Wednesday, February 15, 2012

Frontier job losses and the failure of business climate strategies

Frontier airlines became the third major employer in Milwaukee to announce major layoffs this week when it announced plans to layoff almost 450 employees. Earlier, C and D Technologies and Thermo Fischer said they would be moving jobs to Reynosa, Mexico.

Frontier's announcement illustrates the bankruptcy of Wisconsin Governor Scott Walker's business climate strategy that relies on reducing tax rates and eliminating environmental and labor regulations. 
Shortly after he was inaugurated, Walker declared: "Wisconsin is open for business."  

The Wisconsin Manufacturers and Commerce (WMC) press release entitled "Wisconsin Business Climate Improves in 2011, Manufacturing Income Tax Phase Out Fosters High-wage Job Creation" boasted: "Wisconsin’s business climate improved dramatically this year as Governor Scott Walker and the Legislature approved historic pro-growth reforms that will foster long-term economic growth."

Yet, since Walker's budget was enacted on July 1, 2011, Wisconsin has lost jobs for six straight months, a dismal record that is unmatched by any other state. 

The business climate strategy is based on the false assumption that marginal cuts in business costs drive investment and job creation.

But businesses don't invest or create jobs because state government cuts marginal tax rates or eliminates regulations. Firms invest and hire in response to increased demand for their products or services. Or, like Frontier, they cutback when they lose market share.

The Walker administration, by enacting an austerity budget that reduces wages and public employment, has caused demand to decline in Wisconsin. As a result, Wisconsin has lost jobs for six straight months even as the national economy has added  3.7 million payroll jobs over the last twenty-three months.

Walker's draconian cuts to local government and to public schools ($1.2 billion), technical colleges (30%) and the university system ($250 million) have reduced public employment as workers are laid off and positions go unfilled.

Last year Wisconsin lost a higher percentage of its state government employees than any other state, according to the federal Bureau of Labor Statistics. As public employment declines as a  result of layoffs and retirements, discretionary income and demand have also declined.

Finally, Act 10, Walker's anti-union budget repair bill, dramatically reduced the take home pay of all public employees, reducing demand and consumption by more than $700 million-a-year.

The Federal Reserve of Philadelphia released the leading indexes for the 50 states for December 2011. The indexes are a six-month forecast. Forty-four state coincident indexes are projected to grow over the next six months, while only six including Wisconsin are projected to decrease.

Wisconsin's job losses and economic trajectory stand in sharp contrast to the national economy that created 225,000 jobs last month alone. This graph from Econbrowser demonstrates how poorly Wisconsin compares to the U.S economy.

Wisconsin Governor Walker based his campaign for Governor on a promise to create 250,000 private sector jobs. 

Walker's policies are not working. 


Anonymous said...

If Governor Doyle or any socialist where still in charge of this state we Wisconsin would be be losing tens of thousands of jobs - not hundreds.

No employers laid off anyone during Jim Doyle's tenure bankrupting WI did they? I believe even lots of state (union) workers lost their jobs to layoff.

You are really reaching this time Dr. Rosen.

Anonymous said...

Dear Anonymous:

Please look at the last graph. Notice the line going up. Then notice the redirection of the line. Notice the date.

I was no great fan of Doyle, but what you say is nonsense. Your "things would be ten thousand times worse without Walker" argument is not an argument at all, merely a ridiculous opinion based upon nothing but empty assertion.

Yours truly,


Anonymous said...

First of all, the austerity measures that were enacted did nothing to lower demand for anything in Wisconsin. In fact, if anything, they increased demand, and here's why: States are required to balance their budgets. We can run deficits like the Federal government. It isn't an option. The money that the state is saving by having public employees contribute to their insurance and pension costs is either a) being spent elsewhere or b) being "returned" to taxpayers in the form of lower property taxes or lower property tax increases. The reasons this matters is because local purchasing happens at the margins.

Consider this: A teacher who was making $50,000 takes a $5,000 pay cut this year. That sucks for that teacher, of course, but that is $5,000 that others in the community now don't have to pay. For the sake of simplicity, let's say there are 5,000 people in the community. They now all have an extra dollar. You could look at it and ask if it is worth having one person take such a big hit so the others can get such a tiny gain, but from an economic perspective it makes perfect sense. The teacher with the $5,000 is still making plenty of money to live on. They are, however, cutting back on big purchases - a different car, a vacation, a new TV, whatever it is. I'm not saying that they were living large before, but obviously those extra things are the first to go when one takes an income hit. You could say that that $5,000 is now being taken out of the economy, but that isn't true because chances are that that car or TV was built somewhere else and that that's where a good chunk of that money is going. Same with a vacation, obviously. It doesn't do the state any good if someone pays $5,000 to go on a cruise. Yes, some of the money from purchases stay here - the car salesman gets his commission, etc. - but the bulk of it is gone. Those 5,000 with the extra $1, however, are much, much more likely to simply incorporate it into their normal spending, almost all of which stays here in the state. Yes, some of them may use it to buy a song from iTunes. I'm not saying it's a 100% retention rate. I AM saying that it is more likely to be spent at the grocery store, at a local restaurant, or whatever. The point is, it is not being uses on big purchases that cause money to leave the state.

You're looking at this all wrong. There is truth to the adage that a penny saved is a penny earned, and that is exactly what is going on here as the taxpayers of Wisconsin save money that otherwise would have been spent on public employees.

