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. 

Walker's "tools" cost more jobs; austerity does not work

 

Wisconsin lost 3,900 private sector jobs in December according to data released Thursday by the state Department of Workforce Development. In the same month, the United States gained an estimated 212,000 jobs.

 

In the public sector, government agencies at the state level shed jobs last month while city and county employers showed job gains. Losses in the private sector and changes in government staffing left the state with an estimated net loss of 1,700 non-farm jobs for December. .

Wisconsin has lost jobs for six consecutive months and has lost more jobs than any state in the nation since Governor Scott Walker's budget went into effect in July 2011. The graph by the Philadelphia Reserve Board below documents this.

Wisconsin is continuing to hemorrhage jobs because of Governor Walker's one-sided reliance on spending cuts to balance the state budget. That is because demand creates jobs.  Consumers account for almost 70 % of the economy. Yet Walker's budget cuts have caused the demand for goods and services to decline in Wisconsin.

Wisconsin shed more state government jobs than any state in the nation in 2011. When workers lose their jobs, their incomes decline and they buy less. In addition, the disposable incomes of virtually all of Wisconsin's public workers declined as health care premiums increased and pension contributions increased to 5.8% of income. The result a decline in aggregate demand that has caused Wisconsin to shed jobs even as the national economy is adding them.

The lesson of Walker's first year is that you cannot cut your way to job growth and prosperity.

Austerity has been a failure where ever it has been tried. 

In a recent paper for the International Monetary Fund, Laurence Ball, Daniel Leigh and Prakash Loungani look at 173 episodes of fiscal austerity over the past 30 years—with the average deficit cut amounting to 1 percent of GDP. Their verdict? Austerity “lowers incomes in the short term, with wage-earners taking more of a hit than others; it also raises unemployment, particularly long-term unemployment.”

Let's take a quick  look at the unemployment rates in those nations that have responded to budget deficits with austerity. In Ireland the unemployment rate has soared to 14.3%. It would be even higher but tens of thousands have migrated abroad. England's unemployment rate is 8.4%, the highest in sixteen years and Spain's has soared to 22.9%.

As Reuter's reports: "Europe's worsening sovereign debt crisis and governments' tough cost-cutting response appear to be driving the 17-nation currency bloc back into recession following the 2008-2009 global financial crisis, while the number of people out of work is rising."

Austerity does not promote growth or job creation. Walker's tools are not working. It is time for a new approach in Wisconsin.

Austerity economics will undermine recovery

A month ago the Milwaukee Journal Sentinel ran a column by Sheldon Lubar arguing:" The Age of Austerity is also what lies ahead for all of us today, not our grandchildren. This is the painful reality."

Putting aside the fact that tens of millions of working and middle class Americans, including the fifteen million who are unemployed and fifty million without health care insurance, have already been subject to the austerity of declining real wages, stagnate family incomes and soaring medical, education and real estate prices (until recently), Lubar is prescribing exactly the wrong medicine for what ails the U.S. economy.

Nobel Prize winning economist Paul Krugman repudiates Lubar and the austerity crowd:

For the last few months, I and others have watched, with amazement and horror, the emergence of a consensus in policy circles in favor of immediate fiscal austerity. That is, somehow it has become conventional wisdom that now is the time to slash spending, despite the fact that the world’s major economies remain deeply depressed.

This conventional wisdom isn’t based on either evidence or careful analysis. Instead, it rests on what we might charitably call sheer speculation, and less charitably call figments of the policy elite’s imagination — specifically, on belief in what I’ve come to think of as the invisible bond vigilante and the confidence fairy.

Krugman concludes:... the next time you hear serious-sounding people explaining the need for fiscal austerity, try to parse their argument. Almost surely, you’ll discover that what sounds like hardheaded realism actually rests on a foundation of fantasy, on the belief that invisible vigilantes will punish us if we’re bad and the confidence fairy will reward us if we’re good. And real-world policy — policy that will blight the lives of millions of working families — is being built on that foundation.

Krugman's column is worth reading and is linked here.

The Milwaukee Journal editorial Board also weighs in today with an editorial that explains why focusing on deficit reduction is not only wrong, but likely to undermine the recovery and revive the worst recession since the Great Depression.