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?)

Roth IRA: “One of the best deals in retirement planning”

With a Roth IRA, virtually all income growth and withdrawals are tax-free.  Because retirees don’t pay taxes on their withdrawals, the Roth IRA has been called one of the best deals in retirement planning.

With the turn of the New Year, the income limits that have prevented many individuals from converting a traditional IRA or employer-sponsored retirement plan to a Roth have been eliminated.   The loosening of the rules is particularly well-timed for a period when workers are losing their jobs and are no longer employed with the company that holds their retirement account.

There is a catch, though.  If you convert your traditional IRA or employer-sponsored retirement plan to a Roth IRA, you must pay taxes on the converted money as if it was earned income.

Even so, the Federal government has made this part less painful in 2010. You can report the amount you convert in 2010 on your tax return for that year. Or, you can spread the amount converted equally across your 2011 and 2012 tax returns, paying any resulting tax in those years. For example, if you convert $50,000 next year and choose not to declare the conversion on your 2010 return, you must declare $25,000 on your tax return for 2011 and $25,000 on you return for 2012. The two-year option is a one-time offer for 2010 conversions.

Many Roth IRA conversions may be subject to Measure 66′s higher rates

While most of the attention on Measure 66 has been directed at the impacts on entrepreneurs and investors, the increased taxes will also affect the thousands of middle class households that are considering a Roth IRA conversion.  Oregon’s Measure 66 will make such conversions especially painful because some or all of the money that investors have saved over the years may be subject to Measure 66′s highest tax rates.

Measure 66 imposes two new tax brackets affecting 2010 income:

• A new marginal tax rate of 10.8 percent would be levied for taxable income between $250,000 and $500,000 for joint filers and $125,000 and $250,000 for single filers.

• A new 11 percent marginal tax bracket would be created for taxable income above $500,000 for joint filers and $250,000 for single filers.

More than 40 percent of all families in the U.S. participate in some type of employment-based retirement plan.  These plans include defined benefit (pension) plans and defined contribution plans such as a 401(k) or 403(b).  In addition, approximately 1 in 3 families has an IRA or Keogh account.

Among those with either a defined contribution plan or an IRA/Keogh account, the average account balance is $148,440.  For those age 55 and older, the average account balance is more than $250,000.  More than 1 in 10 families have account balances in excess of $500,000.

A family converting $300,000 in retirement funds would have to come up with another $900 in Oregon taxes if subject to Measure 66.  A family converting a $600,000 retirement account would have to find another $6,500 in cash to pay additional Measure 66 taxes.

As an unintended consequence, Measure 66 may deny many Oregonians the chance to participate in a once-in-a-lifetime opportunity to get into what has been called one of the best deals in retirement planning.

The Wall Street Journal provides a summary of the provisions of the Roth IRA conversion program.  The Employee Benefit Research Institute provides statistics on retirement plans and balances in the plans.

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.

• Oregon has one of the world’s most ambitious greenhouse gas reduction goals: A 40 percent reduction per person by 2020.
• There is a strong relationship between economic activity and carbon emissions: A 1% decrease in carbon emissions is associated with 0.71% lower GDP.
• Technological advances cannot fully mitigate the costs of a 40 percent reduction in GHG emissions. Replacing capital is expensive and take years.  Households and firms would have to face years of significantly higher energy prices before investments in more energy efficient technologies replace existing technologies.
• Meeting Oregon’s greenhouse gas reduction goals will slow the state’s economic growth:
  • Output would be $48.3 billion lower because of the State’s GHG emissions targets,
  • 90,000 fewer people would be employed,
  • State and local government revenues would be $4.4 billion lower.

Citation:

Fruits, E. and Pozdena, R. J. (2008). Oregon Greenhouse Gas Reduction Policies: The Economic and Fiscal Impact Challenges. Cascade Policy Institute.

Earlier this year, Toronto imposed a land transfer tax on the sale of real estate within its municipal boundaries.  A recent study (PDF) published by the C.D. Howe Institute finds that the transfer tax caused a 16 percent decline in the number of single-family homes sold and a 1.5 percent reduction in house values. Unsurprisingly, the decline in house values is approximately equal to the amount of the tax.