It's also important to point out that however bad those public employees think they have it now, they aren't exactly leaving in droves. They realize that they are still sitting pretty compared to everyone else. They just like to whine because they aren't getting their way. There is not a single, solitary reasonable argument that can be made against Act 10 that doesn't boil down to, "we had it before, we still want it, so we deserve to get it".

Anonymous said...

If cutting teachers take home pay is such a boom for the Wisconsin tax payer, then why didn't Walker extend that cut to all public workers, such as policeman, fire man and state troopers? Why did he just pick on teachers,and county employees? We all know the real reason, and it was not economics. You can blow smoke all you want, when Walker testified in front of congress, he all but admitted to the farce.

Michael Rosen said...

The austerity measures were not required. Walker raised taxes on the poor and low income people, who have the highest marginal propensity to consume. That reduced demand. He took money out of the pockets of middle class state employees who have a high marginal propensity to consume and cut taxes for investors who have a low marginal propensity to consume and for corporations. Tax breaks are the weakest economic multipliers. The fact that products may be made in other countries is beside the point. If we buy them at Target or Best Buy those firms pay their employees and suppliers and it ripples through the economy. There is so much else wrong with what you wrote. But this is all I have time for. IN the final analysis the point is Walker's policy of raising taxes on the poor and working people, cutting investments in education and infrastructure, and gutting regulations and cutting corporate tax rates is NOT working. The proof is in 6 months of job loss.

Rick Esenberg said...

Some thing that would take money "out of the economy" was clearly necessary. The state, unlike the federal government, must balance its budget. Your argument has to be that money in the hands of the recipients of government spending is better than money left in the hands of taxpayers. Certainly six months of data can't prove that.

And even if you believe, as I suspect you do, that money circulates more rapidly in the hands of lower income earners (a proposition that is not self evident), it is not clear to me that the Walker reforms were heavily weighted in favor of wealthier persons. The tax increases and cuts that you mention were relatively small and the bulk of the spending cuts were reductions in pay of persons that, as a group, make more than the average taxpayer (whether or not you can be argued that they deserve it). Since Wisconsin's tax system isn't all that progressive, even on your assumptions, your case is not made.

As to your assertion that costs don't affect business decision-making (which is essentially what you are saying), all I can say is that I was part of senior management in a fairly large business for ten years and the reality is pretty much what common sense would tell you. They do matter.

Michael Rosen said...

You are wrong on several accounts:
1)My argument which is supported by rigorous economic analysis (see Moody’s Analytics) is that money in the hands of low-income and middle class citizens is a far more effective economic multiplier than tax cuts for investors or corporations. Walker raised taxes on low- income Wisconsinites and reduced the discretionary income of all public employees while enacting almost $2 billion in corporate tax cuts. If you want to cut taxes to grow the economy Walker cut their wrong taxes!
2) The fact that some state employees make above the state median wage is irrelevant. State employees incomes are decidedly middle class and their marginal propensity to consume is much higher than the MPC of the state’s wealthy and they are far more likely to spend their money in Wisconsin. Cutting their discretionary income reduced aggregate spending and hurt the economy.
3) I did not assert that costs do not affect business decisions. You are playing games here. I said cuts in marginal tax rates and regulations (marginal costs) do not drive investment decisions or job creation. There is a huge body of research regarding this. As you surely must know there are other costs, labor, access to suppliers, transportation, costs of capital, that have a far greater impact than tax rates and regulations.
4) Studies aside, The Bush presidency was an experiment with the supply side notion that cutting taxes promotes growth and job creation. President Bush imposed the largest tax cut in the nation's history ($1.3 trillion, heavily weighted toward those with high incomes). The result-the weakest growth and worst job creation records, even before the Great Recession, of any Post WWII expansion.

Anonymous said...

Call the people of Illinois and ask them how their toxic tax climate is contributing to job growth in their state. Better yet, call the CEO of Caterpillar and ask him about their big non-expansion in Illinois due to a toxic business climate. Yep, it's going great in Illinois - not. Here in Wisconsin, Walker's reforms are working.

Anonymous said...

Both Caterpillar and Toyota are making plans for Indiana. Both are industrial giants. What could Wisconsin do, which Indiana already did?
(Just a thought)

Anonymous said...

Great posts Michael have a sold knowledge of economics in the real world, while some still cling to mythology such as supply-side economics. Technically it didn't even work under Reagan as cold-war manufacturing brought the US out of the recession. Tax rates had also just been changed at the end of the 70's along with high inflation, and high interest rates out of the FRB. None of these circumstances are applicable today. Supply-side economics is a myth which is why there are no formulas or mathematical models that go along with that ideology. Basically all the Reagan tax cuts did was increase inequality in the US.

small firms are the net job creators in the US not large firms. 70% of the net jobs created in the US the past 20 years have come from small firms. Large firms also do not "pay" taxes, those losses are recuperated by reduced wages and benefits to the workers. US large firm pay the least amount of taxes in the OECD.

And those Caterpillar jobs in Indiana are going to be paying $12-18.50/hr or $4-$6.10/hr once adjusted for inflation back to 1980. Good luck consuming on those poverty wages.

Hundreds of economists over the globe have already stated time and time again for many years that the US needs to bring up wages, which can occur with out price inflation. The US was named specifically in the ILO 2008 and 2010 Global Wage reports in regards to low wages and the outdated CPI. Low wages in the US contributed to the cause of the recession and are hampering the recovery as those than can afford to save are doing so because of so much home wealth that was lost.

Reports out of the SBA have stated that small businesses can not expand due to a general lack of customers, which is indicative of a lack of disposable income.