Posted tagged ‘NH’

To Divest or Not to Divest Electricity Generation

April 9, 2014

Whether or not New Hampshire’s largest electric utility should divest its generating facilities is a hot topic again. The NH Public Utilities Commission issued a preliminary report last week which concluded that it is in the economic interests of PSNH’s retail customers for the company to divest its generating assets. The report was less sanguine about the economic impacts on customers not purchasing electricity from PSNH, but that depends on how the stranded costs are allocated in any divestiture.

“Staff continues to believe that over the long term, PSNH’s default service rate will be substantially higher than market prices resulting in continued upward pressure on default service rates. Based on La Capra’s forecast of wholesale prices in New Hampshire and adjusted for retail, Staff’s rate analysis indicates that PSNH’s default service customers would be better off under a divestiture of the PSNH assets if the stranded costs were recovered from all customers. Customers who do not receive default service from PSNH, however, would see rate increases through the imposition of a stranded cost charge. While we recognize the volatility in today’s energy markets, the value of PSNH’s “hedge” will likely diminish over the long term and will continue to be at risk due to potential environmental legislation.”

There are also smart and well-meaning people in New Hampshire who argue that that PSNH’s generating assets provide a valuable ‘hedge” given the volatility of fuel (primarily natural gas) prices and the impending retirement of several regional electricity generating facilities. But the value of that hedge depends, in part, on the price paid for it. This winter’s cold snap and concomitant spike in natural gas prices are times when the PSNH hedge did provide some benefits. But even in those instances, the net electricity generated by PSNH was below what it was in the early and mid-2000s (the latest available data is for January of 2014 so this may change with February and March data). The figure below shows the capacity utilization of PSNH’s coal-fired generating units on a monthly basis during three separate time periods. Capacity factors are the ratio of net electricity actually generated to the total potential electricity that could be generated by a facility (for this analysis I used the average of winter and summer coal-fired capacity for each facility -Merrimack and Schiller stations – rather than the nameplate capacity).

Monthy capacity
The chart shows that from 2004 to 2009, PSNH’s coal-fired generating units were primarily ‘baseload” generators, operating at 60% of capacity or higher. I have previously written about how electricity gets sold into the regional market and which generators will provide that electricity (which determines their capacity utilization) so I won’t cover that again here. Baseload generating units typically operate 24 hours per day year-round baring maintenance outages. At the other end of the spectrum are peaking generators, which mainly operate when hourly electricity load demand is at its highest (think the hottest summer and coldest winter days). Intermediate (or cycling generating units) operate between base load and peaking generators, varying their output to adapt as demand for electricity changes over the course of the day and year. After 2009 the decline in natural gas prices along with higher generating costs, including environmental, associated with PSNH’s coal facilities have resulted in the price at which it can supply electricity to the regional grid being higher than many other generators. As long as their generating cost remain higher, except for times of peak demand, limited capacity by other generators, or when events like the spike in natural gas prices occur, PSNH’s coal-fired units will produce little electricity for sale to the regional grid. During 2013 alone, there were six months when the coal units operated at less than 10% of capacity. PSNH’s coal-fired units have gone from baseload, to intermediate generators and as the chart below shows, when averaged over 12 months, they are looking a lot more like peaking units. Whether this pattern will continue is the heart of the debate over whether PSNH should be required to divest its generating assets.
Annualized generation
It becomes a lot harder to amortize the costs of generating units as their capacity utilization is lowered. There may be times when the hedge provided by PSNH’s generating assets provides a benefit and that would be truer if the units were baseload generators. But even with the extremes of this winter’s cold, price spike in natural gas, and high demand for electricity, the chart above shows, over the course of a year, the facilities have moved from baseload generators, to intermediate, and are trending toward peaking units. The NH Public Utilities Commission, its consultants, and a lot of other knowledgeable people think that, despite current market conditions and the uncertainties surrounding regional generating capacity and natural gas supply and price, these trends will continue.

