Rampell notes her surprise that the graphs appear to show that more conservative states (i.e., those that are stereotyped as wanting smaller government) have seem to have a higher share of their work force employed in state and local government.

For example, the graphs show that Wyoming and Alaska have the highest share of their workforce employed in state and local government.  In both states, Obama drew less than 40 percent of the popular vote.

Rampell’s analysis of the graphs raises some potentially interesting questions.  The analysis also has some potentially serious flaws that highlight the pitfalls of statistical analysis.

Federal or state & local public sector employment?

Rampell’s graphs focus on state and local public sector employment. She then attempts to link state and local public sector employment to a national election.

One could argue that a U.S. President has greater control over federal employment than over state and local employment.  For that reason alone, one would expect to see one or more graphs showing the share of federal employment.

Static versus dynamic analysis

The New York Times graphs show employment for only a single point in time: 2009.

One reasonable hypothesis might link the changes in employment over time to voting patterns.  For example, a politician who promises more public sector employment may be rewarded with more votes.

The dynamics, however, raise a question of causation: Do changes in employment affect voting or do election results affect employment opportunities.  Do voters reward and punish politicians or do politicians “pay back” (or “pay off”) voters?

The answer to that question requires more than few pieces of information and a few hours of analysis.

The graph below shows that there in no measurable relationship between changes in state and local government’s share of employment and voting behavior in the last election.

The graph below suggests that there may be a relationship between changes in the federal government’s share of employment and voting behavior in the last election.

Much of this relationship appears to be driven by outliers.  However, these outliers raise some interesting questions.

For example, former Vice President Cheney’s home state of Wyoming had the lowest percentage voting for Obama.   Wyoming has also seen the steepest five year decline federal government employment as a share of total employment.

On the other end of the spectrum, President Obama’s home state of Hawaii had the highest percentage voting for him.  The Aloha State has also seen the steepest five year increase in federal employment as a share of total employment.

All this raises the question: Did the voters create the jobs or did the jobs bring out the voters? (Or are the two things unrelated?)

At 11 percent unemployment, Oregon is tied with Alabama for having the ninth highest unemployment in the U.S.  Some politicians and policy makers are cheering the fact that Oregon is not tied for first or second place, as it was a few months ago. Even so, Oregon has occupied a spot in the top ten highest unemployment states in 18 of the past 34 years.

Oregon’s chronic high employment has been a source of bafflement for many observers and economists.

Businesses note that Oregon has an anti-business attitude that treats business as a problem to be dealt with rather than an endeavor to foster.  In contrast, others point to surveys that rank Oregon as having one of the lowest business tax burdens in the country [1, 2] or being one of the most “business friendly” states in the country. In the face of these studies, Oregon’s persistent high employment rate suggests (1) Oregon is not employment friendly, and/or (2) the various tax burden and business friendly reports are fundamentally flawed and, therefore, meaningless.

Since so many Oregonian’s do not like to discuss the state’s business environment, observers have tried other explanations for Oregon’s moribund jobs environment, including:

1. Education.  If Oregon just spent more money on education, employment in the state would improve.
2. Climate.  Analysts at the Oregon Employment Department have a theory that states with milder climates have higher unemployment rates and (believe it or not) Oregon is considered to have a relatively mild climate.
3. High minimum wage.  Although minimum wage workers (and potential workers) make up a relatively small portion of the workforce, Oregon’s unemployment rate among those most likely to earn minimum wage is substantially higher than if Oregon’s minimum wage was the same as the Federal rate.

