Archive for November 2012

How Much Federal Government Revenue is Enough?

November 14, 2012

Federal government revenues as a percentage of gross domestic product have averaged about 18% over the past 50 years (the median is also 18%).  Federal government revenue is “pro-cyclical,” that means revenues as a percentage of GDP grow when the economy is stronger, as profitability of businesses increases and as individual wage, salary and investment income is increasing.  This relationship has a couple of important implications: First, it can confound ideological interpretations of the appropriate level of current revenues as a percentage of the economy because higher revenues as a percentage of GDP aren’t associated with slow growth and low percentages aren’t associated with higher rates of economic growth – just the opposite is true (with the exception of the dual recessions of the early 1980s), second it suggests how important economic growth is to revenue growth and thus to potentially reducing the nation’s budget deficit.

I haven’t done the math but others who have indicate that the various deficit reduction proposals all require revenues as a percentage of GDP of over 18%.  The U.S. House passed Ryan budget proposal would produce estimated revenues as a percentage of forecast GDP of approximately 19%, the President’s proposals would produce estimated revenues at 20% of GDP, and the “Simpson-Bowles” model would result in estimated revenues as a percentage of forecast  GDP of 21%.  That doesn’t sound like much of a difference, but in an economy with a GDP of $15.5 trillion each 1% increase equates to $155 billion in revenue.  Going from federal revenues that are 18% of GDP to 21% implies a revenue increase of $465 billion.   I could be ok with that if the bulk of the increase were the result of a roaring economy producing large increases in profitability and income, but that isn’t the foundation of any deficit reduction plan and it is hard to see a scenario where $465 of additional revenue is consistent with a high growth economy (the pro-cyclical nature of revenues aside – that relationship isn’t  infinitely linear).  The national debate over reducing our nation’s budget deficit is framed by two choices or their combinations,  increasing tax rates (or eliminating temporary reductions and reducing tax breaks etc.) or by cutting spending.  Revenues at 18% of GDP seems to have worked reasonably well over the past one-half century with the past decade being the exception.  It may be time to aim for a different ratio for the sake of longer-term fiscal balance, but I wouldn’t do it without first exhausting opportunities for spending reductions that maintain a ratio close to the historical average of 18%.  But whatever the combination of spending reductions and revenue increases that eventually becomes the strategy for addressing the nation’s long-term fiscal imbalances, I hope economic growth is the ultimate goal, because as the chart above shows, achieving that goal will make addressing fiscal imbalances a much more manageable task.

The World Needs Another Election Analysis

November 13, 2012

How many times over the last week have you heard someone say “I just don’t think there has been enough post-election analysis, where can I get more”?  Ok, nobody has likely said that to anyone, anywhere, in this country since November 6th.  But just like there is “always room for Jello,” there is always a little more room for political analysis, especially when it comes with absolutely no political spin, and from someone uniquely unqualified to offer it.  Examining town-by-town results from NH’s race for governor in the context of  demographic as well as political variables provides some clues to the problems facing the NH Republican party.   Using regression analysis to predict the percentage of votes both the Republican and Democratic candidates received in each of 230+ towns shows that several variables were significantly related to the percentage of votes each candidate received.  I know there are all sorts of explanations and contexts that account for the election results but I am striving for some level of empiricism in an ocean of spin, even if some of the important context (issues) can’t be quantified and are left out.  I am going for parsimony here.

Of course the percentage of voters registered in each party in a town is the single largest determinant of the percentage of votes received by the party’s candidate, but after and controlling for that, what other variables were significantly related to the election results?  The chart below shows the most important demographic variables (at least the most important of the 30 or so I examined).  The bars are standardized results (z scores) that show the RELATIVE importance of the variables in determining the percentage of the vote that went to the Republican candidate.