Maximizing Costs and Benefits of the Minimum Wage

April 1, 2014

Note: Links updated and some errors corrected at 6:23 pm

Lawmakers want to do the right thing on the minimum wage issue and even if some don’t, the issue is a highly symbolic indicator of one’s position on a number of important policy issues. That’s too bad because it reduces the probability that the issue will be decided entirely on its merits (benefits versus costs). With so much hyperbole on both sides of the debate it is difficult to know what the “right thing” is and raising wages for those at the bottom of the wage scale has a lot of appeal as an easier and faster way to augment income than is increasing the productivity and educational attainment of individuals.
This month the U.S. Bureau of Labor Statistics (BLS) issued a brief report on minimum wage workers. Anyone interested in the policy debates about minimum wage should at least peruse “Characteristics of Minimum Wage Workers, 2013.”  According to the BLS, about 59 percent of workers in this country are paid on an hourly basis and the percentage of that group that is working at or below the minimum wage declined to 4.3 percent last year. Thus about 2.6 percent of all workers (those paid hourly and those on salary) are paid at or below the minimum wage. Most of those workers are employed in a few industries, led by the food service industry which employs nearly one-half of all workers making at or below the minimum wage.
min wage industries

New Hampshire is immersed in its own debate over raising the state’s minimum wage. In what was largely a symbolic measure, the prior legislature repealed the minimum wage and the current legislature looks to reinstate and raise the minimum wage in the state. My analysis of data from the U.S. Census and BLS’s “Current Population Survey” (CPS) indicates that about 10,000 workers in NH earn at or below the national minimum wage of $7.25 (this number is slightly below the 11,000 estimate in the BLS report, but that report rounds the NH estimate so the discrepancy is probably less and well within the CPS’s sampling error).

number of min wage workersAnother 16,200 earn between $7.25 and the proposed new state minimum of $8.25. Thus about 26,000 hourly workers, about two-thirds of whom are mostly in the food services and retail industries, would be affected by a $8.25 minimum wage. A second proposed increase to $9.00 would affect another 13,600 workers. So all told, about 40,000 workers or about six percent of all workers in the state could be affected. I did not analyze the age composition of NH’s minimum wage workers but a 2007 study by the Federal Reserve Bank of Boston did and they conclude that younger workers comprise a larger portion of minimum wage workers in NH than in the U.S. as a whole. Almost one-half of workers at the minimum in NH are teenagers age 16-19 (chart below).

age of min wage workersWhatever the result of NH’s minimum wage debate, a lot of people earning far more than minimum are working to influence the outcome. I have no personal or professional stake in the minimum wage debate but I like the issue because it is a documentary on highly-charged policy fights, combining real and perceived forces of good and darkness: economics, emotion, populism, ideology, compassion, greed, idealism, labor versus management, as well as wealth versus want. The minimum wage debate also provides some of the clearest examples of the tradeoffs involved in public policy choices. In this case, the tradeoff is raising wages for some while reducing the employment opportunities (hours or jobs) for others. Despite what the media say, and the President’s statement that “there’s no solid evidence that a higher minimum wage costs jobs,” most economists do agree that minimum wage increases result in some economic damages (reducing employment). They don’t agree on everything about the impacts of the minimum wage, however, and a good number of reasonable economists believe that the negative employment impacts from minimum wages are offset or even outweighed by the benefits. The negative employment impacts are substantial but do not appear, to me at least, to be dramatic, which of course is a fairly insensitive view that could only be held by someone not negatively impacted by an increase in the minimum wage (who are likely to be the least skilled and with the fewest economic opportunities among us).

In any case, having some negative impacts is not, in itself, enough to reject a policy. Most people, me included, accept the fact that the tradeoff for a compassionate policy that provides a minimal cushion against the ravages of unemployment (unemployment compensation) is some increase in the rate of unemployment. There are just as many or more policies that benefit some businesses or industries but also have some negative competitive impacts or costs to consumers.