Ultimately, many observers, reporters, and politicians throw up their hands and blame manufacturing.  The story goes like this …

Oregon relies heavily on heavy manufacturing. Heavy manufacturing is highly cyclical: Employment soars during boom times and plummets during down times.  Thus, during recessions Oregon’s employment suffers worse than the rest of the country.  The story falls apart for several reasons:

1. Oregon’s unemployment rate is high even during boom times.  If the manufacturing story were true, during economic booms Oregon’s unemployment rate should drop faster and/or be lower than the rest of the country’s.
2. Oregon does not rely that heavily on heavy manufacturing.  According to the Oregon Employment Department, throughout the U.S. heavy manufacturing accounts for approximately 6.1 percent of employment.  In Oregon, it accounts for 8.3 percent. It not clear that this is enough of a difference to explain the state’s persistently high unemployment.
3. Other states that rely more heavily on heavy manufacturing do not have persistently high unemployment.  According to the Oregon Employment Department, Wisconsin, Iowa, and New Hampshire have a greater share of their employment in heavy manufacturing, yet these states have much lower unemployment than Oregon.  In fact, the Oregon Employment Department produced the following graph that concludes that “there seem to be other factors that have a stronger correlation to the unemployment rate than the concentration of durable goods employment.”

The following provides an economist’s view of selected portions of the Pew report.  While most of the study is more reportage than analysis, some of the facts and analysis would have benefited from a more rigorous review.

[The recession has] prompted lawmakers to respond with $2 billion in spending cuts, aggressive use of federal stimulus dollars and more than $1 billion in new taxes, including $733 million in proposed income tax hikes that will be challenged at the polls in January 2010.

Oregon’s Legislative Fiscal Office reports (pdf) that the state budget has increased by 9.3 percent (enlarge figure).  The Legislature increased spending by $4.8 billion.

Between the second quarter of 2008 and the second quarter of 2009, Oregon’s unemployment rate more than doubled, outpacing California’s job loss increases and surging faster than that of any other state. … To understand Oregon’s soaring unemployment rate and its corresponding decline in tax revenue, look no further than the goods the state produces—many of which are going unsold. Oregon’s once-mighty wood products industry, whose workforce has been shrinking due to automation and technology advances, is projected to lose a jarring 21 percent of its jobs in 2009. Driving the collapse is the nation’s housing bust: When new homes are not being built, timber sales slump.

Oregon almost always has some of the highest unemployment in the U.S., whether or not the country is in boom or recession. While the decline in the timber industry and the housing bust may explain Oregon’s chronic high employment, eventually a time comes to ask whether the state’s policies are contributing to the unemployment.

Some policy makers, including the governor, believe that one sector of Oregon’s economy, clean energy, offers hope. Oregon had a bigger share of its jobs in clean energy than any other state as of 2007, according to a Pew report. Kulongoski has worked hard to build a green legacy—insisting on generous tax credits for renewable-energy firms even as other Democrats sought to reduce them, for example, and publicly test-driving electric cars in an effort to lure their manufacturers to Oregon. … But some experts question whether the sector can lead Oregon out of its economic doldrums. “There are worries that we’re getting in a little late, especially with all the investment that China is doing,” said Jessica Nelson, an economist with the Oregon Employment Division.

It is becoming more and more clear that the “generous tax credit” could more accurately be described as a money grab bordering on scandalous.

Confronted with a staggering loss of jobs and tax revenue that accompanied the state’s economic nosedive, Oregon Democrats seized upon the supermajorities they won in last year’s legislative elections. On February 5, less than a month after the session began and about two weeks before President Obama signed the federal stimulus package into law, Kulongoski signed Oregon’s own, state-level stimulus initiative, a $175 million borrowing plan that promised to create jobs while making improvements to the state’s roads and schools. At the same time, lawmakers made about $2 billion in cuts ….

Again, these “cuts” were actually an increase of $4.8 billion.

But the more than $1 billion in tax increases that Democrats pushed through to balance the budget and pay for major new initiatives in transportation and health care have proven most controversial. To help fund a massive road-improvement plan they said would create thousands of jobs, lawmakers raised the gas tax from 24 to 30 cents per gallon and hiked the cost of vehicle registration from $54 to $86. To expand health care for to up to 115,000 uninsured children, they created a new 1 percent tax on health insurance premiums and raised hospital taxes.  … The vast majority of new tax revenue, $733 million, came in the form of new personal and corporate income tax rates that have drawn national attention and will go before the voters in a crucial special election in 2010.

