.6% in June 2011) and the percentage of people without health insurance in Texas is the country's highest (26% of the total population) while Massachusetts has the lowest uninsured rate at 5%. 

We can further note that Texas suffered worse unemployment from the recession than Massachusetts did: in 2008 it had a lower unemployment rate than Massachusetts, while today it is higher. Its full-year unemployment rate for 2008 was 4.9%, while that of Massachusetts was 5.3%.

In 2008, only 10.0% of Massachusetts residents lived in poverty, whereas for Texas the rate was 15.8%.

Median household income in 2008 was $65,401 for Massachusetts, but only $50,043 for Texas.

  

Similarly, personal per capita income in Massachusetts in 2008 was $51,254, but only $37,774 in Texas.

Despite Texas' low home prices, Massachusetts had a marginally higher homeownership rate in 2008, 65.7% vs. 65.5%.

The infant mortality rate for Massachusetts in 2008 was 4.8 per 1000 live births, compared to 6.2 in Texas.

Massachusetts had more than twice as many doctors per 100,000 population in 2007 than did Texas, 469.0 vs. 214.2.

Violent crimes per 100,000 population in 2009: 457.1 in Massachusetts, 490.9 in Texas.

 

Massachusetts led the country in 2008 on the percentage of people over 25 years of age with a bachelor's degree or better: 38.1% compared to Texas' 25.3%. This means in Texas you are slightly more likely to lack health insurance than to have a bachelor's degree.

9.6% of workers in Texas were paid at or below the minimum wage in 2010, compared to 3.0% in Massachusetts (h/t Patrick Brendel and Pat Garofolo).

For good measure, the divorce rate in Massachusetts in 2004 was 2.2 per 1,000 residents compared to 3.6 in Texas.

To sum up, in Texas you are five times more likely to be uninsured than in “Taxachusetts,” 50% more likely to live in poverty, three times as likely to make the minimum wage or below, 1/3 less likely to have a bachelor's degree, and household median income is $15,000 lower.

Sign me up!

Chess Break

I'm playing  in a chess tournament this weekend, so I won't have any new posts until it's over. I will be checking in to moderate comments, though.

Ireland's Recent Success Not Built on Low Taxes

As we survey the wreckage of the Irish economy (14.3% unemployment rate in July, average July interest rate of 12.45% vs. Germany's 2.74%), it's worth remembering that not so long ago, Ireland was lauded as a miracle economy we could all learn lessons from. But many people have drawn the wrong lessons from Ireland's success in the 1990s and early 2000s, in particular by claiming that low taxes were a major cause of Ireland's dramatic growth.

One important example of this comes from Sean Dorgan, who was head of Ireland's Industrial Development Authority, now known as IDA Ireland, until 2007. He wrote a “backgrounder” for the Heritage Foundation in June 2006, in which he emphasized free trade, low taxes, and investment in education as the keys to “le(aving) behind” Ireland's “past of declining population, poor living standards, and economic stagnation...”

OK, so the US is currently doing everything possible to reduce investment in education, especially by going after teachers' unions and cutting K-12 and university spending. It doesn't measure up against what was publishable at Heritage just 5 years ago. (And heaven forbid we should adopt Heritage recommendations from the 1980s, like the individual mandate!). At least we've got free trade and low taxes. But what did they do for Ireland?

As I show in my book, Investment Incentives and the Global Competition for Capital, the answer for the first 30 years of low-tax foreign investment attraction (1958-87) was “Not much.” Ireland grew modestly, but it did not grow any faster than the average of the first 15 European Union members (the EU-15). Ireland started out with a 0% tax on foreign multinationals export profits, which of course was virtually all their profits. After Ireland joined the European Union in 1973, it had to get rid of that export subsidy, but replaced it with a mere 10% tax on manufacturing starting in 1983. Yet by 1987, unemployment was 16.8% even though about 27,000 people, almost 1% of the population, were leaving annually (net emigration).

Things started changing in 1987. In that year, Ireland inaugurated a “Social Partnership” of government, capital, and labor, which cut the budget sharply, but also traded lower personal income taxes for wage restraint, leading to after-tax wage gains that were larger than the pre-tax gains. In 1988, the European Union sharply increased the money going into the Structural Funds, which paid for infrastructure, training, and investment attraction. Ireland's allocation equaled 2.5-3.0% of its gross domestic product throughout the 1990s. Several officials I interviewed in March 2009 argued that the EU's “Single Market” program (1985-92) helped the country substantially by giving it better access to the continental European market by reducing other countries' use of subsidies and restrictive government procurement rules.

Then, of course, there was education. Ireland made high school free in 1966; later, the country built several new technological universities. Finally, many observers see Ireland as having gotten lucky by achieving the preconditions for growth just as the world economy began a growth and foreign investment boom in the 1990s.

In the 50+ years Ireland has spent using low corporate income taxes (and high investment subsidies) to attract investment, the country has seen both failure and success. In fact, corporations faced a higher tax rate in the Celtic Tiger years than during the slow-growth era (10% vs. 0). For the very reason that both success and failure accompanied the low tax rates, we can conclude that tax rates cannot explain success: we need something that was present during the boom years but not the slow-growth years. Education, infrastructure, training, and the Social Partnership are the most plausible explanations.

The right lesson to draw in the U.S., then, is that we need to resist the drumbeat for lower corporate income taxes, which in 2008 (the latest year for complete OECD data) came to 1.8% of U.S. GDP versus an OECD average of 3.5% (in most recent years, the difference is smaller, but the U.S. is consistently below average). Similarly, rather than reward corporate tax scofflaws for hiding their money in tax havens with a “one-time” low rate on repatriated profits, we should move away decisively from tax deferral for overseas profits.

I'll have more to say about tax havens in future columns.