I don’t have strong feelings either way about re-establishing and raising the state’s minimum wage. Raising the state’s minimum wage will cost some businesses and/or consumers more and reduce and have some negative impact on employment and hours worked (see the Boston Fed’s study here if you don’t trust me). The chart below demonstrates (too busily) the impacts on a business of an increase in the minimum wage assuming they can’t or don’t raise prices and any increase in the minimum wage comes at the expense of profitability (that is increases is efficiencies can’t offset wage increases). Wages comprise close to 40 percent of business costs for both food service and retail businesses and the high-end of profit margin in those industries is about 5 percent so the chart also incorporates those two assumptions. Depending on what percentage of the businesses’ workforce is currently at or below the minimum wage, the chart shows how business costs increases for both the $8.25 and $9.00 increases (the red lines), as well as how profitability is affected (the blue lines). It may use simplifying assumptions but I think the chart demonstrates why businesses in affected industries are so opposed to a minimum wage increase. While expenses appear to rise modestly, profit margins can quickly erode.

business impactsMy issues with raising the minimum wage tend to be more about the distribution of the impacts than with their magnitude. Freedom from want for working Americans should be a national goal. If augmenting the income of individuals with the least earning power (because of experience, skills, education, etc.) is a national goal, it is it is hard to see why that responsibility should fall only on a few industries that employ these individuals, especially when doing so will only decrease the opportunities for employment.  That seems to be the philosophy behind the Earned Income Tax Credit.  There are other distributional impacts as well.   Those with the least opportunities bear the greatest negative employment impacts even as they also receive some benefits.   Big companies are more able to absorb higher costs and in any case are less likely to pay minimum wage, so smaller, local businesses already at a cost disadvantage can be put at even more of a competitive disadvantage.   This is especially true in rural areas. Small, rural towns have lower costs, especially for real estate, so an increase in the minimum wage gives cities and big companies competitive advantages at the expense of small and rural employers.

As is the case with most policy debates, proponents of a minimum wage increase maximize benefits and minimize costs while opponents minimize the benefits while maximizing the costs.

Demographic Demise – The Sequel

June 17, 2013

Those well known demographers at Governing Magazine are likely to ignite another round of hysteria about NH’s aging population with their recent article highlighting increases in the median age of state populations.  I do not plan to go “gently into that good night” and for the past decade, as I hurtle toward my dotage,  I have “raged against the dying of the light” by highlighting why, at least in NH’s case, demographic trends are far less apocalyptic than popularly portrayed.

I can’t say it enough, I  believe that demographics explain two-thirds of everything.  Current trends will present the U.S. and NH with many challenges but we will be infinitely better able to confront these challenges with an accurate understanding of the forces that are creating them.  Too often demographic data is tortured to yield conclusions in support of some issue or cause rather than analyzed to reveal the real underlying  forces affecting the economy and society.  If we think the state’s population is aging because of zoning restrictions or because contraceptives are too widely available,  or because there aren’t enough skateboard parks or coffee shops then policies designed to manage the changes resulting from demographic forces are going to be profoundly ineffective.

I first made the arguments below  about a decade ago and despite the protestations of those who have horror stories to tell and books and documentaries to sell, nobody has shown why they are inaccurate.

Aging is a permanent, irreversible consequence of low average family size and longer life expectancies in developed societies.  Because NH has both wealthier and healthier older citizens (on average) than does the US, we expect greater longevity.  NH also has among the lowest fertility rates of any state in the nation and this, more than anything, accounts for our increasing median age relative to the US.  The chart below shows how much lower and how much faster the fertility rate among women of child bearing years has been declining in NH compared to the U.S. average, along with how much lower NH’s mortality rate is than is the U.S. rate.

Fertility and mortality trendsUnlike the brother and son of former U.S. presidents I don’t know anything about how fertile women of different races or ethnic origins are but I am probably just as prone to putting my foot in my mouth, so here goes:  “Fertility rates,”  or the number of births per 1,000 women in child bearing years does vary  by the educational attainment, labor force status, and as is evident in the state of Utah, even the religious beliefs of women and their partners.  Fertility rates largely account for NH’s rising median age, just as they do for Vermont and Maine.  Fertility almost always has a more powerful effect on the age structure of a state’s population than does either migration or mortality because all of the population changes that it generates arise at age zero and work their way through the age structure for 70+ years.  The chart below shows how much lower is NH’s fertility rate among women age 15-44 than is the rate in most other states in the nation.  The chart also largely explains why Utah has the youngest median age of any state and why NH, VT, ME and other New England states have older median age populations.

State Fertility RatesWomen in NH (as well as in most New England states) have higher educational attainment (on average) and are more likely to be in the labor force than are women overall in the U.S..  Both of these factors are associated with lower birth rates. Much of NH’s increase in college educated workers is the result increases among women and this has produced substantial economic benefits for the state and its residents.