Results show that sometimes, empiricism supports rather than refutes conventional wisdom.  The variable that has the strongest negative association with the percentage of votes for the Republican candidate (controlling for all other variables) is the percentage of the town’s population age 25+ that has at least a bachelor’s degree or higher.  The percentage of the population age 25-34 also has a strong, statistically significant negative association with the vote received by the Republican candidate.  On the plus side, higher income towns and towns where a higher percentage of residents moved to NH from another state (again controlling for all the other variables and with a caveat that this data include only those who moved to NH between 1995 and 2000) were both associated with higher percentage totals for the Republican candidate.  The percentage of households with children in a town  just missed a statistically significant relationship with higher vote percentages for the Republican candidate.  In combination, these three variables point to Republican strength in higher income communities that also have a high percentage of families with children and that have a higher percentage of households that moved into NH from another state- that is a good description of many of NH’s, bedroom communities near our southern border.  It is (or was until recently) also a pretty good characterization of the bulk of NH’s in-migration from other states.   The notion that movement to NH is positively related to Republican vote totals suggests that other explanations (demographic but also issue-based) besides “NH is becoming Massachusetts north” may be responsible for NH’s emerging blue hue.  In any case,  in-migration to bedroom communities slowed a lot this past decade.  More troubling for Republicans is the negative association between higher educational-attainment and the percentage of votes received by the Republican candidate.  A higher percentage of population aged 25-34 is also negatively associated with the percentage of Republican votes, although the true meaning of this is harder to glean because this age group is also associated with a higher percentage of independent voter registration.  Whether it is age or lack of party affiliation that is the cause, however, votes for the Republican candidate were negatively associated with a higher percentage of individuals in a town in this age group.  None of this is an epiphany, but sometimes you just have to document the obvious (even if only to make it patently or inherently obvious) in order to really believe it.

Don’t Just Honor Them, Hire Them!

November 12, 2012

Today we honor veterans, at least that’s the idea if we can find the time between trips to the mall.  I hope you read about or  listen to their stories today.  If you happen to come by this blog, on this important day, here is one important story.  The unemployment rate among those who have served on active military duty  is higher than it is for those who have not served,  at all levels of educational attainment.  I am no expert on why, but I know it  is no way to thank men and women for their service.   Below is a chart that shows the unemployment rate among 25-34 year olds in New Hampshire, by educational attainment and whether or not they ever served on active military duty.    So honor them today for sure, but  hire them tomorrow if you can.

Will NH’s Fiscal System Get Better Looking Each Year?

November 9, 2012

Up close everyone sees the wrinkles, greys and infirmities that come with age,  but some things do, in fact,  get better looking with age.  Surprisingly,  NH’s revenue structure  may be one of them.  For a lot of people New Hampshire’s fiscal system has been out of balance for a long time.  I see it somewhat differently.  The state was able to maintain a fiscal structure that was unlike any other in the country.  Some hate it, some like, but one thing it absolutely most depends on is balance.  Specifically, those identifying with the left of the political spectrum had to be satisfied with doing the things that state government has to do and only a limited amount of what it may want to do.  While those on  the right of the political spectrum had to be willing to occasionally adjust the tax price of services (adjust rates and fees etc. temporarily or in some cases permanently).  Without a recognition of the need for balance from either side, the pressures from one side that were met with complete inelasticity from the other could cause the system to burst.   If NH has lost some of that balance I hope it regains it quickly because while some may see our system as flawed, it has also been a big part of our successes.

Looking toward the future, our current system is likely to suffer less from some of the demographically and economically induced changes in the growth in state-level revenues.  I don’t know if we will be the envy of other states but we should consider the impacts of the changes before walking too far down the path of big changes.  The biggest change is the fact that growth in the working age population is slowing and may continue to do so for decades (see below for NH).

That, of course, implies slower growth in wage and salary income and states most reliant on income taxes will feel that pinch the most.  On the flip side, with more older citizens, likely more income will be in the form of interest and dividends, a benefit for NH’s current system if interest and dividends tax revenue grows proportionately .  NH’s business enterprise tax (BET) depends on wage and salary payments so that revenue source would be negatively affected but because of the way the BET interacts with the business profits tax(BPT), a decline in either source is cushioned by impacts to the other source.  Moreover, as labor becomes more scare, the capital intensity of businesses should increase as businesses look to produce more with fewer people.  While the BPT impacts will be mostly neutral, it is possible that a deepening of capital in the economy could  increase in the relative profitability of businesses which would provide more lift to the BPT.