As noted on this blog, over the next four years, increased taxes on hospitals and health insurance will be as large as the increased personal and corporate income taxes.  All of these new taxes amount to $2.6 billion in new taxes.

Oregon’s minimum wage is another line of demarcation. The $8.40 hourly rate is the second- highest in the nation, and while liberals see it as helpful to the poor, fiscal conservatives claim that it hurts businesses and even some low-wage workers who might not get jobs because of it.

Actually, this has nothing to do with “liberals” and “conservatives.”  Empirical research demonstrates that Oregon’s minimum wage is associated with an unemployment among young workers that is 5 to 10 percentage points higher than it would be if the state’s minimum wage was the same as the federal minimum wage.

The state-level stimulus has provided its own controversy, similar to the national debate over the federal stimulus. The Oregon Legislative Fiscal Office credits the program with having “created or retained a total of 3,236 jobs” in its first three months.201 But an Associated Press investigation questioned the way the state counted those jobs and found that each job lasted a total of 35 hours, or less than a week of full-time employment.

Oregon is quickly reaching the point where employment impacts published by state agencies cannot be trusted [1, 2, 3].

PERS: Oregon’s 800-pound gorilla that the Pew report missed

It is well known that Oregon’s Public Employee Retirement System (PERS) has been a major driver of Oregon’s high state and local government spending.  It is a system of generous promises that shifts to taxpayers nearly all of the risks of investing in asset markets.  The PERS crisis earlier this decade pushed the state to the edge of insolvency.  There is still a risk of another crisis in the future.

At the end of 2007, Pew published a report that said Oregon had THE BEST funded pension system in the U.S. (pdf). Even though the PERS Board knew of the flaws in Pew’s study, it promoted the report as proof of the system’s soundness (pdf).

Pew seemed unaware that the state and many local governments issued pension obligation bonds to plug the huge deficits in their accounts.  This practice shifted money out of the pension system and onto the books of the individual government entities.  It did not solve the problem, it simply made a pension problem into a bond problem.  Pew missed this crucial fact of Oregon’s pension system, which means that Pew’s conclusions are meaningless.  The PERS Board should have known this and flagged it for Pew.  Instead, the PERS Board trumpeted the flawed findings.

California—and Oregon’s—fiscal problems are spending problems not revenue problems

The Pew report focuses almost exclusively on states’ challenges to find new or additional revenues.  Much of the fiscal problem facing states are spending problems: Misdirected tax credits, ambitious programs, and skyrocketing public employee expenditures.

The Pew report does not describe how much is spent on Oregon’s Business Energy Tax Credits.  The Pew report only briefly mentions the massive expansion of state-run and state-subsidized health care in the state.  These new programs will cost as much or more than the amount returned to taxpayers with the last Kicker payment.

When financial markets tanked earlier this decade, governments were facing huge increases in the amounts they would have to contribute to their employee’s PERS accounts to fill the defined benefit gap. The Oregon economy was in recession and the electorate had little or no tolerance for increased taxes. In response, the state and some local governments issued pension obligation bonds.

The plan carried some risks: While it would make high returns higher, it could make low returns disastrous. At the time, the stock market was about to begin a four-year run of double digit annual returns, the housing market was taking off and interest rates were nearing record lows. These factors caused state and local governments to determine that the benefits of issuing bonds outweighed the downside risks. The governments that used the bonds have moved themselves toward the back of the train, but they nevertheless remain on the train.

Read the entire op-ed at the Statesman-Journal, or download a PDF.

Minimum wage increases are a hot-button issue in many states. As such, minimum wage increases are politically challenging to implement. To avoid the knock-down/drag-out fights associated with minimum wage increase, several states—including Oregon and Washington—have introduced minimum wage indexing. With indexing, the minimum wage increases automatically each year based on some measure of inflation. As a result, Oregon and Washington have some of the highest minimum wage rates in the country.