For two decades NH has added large numbers of families with children and lost younger people who attend college or otherwise leave the state in young adulthood.   In recent years a weak economy and a housing market that made it difficult to both sell and buy a house has greatly curtailed migration into NH.  Mover’s to NH over the past several decades are more likely to be a married couple family age 30-44 with children and  likely to both be college educated and working.  That demographic doesn’t do a lot to lower the median age of a population but it can help keep the median age stationary in the middle of the age range.  However, economic conditions not only have curtailed state-to-state migration, they have also lowered fertility rates, as income and employment trends appear to have given  pause to more families considering expansion.   Across the nation state-to-state migration has been lower than at any time in a half century and fertility rates started to decline in the U.S. (after rising in a few consecutive years) as the last recession took hold. 

The long-term trend in NH is for a gradually increasing median age that should be rising at about the same rate as the much of the U.S..  The state is not even close to the top among state on the percentage of its population age 65 or older and that fact alone should eliminate some of the more simplistic explanations for why NH’s median age has been rising faster than the U.S..  Because of our low fertility and mortality rates, NH is more dependent upon in-migration to offset trends that would produce more rapid increases in median age than seen in much of the country.  Over the past several years those migration trends haven’t been favorable.  If the economy and housing markets recovery continue and NH focuses on the right policies (hint – zoning regulations aren’t it) this should be a temporary  phenomenon, but that doesn’t mean we aren’t going to get any older, it just means that we can keep the median age at a more stationary point in the middle of the age distribution.  The middle has gotten a pretty bad name in recent years, but demographically at least, its not at all a bad place to be.

Is Your State Overrated?

May 24, 2013

My penance (and your burden) for being an absent blogger over the past week or so is a longer post with extra graphics today.

A lot of people, including me, are accustomed to assessing the overall skill level of a state’s or a region’s workforce (and thus its potential to capture growing industries that rely on more highly educated workers) based largely on the percentage of the workforce with a college degree.  It is simple, intuitive,  and more than a  little lazy.  It is also becoming a  less useful indicator of the supply of labor that is in demand by businesses.   Populations with higher levels of educational attainment confer a lot of benefits on a state or region but today, having a high percentage of a state’s or region’s population with at least a BA degree probably says as much about the state’s political and cultural sensibilities (as well is its “demand” for services rather than its “need” for services but that is another post)  than it does about its economic performance and potential.

The sense of self-satisfaction we in New England and in New Hampshire enjoy about  having a population with among the highest levels of educational attainment in the country is palpable, but the reality is that more states are increasing their levels of educational attainment and New England and the Northeast stand-out far less than in the past.  Moreover, in an economy that is increasingly rewarding particular skills and degrees more  than  just high educational attainment, it is not as clear that much of the region still has an edge  on the one resource that  it has that is always in demand – talent.

Much of New England and the Northeast has a high percentage of its adult population with a four-year college degree or higher (see chart below).

% With BA or Higher

Just looking at levels of educational attainment tells only part of the story.  I can’t blog for too long without talking about the “skills-gap”  so here goes.  Much of the demand for college-trained labor is in fields that require scientific, technical, engineering,  or mathematical (STEM) skills and degrees.  The percentage of a state’s population with a BA or higher degree tells a lot about the availability of STEM skills but for a number of states it tells a lot less.  I calculated the percentage of a state’s population with a STEM degree (based on first college degree earned) and included it above as the dark blue portion of the bar graph.  The official listing of STEM fields is maintained, surprisingly, by the Dept. of Homeland Security ( I categorized 171 college degrees into STEM and non-STEM degrees and I think my listing is close but not a perfect match).  If you compare  the percentage of the population with a four-year or higher STEM degree (chart below) with the percentage of the population with a BA degree or higher (chart above) it shows a large change in the relative rankings of a number of states, and a some in New England in particular.