As the age structure of the population changes to include more older residents, in the aggregate, less money will be spent on the types of things subject to general sales taxes and more on goods and services that are not taxed (health care being the most notable), thus sales tax revenue growth rates could slow.  Combined with more sales occurring digitally via the internet and the generally increasing geographical separation of  buyers from the location of sellers, this does not bode well for long-term growth in sales taxes.  NH’s hybrid mix of taxes and fees collectively are likely to suffer less as a result of demographically induced changes in revenue .  As the risk of impacts is spread over a greater number of sources, any negative impacts on one source will have less of an effect than if the state relied on either of the two major sources of most other state’s revenue, the income and general sales tax.  For the most part, property taxes will also be relatively less affected by demographically induced changes.

It may not look like it now, but with the kind of balance that characterized fiscal policy making in NH for decades, and with coming shifts in revenue growth resulting from demographic and economic changes, NH’s fiscal structure  may well be better positioned to avoid the next (and inevitable)  fiscal calamity to hit states.

Its the Dependency Ratio That Matters Most

November 8, 2012

There is a good deal of fretting (warranted) about the impact on national and state-level government spending of a population that is growing older.  It is relatively easy to project a path for age-affected expenditures both nationally and in NH and to model how changes in spending programs and policies could alter the projected path of those expenditures.   Getting agreement on which policies to alter to influence the spending path is a much more difficult task.  What is missing from most discussions is an understanding that aging isn’t the only important demographic trend.  The dynamics of an increasing number of older individuals and median age of the population are largely misunderstood, but that is a subject for another post.  From a fiscal perspective, the most important indicator of spending pressures resulting  from the age structure  of the population is the “dependency ratio.”   The dependency ratio measures the ratio of working-age individuals in a population to those who are generally more ‘dependent” in a population (that is are likely to draw greater resources from governments then they give to governments).  Generally dependency is defined as age groups least likely to be in the labor force (children and those age 65+ – which may be unrealistic as individuals are healthier and for a variety of reasons stay longer in the labor force).  The dependency ratio affects both spending and revenues (revenue impacts are mostly missing from the demographic discussion and are the subject of tomorrow’s post).  A lot of government spending is directed at these groups – young people via schools and older citizens via things like Medicare, Medicaid, Social Security etc.  The chart below shows the rise in the projected dependent population in NH.  The chart shows that the past decade has been a “sweet spot” for the dependency ratio in NH, with an overall decline in the percentage of the population in “dependent” years (albeit with an increase in older dependency).  I produced a similar chart in the early 2000’s and suggested state government make good use of the state’s time in the “sweet spot” by adopting policies to minimize the impacts of future increase in the dependency ratio in the state (it wasn’t the first nor will it be the last time my thoughts were ignored by lawmakers – in fairness, it’s not always unreasonable for them to do so).  Certainly some policies have looked to reduce the impacts of an increasing older population.  But with limited, and in some years declines in the youth dependency, less attention has been given to innovative ways to slow the growth in spending (largely education expenditures) in a way that is proportional to growth in the youth population.   Effectively managing changes in spending pressures without producing unacceptably large overall increases in spending or unacceptable reductions in services requires that resources not be locked in specific spending categories or programs, but rather be allowed to rise and fall and flow to and from programs programs and services most influenced by demographic and economic pressures.  Tomorrow: The other side of the ledger – demographic influences on revenues.