The Portland Tribune reports that Oregon’s business interests are recognizes that the state’s ambitious emissions goals will come at an economic cost. NW Natural president and Oregon Global Warming Commission member, Gregg Kantor, describes his concerns.

We need to protect workers of businesses in Oregon. You don’t want to create another reason to ship jobs offshore.

Mr. Kantor’s concerns are buttressed by a white paper written by Eric Fruits and Randall Pozdena.

The paper notes that the notion of capping emissions and providing market signals through a cap-and-trade scheme is not conceptually unreasonable or without precedent. However, the cap-and-trade mechanism has a history of implementation difficulties. The difficulties are due to the vulnerability of the caps and permit allocations to political influence and the tendency of permit values to be highly volatile. In the Oregon context, in which the portfolio of politically-acceptable, alternative energy sources is constrained, and the non-carbon technology options undeveloped, these problems may be aggravated.  The studies key findings include the following.

1. Economic output, energy use and carbon dioxide emissions have been tightly cointegrated historically, and energy strongly “causes” economic vitality. This is true both in studies over time and across countries. Of the OECD countries that display lower than average energy use relative to their economies, all have embraced nuclear power–a source that historically has been “off-the-table” in Oregon.
2. The cost to the Oregon economy of meeting the state’s emissions goals are large. Oregon’s economic growth to 2020 would be approximately cut in half, and gross output per capita would be reduced by 20 percent relative to the baseline case.
3. State and local revenues would be reduced by about 13 percent, relative to the baseline case.
4. Energy consumption and technology choices are strongly embedded in long-lived capital. This raises
   theoretical and practical obstacles to the economic development and adoption of low-carbon technology. In addition, because of the existing carbon intensity of the production of capital goods, too-rapid turnover of existing capital may actually accelerate atmospheric carbon accumulation.

Citation:

Fruits, E. and Pozdena, R. J. (2008). Oregon Greenhouse Gas Reduction Policies: The Economic and Fiscal Impact Challenges. Cascade Policy Institute.

A municipal bond issuer has a choice in how its debt is issued. With negotiated issuance, one or more underwriting firms acting together  purchase the bonds from the issuer. The issuer and the underwriter negotiate many of the terms of the issuance. With competitive issuance, bidders buy all the bonds according to take-it-or-leave-it terms proposed by the issuer in a widely circulated prospectus.

Some observers believe they have seen systematic differences in the costs to the issuer under the two methods. These perceived differences have, in turn, led to research to evaluate whether–or under what conditions–one method is superior to another.

Our research indicates a strong tendency for issuers to select the method of issuance that best suits the nature of the issue at hand, such that policies to mandate one type of issuance over the other will likely increase, rather than decrease, issuance costs.

Citation:

Fruits, E., Pozdena, R., Booth, J., and Smith, R. (2008). A comprehensive evaluation of the comparative cost of negotiated and competitive methods of municipal bond issuance. Municipal Finance Journal, 28(4):15-41.

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.

Proponents of the scrapped rules say they were introduced to ensure common EU standards.  Critics decried the rules as examples of Euro-madness.  If the rules were madness, then surely everyone would have voted to scrap the rules.  Instead, the BBC’s blog notes that that 16 countries–mainly the big fruit and vegetable producers–voted against scrapping the rules.

If the rules were such Euro-madness, why would 16 countries vote to continue the madness?

Economists know that there was a method to the madness: the rules were designed to increase food prices and, in turn, producers’ profits.

How can beautiful fruits and vegetables increase food prices?

Adam Smith noted that meetings of people in the same industry usually result in “some contrivance to raise prices.” The contrivance is usually some agreement to restrict output, thereby force consumers up their demand curves to pay higher prices.

In an article published by the Journal of Law and Economics, Eric Fruits and his co-authors show that many agricultural cartels in the U.S. raise the prices for their crops by imposing quality restrictions on output. Produce that is too small or misshapen is not allowed to be marketed by cartel members.  Such rules raise prices in two ways:

1. Higher quality produce is more desirable to consumers. Consumers are willing to pay more for a larger beautiful melon than for a small ugly one.
2. Because some produce does not “make the grade,” quality restrictions reduce the amount available for sale.  If only “large” melons can be marketed, then the total number of melons for sale shrinks. The reduced supply of produce results in higher prices.