% with STEM degrees

The final chart makes just that comparison, it shows the change in ranking  between a state’s position on the percentage of its adult working population with at least a BA degree and the percentage of its population with a STEM degree.  The chart highlights states that may be over and underrated on the skill level (at least skills in demand) of their workforce.   Vermont stands out as having the biggest drop in rankings between the percentage of its population with at least a BA degree and its ranking on the percentage of the population with a STEM degree.  Maine also fares poorly.  But New Hampshire, Rhode Island, and Connecticut also drop in rankings when measuring “talent in-demand” among the workforce.  Only Massachusetts does not  drop in ranking  ( it is ranked number one on both measures so there is no way it could show anything but a drop in relative rankings).   On the other hand, states that are often derided by Northeastern “elites”, such as Texas, Arizona, Florida and Alabama  have a smaller percentage of college-trained labor but more of them (on a percentage basis) are trained in the STEM fields most in demand.  Still, they  don’t have as high a percentage of their adult populations with a STEM degree as do some New England and some other states, but with population and migration trends, and as more individuals with those skills and more companies that want access to them agglomerate in those states, how long before some take the lead in “talent”?   I don’t think Massachusetts has as much to worry about as do other states in  New England because of their unique higher-education assets.  The question for the rest of us is, can we continue to “beggar our neighbor” and benefit from the Bay State’s ability to churn-out and attract individuals with the degrees and skills in demand?

over and under rated states

As New Jersey, New York, and Connecticut show, having a lot of “talent” in your workforce doesn’t guarantee strong economic growth.  The business, political, environmental, and even cultural and social climates also play an important role in promoting prosperity.  I look at states with a relatively higher  percentage of their college trained workforces  in STEM fields as “up-and-comers.”   Most don’t have the history of high educational attainment in their populations that New England does, so their overall ranking on educational attainment tends to be lower.  Some, like Texas and Arizona also have had a large influx of individuals with traditionally lower levels of educational attainment.  Nevertheless, they are accumulating and growing a larger portion of the nation’s “talent” in STEM fields and over the long-haul, that is the biggest threat to New England’s most valuable and most in-demand resource, and thus the biggest threat to its prosperity.

“Honest Brokers” and Revenue Estimates

May 14, 2013

Unlike the federal government, states can’t easily budget and spend more money than they take in revenue so revenue estimates play a much more important role in state budgeting than they do  in federal budgeting.  I don’t know how anyone can accurately forecast revenues when the revenue yields are based on negotiations, lawsuits or other non-economic variables but that seems to be the basis  of much of the disagreement among budget writers in New Hampshire. When a comparatively large percentage (compared to many other states) of your revenues are derived from a “Medicaid enhancement tax”  and “tobacco settlement”  money budget writing can become even more politicized than usual.

I don’t pretend to know what these non-traditional sources of revenue will yield in the coming years but I get a sense that those who do are fitting their forecasts to their meet their budgetary goals.  I  don’t think revenue forecasting is that difficult as long it is based on real economic data and trends and it minimizes the use of assumptions about changes in the performance of the economy.   I make forecasts with assumptions all the time but  minimizing their use  in revenue forecasts will mean that even if the forecast is wrong, it won’t appear as though the error resulted from a desire to “coax” a specific result from the forecast.   In January I presented my outlook to the NH House Committee on Ways Means.  At that time I said I thought revenue growth from major, “own-source” revenues would average about 2% each year of the biennium and that businesses tax revenue growth would be a bit higher, but with even modest economic improvement could average 5-6% annual growth.  Now, several months later, based on recent revenue performance, and making  no assumptions about significant changes in economic conditions, I see growth at about 3% in FY 2014 from the eight largest sources of general revenue, and just under 5% in 2015.  Those numbers don’t count the “non-traditional” revenue sources but I think they are important in reflecting the fundamental underlying growth in the state’s economy and a better assessment of  general revenue trends.