Renewable Energy in the Era of Rising U.S. Oil and Gas Production

November 7, 2012

Dramatic increases in natural gas and oil production in the U.S. have increased the nation’s prospects for energy independence.  Increases in oil and gas production are good news for the U.S. economy and consumers, but one unfortunate result could be reduced efforts to increase the nation’s production of energy from renewable sources.   High oil and gas prices, as painful and harmful economically as they are,  spur development of renewable sources of energy.  I couldn’t be more enthusiastic about the positive implications of increased domestic oil and gas production but my enthusiasm is tempered by the prospect of a stalling emphasis on developing  renewable energy sources.   Northern New England states are above the U.S. average for electricity generated by renewables, with Maine being a national leader at 56% of it electricity generation.  Vermont is at 25% and NH 14% (each of these states generates a large percentage of electricity from nuclear fuel while Maine does not).

Southern New England states lag in electricity generated from renewable sources of energy, and as the chart below shows, have a long way to go in meeting their goals for the percent of electricity generated by renewable resources – even when the goals are modest.

Whoever Wins, I’m Rooting for Propserity

November 6, 2012

The winners of today’s state and national elections face some daunting budgeting tasks.  Compounding those difficulties is the fact that winners will likely begin their efforts having disappointed close to 50 percent of the people who care enough about their country and state to exercise their right of franchise.  Its hard to set a course when half the oarsmen and women are are using them to poke you in the eye rather than right the ship of state.  This is not a circumstance unique to this election, but what does seem different is how many people think they still win even when their candidate loses, if the country or the state fail to prosper under the administration of the victor.    Some may have, but I never have  been better off when the economy is weak,  so whether or not my candidates win today, I’m rooting for prosperity.

In NH, today’s winner of the race for governor will confront pent-up demand for limited state resources that show no near-term signs of significant increase.   The state’s largest source of general fund revenue, the combined business profits and business enterprise taxes, has shown limited growth recently.  In the past, this source of revenue has demonstrated an ability to rise quickly and dramatically as the state’s and nation’s economies rebound, but a severe recession and changes to the state’s business loss carry forward provisions will dampen some of these effects that typically occur early in a recovery.  The chart below shows the seasonally adjusted,  annualized, business tax revenue over the past decade, along with our forecast for the next two years.  This forecast uses a statistical model (ARIMA) that makes no assumptions about changes in the strength of the economy and it indicates that, without significant changes,  business tax revenues can be expected to increases by about 5.3 percent over the next two years.  We will update the forecast as new data becomes available as well as use modeling that incorporates key assumptions about changes in state and national economic variables, but as it stands now, it appears that  little of the pent-up demand for state spending  is likely to be satisfied under the current path.

The Recession’s Impact on The Entrepreneurial Economy

November 5, 2012

The cost of the recent recession in terms of jobs lost was great,  but the  longer-term cost could be far greater because of the impact the recession had on NH’s entrepreneurial economy.   While small businesses are cited as being responsible for the majority of new job creation, the fact always left out of that truism is that most of the job creation by small businesses come from new businesses, and more specifically, a small number of new businesses that become “gazelles,” new businesses with the potential to grow much larger.  Most small business will always be small.  They start, they fail, and with a lot of churning they are the businesses with whom we most interact on a daily basis. New Hampshire and New England increasingly have relied on our economy’s ability to generate new and innovative businesses to maintain a dynamic economy, a decline in entrepreneurial activity would have significant implications for our ability to continue to do so.

Looking at data on employment by age of businesses in NH from the past decade, it is clear that while NH may have suffered less than most states during the recent recession, it is not so clear that our entrepreneurial economy did as well.  The chart below shows that the recession had an especially large impact on NH’s entrepreneurs, as the the number of people employed at firms operating for three years or less declined by 34% between its peak in 2006, and 2011.