Now that Oregon’s economy is in a tailspin, with record unemployment and business closures, the legislature is considering HB 3053 that would halt increases in the minimum wage during an economic downturn.

A study by Eric Fruits for the Employment Policies Institute measures the effect of minimum wage indexing on employment and wages in Oregon and Washington.  The study finds that minimum wage indexing imposes employment costs with no measurable income benefits. In particular:

• Higher minimum wages in Oregon and Washington are associated with reduced employment.
• Younger members of the labor force—age 25 and younger—are more likely to be adversely affected by increases in the minimum wage and minimum wage indexing. The figure above shows that Oregon and Washington would have significantly lower unemployment if the state minimum wage rates were equal to the lower Federal rate.
• Higher minimum wages have no statistically significant impact on wages of Oregon and Washington hourly wage earners.

USA Today

Eric Fruits of Economics International in Portland, Ore., warns that stimulus spending may not revive the economy in the long run. “Borrowed money has to be repaid. A job today may come at the cost of someone not having a job in two or three years,” the economist says.

What makes Oregon different so that it always has high unemployment?

As with most economics issues, there is no single answer.  In Oregon, several factors combine to produce the state’s long-run high unemployment.

1. Unemployment benefits. The Economic Policy Institute in Washington, D.C., ranks Oregon as one of the more “generous” states for unemployment benefits. On one hand, unemployment benefits help to put food on the table. But overly generous benefits allow job seekers more leeway to hold out for higher wages than they would otherwise, thereby slowing their return to work.
2. Taxes and regulations. Taxes and regulations raise costs to firms offering employment. Rigidity in employment laws adds to a firm’s costs of growing its workforce. In addition, employer-provided health insurance in Oregon is expensive because of regulations mandating that insurers cover specific conditions, procedures or treatments. Such mandates raise the costs of adding and retaining employees.
3. Minimum wage. A binding minimum wage creates a surplus of unskilled labor. At $8.40 an hour, Oregon has one of the highest minimum wages in the country. This has the effect of decreasing the amount of labor demanded by Oregon businesses and increasing the amount of labor supplied by Oregon workers. On the upside, owners can be choosy about who they hire. But, this puts the unskilled in a Catch-22: Their inexperience makes them unemployable at the high minimum wage so they cannot get experience to justify the wage.
4. Migration. If people are moving to the state faster than jobs are being created, higher unemployment results. Oregon has a well-deserved reputation for livability. As a result, people from outside of Oregon are attracted to the state and people who are here already are hesitant to leave: Some people would rather be unemployed in Oregon than find work out of state.

Is there a solution?

On the public spending side, many Oregonians are hopeful that an injection of state and federal infrastructure spending will pull people off the unemployment line and onto construction crews. However, by the time projects are funded, requests for bids are issued, contractors are in place and workers are hired, we may already be six months into a recovery.

On the private side, investments by businesses produce the gains in productivity that fuel future production and consumption. Broad-based investment tax credits and similar investment incentives are not as alluring as large-scale spending programs and showpiece infrastructure projects. On the other hand, much of the blame for the current recession has been placed on the credit crunch and the resulting decline in private investment. Broad-based investment incentives would mitigate some of the crunch and encourage firms to begin spending and hiring again.

In the past year, a variety of studies by organizations supportive of aggressive climate change policies have attempted to calculate the additional annual expenditures in renewable energy generation and energy efficiency necessary to meet greenhouse gas reduction goals.

One problem: No one knows how much spending is needed

And the guesses are all over the place.

In the past year, four separate studies came up with a wide range of cost estimates for climate policies. Most recently, a report issued by the World Economic Forum in Davos, Switzerland summarizes three studies. The Forum says between $150 billion and $313 billion in additional spending is needed each year between now and 2030 too reduce carbon emissions to levels deemed sustainable by the Intergovernmental Panel on Climate Change (IPCC).

Earlier this month McKinsey & Company said the additional costs would range begin at $475 billion a year and rise to $1.2 trillion a year through 2030, with an average additional cost of $846 billion a year.