NH General revenue forecast

Clearing out some old boxes from my attic  I came across a number of old college tests and papers.  One was from a graduate school class on public finance where I argued that all federal budgeting and budgeting  debates should proceed from a common economic and revenue forecast.  I also found one from an undergraduate class on the philosophy of Marxism in which I wrote phrases like “man should never be a means to end but only an end in himself ” so clearly I was prone to a lot of bad and muddled thinking back then.  In the 1990′s I wrote a column in a publication arguing for a non-partisan revenue estimating committee in NH.  That was a pretty good idea  and it did happen – although my prompt had nothing to do with it -  and it was enacted largely absent the “non-partisan” aspect (or at least “unbiased”).  I still think a true, non-partisan, representative revenue estimating panel would be a good thing for NH, not to bind any actions but simply to serve as a baseline scenario that any policymakers who wishes to deviate from would have to offer solid reasons for doing so.  Some group in the budget debate has to serve as the “honest broker”  but the honest broker role won’t happen if the group is loved too much by some or hated too passionately by others.   The current estimating panel has some of the best and most qualified people I know to do revenue estimating .  It just doesn’t have the  credibility among many policymakers that it could have  if  no one loved or hated it too much, but instead almost everyone complained a little (or a lot) about  it.  It is too bad because we are still going to need an “honest broker” when the NH House and Senate begin negotiations on the next budget.

There’s No Place Like Home (Your Home State)

April 29, 2013

I was surprised by data on the enrollment migration of high school graduates who enter  four-year colleges immediately or shortly after graduation from high school.   As the chart below shows, in most states, a very high percentage of students enrolling in four-year colleges enroll in a school in their home state.

Student Migration

This would not be  unexpected if it were data from 1920 but a lot has changed in the world that should exert a fairly strong influence on the enrollment decisions of high school graduates.  First, anything that reduces the time, cost, or difficulty in travel should contribute to an increase in the willingness of students to travel further to attend college.  The real cost of travel (measured as dollar per airline mile) has fallen dramatically over the past several decades.  In addition, the increased ability to communicate over longer distances and at ever lower prices should also reduce disincentives to enrollment over distances.  Perhaps even more importantly, the information available to students and their parents about schools (including video tours, rankings, and all types of detailed data), should also reduce the barrier of distance from home  to enrollment in a college.   In addition, colleges have more information about students and an increasing ability to target potential students irrespective of their distance from campus.  States with a low percentage of students enrolling in a college in their homes state (NH, VT, CT, MD, DE) all have many college choices in nearby states so many of the barriers that might influence enrollment distance don’t really apply.

We in NH fret a lot about the percentage of students who choose to enroll in an out-of-state college, but almost 90 percent of NH grads enrolling in a four-year institution enroll in a college in New England and on balance we are a slight “net-importer” of college enrollees.   There are tremendous economic and public policy implications related to the supply of young college graduates but we need to be careful that in analyzing the issues we use appropriate metrics.  I am not convinced that in NH’s case, the percentage of students enrolling in-state is a good one.

I need to look at a time series of this data to get a better handle on some of the contributing factors to these data.  For now the only conclusion I can draw is that college-age children simply care too much about their families to want to venture far from home – at least that is want I have wanted to believe for the past several years.

What Do Help Wanted Ads Say About the “Skills Gap”?

April 18, 2013

It has been quite a while since I wrote about some of my favorite topics, the “skills gap” and occupational supply and demand.  But since there are recent media reports about the issue and more and new or renewed groups in NH looking to influence the debates and discussions on the issue, let me once again add my $.02.

I’ve made the plea for empirical rather than anecdotal or ideological evidence on the issue and produced a little evidence myself that both points to a skills gap as a contributor to slower than desired employment growth as well as evidence that suggests the issue may not be as prominent an explanation for slower job growth as some believe.  I’ve also noted the larger economic policy debate that engulfs the skills gap issue.  The data I’ve presented in this blog only hints at  answers to the fundamental question of whether slower job growth is more of a problem of labor supply (the number and/or quality available workers with the education, skills and training desitred by employers), or one more of labor demand (not enough employers looking to hire qualified, educated and skilled workers in NH).  I think the charts below  again provide some clues to labor supply and demand trends in NH and also illustrate some bigger trends in the NH economy.

The first chart most directly addresses the skills gap issue.  It shows that in terms of broad occupational groupings, professional and technical job openings are the largest component of on-line help wanted advertisements in NH.  Because these tend to be among the most-skilled and highest-paying jobs we assume that if there were a sufficient supply of labor then job growth in the industries that most employee these occupations would be relatively strong.  In fact, one  industry grouping – business and professional services  – employs a lot of professional and technical occupations and it is growing almost twice as fast as is overall private sector employment in NH.