As a percentage of private employment, workers at firms three years old or has fallen from over nine percent of private employment to just over six percent.  This data does not mean that 16,000 workers in firms three years old or younger actually lost their jobs.  Remember, this is time series data so the firms in 2006 that were three years old or younger are not the same firms in the three year old and under category in 2011.  Certainly there were substantial job losses among young firms during the recession (as well as some gains) but the data more likely suggests that the next wave of new businesses (some of whom could be expected to become “gazelles”) simply did not start or  were not able to survive and grow.   For how long those effects lasts should be a question for anyone wondering what to do about the slow pace of job creation in the state.  It would be nice to have a control group of data from Massachusetts to examine for comparison purposes but they do not participate in the program from which these data are drawn.  Recessions always take a toll on smaller and newer businesses because those businesses are often in more precarious financial positions.  The data for NH do not go back earlier than 2003 so it is difficult to say whether this recession was different in its impacts on entrepreneurial activity in NH but we really should be concerned about whether the impact of the recession on entrepreneurial activity will have longer-term impacts on the NH economy.

The Skills Gap Part Deux: Some Evidence and Who’s Fault is it Anyway?

November 2, 2012

A good national job growth report  was released today that showed private sector job growth was up 184,000 in October.  With government job losses at -13,000, total employment increased nationally by 171,000.   We  have to wait a few weeks to see NH’s job growth for the month but regardless of the number, the underlying causes of the state’s relatively slow recent  job growth still need to be debated .  A solid and empirically-based understanding of the  factors influencing job growth rates is the only way to formulate effective economic  policy in the state.  I am on record as saying (probably too often) that I believe NH’s job growth numbers will be revised upward at some point (probably with the annual revisions released early next year).  But even if that is true (errr, when it is conformed to be true),  by historical standards, recent job growth in NH will still have underperformed.   Whether job growth is slower now than in the past because employers are not willing to add additional workers or because they are not able to find qualified workers  (the “skills gap” argument) is among the most important issues to understand in setting both national and state-level economic policies.  If employers are unwilling to add employees that are readily available,  then the efforts to spur job growth focus more on factors affecting businesses (tax rates, regulations, costs etc.).  If job growth is constrained because employers are unable to find qualified workers to fill open positions, then the focus of efforts to spur job growth will be more effective if they look to increase the skills of the labor force, and/or better match them to the needs of employers.  In reality this is not an either or question because inadequate attention to the needs of either employers or the workforce will produce sub-optimal economic growth.  But in today’s polarized policy environment whatever light is shed on these issues is too often separated by an ideological prism that produces policy proposals aimed at either the needs of business or the needs of the workforce to the exclusion of the other.   If job growth is slowed because there are too few qualified workers to meet the needs of businesses then it is not policy maker’s  fault  but they can help alleviate the problem by adopting more “human capital” policies.  Businesses bear some of responsibility for any skills gap because studies have shown that businesses spend less time and money training workers than they did decades ago, and that more of the training that does occur is concentrated on management positions rather than mid- and lower- level positions.  In an age when job turnover has accelerated, and the tenure of workers with one businesses continues to decline, it is understandable that businesses would be less willing to invest in workers who may only be with their firm for a short while.  But who is more responsible for the decline in employer-employer loyalty and tenure?  The labor market has been signaling strong demand increases in many occupations – especially technical and scientific  occupations and increasingly skilled production occupations.  Older and experienced workers may have difficulty responding to these demands if their experience, education or training is in occupations in less demand but why are younger and new entrants to the labor market not responding  to these labor market signals by selecting the majors or training programs that would qualify them for more occupations in demand?  One reason is that regardless of whether or not the labor market is signaling many job opportunities in technical and scientific occupations (or skilled production occupations), if large numbers of the emerging workforce don’t have the intellectual and academic rigor to study these subjects the positions will increasingly go unfilled, go elsewhere, or as I will document in a later post, be filled by foreign born workers.