A range as big as the Dutch economy

No wonder policy makers are confused. The additional costs across four studies range from $150 billion a year to $846 billion a year.  That is a $696 billion range.  That is a swing that is bigger than the economy of the Netherlands ($650 billion). It is impossible to design effective policies when the cost estimates have a margin of error that is as big as the 20th largest economy in world.

Citations:

Dinkel, J., Enkvist, P.-A., Nauclér, T., and Pestiaux, J. (2009). Pathways to a low-carbon economy: Version 2 of the global greenhouse gas abatement cost curve. McKinsey & Company.

Liebreich, M., Greenwood, C., von Bismarck, M., and Gurung, A. (2009). Green investing: Towards a clean energy infrastructure. World Economic Forum and New Energy Finance.

United States Government Accountability Office (2008). Climate change: Expert opinion on the economics of policy options to address climate change. GAO-08-605.

Oregon’s unemployment just spiked past 8 percent.  That means one out of every 12 members of the labor force is looking for a job.  Some economists predict that Oregon’s unemployment rate could hit 9.5 percent in the next year.

Over the 32 years between 1976 and 2007, Oregon has been in the top 10 for unemployment in 18 of those years.  The state has had the highest unemployment for 3 of those years.

Paul Krugman (PDF) explains how a welfare state and business regulations contribute to persistent high unemployment:

How might a welfare state create unemployment? Taxes (such as required employer contributions to social insurance funds) and regulations may raise the cost to firms of offering jobs, and thus reduce the wages they are willing to pay; simultaneously, benefits such as unemployment insurance may reduce the incentive for workers to accept jobs, and thus raise the wages they demand.

Other studies have found that a strong “sense of place” measured by things such a home ownership rates can contribute to higher unemployment.  Individuals with a strong “sense of place” are less likely to move out of state to find work.

Oregon’s home ownership rate is slightly lower than the national average.  Thus, it is not entirely clear that Oregonians have a stronger sense of place than anywhere else.

Studies have found that high levels of migration into an area contribute to higher unemployment.  Oregon’s ratio of employment growth to population growth is slightly lower than U.S. average.  This suggests that Oregon’s employment opportunities may not be keeping pace with population growth.

Oregon’s economic development policies tend to be focused on “picking winners” by offering tax credits and subsidies to whatever is the favored industry of the day.  A broader pro-business and pro-employment policy would better diversify Oregon’s industries and improve employment prospects.

This isn’t a good time to be a state legislator. In Oregon, state revenues are now projected to be $1 billion short of paying for existing services in the next biennial budget. At the same time, the economic downturn is putting pressure on all levels of government to hand out help to households and businesses. …

As Oregon households and businesses see their incomes shrink over the next year or so, state and local governments will be challenged to explain to taxpayers why they should open their wallets wider for more taxes.

By adopting principles of “smart spending” the incoming Legislature can fund valuable services and calm taxpayer jitters. The principles of this concept allow for increased spending — even in a recession. However, smart spending puts a burden on policymakers to critically evaluate benefits against burdens. …

[I]f new road and rail projects truly are needed, then roadway users and rail passengers should be willing to pay for such improvements. Properly implemented mileage-based user fees can fund construction, reduce congestion and diminish emissions. Transportation revenue would rise in line with road use, ensuring adequate funds for road maintenance and expansion. Because better roads boost economic productivity, the benefits to all Oregonians would exceed the individual costs of user fees — an important principle of smart spending. …

Another principle asks whether more money will produce better outcomes: How much bang will Oregonians get for taxpayer bucks? In a series of studies for the Cascade Policy Institute, Randall Pozdena and I found that, after accounting for differences in income and demographics, Oregon’s state and local government spending is among the highest in the country. Spending on K-12 education and on police and corrections are especially high relative to that of comparable states.

Update: The Statesman-Journal, the Beaverton Valley Times and the Forest Grove News Times have also published the op-ed.