The crux of the skills gap issue is this: “would a larger or better qualified supply of individuals in these occupations result in faster job growth in NH, or are there other or complimentary factors that also need to contribute to faster growth?”   How you define the problem of slower job growth also largely defines the range of your solutions. Increasingly, and I think somewhat disappointingly,  it also seems to define your ideology (if you have one).

March 2013 HW

The chart  below is less sanguine.  It shows that compared to the same month in 2012, March 2013 help wanted ads in NH for professional and technical ads declined by more than 10 percent.  One month isn’t a trend but recent months have shown more weakness than strength in this indicator.  The chart also shows that the largest improvements in labor demand are not among the most skilled occupations, although changes in the occupational make-up of manufacturing industries makes it increasingly likely that production workers will  have higher levels of education, training and skills.

Pct Change in HW in March

 

Getting What You Want But Not What You Need

April 10, 2013

Business taxes are about one-quarter of NH state government revenues and an even higher percentage when you take out sources such as the statewide property tax which is largely an accounting fiction that really does nothing to support state services.  That is a higher percentage than any state with the exception of some states that get oil, gas and mineral extraction revenues.

When business taxes are that important to a state’s fiscal health it better make sure that it takes care of its businesses and its business climate because if and when they go south (or south and west just as more people have) it becomes very difficult for the state to produce a budget.   The chart below shows how NH’s “own source” general and education fund revenue from the nine largest sources of revenue (exclusive of the statewide property tax) have grown comparatively since 2003.  I think the chart shows how important trends in business tax revenues are to overall revenue trends in the state.  The bad news is that revenues from the business profits and business enterprise tax are still more than 20 percent below peak.  The good news is that they are growing.

Growth in Own Source Revenue

The chart also says a few other things to me.  First, a strong and dynamic business climate is the best fiscal policy for the state.  Second, if you are going to cut business taxes you had better be certain that it is a good way produce a strong and dynamic economy because if not, the fiscal health of the state will suffer.  Third (and related), if revenues rise in response to cuts in business taxes great, it will be evidence of a stronger economy and healthier state finances, but if revenues  fall you better be sure that the service and spending reductions that result don’t affect those things that most contribute to a strong and dynamic economy because economic growth (and thus revenues) will be at risk for falling further.   All businesses want lower taxes and it that is the quickest and easiest way for policymakers to demonstrate how much they love  businesses.  But businesses also need and want a lot of other things to prosper and, like lowering taxes, they aren’t shy about asking for them.  Unfortunately, in a state so dependent on business tax revenues businesses getting what they want can sometimes make it more difficult to get what they need.

NH lawmakers, like lawmakers in most other states, want prosperity and opportunity for residents .  Most  also recognize that a strong and dynamic economy is the way to assure that.   So unless you are big financial institution, a big oil company, or just about any business or industry that is prefaced by “big,”  it’s a pretty good time to be in business because almost everyone wants to show you some love, they just can’t agree on how to demonstrate it.  Right now a lot of ideology and little evidence is being brought to bear on the question of “what policies are most helpful in producing a strong and dynamic NH economy.”   That makes it a lot harder to see that we all have a common interest in a strong economy and even more difficult to agree on what to do about it.

Electricity Prices Highlight the Benefits of Markets and Choice

March 28, 2013

Four of the six New England states (CT,ME, MA and NH) had lower average retail prices for residential electricity customers in January of 2013 than they did in January of 2012 (chart below).

Chang in Avg Retail Price of Electricity

Most of that is a result of the increasing sales into the region’s electricity market  of electricity generated by natural gas which is priced lower than the electricity generated using other sources.  The decline in the average price in NH is smaller than in some other states but it could have been, and could still be,  larger if retail competition in the residential electricity market takes hold.   The chart below shows the average cost of retail electricity for residential customers in the continental United States in January of 2013.  New Hampshire and all of New England have among the highest average rates but based on the contract information from the largest competitive suppliers of residential electricity in New Hampshire, the average price would be significantly lower (at least until November of 2013) for those who choose the lowest rates available from competitive suppliers (other higher rates are available that let customers choose to purchase a higher percentage of electricity generated from ‘green” sources).