Ok, that was a bit of a rant, now back to the core issue.  Is there evidence of a skills gap in NH that is constraining job growth?  The answer of course, as it is with almost all economic issues,  is both yes and no and also something in-between and with a twist.  I will share this evidence across several postings, today I offer one, small bit of evidence that suggests the skills gap is playing a larger role in disappointing job growth trends.  I noted in an earlier post that help-wanted advertising has generally been on the rise in NH, while job growth has not.  Some of this will be corrected with job growth revisions, but evidence that a skills gap is playing a role comes in the form of the percentage of help-wanted ads each month that are “new ads”.  If help-wanted ads are rising and the number or percentage of new ads is rising similarly each month,  that means positions are being filled at a fairly consistent rate, but if the number of ads is increasing, but the percentage of ads that are “new ads” is declining, that suggest that positions are not being filled or taking longer to fill – perhaps suggesting employers are having a harder time filling the positions or a skills gap.  The chart below shows that indeed, the percentage of monthly help-wanted ads in NH that are :new ads” for the month has been slowly declining, providing some small bit of support for the skills gap explanation for job growth.  A lot more evidence is needed, but given the importance of the issue in policy making, it is worth the effort to find or refute it.

What’s Behind NH’s Recent Net Out-Migration?

November 1, 2012

I’ve written often about how important the ability to attract skilled, well-educated individuals is to NH’s past and future economic success.  Appropriately, there is much concern over NH’s recent population losses resulting  from movements of residents into and out-of the state and what it says about NH’s relative attractiveness.  Not surprisingly, that concern  results in many simplistic, inaccurate, and analytical flawed explanations for the patterns of migration to and from NH.  I don’t have a book, video, seminar, or anything else to sell that depends of any particular explanation for NH’s migration patterns so I will let the data , as it becomes clearer, shape and evolve my theories on the phenomenon.

Here is the basic scenario:  NH has traditionally been a magnet for residents moving from another state (most prominently from  another Northeastern state – especially MA). During the past decade NH has attracted less net in-migration from other states, especially during the second half of the decade, culminating in net out-migration at the end of the decade.  The resulting concern by many (including me) is that NH may be losing its fundamental attractiveness relative to other states.  Because NH has relied on in-migration to fuel growth in “human capital” and the economy, this would imply very bad things about the future of our state.  I worry a lot about NH’s attractiveness  but my answer to the question of whether the state has lost its attractiveness is: “no…….not yet“.   Lets look at migration to and from the state during the recession (chart below). During the recession the patterns of the past several decades were largely the same – albeit with different magnitudes.  NH gained and lost a  lot of residents from other Northeastern states, and smaller numbers from other states in the South and West.

The difference in recent years has been that the positive net flows to  NH have been smaller for states that traditionally send NH a lot of residents (the Northeast), while the states with whom NH traditionally has net negative outflows have been larger (largely states in the south and west).   But is this a sign that NH is now less attractive?  I don’t think so (yet) and here is why. Since the housing and financial crisis and subsequent recession, the U.S. Census Bureau reports that state-to-state movement in the U.S. (on a % basis) has been about as low as it ever has been.  One reason for that,  many economists believe, is the fact that there were fewer places to move to that had stronger economic growth that often drives migration.  But another important factor has been the phenomenon of “housing lock.”

Because of the housing market bust and subsequent housing equity, credit and financial issues, both the selling and buying of homes were disrupted or impossible for large numbers of homeowners in NH and across the country.  That has especially profound impacts on net migration to NH.  I can’t explain in detail here, but migration patterns in NH indicate that the state has been especially attractive to and a magnate  for  30-44 yr. old, two wage-earner married couple families with children.  To move to NH they typically have to sell a house in their  native state and buy one in NH.  Each of those was a lot more difficult at the end of the last decade.  I believe this  reduced our core demographic of  potential  in-migrants.  At the same time, the housing market crash had less of an effect on the ability of the young, and non-homeowners to move from state-to-state.  This is the demographic group that traditionally has shown net out-migration from NH.  So the groups most likely to choose NH were most constrained from doing so during the last half of the 2000s, while the groups most likely to leave NH were not constrained from doing so by “housing lock” or other housing market issues.  The result – much lower rates of net in-migration to the state.  This explanation doesn’t account for all of the recent decline in net migration to NH, but it surely has played a significant role in the trend.


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