Avg Residential Price of Electrictyby State

I was going to make this a much longer post and include a discussion of why the warnings by some about an “over-reliance” on natural gas in the region are overstated but not inaccurate (the natural gas pipeline limitations to the region are real but more likely to be remedied than not with increased natural gas usage in the region) but I will save that for another day.  The reputation and belief in free(er) markets and competition have taken a beating over the past several years so  for now I am just going to enjoy highlighting  of  one of their recent successes.

Gasoline Taxes, Prices, and Price Differentials

March 27, 2013

Policymakers often assume that sales and excise taxes are the primary reason for variations in the price of goods and they too often assume that consumers consider differences in tax rates across jurisdictions when making purchases rather than differences in the total price (tax plus non-tax price) of a good.  A good example was the $.10 drop in NH’s cigarette tax in 2010.   Some thought the decrease would be a beacon to NH for consumers.  But the decline did nothing to lower the price of cigarettes in NH because manufacturers increased their price by an equivalent amount immediately after the tax decrease (effectively capturing the revenue that would have gone to the State of NH).  I did a fair amount of gloating in an early post as the revenue numbers reflected my predictions. Consumers saw no price break and no major changes occurred in other states so no increases in competitive advantage for retailers occurred in NH (retailers saw no benefit) and the longer-term trend of declining smoking rates (along with a things like higher gasoline prices and fewer visitors to the state) were the primary determinants of sales trends, and thus lower revenues.

The demand for gasoline, like cigarettes, is relatively inelastic so it takes a surprisingly large price increase to change consumption very much but differences in prices among  locations may shift the location of some gasoline sales where consumers can conveniently choose where to make their purchases.  I can buy gasoline as easily in Maine as in NH and with a little more effort I can also buy in MA.  I often can get gasoline as or even a bit cheaper in MA than in the town where I live,  but I can’t get gasoline cheaper in Maine.  I can also get gasoline  cheaper if I drive a few miles to towns just north and south of me, or even to a gasoline station on the other side of town.   These price differences are often $.10 per gallon and occur among retailers of similar types – i.e. gasoline stations with a convenience store, the same brand convenience store selling the same brand of gasoline.   Nevertheless, when I look at the average price of gasoline between neighboring states (with some exceptions like California where environmental regulations have large retail price impacts), the differences in price appear  to be strongly related to differences in state tax rates (r=.82).  Comparing statewide average prices and tax rates for gasoline masks much of the variation in pricing that occurs within states and even within communities.  That is one reason why I think policymakers focus so much on tax rates as the primary reason for price differences.

State Gasoline Prices

Despite all of the attention to gasoline prices and proposals to raise or lower gasoline taxes over the past decade there has been surprisingly little research on the retail price impacts (or “pass-through” effects) of changes in gasoline taxes.  That may be because changes in gasoline taxes are relatively small (usually a few cents) compared to the much larger price changes that occur as a result of  supply/demand issues and variations in the world-wide price of oil.  The chart below shows how gasoline prices in NH have changed since 2004 and it also shows the theoretical price if the state had no excise tax on gasoline.  The red line shows the theoretical prices because, like cigarettes, retail prices may or may not be reduced by an equivalent amount if the gasoline tax were lowered.

Monthly NH Gasoline Prices

The theory of tax incidence suggests that sales and excise taxes should be fully passed on to consumers in competitive markets with constant marginal costs.  Less than full “pass-though” is expected in markets with increasing marginal costs, while the pass-through rate may be less than, or greater than, one-hundred percent in markets that are less competitive.  In addition, tax increases in one state may lead to higher prices across the border as stations there face greater demand.  A study examining a temporary reduction and reinstatement of a 5% gasoline tax in Illinois (sorry I can’t find the reference)  found that that when the 5% tax was eliminated, prices declined by 3% and when the tax was reinstated prices rose by 4%.

Politicos are looking to score big points for their positions on gasoline taxes.  There was a time when whatever marginal changes lawmakers made to gasoline taxes may have meant a lot to changes in prices at the pump.  Right now, and in the future, changes in world-wide oil markets are likely to overwhelm  any impacts from changes in state taxes and  together with the uncertainty over the degree of pass-through, make any predictions about the economic impacts of gasoline tax hikes nearly impossible.


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